<PAGE> 1
As filed with the Securities and Exchange Commission on March 27, 1997
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. 23
AND
REGISTRATION STATEMENT
UNDER
THE INVESTMENT COMPANY ACT OF 1940
AMENDMENT NO. 24
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, 1997 pursuant to paragraph (b)
| | 60 days after filing pursuant to paragraph (a)(i)
| | on [date] pursuant to paragraph (a)(i)
| | 75 days after filing pursuant to paragraph (a)(ii)
| | on [date] pursuant to paragraph (a)(ii) of rule 485.
If appropriate, check the following box:
| | this post-effective amendment designates a new effective date for a
previously filed post-effective amendment
Pursuant to Rule 24f-2, the registrant has registered an indefinite number of
its Shares of Beneficial Interest, without par value, under the Securities Act
of 1933. The Registrant filed a Rule 24f-2 Notice on behalf of all of its series
for its fiscal year ended November 30, 1996 on January 28, 1997.
================================================================================
<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>
STATEMENT OF
ITEM NUMBER 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 the Fund - Performance
Information
(d) Condensed Financial Information *
4 (a) Front Cover Page; The Fund; *
Investment Objective and
Policies; Investment Techniques
and Risk Factors
(b) Investment Objective and *
Policies; Investment Techniques
and Risk Factors
(c) Investment Objective and *
Policies; Investment Techniques
and Risk Factors; Additional
Risk Factors
</TABLE>
<PAGE> 3
<TABLE>
<CAPTION>
STATEMENT OF
ITEM NUMBER ADDITIONAL
FORM N-1A, PART A PROSPECTUS CAPTION INFORMATION CAPTION
- ----------------- ------------------ -------------------
<S> <C> <C> <C>
5 (a) The Fund; Management of the *
Fund - Investment Adviser
(b) Front Cover Page; Management *
of the Fund - Investment
Adviser; Back Cover Page
(c) Management of the Fund - *
Investment Adviser
(d) Management of the Fund - *
Administrator
(e) Management of the Fund - *
Shareholder Servicing Agent;
Back Cover Page
(f) Information Concerning the Fund - *
Expenses; Condensed Financial
Information; Expense Summary
(g) Additional Risk Factors - Portfolio *
Trading
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 *
</TABLE>
<PAGE> 4
<TABLE>
<CAPTION>
STATEMENT OF
ITEM NUMBER ADDITIONAL
FORM N-1A, PART A PROSPECTUS CAPTION INFORMATION CAPTION
- ----------------- ------------------ -------------------
<S> <C> <C> <C>
(f) Information Concerning Shares *
of the Fund - Distributions;
Shareholder Services -
Distribution Options
(g) Information Concerning Shares *
of the Fund - Tax Status;
Information Concerning Shares
of the Fund - Distributions
(h) * *
7 (a) Front Cover Page; Management *
of the Fund - Distributor; Back
Cover Page
(b) Information Concerning Shares *
of the Fund - Purchases;
Information Concerning Shares
of the Fund - Net Asset Value
(c) Information Concerning Shares *
of the Fund - Purchases;
Shareholder Services;
Information Concerning Shares
of the Fund - Exchanges
(d) Front Cover Page; Information *
Concerning Shares of the Fund -
Purchases; Shareholder Services
(e) Information Concerning Shares *
of the Fund - Distribution Plans;
Expense Summary
(f) Information Concerning Shares *
of the Fund - Distribution Plans
</TABLE>
<PAGE> 5
<TABLE>
<CAPTION>
STATEMENT OF
ITEM NUMBER ADDITIONAL
FORM N-1A, PART A PROSPECTUS CAPTION INFORMATION CAPTION
- ----------------- ------------------ -------------------
<S> <C> <C> <C>
(g) Expense Summary; Information
Concerning Shares of the Fund -
Purchases; Information Concerning
Shares of the Fund - Exchanges;
Information Concerning Shares of the
Fund - Redemptions and Repurchases;
Information Concerning Shares of the
Fund - Distribution Plan; Information
Concerning Shares of the Fund -
Distributions; Information Concerning
Shares of the Fund - Performance
Information; Shareholder Services
8 (a) Information Concerning Shares *
of the Fund - Redemptions and
Repurchases; Information
Concerning Shares of the
Fund - Purchases; Shareholder
Services
(b) Information Concerning Shares *
of the Fund - Redemptions and
Repurchases
(c) Information Concerning Shares *
of the Fund - Redemptions and
Repurchases
(d) Information Concerning Shares *
of the Fund - Redemptions and
Repurchases
9 * *
</TABLE>
<PAGE> 6
<TABLE>
<CAPTION>
STATEMENT OF
ITEM NUMBER ADDITIONAL
FORM N-1A, PART A 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), (c) * Investment Objective, Policies
and Restrictions; Investment
Techniques; Investment
Restrictions
(d) * *
14 (a), (b), (c) * Management of the Fund -
Trustees and Officers; Trustee
Compensation Table
15 (a) *
*
(b), (c) * Management of the Fund -
Trustees and Officers
16 (a) Management of the Fund - Management of the Fund -
Investment Adviser Investment Adviser;
Management of the Fund -
Trustees and Officers
(b) Management of the Fund - Management of the Fund -
Investment Adviser Investment Adviser
(c) * *
(d) * Management of the Fund -
Investment Adviser - Administrator
(e) * Portfolio Transactions and
Brokerage Commissions
(f) Information Concerning Shares Distribution Plans
of the Fund - Distribution
Plans
(g) * *
</TABLE>
<PAGE> 7
<TABLE>
<CAPTION>
STATEMENT OF
ITEM NUMBER ADDITIONAL
FORM N-1A, PART A PROSPECTUS CAPTION INFORMATION CAPTION
- ----------------- ------------------ -------------------
<S> <C> <C> <C>
(h) * Management of the Fund -
Custodian; Independent
Auditors and Financial
Statements; Back Cover Page
(i) * Management of the Fund -
Shareholder Servicing Agent
17 (a), (b), (c), * Portfolio Transactions and
(d), (e) Brokerage Commissions
18 (a) Information Concerning Shares Description of Shares Voting
of the Fund - Description of Rights and Liabilities
Shares, Voting Rights and
Liabilities
(b) * *
19 (a) Information Concerning Shares Shareholder Services
of the Fund - Purchases;
Shareholder Services
(b) Information Concerning Shares Management of the Fund -
of the Fund - Net Asset Value; Distributor; Determination
Information Concerning Shares of Net Asset Value and
of the Fund - Purchases Performance - Net Asset
Value
(c) * *
20 * Tax Status
21 (a) * Management of the Fund -
Distributor; Distribution
Plans
(b) * Management of the Fund -
Distributor; Distribution
Plans
(c) * *
22 (a) * *
</TABLE>
<PAGE> 8
<TABLE>
<CAPTION>
STATEMENT OF
ITEM NUMBER ADDITIONAL
FORM N-1A, PART A PROSPECTUS CAPTION INFORMATION CAPTION
- ----------------- ------------------ -------------------
<S> <C> <C> <C>
(b) * Determination of Net Asset
Value and Performance; Appendix A
23 * Independent Auditors
and Financial Statements
<FN>
- -----------------------
* Not Applicable
** Contained in Annual Report
</TABLE>
<PAGE> 9
MFS WORLD GOVERNMENTS FUND
SUPPLEMENT TO THE APRIL 1, 1997 PROSPECTUS AND STATEMENT OF
ADDITIONAL INFORMATION
THE FOLLOWING INFORMATION SHOULD BE READ IN CONJUNCTION WITH THE FUND'S
PROSPECTUS AND STATEMENT OF ADDITIONAL INFORMATION ("SAI"), DATED APRIL 1, 1997,
AND CONTAINS A DESCRIPTION OF CLASS I SHARES.
CLASS I SHARES ARE AVAILABLE FOR PURCHASE ONLY BY CERTAIN INVESTORS AS
DESCRIBED UNDER THE CAPTION "ELIGIBLE PURCHASERS" BELOW.
<TABLE>
EXPENSE SUMMARY
<CAPTION>
CLASS I
-------
SHAREHOLDER TRANSACTION EXPENSES:
<S> <C>
Maximum Initial Sales Charge Imposed on Purchases of Fund
Shares (as a percentage of offering price)........................................... None
Maximum Contingent Deferred Sales Charge (as a percentage
of original purchase price or redemption proceeds, as applicable).................... None
ANNUAL OPERATING EXPENSES OF THE FUND (AS A PERCENTAGE OF AVERAGE NET ASSETS):
Management Fees........................................................................ 0.75%
Rule 12b-1 Fees........................................................................ None
Other Expenses(1)(2)................................................................... 0.34%
----
Total Operating Expenses............................................................... 1.09%
<FN>
(1) "Other Expenses" is based on Class A expenses incurred during the fiscal
year ended November 30, 1996.
(2) The Fund has an expense offset arrangement which reduces the Fund's
custodian fee based upon the amount of cash maintained by the Fund with its
custodian and dividend disbursing agent, and may enter into other such
arrangements and directed brokerage arrangements (which would also have the
effect of reducing the Fund's expenses). Any such fee reductions are not
reflected under "Other Expenses."
</TABLE>
EXAMPLE OF EXPENSES
-------------------
An investor would pay the following dollar amounts of expenses on a $1,000
investment in Class I shares of the Fund, assuming (a) a 5% annual return and
(b) redemption at the end of each of the time periods indicated:
PERIOD CLASS I
------ -------
1 year........................................ $11
3 years....................................... 35
The purpose of the expense table above is to assist investors in
understanding the various costs and expenses that a shareholder of the Fund will
bear directly or indirectly. A more complete description of the Fund's
management fee is set forth under the caption "Management of the Fund" in the
Prospectus.
THE "EXAMPLE" SET FORTH ABOVE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST
OR FUTURE EXPENSES OF THE FUND; ACTUAL EXPENSES MAY BE GREATER OR LESS THAN
THOSE SHOWN.
ELIGIBLE PURCHASERS
Class I shares are available for purchase only by the following purchasers
("Eligible Purchasers"):
(i) certain retirement plans established for the benefit of employees of
Massachusetts Financial Services Company ("MFS"), the Fund's investment
adviser, and employees of MFS' affiliates;
-1-
<PAGE> 10
(ii) any fund distributed by MFS Fund Distributors, Inc. ("MFD"), the Fund's
distributor, if the fund seeks to achieve its investment objective by
investing primarily in shares of the Fund and other funds distributed by
MFD;
(iii) any retirement plan, endowment or foundation which (a) purchases shares
directly through MFD (rather than through a third party broker or dealer
or other financial intermediary); (b) has, at the time of purchase of
Class I shares, aggregate assets of at least $100 million; and (c) invests
at least $10 million in Class I shares of the Fund either alone or in
combination with investments in Class I shares of other MFS funds
distributed by MFD (additional investments may be made in any amount);
provided that MFD may accept purchases from smaller plans, endowments or
foundations or in smaller amounts if it believes, in its sole discretion,
that such entity's aggregate assets will equal or exceed $100 million, or
that such entity will make additional investments which will cause its
total investment to equal or exceed $10 million, within a reasonable
period of time; and
(iv) bank trust departments which initially invest, on behalf of their trust
clients, at least $100,000 in Class I shares of the Fund (additional
investments may be made in any amount); provided that MFD may accept
smaller initial purchases if it believes, in its sole discretion, that the
bank trust department will make additional investments, on behalf of its
trust clients, which will cause its total investment to equal or exceed
$100,000 within a reasonable period of time.
In no event will the Fund, MFS, MFD or any of their affiliates pay any sales
commissions or compensation to any third party in connection with the sale of
Class I shares; the payment of any such sales commission or compensation would,
under the Fund's policies, disqualify the purchaser as an eligible investor of
Class I shares.
SHARE CLASSES OFFERED BY THE FUND
Four classes of shares of the Fund currently are offered for sale: Class A
shares, Class B shares, Class C shares and Class I shares. Class I shares are
available for purchase only by Eligible Purchasers, as defined above, and are
described in this Supplement. Class A shares, Class B shares and Class C shares
are described in the Fund's Prospectus and are available for purchase by the
general public.
Class A shares are offered at net asset value plus an initial sales charge
up to a maximum of 4.75% of the offering price (or a contingent deferred sales
charge (a "CDSC") upon redemption of 1.00% during the first year in the case of
purchases of $1 million or more and certain purchases by retirement plans), and
are subject to an annual distribution fee and service fee up to a maximum of
0.35% per annum. Class B shares are offered at net asset value without an
initial sales charge but are subject to a CDSC upon redemption (declining from
4.00% during the first year to 0% after six years) and an annual distribution
fee and service fee up to a maximum of 1.00% per annum; Class B shares convert
to Class A shares approximately eight years after purchase. Class C shares are
offered at net asset value without an initial sales charge but are subject to a
CDSC upon redemption of 1.00% during the first year and an annual distribution
fee and service fee up to a maximum of 1.00% per annum. Class I shares are
offered at net asset value without an initial sales charge or CDSC and are not
subject to a distribution or service fee. Class C and Class I shares do not
convert to any other class of shares of the Fund.
OTHER INFORMATION
Eligible Purchasers may only purchase Class I shares directly through MFD.
Eligible Purchasers may exchange Class I shares of the Fund for Class I shares
of any other MFS Fund available for purchase by such Eligible Purchasers at
their net asset value (if available for sale), may exchange Class I shares of
the Fund for shares of the MFS Money Market Fund (if available for sale) and may
redeem Class I shares of the Fund at net asset value. Distributions paid by the
Fund with respect to Class I shares generally will be greater than those paid
with respect to Class A shares, Class B shares and Class C shares because
expenses attributable to Class A shares, Class B shares and Class C shares
generally will be higher.
THE DATE OF THIS SUPPLEMENT IS APRIL 1, 1997
-2-
<PAGE> 11
<TABLE>
<S> <C>
PROSPECTUS
April 1, 1997
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>
<TABLE>
<CAPTION>
Page
----
<C> <S> <C>
1. Expense Summary................................................................. 2
2. The Fund........................................................................ 3
3. Condensed Financial Information................................................. 4
4. Investment Objective and Policies............................................... 7
5. Investment Techniques and Risk Factors.......................................... 9
6. Additional Risk Factors......................................................... 14
7. Management of the Fund.......................................................... 16
8. Information Concerning Shares of the Fund....................................... 17
Purchases....................................................................... 17
Exchanges....................................................................... 22
Redemptions and Repurchases..................................................... 23
Distribution Plan............................................................... 25
Distributions................................................................... 27
Tax Status...................................................................... 27
Net Asset Value................................................................. 28
Description of Shares, Voting Rights and Liabilities............................ 28
Performance Information......................................................... 28
9. Shareholder Services............................................................ 29
Appendix A...................................................................... A-1
</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
This Prospectus pertains to MFS World Governments Fund (the "Fund"), a
non-diversified series of MFS Series Trust VII (the "Trust"), an open-end
investment company consisting of two series. The Fund's investment objective is
to seek not only preservation, but also growth of capital, together with
moderate current income. 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 "Information
Concerning Shares of the Fund -- 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.
INVESTMENT PRODUCTS ARE NOT INSURED BY THE FDIC OR ANY OTHER GOVERNMENT AGENCY,
AND ARE NOT DEPOSITS OR OTHER OBLIGATIONS OF, OR GUARANTEED BY, ANY FINANCIAL
INSTITUTION. SHARES OF MUTUAL FUNDS ARE SUBJECT TO INVESTMENT RISK, INCLUDING
POSSIBLE LOSS OF THE PRINCIPAL AMOUNT INVESTED, AND WILL FLUCTUATE IN VALUE. YOU
MAY RECEIVE MORE OR LESS THAN YOU PAID WHEN YOU REDEEM YOUR SHARES.
This Prospectus sets forth concisely the information concerning the 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, 1997, as amended or
supplemented from time to time (the "SAI"), which contains more detailed
information about the Trust and the Fund and is incorporated into this
Prospectus by reference. See page 31 for a further description of the
information set forth in the SAI. A copy of the SAI may be obtained without
charge by contacting the Shareholder Servicing Agent (see back cover for address
and phone number). The SEC maintains an Internet World Wide Web Site that
contains the SAI, materials that are incorporated by reference into this
Prospectus and the SAI, and other information regarding the Fund. This
Prospectus is available on the Adviser's Internet World Wide Web site at
http://www.mfs.com.
INVESTORS SHOULD READ THIS PROSPECTUS AND RETAIN IT FOR FUTURE REFERENCE.
<PAGE> 12
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% 1.00%
ANNUAL OPERATING EXPENSES OF THE FUND (AS A PERCENTAGE OF
AVERAGE NET ASSETS):
Management Fees...................................... 0.75% 0.75% 0.75%
Rule 12b-1 Fees...................................... 0.22%(2) 1.00%(3) 1.00%(3)
Other Expenses(4).................................... 0.31% 0.34% 0.34%
Total Operating Expenses............................. 1.31% 2.09% 2.09%
</TABLE>
- ---------------
(1) Purchases of $1 million or more and certain purchase by retirement plans 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" below).
(2) The Fund has adopted a distribution plan for its shares in accordance with
Rule 12b-1 under the Investment Company Act of 1940, as amended (the "1940
Act") (the "Distribution Plan"), which provides that it will pay
distribution/service fees aggregating up to (but not necessarily all of)
0.35% per annum of the average daily net assets attributable to the Class A
shares. Payment of the 0.10% per annum Class A distribution fee will
commence on such date as the Trust's Board of Trustees may determine. The
0.25% per annum service fee is reduced to 0.15% per annum for shares
purchased prior to October 1, 1989. Distribution expenses paid under this
Plan, together with the initial sales charge, may cause long-term
shareholders to pay more than the maximum sales charge that would have been
permissible if imposed entirely as an initial sales charge. See "Information
Concerning Shares of the Fund -- Distribution Plan" below.
(3) The Fund's Distribution Plan provides that it will pay distribution/service
fees aggregating up to (but not necessarily all of) 1.00% per annum of the
average daily net assets attributable to the Class B and Class C shares,
respectively. Distribution expenses paid under the Distribution Plan with
respect to Class B or Class C shares, together with any CDSC payable upon
redemption of Class B and Class C shares, may cause long-term shareholders
to pay more than the maximum sales charge that would have been permissible
if imposed entirely as an initial sales charge. See "Information Concerning
Shares of the Fund -- Distribution Plan" below.
(4) The Fund has an expense offset arrangement which reduces the Fund's
custodian fee based upon the amount of cash maintained by the Fund with its
custodian and dividend disbursing agent, and may enter into other such
arrangements and directed brokerage arrangements (which would also have the
effect of reducing the Fund's expenses). Any such fee reductions are not
reflected under "Other Expenses."
2
<PAGE> 13
EXAMPLE OF EXPENSES
An investor would pay the following dollar amounts of expenses on a $1,000
investment in the Fund, assuming (a) a 5% annual return and (b) redemption at
the end of each of the time periods indicated (unless otherwise noted):
<TABLE>
<CAPTION>
PERIOD CLASS A CLASS B CLASS C
-------------------------------------- ------- --------------- -------------------
<S> <C> <C> <C> <C> <C>
(1) (1)
1 year............................... $ 60 $ 61 $ 21 $ 31 $ 21
3 years.............................. 87 95 65 65 65
5 years.............................. 116 132 112 112 112
10 years.............................. 198 222(2) 222(2) 242 242
</TABLE>
- ---------------
(1) Assumes no redemption.
(2) Class B shares convert to Class A shares approximately eight years after
purchase; therefore, years nine and ten reflect Class A expenses.
The purpose of the expense table 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 Plan."
THE "EXAMPLE" SET FORTH ABOVE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST
OR FUTURE EXPENSES OF THE FUND; ACTUAL EXPENSES MAY BE GREATER OR LESS THAN
THOSE SHOWN.
2. THE FUND
The Fund is a 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 objectives
and 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 for
sale to the general public. Class A shares are offered at net asset value plus
an initial sales charge up to a maximum of 4.75% of the offering price (or a
CDSC of 1.00% upon redemption during the first year in the case of purchases of
$1 million or more and certain purchases by retirement plans) and are subject to
an annual distribution fee and service fee up to a maximum of 0.35% per annum.
Class B shares are offered at net asset value without an initial sales charge
but are subject to a CDSC upon redemption (declining from 4.00% during the first
year to 0% after six years) and an annual distribution fee and service fee up to
a maximum of 1.00% per annum; Class B shares will convert to Class A shares
approximately eight years after purchase. Class C shares are offered at net
asset value without an initial sales charge but are subject to a CDSC of 1.00%
upon redemption during the first year and an annual distribution fee and service
fee up to a maximum of 1.00% per annum. Class C shares do not convert to any
other class of shares of the Fund. In addition, the Fund offers an additional
class of shares, Class I shares, exclusively to certain institutional investors.
Class I shares are made available by means of a separate Prospectus Supplement
provided to institutional investors eligible to purchase Class I shares and are
offered at net asset value without an initial sales charge or CDSC upon
redemption and without an annual distribution and service fee.
The Trust's Board of Trustees provides broad supervision over the affairs of the
Fund. The Adviser is responsible for the management of the 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 depend 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
<PAGE> 14
3. CONDENSED FINANCIAL INFORMATION
The following information has been audited for at least the latest five years of
the Fund and should be read in conjunction with the financial statements
included in the Fund's Annual Report to shareholders which are incorporated by
reference into the SAI in reliance upon the report of the Fund's independent
auditors, given upon their authority as experts in accounting and auditing. The
Fund's independent auditors are Ernst & Young LLP.
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
Year Ended
Year Ended November 30, December 31,
---------------------------------------------- --------------------
1996 1995 1994 1993++++ 1992 1991
------- ------- ------- ------- ------- -------
Class A
------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
PER SHARE DATA (FOR A SHARE OUTSTANDING
THROUGHOUT EACH PERIOD):
Net asset value -- beginning of period........ $ 12.46 $ 11.39 $ 13.37 $ 11.50 $ 12.63 $ 12.00
------- ------- ------- ------- ------- -------
Income from investment operations# --
Net investment income....................... $ 0.65 $ 0.76 $ 0.63 $ 0.58 $ 0.87 $ 0.94
Net realized and unrealized gain (loss) on
investments and foreign currency
transactions.............................. 0.17 0.76 (1.17) 1.29 (0.70) 0.67
------- ------- ------- ------- ------- -------
Total from investment operations........ $ 0.82 $ 1.52 $ (0.54) $ 1.87 $ 0.17 $ 1.61
------- ------- ------- ------- ------- -------
Less distributions declared to shareholders --
From net investment income.................... $ (1.58) $ -- $ (1.15) $ -- $ (1.30) $ (0.75)
From net realized gain on investments and
foreign currency transactions............... -- (0.45) (0.29) -- -- --
From paid-in capital.......................... -- -- -- -- -- (0.23)
------- ------- ------- ------- ------- -------
Total distributions declared to
shareholders.......................... $ (1.58) $ (0.45) $ (1.44) $ -- $ (1.30) $ (0.98)
------- ------- ------- ------- ------- -------
Net asset value -- end of period.............. $ 11.70 $ 12.46 $ 11.39 $ 13.37 $ 11.50 $ 12.63
------- ------- ------- ------- ------- -------
Total return++................................ 7.36% 13.93% (4.63)% 17.77%+ 1.35% 13.42%
RATIOS (TO AVERAGE NET ASSETS)/SUPPLEMENTAL
DATA:
Expenses##.................................... 1.42% 1.51% 1.54% 1.54%+ 1.53% 1.61%
Net investment income......................... 5.70% 6.42% 5.45% 5.66%+ 6.78% 7.75%
PORTFOLIO TURNOVER.............................. 370% 277% 358% 179%+ 163% 208%
NET ASSETS AT END OF PERIOD (000 OMITTED)....... $283,770 $343,188 $370,110 $443,304 $340,347 $286,089
</TABLE>
- ---------------
<TABLE>
<C> <S>
+ Annualized.
++ Total returns for Class A shares do not include the applicable sales charge. If the charge had been included,
the results would have been lower.
++++ For the 11 months ended November 30, 1993.
# Per share data for the periods subsequent to November 30, 1993, is based on average shares outstanding.
## For fiscal years ending after September 1, 1995, the Fund's expenses are calculated without reduction for fees
paid indirectly.
</TABLE>
4
<PAGE> 15
FINANCIAL HIGHLIGHTS -- (CONTINUED)
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------------------------
1990 1989 1988 1987 1986
------- ------- ------- ------- -------
Class A
-----------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE DATA (FOR A SHARE OUTSTANDING THROUGHOUT EACH
PERIOD):
Net asset value -- beginning of period................... $ 11.45 $ 11.11 $ 11.87 $ 11.45 $ 10.70
------- ------- ------- ------- -------
Income from investment operations --
Net investment income.................................. $ 0.98 $ 1.07 $ 0.94 $ 0.91 $ 0.82
Net realized and unrealized gain (loss) on investments
and foreign currency transactions.................... 1.07 (0.26) (0.42) 1.86 2.35
------- ------- ------- ------- -------
Total from investment operations................... $ 2.05 $ 0.81 $ 0.52 $ 2.77 $ 3.17
------- ------- ------- ------- -------
Less distributions declared to shareholders --
From net investment income............................. $ (0.95) $ (0.47) $ (0.90) $ (0.90) $ (0.82)
From net realized gain on investments and foreign
currency
transactions......................................... (0.50) -- (0.32) (1.40) (1.52)
From paid-in capital................................... (0.05) -- (0.06) (0.05) (0.08)
------- ------- ------- ------- -------
Total distributions declared to shareholders....... $ (1.50) $ (0.47) $ (1.28) $ (2.35) $ (2.42)
------- ------- ------- ------- -------
Net asset value -- end of period........................... $ 12.00 $ 11.45 $ 11.11 $ 11.87 $ 11.45
======= ======= ======= ======= =======
Total return++............................................. 17.90% 7.27% 3.68% 23.29% 29.36%
RATIOS (TO AVERAGE NET ASSETS)/SUPPLEMENTAL DATA:
Expenses................................................. 1.44% 1.42% 1.12% 1.13% 1.17%
Net investment income.................................... 8.06% 8.42% 7.91% 7.54% 6.57%
PORTFOLIO TURNOVER......................................... 220% 282% 232% 378% 371%
NET ASSETS AT END OF PERIOD (000 OMITTED).................. $145,202 $124,935 $190,590 $182,738 $142,183
</TABLE>
- ---------------
<TABLE>
<C> <S>
++ Total returns for Class A shares do not include the applicable sales charge. If the charge had been included,
the results would have been lower.
</TABLE>
5
<PAGE> 16
FINANCIAL HIGHLIGHTS -- (CONTINUED)
<TABLE>
<CAPTION>
Year Ended November 30,
-------------------------------------------
1996 1995 1994 1993*
------- ------ ------ ------
Class B
<S> <C> <C> <C> <C>
PER SHARE DATA (FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD):
Net asset value -- beginning of period................................. $ 12.28 $11.32 $13.35 $13.22
------- ------ ------ ------
Income from investment operations# --
Net investment income................................................ $ 0.54 $ 0.65 $ 0.56 $ 0.07
Net realized and unrealized gain (loss) on investments and foreign
currency transactions.............................................. 0.17 0.76 (1.19) 0.06
------- ------ ------ ------
Total from investment operations................................. $ 0.71 $ 1.41 $(0.63) $ 0.13
------- ------ ------ ------
Less distributions declared to shareholders --
From net investment income........................................... $ (1.49) $ -- $(1.11) $ --
From net realized gain on investments and
foreign currency transactions...................................... -- (0.45) $(0.29) --
------- ------ ------ ------
Total distributions declared to shareholders..................... $ (1.49) $(0.45) $(1.40) $ --
------- ------ ------ ------
Net asset value -- end of period......................................... $ 11.50 $12.28 $11.32 $13.35
------- ------ ------ ------
Total return............................................................. 6.39% 13.01% (5.39)% 4.32%+
RATIOS (TO AVERAGE NET ASSETS)/SUPPLEMENTAL DATA:
Expenses##............................................................. 2.27% 2.33% 2.38% 2.48%+
Net investment income.................................................. 4.89% 5.59% 4.81% 4.72%+
PORTFOLIO TURNOVER....................................................... 370% 277% 358% 179%+
NET ASSETS AT END OF PERIOD (000 OMITTED)................................ $102,717 $90,978 $73,458 $24,590
</TABLE>
- ---------------
<TABLE>
<C> <S>
+ Annualized.
* For the period from the commencement of offering of Class B shares, September 7, 1993 to November 30, 1993.
# Per share data for the periods subsequent to November 30, 1993, is based on average shares outstanding.
## For fiscal years ending after September 1, 1995, the Fund's expenses are calculated without reduction for fees
paid indirectly.
</TABLE>
6
<PAGE> 17
<TABLE>
<CAPTION>
Year Ended November 30,
------------------------------
1996 1995 1994**
------ ------ ------
Class C
------------------------------
<S> <C> <C> <C>
PER SHARE DATA (FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD):
Net asset value -- beginning of period.................................. $12.29 $11.31 $12.30
------ ------ ------
Income from investment operations# --
Net investment income................................................. $ 0.55 $ 0.66 $ 0.50
Net realized and unrealized gain (loss) on investments and foreign
currency transactions............................................... 0.17 0.77 (1.35)
------ ------ ------
Total from investment operations.................................. $ 0.72 $ 1.43 $(0.85)
------ ------ ------
Less distributions declared to shareholders --
From net investment income............................................ $(1.50) $ -- $(0.14)
From net realized gain on investments and
foreign currency transactions....................................... -- (0.45) --
------ ------ ------
Total distributions declared to shareholders...................... $(1.50) $(0.45) $(0.14)
------ ------ ------
Net asset value -- end of period.......................................... $11.51 $12.29 $11.31
------ ------ ------
Total return.............................................................. 6.56% 13.11% (6.92)%
RATIOS (TO AVERAGE NET ASSETS)/SUPPLEMENTAL DATA:
Expenses##.............................................................. 2.20% 2.26% 2.32%+
Net investment income................................................... 4.97% 5.67% 5.06%+
PORTFOLIO TURNOVER........................................................ 370% 277% 358%
NET ASSETS AT END OF PERIOD (000 OMITTED)................................. $14,487 $11,813 $ 8,687
</TABLE>
- ---------------
<TABLE>
<C> <S>
+ Annualized.
** For the period from the commencement of offering of Class C shares, January 3, 1994 to November 30, 1994.
# Per share data is based on average shares outstanding.
## For fiscal years ending after September 1, 1995, the Fund's expenses are calculated without reduction for fees
paid indirectly.
</TABLE>
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, including emerging market
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 temporary 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.
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 (i) which may have a call on common stock
by means of a conversion privilege or (ii) attached warrants.
7
<PAGE> 18
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 0% to
80%) of its total assets in foreign securities, including emerging market
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
portion of the Fund's assets invested in the United States will consist of high
quality debt securities. The remainder of the Fund's 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" series of an 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 with respect to the amount of assets that may be invested in the
securities of any one issuer. 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.
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.
8
<PAGE> 19
5. INVESTMENT TECHNIQUES AND RISK FACTORS
CONSISTENT WITH THE FUND'S INVESTMENT OBJECTIVE AND POLICIES, THE FUND MAY
ENGAGE IN THE FOLLOWING INVESTMENT TECHNIQUES, MANY OF WHICH ARE DESCRIBED MORE
FULLY IN THE SAI. SEE "INVESTMENT OBJECTIVE, POLICIES AND RESTRICTIONS" IN THE
SAI.
EMERGING MARKET SECURITIES: Consistent with the Fund's objective and policies,
the Fund may invest in securities of issuers whose principal activities are
located in emerging market countries. Emerging market countries include any
country determined by the Adviser to have an emerging market economy, taking
into account a number of factors, including whether the country has a low- to
middle-income economy according to the International Bank for Reconstruction and
Development, the country's foreign currency debt rating, its political and
economic stability and the development of its financial and capital markets. The
Adviser determines whether an issuer's principal activities are located in an
emerging market country by considering such factors as its country of
organization, the principal trading market for its securities and the source of
its revenues and assets. The issuer's principal activities generally are deemed
to be located in a particular country if: (a) the security is issued or
guaranteed by the government of that country or any of its agencies, authorities
or instrumentalities; (b) the issuer is organized under the laws of, and
maintains a principal office in, that country; (c) the issuer has its principal
securities trading market in that country; (d) the issuer derives 50% or more of
its total revenues from goods sold or services performed in that country; or (e)
the issuer has 50% or more of its assets in that country.
BRADY BONDS: The Fund may invest in Brady Bonds, which are securities created
through the exchange of existing commercial bank loans to public and private
entities in certain emerging markets for new bonds in connection with debt
restructurings under a debt restructuring plan introduced by former U.S.
Secretary of the Treasury, Nicholas F. Brady (the "Brady Plan"). Brady Plan debt
restructurings have been implemented to date in Argentina, Brazil, Bulgaria,
Costa Rica, Dominican Republic, Ecuador, Jordan, Mexico, Nigeria, Panama, the
Philippines, Poland, Uruguay and Venezuela. Brady Bonds have been issued only
recently, and for that reason do not have a long payment history. Brady Bonds
may be collateralized or uncollateralized, are issued in various currencies (but
primarily the U.S. dollar) and are actively traded in over-the-counter secondary
markets. U.S. dollar-denominated, collateralized Brady Bonds, which may be
fixed-rate bonds or floating-rate bonds, are generally collateralized in full as
to principal by U.S. Treasury zero coupon bonds having the same maturity as the
bonds. Brady Bonds are often viewed as having three or four valuation
components: the collateralized repayment of principal at final maturity; the
collateralized interest payments; the uncollateralized interest payments; and
any uncollateralized repayment of principal at maturity (these uncollateralized
amounts constituting the "residual risk"). In light of the residual risk of
Brady Bonds and the history of defaults of countries issuing Brady Bonds with
respect to commercial bank loans by public and private entities, investments in
Brady Bonds may be viewed as speculative.
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.
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 prepayments. 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
9
<PAGE> 20
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 Government National Mortgage Association (the "GNMA")); or guaranteed by
agencies or instrumentalities of the U.S. Government (such as the Federal
National Mortgage Association (the "FNMA") or the Federal Home Loan Mortgage
Corporation (the "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 is
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.
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.
ZERO COUPON BONDS: 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.
10
<PAGE> 21
"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.
REPURCHASE AGREEMENTS: The Fund may enter into repurchase agreements in order to
earn income on available cash or as a temporary defensive measure. Under a
repurchase agreement, the Fund acquires securities subject to the seller's
agreement to repurchase at a specified time and price. If the seller becomes
subject to a proceeding under the bankruptcy laws or its assets are otherwise
subject to a stay order, the Fund's right to liquidate the securities may be
restricted (during which time the value of the securities could decline). As
discussed in the SAI, the Fund has adopted certain procedures intended to
minimize risk.
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"). A determination is made based upon a continuing review of the
trading markets for a specific Rule 144A security, whether such security is
liquid and thus not subject to the Fund's limitations on investing not more than
15% of its net assets in illiquid investments. The Board of Trustees has adopted
guidelines and delegated to MFS the daily function of determining and monitoring
the liquidity of Rule 144A securities. The Board, however, retains oversight,
focusing on factors such as valuation, liquidity and availability of
information. Investing in Rule 144A securities could have the effect of
decreasing the level of liquidity in the Fund to the extent that qualified
institutional buyers become for a time uninterested in purchasing Rule 144A
securities held in the Fund's portfolio. Subject to the Fund's 15% limitation on
investments in illiquid investments, the Fund may also invest in restricted
securities that may not be sold under Rule 144A, which presents certain risks.
As a result, the Fund might not be able to sell these securities when the
Adviser wishes to do so, or 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, U.S. Treasury securities or an irrevocable letter of credit maintained
on a current basis at an amount at least equal to the market value of the
securities loaned. If the Adviser determines to make securities loans, it is
intended that the value of the securities loaned would not exceed 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 protecting 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
11
<PAGE> 22
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 SAI.
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 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 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
12
<PAGE> 23
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 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, indexes or other
financial indicators. Most indexed securities are short to intermediate term
fixed-income securities whose values at maturity (i.e., principal value) or
interest rates rise or fall according to the change in one or more specified
underlying instruments. Indexed securities may include securities that have
embedded swap agreements (see "Swaps and Related Transactions" below). Indexed
securities may be positively or negatively indexed (i.e., their principal value
or interest rates may increase or decrease if the underlying instrument
appreciates), and may have return characteristics similar to direct investments
in the underlying instrument or to one or more options on the underlying
instrument. Indexed securities may be more volatile than the underlying
instrument itself.
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.
13
<PAGE> 24
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.
Swaps, caps, floors and collars are highly specialized activities which involve
certain risks. 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.
6. ADDITIONAL RISK FACTORS
OPTIONS, FUTURES CONTRACTS, OPTIONS ON FUTURES CONTRACTS, FORWARD CONTRACTS AND
OPTIONS ON FOREIGN CURRENCIES: 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. 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.
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.
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
14
<PAGE> 25
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.
EMERGING MARKET SECURITIES: 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, a decrease in the
level of liquidity in the Fund's portfolio, or, if the Fund has entered into a
contract to sell the security, in possible liability to the purchaser. Certain
markets may require payment for securities before delivery and in such markets
the Fund bears the risk that the securities will not be delivered and that the
Fund's payments will not be returned. Securities prices in emerging markets can
be significantly more volatile than in the more developed nations of the world,
reflecting the greater uncertainties of investing in less established markets
and economies. In particular, countries with emerging markets may have
relatively unstable governments, present the risk of nationalization of
businesses, restrictions on foreign ownership, or prohibitions against
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: The primary consideration in placing portfolio security
transactions is execution at the most favorable prices. Consistent with the
foregoing primary consideration, the Conduct Rules of the National Association
of Securities Dealers, Inc. (the "NASD") and such other policies as the Trustees
may determine, the Adviser may consider sales of shares of the Fund and of the
other investment company clients of MFD, 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 SAI. 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. For the fiscal year ended November 30,
1996, the Fund had a portfolio turnover rate in excess of 100%. Transaction
costs incurred by the Fund and the realized capital gains and losses of the Fund
may be greater than that of a Fund with a lesser portfolio turnover rate.
------------------------
15
<PAGE> 26
The investment objective and policies described above are not fundamental and
may be changed without shareholder approval.
The SAI 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 SAI may be changed without
shareholder approval unless indicated otherwise. See "Investment Restrictions"
in the SAI. 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.
7. 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").
Under the Advisory Agreement, the Adviser provides the Fund with overall
investment advisory services. Richard O. Hawkins, a Senior Vice President of the
Adviser, has been the Fund's portfolio manager since January 1, 1996. Mr.
Hawkins has been employed as a portfolio manager by the Adviser since 1988.
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 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. Prior to July 1, 1996, the Adviser received 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 assets. For the Fund's fiscal
year ended November 30, 1996, the management fee was computed and paid monthly
at an effective annual rate of 0.84% of average daily net assets, and MFS
received fees under the Advisory Agreement of $3,491,716.
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, 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 various
fixed/variable annuity contracts. MFS and its wholly owned subsidiary, MFS
Institutional Advisors, Inc., provide investment advice to substantial private
clients.
MFS is America's oldest mutual fund organization. MFS and its predecessor
organizations have a history of money management dating from 1924 and the
founding of the first mutual fund in the United States, Massachusetts Investors
Trust. Net assets under the management of the MFS organization were
approximately $52.8 billion on behalf of approximately 2.3 million investor
accounts as of February 29, 1997. As of such date, the MFS organization managed
approximately $19.9 billion of assets invested in fixed income securities. MFS
is a subsidiary of Sun Life of Canada (U.S.), which in turn is a wholly owned
subsidiary of Sun Life Assurance Company of Canada ("Sun Life"). The Directors
of MFS are A. Keith Brodkin, Jeffrey L. Shames, Arnold D. Scott, John D. McNeil
and Donald A. Stewart. Mr. Brodkin is the Chairman, Mr. Shames is the President
and Mr. Scott is the Secretary and a Senior Executive Vice President of MFS.
Messrs. McNeil and Stewart are the Chairman and 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.
MFS has established a strategic alliance with Foreign & Colonial Management Ltd.
("Foreign & Colonial"). Foreign & Colonial is a subsidiary of two of the world's
oldest financial services institutions, the London-based Foreign & Colonial
Investment Trust PLC, which pioneered the idea of investment management in 1868,
and HYPO-BANK (Bayerische Hypotheken-und Wechsel-Bank AG), the oldest publicly
listed bank in Germany, founded in 1835. As part of this alliance, the portfolio
managers and investment analysts of MFS and Foreign & Colonial share their views
on a variety of investment related issues, such as the economy,
16
<PAGE> 27
securities markets, portfolio securities and their issuers, investment
recommendations, strategies and techniques, risk analysis, trading strategies
and other portfolio management matters. MFS has access to the extensive
international equity investment expertise of Foreign & Colonial and Foreign &
Colonial has access to the extensive U.S. equity investment expertise of MFS.
MFS and Foreign & Colonial each have investment personnel working in each
other's offices in Boston and London, respectively.
In certain instances there may be securities which are suitable for the Fund's
portfolio as well as for portfolios of other clients of MFS or clients of
Foreign & Colonial. Some simultaneous transactions are inevitable when several
clients receive investment advice from MFS and Foreign & Colonial, particularly
when the same security is suitable for more than one client. While in some cases
this arrangement could have a detrimental effect on the price or availability of
the security as far as the Fund is concerned, in other cases, however, it may
produce increased investment opportunities for the Fund.
ADMINISTRATOR -- MFS provides the Fund with certain administrative services
pursuant to a Master Administrative Services Agreement dated March 1, 1997.
Under this Agreement, MFS provides the Fund with certain financial, legal,
compliance, shareholder communications and other administrative services. As a
partial reimbursement for the cost of providing these services, the Fund pays
MFS an administrative fee up to 0.015% per annum of the Fund's average daily net
assets, provided that the administrative fee is not assessed on Fund assets that
exceed $3 billion.
DISTRIBUTOR -- MFD, a wholly owned subsidiary of MFS, is the distributor of
shares of the Fund and also serves as distributor for each of the other MFS
Funds.
SHAREHOLDER SERVICING AGENT -- MFS Service Center, Inc. (the "Shareholder
Servicing Agent"), a wholly owned subsidiary of MFS, performs transfer agency
and other services for the Fund.
8. INFORMATION CONCERNING SHARES OF THE FUND
PURCHASES
Class A, Class B and Class C shares of the Fund may be purchased at the public
offering price through any dealer and other financial institutions ("dealers")
having a selling agreement with MFD. Dealers may also charge their customers
fees relating to an investment in the Fund.
This Prospectus offers Class A, Class B and Class C shares which bear sales
charges and distribution fees in different forms and amounts, as described
below:
CLASS A SHARES: Class A shares are generally offered at net asset value plus an
initial sales charge, but in certain cases are offered at net asset value
without an initial sales charge but subject to a CDSC.
PURCHASES SUBJECT TO INITIAL SALES CHARGE. Class A shares are offered at net
asset value plus an initial sales charge as follows:
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SALES CHARGE* AS PERCENTAGE
OF: DEALER
----------------------------- ALLOWANCE AS A
OFFERING NET AMOUNT PERCENTAGE OF
AMOUNT OF PURCHASE PRICE INVESTED OFFERING PRICE
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Less than $100,000.............................. 4.75% 4.99% 4.00%
$100,000 but less than $250,000................. 4.00 4.17 3.20
$250,000 but less than $500,000................. 2.95 3.04 2.25
$500,000 but less than $1,000,000............... 2.20 2.25 1.70
$1,000,000 or more.............................. None** None** See Below**
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
*Because of rounding in the calculation of offering price, actual sales charges
may be more or less than those calculated using the percentages above.
**A CDSC will apply to such purchases, as discussed below.
MFD allows discounts to dealers (which are alike for all dealers) from the
applicable public offering price as shown in the above table. In the case of the
maximum sales charge, the dealer retains 4% and MFD retains approximately 3/4 of
1% of the public offering price. The sales charge may vary depending on the
number of shares of the Fund as well as certain other MFS Funds
17
<PAGE> 28
owned or being purchased, the existence of an agreement to purchase additional
shares during a 13-month period (or 36-month period for purchases of $1 million
or more) or other special purchase programs. A description of the Right of
Accumulation, Letter of Intent and Group Purchase privileges by which the sales
charge may be reduced is set forth in the SAI.
PURCHASES SUBJECT TO A CDSC (but not an initial sales charge). In the following
four circumstances, Class A shares of the Fund are offered at net asset value
without an initial sales charge, but subject to a CDSC equal to 1% of the lesser
of the value of the shares redeemed (exclusive of reinvested dividend and
capital gain distributions) or the total cost of such shares, in the event of a
share redemption within 12 months following the purchase:
(i) on investments of $1 million or more in Class A shares;
(ii) on investments in Class A shares by certain retirement plans subject to
the Employee Retirement Income Security Act of 1974, as amended ("ERISA"),
if, prior to July 1, 1996: (a) the plan had established an account with
the Shareholder Servicing Agent and (b) the sponsoring organization had
demonstrated to the satisfaction of MFD that either (i) the employer had
at least 25 employees or (ii) the aggregate purchases by the retirement
plan of Class A shares of the MFS Funds would be in an aggregate amount of
at least $250,000 within a reasonable period of time, as determined by MFD
in its sole discretion;
(iii) on investments in Class A shares by certain retirement plans subject to
ERISA, if: (a) the retirement plan and/or sponsoring organization
subscribes to the MFS FUNDamental 401(k) Program or any similar
recordkeeping system made available by the Shareholder Servicing Agent
(the "MFS Participant Recordkeeping System"); (b) the plan establishes an
account with the Shareholder Servicing Agent on or after July 1, 1996; and
(c) the aggregate purchases by the retirement plan of Class A shares of
the MFS Funds will be in an aggregate amount of at least $500,000 within a
reasonable period of time, as determined by MFD in its sole discretion;
and
(iv) on investments in Class A shares by certain retirement plans subject to
ERISA, if: (a) the plan establishes an account with the Shareholder
Servicing Agent on or after July 1, 1996 and (b) the plan has, at the time
of purchase, a market value of $500,000 or more invested in shares of any
class or classes of the MFS Funds. THE RETIREMENT PLAN WILL QUALIFY UNDER
THIS CATEGORY ONLY IF THE PLAN OR ITS SPONSORING ORGANIZATION INFORMS THE
SHAREHOLDER SERVICING AGENT PRIOR TO THE PURCHASE THAT THE PLAN HAS A
MARKET VALUE OF $500,000 OR MORE INVESTED IN SHARES OF ANY CLASS OR CLASSES
OF THE MFS FUNDS. THE SHAREHOLDER SERVICING AGENT HAS NO OBLIGATION
INDEPENDENTLY TO DETERMINE WHETHER SUCH A PLAN QUALIFIES UNDER THIS
CATEGORY.
In the case of such purchases, MFD will pay commissions to dealers on new
investments in Class A shares made through such dealers, as follows:
<TABLE>
<CAPTION>
COMMISSION PAID
BY MFD TO DEALERS CUMULATIVE PURCHASE AMOUNT
--------------------------------------- ---------------------------------
<S> <C>
1.00%.................................. On the first $2,000,000, plus
Over $2,000,000 to $3,000,000,
0.80%.................................. plus
Over $3,000,000 to $50,000,000,
0.50%.................................. plus
0.25%.................................. Over $50,000,000
</TABLE>
For purposes of determining the level of commissions to be paid to dealers with
respect to a shareholder's new investment in Class A shares made on or after
April 1, 1996, purchases for each shareholder account (and certain other
accounts for which the shareholder is a record or beneficial holder) will be
aggregated over a 12-month period (commencing from the date of the first such
purchase).
See "Redemptions and Repurchases -- Contingent Deferred Sales Charge" for
further discussion of the CDSC.
18
<PAGE> 29
WAIVERS OF INITIAL SALES CHARGE AND CDSC. In certain circumstances, the initial
sales charge imposed upon purchases of Class A shares and the CDSC imposed upon
redemptions of Class A shares is waived. These circumstances are described in
Appendix A to this Prospectus. In addition to these circumstances, the CDSC
imposed upon the redemption of Class A shares is waived with respect to shares
held by certain retirement plans qualified under Section 401(a) or 403(b) of the
Code and subject to ERISA, where:
(i) the retirement plan and/or sponsoring organization does not subscribe to
the MFS Participant Recordkeeping System; and
(ii) the retirement plan and/or sponsoring organization demonstrates to the
satisfaction of, and certifies to, the Shareholder Servicing Agent that the
retirement plan has, at the time of certification or will have pursuant to
a purchase order placed with the certification, a market value of $500,000
or more invested in shares of any class or classes of the MFS Funds and
aggregate assets of at least $10 million;
provided, however, that the CDSC will not be waived (i.e., it will be imposed)
in the event that there is a change in law or regulations which results in a
material adverse change to the tax advantaged nature of the plan, or in the
event that the plan and/or sponsoring organization: (i) becomes insolvent or
bankrupt; (ii) is terminated or partially terminated under ERISA or is
liquidated or dissolved; or (iii) is acquired by, merged into, or consolidated
with any other entity.
CLASS B SHARES: Class B shares are offered at net asset value without an initial
sales charge but subject to a CDSC upon redemption as follows:
<TABLE>
<CAPTION>
YEAR OF CONTINGENT
REDEMPTION DEFERRED SALES
AFTER PURCHASE CHARGE
---------------------------------------------------- ---------------
<S> <C>
First............................................... 4%
Second.............................................. 4%
Third............................................... 3%
Fourth.............................................. 3%
Fifth............................................... 2%
Sixth............................................... 1%
Seventh and following............................... 0%
</TABLE>
The CDSC imposed is assessed against the lesser of the value of the shares
redeemed (exclusive of reinvested dividends and capital gain distributions) or
the total cost of such shares. No CDSC is assessed against shares acquired
through the automatic reinvestment of dividends or capital gain distributions.
Except as described below, MFD will pay commissions to dealers of 3.75% of the
purchase price of Class B shares purchased through dealers. MFD will also
advance to dealers the first year service fee payable under the Fund's
Distribution Plan (see "Distribution Plan" below) at a rate equal to 0.25% of
the purchase price of such shares. Therefore, the total amount paid to a dealer
upon the sale of Class B shares is 4% of the purchase price of the shares
(commission rate of 3.75% plus a service fee equal to 0.25% of the purchase
price).
Class B shares purchased by a retirement plan whose sponsoring organization
subscribes to the MFS Participant Recordkeeping System and which has established
its account with the Shareholder Servicing Agent on or after July 1, 1996, will
be subject to the CDSC described above, only under limited circumstances, as
explained below under "Waivers of CDSC." With respect to such purchases, MFD
pays an amount to dealers equal to 3.00% of the amount purchased through such
dealers (rather than the 4.00% payment described above), which is comprised of a
commission of 2.75% plus the advancement of the first year service fee equal to
0.25% of the purchase price payable under the Fund's Distribution Plan. As
discussed above, such retirement plans are eligible to purchase Class A shares
of the Funds at net asset value without an initial sales charge but subject to a
1% CDSC if the plan has, at the time of purchase, a market value of $500,000 or
more invested in shares of any class or classes of the MFS Funds. IN THIS EVENT,
THE PLAN OR ITS SPONSORING ORGANIZATION SHOULD INFORM THE SHAREHOLDER SERVICING
AGENT THAT THE PLAN IS
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ELIGIBLE TO PURCHASE CLASS A SHARES UNDER THIS CATEGORY; THE SHAREHOLDER
SERVICING AGENT HAS NO OBLIGATION INDEPENDENTLY TO DETERMINE WHETHER SUCH A PLAN
QUALIFIES UNDER THIS CATEGORY FOR THE PURCHASE OF CLASS A SHARES.
See "Redemptions and Repurchases -- Contingent Deferred Sales Charge" for
further discussion of the CDSC.
WAIVERS OF CDSC. In certain circumstances, the CDSC imposed upon redemption of
Class B shares is waived. These circumstances are described in Appendix A to
this Prospectus. In addition to these circumstances, the CDSC imposed upon the
redemption of Class B shares is waived with respect to shares held by a
retirement plan whose sponsoring organization subscribes to the MFS Participant
Recordkeeping System and which has established an account with the Shareholder
Servicing Agent on or after July 1, 1996; provided, however, that the CDSC will
not be waived (i.e., it will be imposed) in the event that there is a change in
law or regulations which results in a material adverse change to the tax
advantaged nature of the plan, or in the event that the plan and/or sponsoring
organization: (i) becomes insolvent or bankrupt; (ii) is terminated or partially
terminated under ERISA or is liquidated or dissolved; or (iii) is acquired by,
merged into, or consolidated with any other entity.
CONVERSION OF CLASS B SHARES. Class B shares of the Fund that remain outstanding
for approximately eight years will convert to Class A shares of the same Fund.
Shares purchased through the reinvestment of distributions paid in respect of
Class B shares will be treated as Class B shares for purposes of the payment of
the distribution and service fees under the Fund's Distribution Plan. See
"Distribution Plan" below. However, for purposes of conversion to Class A
shares, all shares in a shareholder's account that were purchased through the
reinvestment of dividends and distributions paid in respect of Class B shares
(and which have not converted to Class A shares as provided in the following
sentence) will be held in a separate sub-account. Each time any Class B shares
in the shareholder's account (other than those in the sub-account) convert to
Class A shares, a portion of the Class B shares then in the sub-account will
also convert to Class A shares. The portion will be determined by the ratio that
the shareholder's Class B shares not acquired through reinvestment of dividends
and distributions that are converting to Class A shares bears to the
shareholder's total Class B shares not acquired through reinvestment. The
conversion of Class B shares to Class A shares is subject to the continuing
availability of a ruling from the Internal Revenue Service or an opinion of
counsel that such conversion will not constitute a taxable event for federal tax
purposes. There can be no assurance that such ruling or opinion will be
available, and the conversion of Class B shares to Class A shares will not occur
if such ruling or opinion is not available. In such event, Class B shares would
continue to be subject to higher expenses than Class A shares for an indefinite
period.
CLASS C SHARES: Class C shares are offered at net asset value without an initial
sales charge but are subject to a CDSC of 1.00% upon redemption during the first
year. Class C shares do not convert to any other class of shares of the Fund.
The maximum investment in Class C shares that may be made is $1,000,000 per
transaction.
The CDSC imposed is assessed against the lesser of the value of the shares
redeemed (exclusive of reinvested dividend and capital gain distributions) or
the total cost of such shares. No CDSC is assessed against shares acquired
through the automatic reinvestment of dividend or capital gain distributions.
See "Redemptions and Repurchases -- Contingent Deferred Sales Charge" below for
further discussion of the CDSC.
MFD will pay dealers 1.00% of the purchase price of Class C shares purchased
through dealers and, as compensation therefor, MFD will retain the 1.00% per
annum distribution and service fee paid under the Fund's Distribution Plan to
MFD for the first year after purchase (see "Distribution Plan" below).
Class C shares are not currently available for purchase by any retirement plan
qualified under Sections 401(a) or 403(b) of the Code if the retirement plan
and/or the sponsoring organization subscribe to the MFS FUNDamental 401(k) Plan
or another similar recordkeeping program made available by the Shareholder
Servicing Agent.
WAIVERS OF CDSC: In certain circumstances, the CDSC imposed upon redemption of
Class C shares is waived. These circumstances are described in Appendix A to the
Prospectus.
GENERAL: The following information applies to purchases of all classes of the
Fund's shares.
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<PAGE> 31
MINIMUM INVESTMENT. Except as described below, the minimum initial investment is
$1,000 per account and the minimum additional investment is $50 per account.
Accounts being established for monthly automatic investments and under payroll
savings programs and tax-deferred retirement programs (other than IRA's)
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 for sale at any time.
SUBSEQUENT INVESTMENT BY TELEPHONE: Each shareholder may purchase additional
shares of any MFS Fund by telephoning the Shareholder Servicing Agent toll-free
at (800) 225-2606. The minimum purchase amount is $50 and the maximum purchase
amount is $100,000. Shareholders wishing to avail themselves of this telephone
purchase privilege must so elect on their Account Application and designate
thereon a bank and account number from which purchases will be made. If a
telephone purchase request is received by the Shareholder Servicing Agent on any
business day prior to the close of regular trading on the Exchange (generally,
4:00 p.m., Eastern time), the purchase will occur at the closing net asset value
of the shares purchased on that day. The Shareholder Servicing Agent may be
liable for any losses resulting from unauthorized telephone transactions if it
does not follow reasonable procedures designed to verify the identity of the
caller. The Shareholder Servicing Agent will request personal or other
information from the caller, and will normally also record calls. Shareholders
should verify the accuracy of confirmation statements immediately after their
receipt.
RIGHT TO REJECT PURCHASE ORDERS/MARKET TIMING. Purchases and exchanges should be
made for investment purposes only. The Fund and MFD each reserves the right to
reject or restrict any specific purchase or exchange request. In the event that
the Fund or MFD rejects an exchange request, neither the redemption nor the
purchase side of the exchange will be processed.
The Fund is not designed for professional market timing organizations or other
entities using programmed or frequent exchanges. The Fund defines a "market
timer" as an individual, or organization acting on behalf of one or more
individuals, if (i) the individual or organization makes three or more exchange
request out of the Fund per calendar year and (ii) any one of such exchange
requests represents shares equal in value to 1/2 of 1% or more of the Fund's net
assets at the time of the request. Accounts under common ownership or control,
including accounts administered by market timers will be aggregated for purposes
of this definition.
As noted above, the Fund and MFD each reserves the right to reject or restrict
any specific purchase and exchange request and, in addition, may impose specific
limitations with respect to market timers, including delaying for up to seven
days on the purchase side of an exchange request by market timers or
specifically rejecting or otherwise restricting purchase or exchange requests by
market timers. Other funds in the MFS Funds may have different and/or more or
less restrictive policies with respect to market timers than the Fund. These
policies are disclosed in the Prospectuses of these other MFS Funds.
DEALER CONCESSIONS. Dealers may receive different compensation with respect to
sales of Class A, Class B and Class C shares. In addition, from time to time,
MFD may pay dealers 100% of the applicable sales charge on sales of Class A
shares of certain specified MFS Funds sold by such dealer during a specified
sales period. In addition, MFD or its affiliates may, from time to time, pay
dealers an additional commission equal to 0.50% of the net asset value of all of
the Class B and/or Class C shares of certain specified MFS Funds sold by such
dealer during a specified sales period. In addition, from time to time, MFD, at
its expense, may provide additional commissions, compensation or promotional
incentives ("concessions") to dealers which sell shares of the Fund. Such
concessions provided by MFD may include financial assistance to dealers in
connection with preapproved conferences or seminars, sales or training programs
for invited registered representatives, payment for travel expenses, including
lodging, incurred by registered representatives for such seminars or training
programs, seminars for the public, advertising and sales campaigns regarding one
or more MFS Funds, and/or other dealer-sponsored events. From time to time, MFD
may make expense reimbursements for special training of a dealer's registered
representatives in group meetings or to help pay the
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<PAGE> 32
expenses of sales contests. Other concessions may be offered to the extent not
prohibited by state laws or any self-regulatory agency, such as the NASD.
SPECIAL INVESTMENT PROGRAMS. For shareholders who elect to participate in
certain investment programs (e.g., the Automatic Investment Plan) or other
shareholder services, MFD or its affiliates may either (i) give a gift of
nominal value, such as a hand-held calculator or (ii) make a nominal charitable
contribution on their behalf.
RETIREMENT PLAN ACCOUNTS. Following the termination of any agreement between a
plan sponsor and the Shareholder Servicing Agent or its affiliates with respect
to the MFS FUNDamental 401(k) Plan or another similar record keeping system made
available by the Shareholder Servicing Agent, the Shareholder Servicing Agent
for each Fund in which the plan invests shall combine all plan participant
accounts into a single omnibus or pooled account.
RESTRICTIONS ON ACTIVITIES OF NATIONAL BANKS. The Glass-Steagall Act prohibits
national banks from engaging in the business of underwriting, selling or
distributing securities. Although the scope of the prohibition has not been
clearly defined, MFD believes that such Act should not preclude banks from
entering into agency agreements with MFD. If, however, a bank were prohibited
from so acting, the Trustees would consider what actions, if any, would be
necessary to continue to provide efficient and effective shareholder services in
respect of shareholders who invested in the Fund through a national bank. It is
not expected that shareholders would suffer any adverse financial consequence as
a result of these occurrences. In addition, state securities laws on this issue
may differ from the interpretation of federal law expressed herein and banks and
financial institutions may be required to register as broker-dealers pursuant to
state law.
------------------------
A shareholder whose shares are held in the name of, or controlled by, a dealer
might not receive many of the privileges and services from the Fund (such as
Right of Accumulation, Letter of Intent and certain recordkeeping services) that
the Fund ordinarily provides.
EXCHANGES
Subject to the requirements set forth below, some or all of the shares in an
account with the Fund for which payment has been received by the Fund (i.e., an
established account) may be exchanged for shares of the same class of any of the
other MFS Funds at net asset value (if available for sale). Shares of one class
may not be exchanged for shares of any other class.
EXCHANGES AMONG MFS FUNDS (EXCLUDING EXCHANGES FROM MFS MONEY MARKET FUNDS): No
initial sales charges or CDSC will be imposed in connection with an exchange
from shares of an MFS Fund to shares of any other MFS Fund, except with respect
to exchanges from an MFS money market fund to another MFS Fund which is not an
MFS money market fund (discussed below). With respect to an exchange involving
shares subject to a CDSC, the CDSC will be unaffected by the exchange and the
holding period for purposes of calculating the CDSC will carry over to the
acquired shares.
EXCHANGES FROM AN MFS MONEY MARKET FUND: Special rules apply with respect to the
imposition of an initial sales charge or a CDSC for exchanges from an MFS money
market fund to another MFS Fund which is not an MFS money market fund. These
rules are described under the caption "Exchanges" in the Prospectuses of those
MFS money market funds.
EXCHANGES INVOLVING THE MFS FIXED FUND: Class A shares of any MFS Fund held by
certain qualified retirement plans may be exchanged for units of participation
of the MFS Fixed Fund (a bank collective investment fund) (the "Units"), and
Units may be exchanged for Class A shares of any MFS Fund. With respect to
exchanges between Class A shares subject to a CDSC and Units, the CDSC will
carry over to the acquired shares or Units and will be deducted from the
redemption proceeds when such shares or Units are subsequently redeemed,
assuming the CDSC is then payable (the period during which the Class A shares
and the Units were held will be aggregated for purposes of calculating the
applicable CDSC). In the event that a shareholder initially purchases Units and
then exchanges into Class A shares subject to an initial sales charge of an MFS
Fund, the initial sales charge shall be due upon such exchange, but will not be
imposed with respect to any subsequent exchanges between such Class A shares and
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<PAGE> 33
Units with respect to shares on which the initial sales charge has already been
paid. In the event that a shareholder initially purchases Units and then
exchanges into Class A shares subject to a CDSC of an MFS Fund, the CDSC period
will commence upon such exchange, and the applicability of the CDSC with respect
to subsequent exchanges shall be governed by the rules set forth above in this
paragraph.
GENERAL: A shareholder should read the prospectus of the other MFS Fund into
which an exchange is made and consider the differences in objectives, policies
and restrictions before making any exchange. Exchanges will be made only after
instructions in writing or by telephone (an "Exchange Request") are received for
an established account by the Shareholder Servicing Agent in proper form (i.e.,
if in writing -- signed by the record owner(s) exactly as the shares are
registered; if by telephone -- proper account identification is given by the
dealer or shareholder of record) and each exchange must involve either shares
having an aggregate value of at least $1,000 ($50 in case of retirement plan
participants whose sponsoring organizations subscribe to the MFS FUNDamental
401(k) Plan or another similar 401(k) recordkeeping system made available by the
Shareholder Servicing Agent) or all the shares in the account. If an Exchange
Request is received by the Shareholder Servicing Agent on any business day prior
to the close of regular trading on the Exchange (generally, 4:00 p.m., Eastern
time), the exchange will occur on that day if all the requirements set forth
above have been complied with at that time and subject to the Fund's right to
reject purchase orders. No more than five exchanges may be made in any one
Exchange Request by telephone. Additional information concerning this exchange
privilege and prospectuses for any of the other MFS Funds may be obtained from
dealers or the Shareholder Servicing Agent. For federal and (generally) state
income tax purposes, an exchange is treated as a sale of the shares exchanged
and, therefore, an exchange could result in a gain or loss to the shareholder
making the exchange. Exchanges by telephone are automatically available to most
non-retirement plan accounts and certain retirement plan accounts. For further
information regarding exchanges by telephone, see "Redemptions by Telephone"
below. The exchange privilege (or any aspect of it) may be changed or
discontinued and is subject to certain limitations, including certain
restrictions on purchases by market timers.
REDEMPTIONS AND REPURCHASES
A shareholder may withdraw all or any portion of the value of his account on any
date on which the Fund is open for business by redeeming shares at their net
asset value (a redemption) or by selling such shares to the Fund through a
dealer (a repurchase). Certain redemptions and repurchases are, however, subject
to a CDSC. See "Contingent Deferred Sales Charge" below. Because the net asset
value of shares of the account fluctuates, redemptions or repurchases, which are
taxable transactions, are likely to result in gains or losses to the
shareholder. When a shareholder withdraws an amount from his account, the
shareholder is deemed to have tendered for redemption a sufficient number of
full and fractional shares in his account to cover the amount withdrawn. The
proceeds of a redemption or repurchase will normally be available within seven
days, except for shares purchased or received in exchange for shares purchased
by check (including certified checks or cashier's checks). Payment of redemption
proceeds may be delayed for up to 15 days from the purchase date in an effort to
assure that such check has cleared. See "Tax Status" below.
REDEMPTION BY MAIL: Each shareholder may redeem all or any portion of the shares
in his account by mailing or delivering to the Shareholder Servicing Agent (see
back cover for address) a stock power with a written request for redemption or
letter of instruction, together with his share certificates (if any were
issued), all in "good order" for transfer. "Good order" generally means that the
stock power, written request for redemption, letter of instruction or
certificate must be endorsed by the record owner(s) exactly as the shares are
registered and the signature(s) must be guaranteed in the manner set forth below
under the caption "Signature Guarantee." In addition, in some cases "good order"
will require the furnishing of additional documents. The Shareholder Servicing
Agent may make certain de minimis exceptions to the above requirements for
redemption. Within seven days after receipt of a redemption request in "good
order" by the Shareholder Servicing Agent, the Fund will make payment in cash of
the net asset value of the shares next determined after such redemption request
was received, reduced by the amount of any applicable CDSC described above and
the amount of any income tax required to be withheld, except during any period
in
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<PAGE> 34
which the right of redemption is suspended or date of payment is postponed
because the Exchange is closed or trading on such Exchange is restricted or to
the extent otherwise permitted by the 1940 Act if an emergency exists.
REDEMPTION BY TELEPHONE: Each shareholder may redeem an amount from his account
by telephoning the Shareholder Servicing Agent toll-free at (800) 225-2606.
Shareholders wishing to avail themselves of this telephone redemption privilege
must so elect on their Account Application, designate thereon a bank and account
number to receive the proceeds of such redemption, and sign the Account
Application Form with the signature(s) guaranteed in the manner set forth below
under the caption "Signature Guarantee." The proceeds of such a redemption,
reduced by the amount of any applicable CDSC and the amount of any income tax
required to be withheld, are mailed by check to the designated account, without
charge, if the redemption proceeds do not exceed $1,000, and are wired in
federal funds to the designated account if the redemption proceeds exceed
$1,000. If a telephone redemption request is received by the Shareholder
Servicing Agent by the close of regular trading on the Exchange on any business
day, shares will be redeemed at the closing net asset value of the Fund on that
day. Subject to the conditions described in this section, proceeds of a
redemption are normally mailed or wired on the next business day following the
date of receipt of the order for redemption. The Shareholder Servicing Agent may
be liable for any losses resulting from unauthorized telephone transactions if
it does not follow reasonable procedures designed to verify the identity of the
caller. The Shareholder Servicing Agent will request personal or other
information from the caller, and will normally also record calls. Shareholders
should verify the accuracy of confirmation statements immediately after their
receipt.
REPURCHASE THROUGH A DEALER: If a shareholder desires to sell his shares through
his dealer (a repurchase), the shareholder can place a repurchase order with his
dealer, who may charge the shareholder a fee. IF THE DEALER RECEIVES THE
SHAREHOLDER'S ORDER PRIOR TO THE CLOSE OF REGULAR TRADING ON THE EXCHANGE AND
COMMUNICATES IT TO MFD BEFORE THE CLOSE OF BUSINESS ON THE SAME DAY, THE
SHAREHOLDER WILL RECEIVE THE NET ASSET VALUE CALCULATED ON THAT DAY, REDUCED BY
THE AMOUNT OF ANY APPLICABLE CDSC AND THE AMOUNT OF ANY INCOME TAX REQUIRED TO
BE WITHHELD.
CONTINGENT DEFERRED SALES CHARGE: Investments in Class A, Class B or Class C
shares ("Direct Purchases") will be subject to a CDSC for a period of: (i) with
respect to Class A and Class C shares, 12 months (however the CDSC on Class A
shares is only imposed with respect to purchases of $1 million or more of Class
A shares or purchases by certain retirement plans of Class A shares); or (ii)
with respect to Class B shares, six years. Purchases of Class A shares made
during a calendar month, regardless of when during the month the investment
occurred, will age one month on the last day of the month and each subsequent
month. Class B shares purchased on or after January 1, 1993 and Class C shares
purchased after April 1, 1996 will be aggregated on a calendar month basis --
all transactions made during a calendar month, regardless of when during the
month they have occurred, will age one year at the close of business on the last
day of such month in the following calendar year and each subsequent year. For
Class B shares of the Fund purchased prior to January 1, 1993, transactions will
be aggregated on a calendar year basis -- all transactions made during a
calendar year, regardless of when during the year they have occurred, will age
one year at the close of business on December 31 of that year and each
subsequent year.
At the time of a redemption, the amount by which the value of a shareholder's
account for a particular class of shares represented by Direct Purchases exceeds
the sum of the six calendar year aggregations (12 months in the case of
purchases of Class C shares and of purchases of $1 million or more of Class A
shares or purchases by certain retirement plans of Class A shares) of Direct
Purchases may be redeemed without charge ("Free Amount"). Moreover, no CDSC is
ever assessed on additional shares acquired through the automatic reinvestment
of dividends or capital gain distributions ("Reinvested Shares"). Therefore, at
the time of redemption of a particular class, (i) any Free Amount is not subject
to the CDSC, and (ii) the amount of redemption equal to the then-current value
of Reinvested Shares is not subject to the CDSC, but (iii) any amount of the
redemption in excess of the aggregate of the then-current value of Reinvested
Shares and the Free Amount is subject to a CDSC. The CDSC will first be applied
against the amount of Direct Purchases which will result in any such charge
being imposed at the lowest possible rate. The CDSC to be imposed upon
redemptions will be calculated as set forth in "Purchases" above.
The applicability of a CDSC will be unaffected by exchanges or transfers of
registration, except as described in Appendix A hereto.
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<PAGE> 35
GENERAL: The following information applies to redemptions and repurchases of all
classes of the Fund's shares.
SIGNATURE GUARANTEE. In order to protect shareholders against fraud, the Fund
requires, in certain instances as indicated above, that the shareholder's
signature be guaranteed. In these cases the shareholder's signature must be
guaranteed by an eligible bank, broker, dealer, credit union, national
securities exchange, registered securities association, clearing agency or
savings association. Signature guarantees shall be accepted in accordance with
policies established by the Shareholder Servicing Agent.
REINSTATEMENT PRIVILEGE. Shareholders of the Fund who have redeemed their shares
have a one-time right to reinvest the redemption proceeds in the same class of
shares of any of the MFS Funds (if shares of such Fund are available for sale)
at net asset value (with a credit for any CDSC paid) within 90 days of the
redemption pursuant to the Reinstatement Privilege. If the shares credited for
any CDSC paid are then redeemed within six years of the initial purchase in the
case of Class B shares or within 12 months of the initial purchase for Class C
share and certain Class A share purchases, a CDSC will be imposed upon
redemption. Such purchases under the Reinstatement Privilege are subject to all
limitations in the SAI regarding this privilege.
IN-KIND DISTRIBUTIONS. The Trust agrees to redeem shares of the Fund solely in
cash up to the lesser of $250,000 or 1% of the net asset value of the Fund
during any 90-day period for any one Shareholder. The Fund has reserved the
right to pay other redemptions or repurchase price of shares of the Fund, either
totally or partially, by a distribution in-kind of securities (instead of cash)
from the Fund's portfolio. The securities distributed in such a distribution
would be valued at the same amount as that assigned to them in calculating the
net asset value for the shares being sold. If a shareholder received a
distribution in-kind, the shareholder could incur brokerage or transaction
charges when converting the securities to cash.
INVOLUNTARY REDEMPTIONS/SMALL ACCOUNTS. Due to the relatively high cost of
maintaining small accounts, the Fund reserves the right to redeem shares in any
account for their then-current value if at any time the total investment in such
account drops below $500 because of redemptions, except in the case of accounts
being established for monthly automatic investments and certain payroll savings
programs, Automatic Exchange Plan accounts and tax-deferred retirement plans,
for which there is a lower minimum investment requirement. See "Purchases --
General -- Minimum Investment" above. Shareholders will be notified that the
value of their account is less than the minimum investment requirement and
allowed 60 days to make an additional investment before the redemption is
processed.
DISTRIBUTION PLAN
The Trustees have adopted a Distribution Plan for Class A, Class B and Class C
shares pursuant to Section 12(b) of the 1940 Act and Rule 12b-1 thereunder (the
"Distribution Plan"), after having concluded that there is a reasonable
likelihood that the Distribution Plan would benefit the Fund and its
shareholders.
In certain circumstances, the fees described below may not be imposed or are
being waived. These circumstances, if any, are described below under the heading
"Current Level of Distribution and Service Fees."
FEATURES COMMON TO EACH CLASS OF SHARES. There are features of the Distribution
Plan that are common to each class of shares, as described below.
SERVICE FEES. The Distribution Plan provides that the Fund may pay MFD a service
fee of up to 0.25% of the average daily net assets attributable to the class of
shares to which the Distribution Plan relates (i.e., Class A shares, Class B
shares or Class C shares, as appropriate) (the "Designated Class") annually in
order that MFD may pay expenses on behalf of the Fund relating to the servicing
of shares of the Designated Class. The service fee is used by MFD to compensate
dealers which enter into a sales agreement with MFD in consideration for all
personal services and/or account maintenance services rendered by the dealer
with respect to shares of the Designated Class owned by investors for whom such
dealer is the dealer or holder of record. MFD may from time to time reduce the
amount of the service fees paid for shares sold prior to a certain date. Service
fees may be reduced for a dealer that is the holder or dealer of record for an
investor who owns shares of the Fund having an aggregate net asset value at or
above a certain dollar level. Dealers may from time to time be required to meet
certain criteria in order to receive service
25
<PAGE> 36
fees. MFD or its affiliates are entitled to retain all service fees payable
under the Distribution Plan for which there is no dealer of record or for which
qualification standards have not been met as partial consideration for personal
services and/or account maintenance services performed by MFD or its affiliates
to shareholder accounts.
DISTRIBUTION FEES. The Distribution Plan provides that the Fund may pay MFD a
distribution fee based on the average daily net assets attributable to the
Designated Class as partial consideration for distribution services performed
and expenses incurred in the performance of MFD's obligations under its
distribution agreement with the Fund. See "Management of the Fund --
Distributor" in the SAI. The amount of the distribution fee paid by the Fund
with respect to each class differs under the Distribution Plan, as does the use
by MFD of such distribution fees. Such amounts and uses are described below in
the discussion of the provisions of the Distribution Plan relating to each class
of shares. While the amount of compensation received by MFD in the form of
distribution fees during any year may be more or less than the expense incurred
by MFD under its distribution agreement with the Fund, the Fund is not liable to
MFD for any losses MFD may incur in performing services under its distribution
agreement with the Fund.
OTHER COMMON FEATURES. Fees payable under the Distribution Plan are charged to,
and therefore reduce, income allocated to shares of the Designated Class. The
provisions of the Distribution Plan relating to operating policies as well as
initial approval, renewal, amendment and termination are substantially identical
as they relate to each class of shares covered by the Distribution Plan.
FEATURES UNIQUE TO EACH CLASS OF SHARES: There are certain features of the
Distribution Plan that are unique to each class of shares, as described below.
CLASS A SHARES. Class A shares are generally offered pursuant to an initial
sales charge, a substantial portion of which is paid to or retained by the
dealer making the sale (the remainder of which is paid to MFD). See "Purchases
- -- Class A Shares" above. In addition to the initial sales charge, the dealer
also generally receives the ongoing 0.25% per annum service fee, as discussed
above.
The distribution fee paid to MFD under the Distribution Plan is equal, on an
annual basis, to 0.10% of the Fund's average daily net assets attributable to
Class A shares. As noted above, MFD may use the distribution fee to cover
distribution-related expenses incurred by it under its distribution agreement
with the Fund, including commissions to dealers and payments to wholesalers
employed by MFD (e.g., MFD pays commission to dealers with respect to purchases
of $1 million or more of Class A shares and purchases by certain retirement
plans which are sold at net asset value but which are subject to a 1% CDSC for
one year after purchase). See "Purchases -- Class A Shares" above. In addition,
to the extent that the aggregate service and distribution fees paid under the
Distribution Plan do not exceed 0.35% per annum of the average daily net assets
of the Fund attributable to Class A shares, the Fund is permitted to pay such
distribution-related expenses or other distribution-related expenses.
CLASS B SHARES. Class B shares are offered at net asset value without an initial
sales charge but subject to a CDSC. See "Purchases -- Class B Shares" above. MFD
will advance to dealers the first year service fee described above at a rate
equal to 0.25% of the purchase price of such shares and, as compensation
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 to
receive the ongoing 0.25% per annum service fee with respect to such shares
commencing in the thirteenth month following purchase.
Under the Distribution Plan, the Fund pays MFD a distribution fee equal, on an
annual basis, to 0.75% of the Fund's average daily net assets attributable to
Class B shares. As noted above, this distribution fee may be used by MFD to
cover its distribution-related expenses under its distribution agreement with
the Fund (including the 3.75% commission it pays to dealers upon purchase of
Class B shares, as described under "Purchases -- Class B Shares" above).
CLASS C SHARES. Class C shares are offered at net asset value without an initial
sales charge but subject to a CDSC. See "Purchases -- Class C Shares" above. MFD
will pay a commission to dealers of 1.00% of the purchase price of Class C
shares purchased through dealers at the time of purchase. In compensation for
this 1.00% commission paid by MFD to dealers, MFD will
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<PAGE> 37
retain the 1.00% per annum Class C distribution and service fees paid by the
Fund with respect to such shares for the first year after purchase, and dealers
will become eligible to receive from MFD the ongoing 1.00% per annum
distribution and service fees paid by the Fund to MFD with respect to such
shares commencing in the thirteenth month following purchase.
This ongoing 1.00% fee is comprised of the 0.25% per annum service fee paid to
MFD under the Distribution Plan (which MFD in turn pays to dealers), as
discussed above, and a distribution fee paid to MFD (which MFD also in turn pays
to dealers) under the Distribution Plan equal, on an annual basis, to 0.75% of
the Fund's average daily net assets attributable to Class C shares.
CURRENT LEVEL OF DISTRIBUTION AND SERVICE FEES. The Fund's Class A, Class B and
Class C distribution and service fees for its current fiscal year are 0.22%,
1.00% and 1.00% per annum, respectively. Payment of the 0.10% per annum Class A
distribution fee will commence on such date as the Trustees of the Trust may
determine. The 0.25% per annum Class A service fee is reduced to 0.15% per annum
for shares purchased prior to October 1, 1989.
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 Internal Revenue Code
of 1986, as amended (the "Code"). Because the Fund intends to distribute all of
its net investment income and net realized capital gains to its shareholders in
accordance with the timing requirements imposed by the Code, it is not expected
that the Fund will be required to pay any federal income or excise taxes,
although the Fund's foreign-source income may be subject to foreign withholding
taxes.
Shareholders of the Fund normally will have to pay federal income taxes and any
state or local taxes on the dividends and capital gain distributions they
receive from the Fund, whether the distribution is in cash or in additional
shares. The Fund expects that none of its distributions will be eligible 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.
Shortly after the end of each calendar year, each shareholder will be sent a
statement setting forth the federal income tax status of all Fund dividends and
distributions for that 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), the portion representing interest on U.S. Government
obligations, and the amount, if any, of federal income tax withheld. In certain
circumstances, the Fund may also elect to "pass through" to shareholders foreign
income taxes paid by the Fund. Under those circumstances, the Fund will also
notify shareholders of their pro rata portion of the foreign income taxes paid
by the Fund; shareholders may be eligible for foreign tax credits or deductions
with respect to those taxes, but will be required to treat the amount of the
taxes as an amount distributed to them and thus includable in their gross income
for federal income tax purposes.
Fund distributions will reduce the Fund's net asset value per share.
Shareholders who buy shares shortly 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.
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<PAGE> 38
The Fund intends to withhold U.S. federal income tax at the rate of 30% on
dividends and other payments that are subject to such withholding and that are
made to persons who are neither citizens nor residents of the U.S., regardless
of whether a lower rate may be permitted under an applicable treaty. The Fund is
also required in certain circumstances to apply backup withholding at the rate
of 31% on taxable dividends and redemption proceeds paid to any shareholder
(including a shareholder who is neither a citizen nor a resident of the U.S.)
who does not furnish to the Fund certain information and certifications or who
is otherwise subject to backup withholding. Backup withholding will not,
however, be applied to payments that have been subject to 30% withholding.
Prospective investors should read the Fund's Account Application for additional
information regarding backup withholding of federal income tax and should
consult their own tax advisers as to the tax consequences to them of an
investment in the Fund.
NET ASSET VALUE
The net asset value per share of each class of 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 SAI. 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.
DESCRIPTION OF SHARES, VOTING RIGHTS AND LIABILITIES
The Fund, one of two series of the Trust, has three classes of shares which it
offers to the general public, entitled Class A, Class B and Class C shares of
Beneficial Interest (without par value). The Fund also has a class of shares
which it offers exclusively to certain institutional investors, entitled Class I
shares. 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 the 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 Declaration of Trust provides
that a Trustee may be removed from office in certain instances (See "Description
of Shares, Voting Rights and Liabilities") in the SAI.
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
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<PAGE> 39
period. Yield calculations for Class B and Class C shares assume no CDSC is
paid. The current distribution rate for each class is generally based upon the
total amount of dividends per share paid by the Fund to shareholders of that
class during the past twelve months and is computed by dividing the amount of
such dividends by the maximum public offering price of that class at the end of
such period. Current distribution rate calculations for Class B and Class C
shares assume no CDSC is paid. The current distribution rate differs from the
yield calculation because it may include distributions to shareholders from
sources other than dividends and interest, such as premium income from option
writing, short-term capital gains, and return of invested capital, and is
calculated over a different period of time. Total rate of return quotations will
reflect the average annual percentage change over stated periods in the value of
an investment in each class of shares of the Fund made at the maximum public
offering price of shares of that class and with all distributions reinvested and
which will give effect to the imposition of any applicable CDSC assessed upon
redemptions of the Fund's Class B and Class C shares. Such total rate of return
quotations may be accompanied by quotations which do not reflect the reduction
in value of the initial investment due to the sales charge or the deduction of a
CDSC, and which will thus be higher. The Fund offers multiple classes of shares
which were initially offered for sale to the public on different dates. The
calculation of total rate of return for a class of shares which initially was
offered for sale to the public subsequent to another class of shares of the Fund
is based both on (i) the performance of the Fund's newer class from the date it
initially was offered for sale to the public and (ii) the performance of the
Fund's oldest class from the date it initially was offered for sale to the
public up to the date that the newer class initially was offered for sale to the
public. See the SAI for further information on the calculation of total rate of
return for share classes initially offered for sale to the public on different
dates.
All performance quotations 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 SAI. For further information
about the Fund's performance for the fiscal year ended November 30, 1996, please
see the Fund's Annual Report. A copy of the Annual Report may be obtained
without charge by contacting the Shareholder Servicing Agent (see back cover for
address and phone number). In addition to information provided in shareholder
reports, the Fund may, in its discretion, from time to time, make a list of all
or a portion of its holdings available to investors upon request.
9. SHAREHOLDER SERVICES
Shareholders with questions concerning the shareholder services described below
or concerning other aspects of the Fund, should contact the Shareholder
Servicing Agent (see back cover for address and phone number).
ACCOUNT AND CONFIRMATION STATEMENTS -- Each shareholder will receive
confirmation statements showing the transaction activity in his 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"
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:
-- 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, or
the shareholder does not respond to mailings from the Shareholder Servicing
Agent with regard to uncashed
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<PAGE> 40
distribution checks, such shareholder's distribution option will automatically
be converted to having all dividends and other distributions reinvested in
additional shares. Any request to change a distribution option must be received
by the Shareholder Servicing Agent by the record date for a dividend or
distribution in order to be effective for that dividend or distribution. No
interest will accrue on amounts represented by uncashed distribution or
redemption checks.
INVESTMENT AND WITHDRAWAL PROGRAMS -- For the convenience of shareholders, the
Fund makes available the following programs designed to enable shareholders to
add to their investment in an account with the Fund or withdraw from it with a
minimum of paper work. The programs involve no extra charge to shareholders
(other than a sales charge in the case of certain Class A share purchases) and
may be changed or discontinued at any time by a shareholder or the Fund:
LETTER OF INTENT: If a shareholder (other than a group purchaser as
described in the SAI) anticipates purchasing $100,000 or more of Class A shares
of the Fund alone or in combination with shares of any class 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 Class A, Class B and Class C
shares of that shareholder in the MFS Funds or MFS Fixed Fund (a bank collective
investment fund) reaches 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 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 circumstances. The aggregate withdrawals of Class B and Class C 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 on any day of the month. If the
shareholder does not specify a date, the investment will automatically occur on
the first business day of the month. Required forms are available from the
Shareholder Servicing Agent or investment dealers.
AUTOMATIC EXCHANGE PLAN: Shareholders having account balances of at least
$5,000 in any MFS Fund may exchange their shares for the same class of shares of
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 if
such Fund is available for sale. Under the Automatic Exchange Plan, exchanges of
at least $50 each may be made to up to six different funds. A shareholder should
consider the objectives and policies of a fund and review its prospectus before
electing to exchange money into such fund through the Automatic Exchange Plan.
No transaction fee is imposed in connection with exchange transactions under the
Automatic Exchange Plan. However, exchanges of shares of MFS Money Market Fund,
MFS Government Money Market Fund or Class A shares of MFS Cash Reserve Fund will
be subject to any applicable sales charge. For federal and (generally) state
income tax purposes, an exchange is treated as a sale of the shares exchanged
and, therefore, could result in a capital gain or loss to the shareholder making
the exchange.
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<PAGE> 41
See the SAI for further information concerning the Automatic Exchange Plan.
Investors should consult their tax advisers for information regarding the
potential capital gain and loss consequences of transactions under the Automatic
Exchange Plan.
Because a dollar cost averaging program involves periodic purchases of shares
regardless of fluctuating share offering prices, a shareholder should consider
his financial ability to continue his purchases through periods of low price
levels. Maintaining a dollar cost averaging program concurrently with a
withdrawal program could be disadvantageous because of the sales charges
included in 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" above, 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 SAI, dated April 1, 1997 contains more detailed information about the
Trust and the Fund, including, but not limited to, information related to: (i)
the Fund's investment objective, policies and restrictions, including the
purchase and sale of Options, Futures Contracts, Options on Futures Contracts,
Forward Contracts and Options on Foreign Currencies; (ii) 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 Plan; and (vii) various services and
privileges provided by the Fund for the benefit of its shareholders, including
additional information with respect to the exchange privilege.
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<PAGE> 42
APPENDIX A
WAIVERS OF SALES CHARGES
This Appendix sets forth the various circumstances in which all applicable sales
charges are waived (Section I), the initial sales charge and the CDSC for Class
A shares are waived (Section II), and the CDSC for Class B and Class C shares is
waived (Section III).
I. WAIVERS OF ALL APPLICABLE SALES CHARGES
In the following circumstances, the initial sales charge imposed on purchases of
Class A shares and the CDSC imposed on certain redemptions of Class A shares and
on redemptions of Class B and Class C shares, as applicable, are waived:
1. DIVIDEND REINVESTMENT
- Shares acquired through dividend or capital gain reinvestment; and
- Shares acquired by automatic reinvestment of distributions of dividends
and capital gains of any fund in the MFS Family of Funds pursuant to the
Distribution Investment Program.
2. CERTAIN ACQUISITIONS/LIQUIDATIONS
- Shares acquired on account of the acquisition or liquidation of assets of
other investment companies or personal holding companies.
3. AFFILIATES OF AN MFS FUND/CERTAIN DEALERS. SHARES ACQUIRED BY:
- Officers, eligible directors, employees (including retired employees) and
agents of MFS, Sun Life or any of their subsidiary companies;
- Trustees and retired trustees of any investment company for which MFD
serves as distributor;
- Employees, directors, partners, officers and trustees of any sub-adviser
to any MFS Fund;
- Employees or registered representatives of dealers and other financial
institutions ("dealers") which have a sales agreement with MFD;
- Certain family members of any such individual and their spouses
identified above and certain trusts, pension, profit-sharing or other
retirement plans for the sole benefit of such persons, provided the
shares are not resold except to the MFS Fund which issued the shares; and
- Institutional Clients of MFS or MFS Institutional Advisors, Inc. ("MFSI")
4. INVOLUNTARY REDEMPTIONS (CDSC WAIVER ONLY)
- Shares redeemed at an MFS Fund's direction due to the small size of a
shareholder's account. See "Redemptions and Repurchases -- General --
Involuntary Redemptions/Small Accounts" in the Prospectus.
5. RETIREMENT PLANS (CDSC WAIVER ONLY). Shares redeemed on account of
distributions made under the following circumstances:
INDIVIDUAL RETIREMENT ACCOUNTS ("IRAS")
- Death or disability of the IRA owner.
SECTION 401(A) PLANS ("401(A) PLANS") AND SECTION 403(B) EMPLOYER SPONSORED
PLANS ("ESP PLANS")
- Death, disability or retirement of 401(a) or ESP Plan participant;
- Loan from 401(a) or ESP Plan (repayment of loans, however, will
constitute new sales for purposes of assessing sales charges);
- Financial hardship (as defined in Treasury Regulation Section
1.401(k)-1(d)(2), as amended from time to time);
- Termination of employment of 401(a) or ESP Plan participant (excluding,
however, a partial or other termination of the Plan);
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<PAGE> 43
- Tax-free return of excess 401(a) or ESP Plan contributions;
- To the extent that redemption proceeds are used to pay expenses (or
certain participant expenses) of the 401(a) or ESP Plan (e.g.,
participant account fees), provided that the Plan sponsor subscribes to
the MFS FUNDamental 401(k) Plan or another similar recordkeeping system
made available by MFS Service Center, Inc. ("the Shareholder Servicing
Agent"); and
- Distributions from a 401(a) or ESP Plan that has invested its assets in
one or more of the MFS Funds for more than 10 years from the later to
occur of: (i) January 1, 1993 or (ii) the date such 401(a) or ESP Plan
first invests its assets in one or more of the MFS Funds. The sales
charges will be waived in the case of a redemption of all of the 401(a)
or ESP Plan's shares in all MFS Funds (i.e., all the assets of the 401(a)
or ESP Plan invested in the MFS Funds are withdrawn), unless immediately
prior to the redemption, the aggregate amount invested by the 401(a) or
ESP Plan in shares of the MFS Funds (excluding the reinvestment of
distributions) during the prior four years equals 50% or more of the
total value of the 401(a) or ESP Plan's assets in the MFS Funds, in which
case the sales charges will not be waived.
SECTION 403(B) SALARY REDUCTION ONLY PLANS ("SRO PLANS")
- Death or disability of SRO Plan participant.
6. CERTAIN TRANSFERS OF REGISTRATION (CDSC WAIVER ONLY). Shares transferred:
- To an IRA rollover account where any sales charges with respect to the
shares being reregistered would have been waived had they been redeemed;
and
- From a single account maintained for a 401(a) Plan to multiple accounts
maintained by the Shareholder Servicing Agent on behalf of individual
participants of such Plan, provided that the Plan sponsor subscribes to
the MFS FUNDamental 401(k) Plan or another similar recordkeeping system
made available by the Shareholder Servicing Agent.
II. WAIVERS OF CLASS A SALES CHARGES
In addition to the waivers set forth in Section I above, in the following
circumstances the initial sales charge imposed on purchases of Class A shares
and the CDSC imposed on certain redemptions of Class A shares are waived:
1. INVESTMENT OF REDEMPTION PROCEEDS FROM UNAFFILIATED MUTUAL FUNDS
- Shares acquired through the investment of redemption proceeds from
another open-end management investment company not distributed or managed
by MFD or its affiliates if: (i) the investment is made through a dealer
and appropriate documentation is submitted to MFD; (ii) the redeemed
shares were subject to an initial sales charge or deferred sales charge
(whether or not actually imposed); (iii) the redemption occurred no more
than 90 days prior to the purchase of Class A shares; and (iv) the MFS
Fund, MFD or its affiliates have not agreed with such company or its
affiliates, formally or informally, to waive sales charges on Class A
shares or provide any other incentive with respect to such redemption and
sale.
2. WRAP ACCOUNT INVESTMENTS
- Shares acquired by investments through certain dealers which have entered
into an agreement with MFD which includes a requirement that such shares
be sold for the sole benefit of clients participating in a "wrap" account
or a similar program under which such clients pay a fee to such dealer.
3. INVESTMENT BY INSURANCE COMPANY SEPARATE ACCOUNTS
- Shares acquired by insurance company separate accounts.
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<PAGE> 44
4. RETIREMENT PLANS
ADMINISTRATIVE SERVICES ARRANGEMENTS
- Shares acquired by retirement plans whose third party administrators or
dealers have entered into an administrative services agreement with MFD
or one of its affiliates to perform certain administrative services,
subject to certain operational and minimum size requirements specified
from time to time by MFD or one or more of its affiliates.
REINVESTMENT OF DISTRIBUTIONS FROM QUALIFIED RETIREMENT PLANS
- Shares acquired through the automatic reinvestment in Class A shares of
Class A or Class B distributions which constitute required withdrawals
from qualified retirement plans.
SHARES REDEEMED ON ACCOUNT OF DISTRIBUTIONS MADE UNDER THE FOLLOWING
CIRCUMSTANCES:
IRAS
- Distributions made on or after the IRA owner has attained the age of
59 1/2 years old; and
- Tax-free returns of excess IRA contributions.
401(A) PLANS
- Distributions made on or after the 401(a) Plan participant has attained
the age of 59 1/2 years old; and
- Certain involuntary redemptions and redemptions in connection with
certain automatic withdrawals from a 401(a) Plan.
ESP PLANS AND SRO PLANS
- Distributions made on or after the ESP or SRO Plan participant has
attained the age of 59 1/2 years old.
III. WAIVERS OF CLASS B AND CLASS C SALES CHARGES
In addition to the waivers set forth in Section I above, in the following
circumstances the CDSC imposed on redemptions of Class B and Class C shares is
waived:
1. SYSTEMATIC WITHDRAWAL PLAN
- Systematic Withdrawal Plan redemptions with respect to up to 10% per year
of the account value at the time of establishment.
2. DEATH OF OWNER
- Shares redeemed on account of the death of the account owner if the
shares are held solely in the deceased individual's name or in a living
trust for the benefit of the deceased individual.
3. DISABILITY OF OWNER
- Shares redeemed on account of the disability of the account owner if
shares are held either solely or jointly in the disabled individual's
name or in a living trust for the benefit of the disabled individual (in
which case a disability certification form is required to be submitted to
the Shareholder Servicing Agent).
4. RETIREMENT PLANS. Shares redeemed on account of distributions made under
the following circumstances:
IRAS, 401(A) PLANS, ESP PLANS AND SRO PLANS
- Distributions made on or after the IRA owner or the 401(a), ESP or SRO
Plan participant, as applicable, has attained the age of 70 1/2 years
old, but only with respect to the minimum distribution under applicable
Code rules.
SALARY REDUCTION SIMPLIFIED EMPLOYEE PENSION PLANS ("SAR-SEP PLANS")
- Distributions made on or after the SAR-SEP Plan participant has attained
the age of 70 1/2 years old, but only with respect to the minimum
distribution under applicable Code rules; and
- Death or disability of a SAR-SEP Plan participant.
A-3
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Investment Adviser [MFS LOGO]
Massachusetts Financial Services Company
500 Boylston Street MFS(R)
Boston, MA 02116 WORLD GOVERNMENTS FUND
(617) 954-5000
Prospectus
Distributor April 1, 1996
MFS Fund Distributors, Inc.
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
Ernst & Young LLP
200 Clarendon Street
Boston, MA 02116
[MFS LOGO]
MFS(R) WORLD GOVERNMENTS FUND
500 Boylston Street
Boston, MA 02116
MWG-1-4/97/110M 20/220/32O
<PAGE> 46
LOGO
<TABLE>
<S> <C>
MFS(R) WORLD STATEMENT OF
GOVERNMENTS FUND ADDITIONAL INFORMATION
(A member of the MFS Family of
Funds(R)) April 1, 1997
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1. Definitions........................................................................... 2
2. Investment Objective, Policies and Restrictions....................................... 2
3. Management of the Fund................................................................ 12
Trustees.............................................................................. 12
Officers.............................................................................. 12
Trustee Compensation Table............................................................ 13
Investment Adviser.................................................................... 14
Administrator......................................................................... 15
Custodian............................................................................. 15
Shareholder Servicing Agent........................................................... 15
Distributor........................................................................... 15
4. Portfolio Transactions and Brokerage Commissions...................................... 16
5. Shareholder Services.................................................................. 17
Investment and Withdrawal Programs.................................................... 17
Exchange Privilege.................................................................... 19
Tax-Deferred Retirement Plan.......................................................... 20
6. Tax Status............................................................................ 20
7. Determination of Net Asset Value and Performance...................................... 22
8. Distribution Plan..................................................................... 25
9. Description of Shares, Voting Rights and Liabilities.................................. 26
10. Independent Auditors and Financial Statements......................................... 26
Appendix A............................................................................ A-1
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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, as amended or supplemented from time
to time (the "SAI") sets forth information which may be of interest to investors
but which is not necessarily included in the Fund's Prospectus, dated April 1,
1997. This SAI should be read in conjunction with the Prospectus, a copy of
which may be obtained without charge by contacting the Shareholder Servicing
Agent (see back cover for address and phone number).
THIS SAI IS NOT A PROSPECTUS AND IS AUTHORIZED FOR DISTRIBUTION TO PROSPECTIVE
INVESTORS ONLY IF PRECEDED OR ACCOMPANIED BY A CURRENT PROSPECTUS.
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1. DEFINITIONS
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"Fund" -- MFS World Governments Fund
(the "Fund"), America's
first global bond fund, is a
series of MFS Series Trust
VII (the "Trust"), a
Massachusetts business
trust. The Fund was previ-
ously known as:
Massachusetts Financial
International Trust -- Bond
Portfolio until its name was
changed effective 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.
"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, 1997, as
amended or supplemented from
time to time.
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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 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.
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 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.
AMERICAN DEPOSITARY RECEIPTS: American Depositary Receipts ("ADRs") are
certificates issued by a U.S. depository (usually a bank) and represent a
specified quantity of shares of an underlying non-U.S. stock on deposit with a
custodian bank as collateral. ADRs may be sponsored or unsponsored. A sponsored
ADR is issued by a depository which has an exclusive relationship with the
issuer of the underlying security. An unsponsored ADR may be issued by any
number of U.S. depositories. Under the terms of most sponsored arrangements,
depositories agree to distribute notices of shareholder meetings and voting
instructions, and to provide shareholder communications and other information to
the ADR holders at the request of the issuer of the deposited securities. The
depository of an unsponsored ADR, on the other hand, is under no obligation to
distribute shareholder communications received from the issuer of the deposited
securities or to pass through voting rights to ADR holders in respect of the
deposited securities. The Fund may invest in either type of ADR. Although the
U.S. investor holds a substitute receipt of ownership rather than direct stock
certificates, the use of the depository receipts in the United
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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 (the "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. The GNMA is a wholly owned U.S. Government corporation within the
Department of Housing and Urban Development. The 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 the 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. The 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 (the "FNMA") and the Federal Home Loan Mortgage Corporation (the
"FHLMC"). The 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. The 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 the FNMA are guaranteed as to timely payment by the FNMA of principal
and interest.
The 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. The FHLMC issues Participation Certificates
("PCs") which represent interest in conventional mortgages (i.e., not federally
insured or guaranteed) from the FHLMC's national portfolio. The 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, the FNMA or the FHLMC, but also may be
collateralized by whole loans or private mortgage pass-through securities (such
collateral collectively hereinafter referred to as "Mortgage Assets"). The Fund
may also invest a portion of its assets in multiclass pass-through securities
which are equity interests in a trust composed of Mortgage Assets. Unless the
context indicates otherwise, all references herein to CMOs include multiclass
pass-through securities. Payments of principal of and interest on the Mortgage
Assets, and any reinvestment income thereon, provide the funds to pay debt
service on the CMOs or make scheduled distributions on the multiclass
pass-through securities. CMOs may be issued by agencies or instrumentalities of
the United States government or by private originators of, or investors in,
mortgage loans, including savings and loan associations, mortgage banks,
commercial banks, investment banks and special purpose subsidiaries of the
foregoing. The issuer of a series of CMOS may elect to be treated as a Real
Estate Mortgage Investment Conduit (a "REMIC").
In a CMO, a series of bonds or certificates are usually issued in multiple
classes with different maturities. Each class of CMOs, often referred to as a
"tranche," is issued at a specific fixed or floating coupon rate and has a
stated maturity or final distribution date. Principal prepayments on the
Mortgage Assets may cause the CMOs to be retired substantially earlier than
their stated maturities or final distribution dates, resulting in a loss of all
or a part of the premium if any has been paid. Interest is paid or accrues on
all classes of the CMOs on a monthly, quarterly or semiannual basis. The
principal of and interest on the Mortgage Assets may be allocated among the
several classes of a series of a CMO in innumerable ways. In a common
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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.
"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 liquid 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 fluctuations since the time the
commitment to purchase such securities was made.
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,
U.S. Government securities or an irrevocable letter of credit maintained on a
current basis at an amount at least equal to the market value of
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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 cash collateral or a fee. The Fund would not, however, have
the right to vote any securities having voting rights during the existence of
the loan, but 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. The Fund records these transactions as sale and purchase transactions,
rather than as borrowing transactions. During the roll period, the Fund foregoes
principal and interest paid on the mortgage-backed securities. The Fund is
compensated for the lost interest by the difference between the current sales
price and the lower price for the future purchase (often referred to as the
"drop") as well as by the interest earned on the cash proceeds of the initial
sale. The Fund may also be compensated by receipt of a commitment fee.
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
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may expire worthless to the Fund. In addition, in the event that the price of
the security in connection with which an Option was 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 "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 liquid assets sufficient to cover the
Fund's net liability under the two options. Therefore, the Fund's liability for
such a covered option is generally limited to the difference between the amount
of the Fund's liability under the option written by the Fund less the value of
the option held by the Fund. Yield curve options may also be covered in such
other manner as may be in accordance with the requirements of the counter party
with which the option is traded and applicable laws and regulations. Yield curve
options are traded over-the-counter and because they have been only recently
introduced, established trading markets for these securities have not yet
developed. Because these securities are traded over-the-counter, the Securities
and Exchange Commission (the "SEC") has taken the position that yield curve
options are illiquid and, therefore, cannot exceed the SEC illiquidity ceiling.
See "Options on Securities" in the Prospectus.
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
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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 asset
account maintained to cover the Fund's obligations with respect to such Futures
Contracts will consist of liquid assets 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
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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, 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, liquid assets, which will be marked to market on a
daily basis in an amount equal to the value of its commitments under Forward
Contracts.
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 indexes, 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" below) and typically, but not always, are debt securities
or deposits whose value at maturity (i.e., principal value) or coupon rate is
determined by reference to a specific instrument or statistic. Gold-indexed
securities, for example, typically provide for a maturity value that depends on
the price of gold, resulting in a security whose price tends to rise and fall
together with gold prices. Currency-indexed securities typically are short-term
to intermediate-term debt securities whose maturity values or interest rates are
determined by reference to the values of one or more specified foreign
currencies, and may offer higher yields than U.S. dollar-denominated securities
of equivalent issuers. Currency-indexed securities may be positively or
negatively indexed; that is, their maturity value may increase when the
specified currency value increases, resulting in a security that performs
similarly to a foreign-denominated instrument, or their maturity value may
decline when foreign currencies increase, resulting in a security whose price
characteristics are similar to a put on the underlying currency.
Currency-indexed securities may also have prices that depend on the values of a
number of different foreign currencies relative to each other.
The performance of indexed securities depends to a great extent on the
performance of the security, currency, or other instrument to which they are
indexed, and may also be influenced by interest rate changes in the U.S. and
abroad. At the same time, indexed securities are subject to the credit risks
associated with the issuer of the security, and their values may decline
substantially if the issuer's creditworthiness deteriorates. Recent issuers of
indexed securities have included banks, corporations, and certain U.S.
government agencies.
SWAPS AND RELATED TRANSACTIONS: The Fund may enter into interest rate swaps,
currency swaps and other types of available swap agreements, such as caps,
collars and floors.
Swap agreements may be individually negotiated and structured to include
exposure to a variety of different types of investments or market factors.
Depending on their structure, swap 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 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
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paying, as the case may be, only the net amount of the two payments), the Fund
will maintain liquid assets with its Custodian with a daily value at least equal
to the excess, if any, of the Fund's accrued obligations under the swap
agreement over the accrued amount the Fund is entitled to receive under the
agreement. If the Fund enters into a swap agreement on other than a net basis,
it will maintain liquid assets with a value equal to the full amount of the
Fund's accrued obligations under the agreement.
The most significant factor in the performance of swaps, caps, floors and
collars is the change in the specific interest rate, currency or other factor
that determines the amount of payments to be made under the arrangement. If MFS
is incorrect in its forecasts of such factors, the investment performance of the
Fund would be less than what it would have been if these investment techniques
had not been used. If a swap agreement calls for payments by the Fund, the Fund
must be prepared to make such payments when due. In addition, if the 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
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risk of trading halts, suspensions, exchange or clearing corporation equipment
failures, government intervention, insolvency of 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 liquid assets 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
ensuring that the leveraging effect of such Futures Contract is minimized.
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 SAI,
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means the lesser of (i) more than 50% of the outstanding shares of the Trust or
a series or class, as applicable, or (ii) 67% or more of the outstanding shares
of the Trust or a series or class, as applicable, present at a meeting 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
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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 (born 8/4/35)
Massachusetts Financial Services Company, Chairman and Director
RICHARD B. BAILEY* (born 9/14/26)
Private Investor; Massachusetts Financial Services Company, former Chairman and
Director (prior to September 30, 1991); Cambridge Bancorp, Director; Cambridge
Trust Company, Director
PETER G. HARWOOD (born 4/3/26)
Private Investor
Address: 211 Lindsay Pond Road, Concord, Massachusetts
J. ATWOOD IVES (born 5/1/36)
Eastern Enterprises (diversified services company), Chairman and Chief Executive
Officer
Address: 9 Riverside Road, Weston, Massachusetts
LAWRENCE T. PERERA (born 6/23/35)
Hemenway & Barnes (attorneys), Partner
Address: 60 State Street, Boston, Massachusetts
WILLIAM J. POORVU (born 4/10/35)
Harvard University Graduate School of Business Administration, Adjunct
Professor; CBL & Associates Properties, Inc. (a real estate investment trust),
Director; The Baupost Fund, (a registered investment company), Vice Chairman
(since November 1993), Chairman and Trustee (prior to November 1993)
Address: Harvard Business School, Soldiers Field Road, Cambridge, Massachusetts
CHARLES W. SCHMIDT (born 3/18/28)
Private Investor; OHM Corporation, Director; The Boston Company, Director;
Boston Safe Deposit and Trust Company, Director; Mohawk Paper Company,
Director
Address: 30 Colpitts Road, Weston, Massachusetts
ARNOLD D. SCOTT* (born 12/16/42)
Massachusetts Financial Services Company, Senior Executive Vice President and
Secretary
JEFFREY L. SHAMES* (born 6/2/55)
Massachusetts Financial Services Company, President
ELAINE R. SMITH (born 4/25/46)
Independent Consultant; Brigham and Women's Hospital, Executive Vice President
and Chief Operating Officer (prior to September 1992)
Address: Weston, Massachusetts
DAVID B. STONE (born 9/2/27)
North American Management Corp. (investment adviser), Chairman; Eastern
Enterprises, Director
Address: Ten Post Office Square, Suite 300, Boston, Massachusetts
OFFICERS
LESLIE J. NANBERG,* Vice President (born 11/4/45)
Massachusetts Financial Services Company, Senior Vice President
STEPHEN C. BRYANT,* Vice President (born 4/24/47)
Massachusetts Financial Services Company, Senior Vice President
W. THOMAS LONDON,* Treasurer (born 3/1/44)
Massachusetts Financial Services Company, Senior Vice President
STEPHEN E. CAVAN,* Secretary and Clerk (born 11/6/53)
Massachusetts Financial Services Company, Senior Vice President, General Counsel
and Assistant Secretary
JAMES R. BORDEWICK, JR.,* Assistant Secretary (born 3/6/59)
Massachusetts Financial Services Company, Senior Vice President and Associate
General Counsel
JAMES O. YOST,* Assistant Treasurer (born 6/12/60)
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 Director of
Sun Life Assurance Company of Canada (U.S.) ("Sun Life of Canada (U.S.)"), the
corporate parent of MFS.
12
<PAGE> 58
The Fund pays the compensation of non-interested Trustees and Mr. Bailey (who
currently receive a fee of $1,500 per year plus $90 per meeting and $70 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 Messrs. Brodkin, Scott and Shames. The
Fund will accrue its allocable share of compensation expenses each year to cover
current year's service and amortize past service cost.
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 $2,540 $ 726 8 $ 247,168
A. Keith Brodkin 0 0 N/A 0
Peter G. Harwood 2,820 477 5 105,995
J. Atwood Ives 2,610 763 17 98,750
Lawrence T. Perera 2,590 1,517 26 98,310
William J. Poorvu 2,730 1,587 25 102,840
Charles W. Schmidt 2,750 1,497 20 105,995
Arnold D. Scott 0 0 N/A 0
Jeffrey L. Shames 0 0 N/A 0
Elaine R. Smith 2,750 733 27 105,995
David B. Stone 2,890 1,114 11 108,710
</TABLE>
- ---------------
(1) For fiscal year ended November 30, 1996.
(2) Based on normal retirement age of 73.
(3) For calendar year 1996. All Trustees receiving compensation served as
Trustees of 23 funds within the MFS fund complex (having aggregate net
assets at December 31, 1996, of approximately $21 billion) except Mr.
Bailey, who served as Trustee of 81 funds within the MFS fund complex
(having aggregate net assets at December 31, 1996, of approximately $38
billion).
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>
$2,286 $343 $572 $ 800 $1,143
2,465 370 616 863 1,232
2,643 396 661 925 1,322
2,822 423 705 988 1,411
3,000 450 750 1,050 1,500
3,179 477 795 1,113 1,590
</TABLE>
- ---------------
(4) Other funds in the MFS fund complex provide similar retirement benefits to
the Trustees.
As of February 28, 1997, all Trustees and officers as a group owned less than 1%
of the Fund's shares outstanding on that date, not including 240,685.52 shares
of the Fund (which represent approximately 0.74% of the outstanding shares of
the Fund) owned of record by certain employee benefit plans of MFS for which
Messrs. Brodkin, Scott and Shames are Trustees.
As of February 28, 1997, MLPF&S for the sole benefit of its customers, 4800 Deer
Lake Drive, Jacksonville, Florida, was the record owner of approximately 7.91%,
6.85% and 14.49% of the outstanding Class A, Class B and Class C shares of the
Fund, respectively. As of February 28, 1997, MFS Defined Contribution Plan,
Massachusetts Financial Services, 500 Boylston Street, Boston, Massachusetts was
the record owner of approximately 95.19% of Class I shares of the Fund.
13
<PAGE> 59
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 wholly
owned subsidiary of Sun Life Assurance Company of Canada ("Sun Life").
The Adviser manages the Fund pursuant to an Investment Advisory Agreement, dated
May 20, 1982, as amended (the "Advisory Agreement"). Under the Advisory
Agreement, the Adviser provides the Fund with overall investment advisory
services. Subject to such policies as the Trustees may determine, the Adviser
makes investment decisions for the Fund. For these services and facilities, the
Adviser receives a management fee computed and paid monthly at the annual rate
of 0.75% 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. Prior to July 1, 1996, the Adviser received 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.
For the Fund's fiscal year ended November 30, 1996, MFS received management fees
under the Advisory Agreement of $3,491,716 equivalent, on an annualized basis,
to 0.84% of the Fund's average daily net assets.
For the Fund's fiscal year ended November 30, 1995, MFS received management fees
under the Advisory Agreement of $3,991,068 equivalent, on an annualized basis,
to 0.90% of the Fund's average daily net assets.
For the Fund's fiscal year ended November 30, 1994, MFS received management fees
under the Advisory Agreement of $4,278,028, equivalent, on an annualized basis,
to 0.90% of the Fund's average daily net assets.
In order to comply with the expense limitations of certain state securities
commissions, the Adviser will reduce its management fee or otherwise reimburse
the Fund for any 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.
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 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 year ended November 30, 1996, see "Statement of
Operations" in the Annual Report to shareholders incorporated by reference into
this SAI. 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."
The Adviser 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 its portfolio
transactions, and, in general, administering its affairs.
The Advisory Agreement will remain in effect until August 1, 1997, and will
continue in effect thereafter only if such continuance is specifically approved
at least annually by the Board of
Trustees or by vote of a majority of the Fund's 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
14
<PAGE> 60
neither the Adviser nor its personnel shall be liable for any error of judgment
or mistake of law or for any loss arising out of any investment or for any act
or omission in the execution and management of the Fund, except for willful
misfeasance, bad faith or gross negligence in the performance of its or their
duties or by reason of reckless disregard of its or their obligations and duties
under the Advisory Agreement.
ADMINISTRATOR
MFS provides the Fund with certain administrative services pursuant to a Master
Administrative Services Agreement dated March 1, 1997. Under this Agreement, MFS
provides the Fund with certain financial, legal, compliance, shareholder
communications and other administrative services. As a partial reimbursement for
the cost of providing these services, the Fund pays MFS an administrative fee up
to 0.015% per annum of the Fund's average daily net assets, provided that the
administrative fee is not assessed on Fund assets that exceed $3 billion.
CUSTODIAN
The Custodian's responsibilities include safekeeping and controlling the Fund's
cash and securities, handling the receipt and delivery of securities,
determining income and collecting interest and dividends on the Fund's
investments, maintaining books of original entry for portfolio and fund
accounting and other required books and accounts, and calculating the daily net
asset value of each class of shares of the Fund. The Custodian does not
determine the investment policies of the Fund or decide which securities the
Fund will buy or sell. The Fund may, however, invest in securities of the
Custodian and may deal with the Custodian as principal in securities
transactions. The Custodian also acts as the dividend disbursing agent 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, as amended (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 the Fund at an effective rate of 0.13%. In addition, the Shareholder
Servicing Agent will be reimbursed by the Fund for certain expenses incurred by
the Shareholder Servicing Agent on behalf of the Fund. State Street Bank and
Trust Company, the dividend and distribution disbursing agent of the Fund, has
contracted with the Shareholder Servicing Agent to 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 Class A shares of the Fund alone or in combination with shares of
all classes of certain other funds in the MFS Family of Funds (the "MFS Funds")
and other funds (as noted under Right of Accumulation), by any person, including
members of a family unit (e.g., husband, wife and minor children) and bona fide
trustees, and also applies to purchases made under the Right of Accumulation or
a Letter of Intent (see "Investment and Withdrawal Programs" below). A group
might qualify to obtain
quantity sales charge discounts (see "Investment and Withdrawal Programs"
below).
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 commis-
15
<PAGE> 61
sions to dealers who initiate and are responsible for purchases of $1 million or
more as described in the Prospectus.
CLASS B, CLASS C AND CLASS I SHARES: MFD acts as agent in selling Class B, Class
C and Class I shares of the Fund. The public offering price of Class B, Class C
and Class I shares is their net asset value next computed after the sale (see
"Purchases" in the Prospectus and the Prospectus Supplement pursuant to which
Class I shares are offered).
GENERAL: Neither MFD nor dealers are permitted to delay placing orders to
benefit themselves by a price change. On occasion, MFD may obtain brokers loans
from various banks, including the custodian banks for the MFS Funds, to
facilitate the settlement of sales of shares of the Fund to dealers. MFD may
benefit from its temporary holding of funds paid to it by investment dealers for
the purchase of Fund shares.
During the Fund's fiscal year ended November 30, 1996, MFD received sales
charges of $86,771 and dealers received sales charges of $429,857 (as their
concession on gross sales charges of $516,628) for selling Class A shares of the
Fund; the Fund received $64,591,974 representing the aggregate net asset value
of such shares. During the Fund's fiscal year ended November 30, 1995, MFD
received sales charges of $108,086 and dealers received sales charges of
$559,396 (as their concession on gross sales charges of $667,482) for selling
Class A shares of the Fund; the Fund received $34,223,178, representing the
aggregate net asset value of such 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 years ended November 30, 1996, 1995 and 1994, the CDSC
imposed on redemption of the Fund's Class A shares was $9,358, $768 and $10,087,
respectively. During the Fund's fiscal years ended November 30, 1996, 1995 and
1994, the CDSC imposed on redemption of the Fund's Class B shares was $212,515,
$266,769 and $107,170, respectively.
During the period April 1, 1996 through November 30, 1996, the CDSC imposed on
the redemption of Class C shares was $609.
The Distribution Agreement will remain in effect until August 1, 1997, and will
continue in effect thereafter only if such continuance is specifically approved
at least annually by the Board of Trustees or by vote of a majority of the
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 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 Conduct Rules of the
National Association of Securities Dealers, Inc. (the "NASD") and such other
policies as the Trustees may determine, the Adviser may consider sales of shares
of the Fund and of the other investment company clients of MFD as a factor in
the selection of broker-dealers to execute the Fund's portfolio transactions.
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
16
<PAGE> 62
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
from time to time through such broker-dealers on behalf of the Fund. The Trust's
Trustees (together with the Trustees of the other MFS Funds) have directed the
Adviser to allocate a total of $39,100 of commission business from the MFS Funds
to the Pershing Division of Donaldson, Lufkin & Jenrette as consideration for
the annual renewal of certain publications provided by Lipper Analytical
Securities Corporation (which provides information useful to the Trustees in
reviewing the relationship between the Fund and the Adviser).
For the fiscal years ended November 30, 1996, 1995 and 1994, the Fund paid no
brokerage commissions.
During the period ended November 30, 1996, the Fund acquired securities issued
by General Electric, a regular broker dealer of the Fund, which securities had a
value of $9,122,000 as of November 30, 1996.
During the period ended December 31, 1996, the Fund acquired securities issued
by Merrill Lynch & Co., Chase Manhattan, General Electric Capital Corp and Ford
Motor Credit Corp, regular broker dealers of the Fund, which securities had a
value of $8,150,000, $11,201,000, $20,969,000 and $91,850,000, respectively.
In certain instances there may be securities which are suitable for the Fund's
portfolio as well as for that of one or more of the other clients of the Adviser
or any subsidiary of the Adviser. Investment decisions for the Fund and for such
other clients are made with a view to achieving their respective investment
objectives. It may develop that a particular security is bought or sold for only
one client even though it might be held by, or bought or sold for, other
clients. Likewise, a particular security may be bought for one or more clients
when one or more other clients are selling that same security. Some simultaneous
transactions are inevitable when several clients receive investment advice from
the same investment adviser, particularly when the same security is suitable for
the investment objectives of more than one client. When two or more clients are
simultaneously engaged in the purchase or sale of the same security, the
securities are allocated among clients in a manner believed by the Adviser to be
equitable to each. It is recognized that in some cases this system could have a
detrimental effect on the price or volume of the security as far as the Fund is
concerned. In other cases, however, the Fund believes that its ability to
participate in volume transactions will produce better executions for the Fund.
5. SHAREHOLDER SERVICES
INVESTMENT AND WITHDRAWAL PROGRAMS -- The Fund makes available the following
programs designed to enable shareholders to add to their investment or withdraw
from it with a minimum of paper work. These are described below and in certain
cases, in the Fund's prospectus. The programs involve no extra charge to
shareholders (other than a sales charge in the case of certain Class A share
purchases) and may be changed or discontinued at any time by a shareholder or
the Fund.
LETTER OF INTENT: If a shareholder (other than a group purchaser described
below) anticipates purchasing $100,000 or more of Class A shares of the Fund
alone or in combination with shares of Class B or Class C of the Fund or any of
the classes of other MFS Funds or 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
17
<PAGE> 63
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 Class A, Class B and Class C
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 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.
SUBSEQUENT INVESTMENT BY TELEPHONE: Each shareholder may purchase additional
shares of any MFS Fund by telephoning the Shareholder Servicing Agent toll-free
at (800) 225-2606. The minimum purchase amount is $50 and the maximum purchase
amount is $100,000. Shareholders wishing to avail themselves of this telephone
purchase privilege must so elect on their Account Application and designate
thereon a bank and account number from which purchases will be made. If a
telephone purchase request is received by the Shareholder Servicing Agent on any
business day prior to the close of regular trading on the Exchange (generally,
4:00 p.m., Eastern time), the purchase will occur at the closing net asset value
of the shares purchased on that day. The Shareholder Servicing Agent may be
liable for any losses resulting from unauthorized telephone transactions if it
does not follow reasonable procedures designed to verify the identity of the
caller. The Shareholder Servicing Agent will request personal or other
information from the caller, and will normally also record calls. Shareholders
should verify the accuracy of confirmation statements immediately after their
receipt.
DISTRIBUTION INVESTMENT PROGRAM: Distributions of dividends and capital gains
made by the Fund with respect to a particular class of shares may be
automatically invested in shares of the same class of one of the other MFS
Funds, if shares of 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 based upon
the value of his account. Each payment under a Systematic Withdrawal Plan (a
"SWP") must be at least $100, except in certain limited circumstances. The
aggregate withdrawals of Class B and Class C shares in any year pursuant to a
SWP generally are limited to 10% of the value of the account at the time of
establishment of the SWP. SWP payments are drawn from the proceeds of share
redemptions (which would be a return of principal and, if reflecting a gain,
would be taxable). Redemptions of Class B and Class C shares will be made in the
following order: (i) 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 and Class C 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 $5,000 either must be held on deposit by, or certificates for such shares
must be deposited with, the Shareholder Servicing Agent. With respect to Class A
shares, maintaining a withdrawal plan concurrently with an investment program
would be disadvantageous because of the sales charges included in share
purchases and because of the assessment of the CDSC for certain share
redemptions. The shareholder may deposit into the account additional shares of
the Fund, change the payee or change the dollar amount of each payment. The
Shareholder Servicing Agent may charge the account for services rendered and
expenses incurred beyond those normally assumed by the Fund with respect to the
liquidation of shares. No charge is currently assessed against the account, but
one could be instituted by the Shareholder Servicing Agent on 60 days' notice in
writing to the shareholder in the event that the Fund ceases to assume the cost
of these services. The Fund may terminate any SWP for an account if the value of
the account falls below $5,000 as a result of share redemptions (other than as a
result of a SWP) or an exchange of shares of the Fund for shares of another MFS
Fund. Any SWP may be terminated at any time by either the shareholder or the
Fund.
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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) under the Automatic Exchange Plan, a dollar
cost averaging program. The Automatic Exchange Plan provides for automatic
exchanges of funds from the shareholder's account in an MFS Fund for investment
in the same class of shares of other MFS Funds selected by the shareholder.
Under the Automatic Exchange Plan, exchanges of at least $50 each may be made to
up to six different funds effective on the seventh day of each month or 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 Class C shares and certain Class A
shares, a CDSC will be imposed upon redemption. Although redemptions and
repurchases of shares are taxable events, a reinvestment within a certain period
of time in the same fund may be considered a "wash sale" and may result in the
inability to recognize currently all or a portion of 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
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sale and if the purchaser is eligible to purchase the class of shares) 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, unit holders 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 unit holders 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
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 Code, by meeting all
applicable requirements of Subchapter M, including requirements as to the nature
of the Fund's
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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 are taxable to shareholders as ordinary income for
federal income tax purposes whether the distributions are paid in cash or
reinvested in additional shares. Because the Fund expects to earn primarily
interest income, it is expected that no Fund dividends will qualify for the
dividends received deduction for corporations. Distributions of net capital
gains (i.e., the excess of net long-term capital gains over net short-term
capital losses), whether paid in cash or reinvested in additional shares, are
taxable to shareholders as long-term capital gains without regard to the length
of time the shareholders have held their shares. Any Fund dividend that is
declared in October, November or December of any calendar year, that is payable
to shareholders of record in such a month, and that is paid the following
January will be taxable to shareholders on December 31 of the year in which the
dividend is declared. The Fund will notify shareholders regarding the federal
tax status of its distributions after the end of each calendar year.
Any Fund distribution will have the effect of reducing the per share net asset
value of shares in the Fund by the amount of the distribution. Shareholders
purchasing shares shortly before the record date of any distribution may thus
pay the full price for the shares and then effectively receive a portion of the
purchase price back as a taxable distribution.
In general, any gain or loss realized upon a taxable disposition of shares of
the Fund by a shareholder that holds such shares as a capital asset will be
treated as a long-term capital gain or loss if the shares have been held for
more than twelve months and otherwise as a short-term capital gain or loss.
However, any loss realized upon a disposition of shares in the Fund held for six
months or less will be treated as a long-term capital loss to the extent of any
distributions of net capital gain made with respect to those shares. Any loss
realized upon a disposition of shares may also be disallowed under rules
relating to wash sales. Gain may be increased (or loss reduced) upon a
redemption of Class A shares of the Fund within 90 days after their purchase
followed by any purchase (including purchases by exchange or by reinvestment)
without payment of an additional sales charge of Class A shares of the Fund or
of another MFS Fund (or any other shares of an MFS Fund generally sold subject
to a sales charge).
The Fund's current dividend and accounting policies will affect the amount,
timing, and character of distributions to shareholders and may, under certain
circumstances, make an economic return of capital taxable to shareholders. Any
investment in zero coupon bonds, certain stripped securities and certain
securities purchased at a market discount will cause the Fund to recognize
income prior to the receipt of cash payments with respect to 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. An investment in residual interests of a CMO that has elected to be
treated as a real estate mortgage investment conduit or "REMIC" can create
complex tax problems, especially if the Fund has state or local governments or
other tax exempt organizations as shareholders.
The Fund's transactions in options, Futures Contracts and Forward Contracts will
be subject to special tax rules that may affect the amount, timing and character
of Fund income and distributions to shareholders. For example, certain positions
held by the Fund on the last business day of each taxable year will be marked to
market (i.e., treated as if closed out) on that day, and any gain or loss
associated with the positions will be treated as 60% long-term and 40%
short-term capital gain or loss. Certain positions held by the Fund that
substantially diminish its risk of loss with respect to other positions in its
portfolio may constitute "straddles," and may be subject to special tax rules
that would cause deferral of Fund losses, adjustments in the holding periods of
Fund securities, and conversion of short-term into long-term capital losses.
Certain tax elections exist for straddles that may alter the effects of these
rules. The Fund will limit its activities in options, Futures Contracts, Forward
Contracts, and swaps and related transactions to the extent necessary to meet
the requirements of Subchapter M of the Code.
Special tax considerations apply with respect to foreign investments of the
Fund. Foreign exchange gains and losses realized by the Fund will generally be
treated as ordinary income and losses. 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 foreign securities 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; 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.
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If the Fund holds more than 50% of its assets in foreign stocks and 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
(subject to such limitations) be able 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 or U.S entities ("Non-U.S. Persons") are
generally subject to U.S. tax withholding at a rate of 30%. The Fund intends to
withhold U.S. federal income tax at the rate of 30% on 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 of at a rate
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 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. The Fund intends to advise
shareholders of the extent, if any, to which its distributions consist of such
interest. Shareholders are urged to consult their tax advisers regarding the
possible exclusion of such portion of Fund distributions for state and local
income tax purposes as well as regarding the tax consequences of an investment
in the Fund. Residents of certain states may be subject to an intangibles tax or
a personal property tax on all or a portion of the value of their shares.
As long as it qualifies as a regulated investment company under the Code, the
Fund will not be required to pay any 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 SAI, 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
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
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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 in its
capacity as the Fund's distributor, or its agent, the Shareholder Servicing
Agent, 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 1% maximum CDSC for Class
C shares) and therefore may result in a higher rate of return, (ii) a total rate
of return assuming an initial account value of $1,000, which will result in a
higher rate of return since the value of the initial account will not be reduced
by the maximum sales charge (currently 4.75%) and/or (iii) total rates of return
which represent aggregate performance over a period or year-by-year performance,
and which may or may not reflect the effect of the maximum or other sales charge
or CDSC.
The Fund offers multiple classes of shares which were initially offered for sale
to the public on different dates. The calculation of total rate of return for a
class of shares which initially was offered for sale to the public subsequent to
another class of shares of the Fund is based both on (i) the performance of the
Fund's newer class from the date it initially was offered for sale to the public
and (ii) the performance of the Fund's oldest class from the date it initially
was offered for sale to the public up to the date that the newer class initially
was offered for sale to the public.
As discussed in the Prospectus, the sales charges, expenses and expense ratios,
and therefore the performance, of the Fund's classes of shares differ. In
calculating total rate of return for a newer class of shares in accordance with
certain formulas required by the SEC, the performance will be adjusted to take
into account the fact that the newer class is subject to a different sales
charge than the oldest class (e.g., if the newer class is Class A shares, the
total rate of return quoted will reflect the deduction of the initial sales
charge applicable to Class A shares; if the newer class is Class B shares, the
total rate of return quoted will reflect the deduction of the CDSC applicable to
Class B shares). However, the performance will not be adjusted to take into
account the fact that the newer class of shares bears different class specific
expenses than the oldest shares (e.g., Rule 12b-1 fees). Therefore, the total
rate of return quoted for a newer class of shares will differ from the return
that would have been quoted had the newer class of shares been outstanding for
the entire period over which the calculation is based (i.e., the total rate of
return quoted for the newer class will be higher than the return that would have
been quoted had the newer class of shares been outstanding for the entire period
over which the calculation is based if the class specific expenses for the newer
class are higher than the class specific expenses of the oldest class, and the
total rate of return quoted for the newer class will be lower than the return
that would have been quoted had the newer class of shares been outstanding for
this entire period if the class specific expenses for the newer class are lower
than the class specific expenses of the oldest class).
Total rate of return quotations for each class are presented in Appendix A
attached hereto under the heading "Performance Quotations."
PERFORMANCE RESULTS: The performance results for Class A shares presented in
Appendix A attached hereto under the heading "Performance Results" assume an
initial investment of $10,000 in Class A shares and cover the period from
January 1, 1987 to December 31, 1996. It has been assumed that 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).
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 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 yield
calculations assume no CDSC is paid. Yield quotations for each class of shares
is presented in Appendix A attached hereto under the heading "Performance
Quotations."
23
<PAGE> 69
CURRENT DISTRIBUTION RATE: Yield, which is calculated according to a formula
prescribed by the SEC, 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 B and Class C shares assumes no CDSC is paid. Current distribution rate
quotations for each class of shares are presented in Appendix A attached hereto
under the heading "Performance Quotations."
GENERAL: From time to time the Fund may, as appropriate, quote Fund rankings or
reprint all or a portion of evaluations of fund performance and operations
appearing in various independent publications, including but not limited to the
following: Money, Fortune, U.S. News and World Report, Kiplinger's Personal
Finance, The Wall Street Journal, Barron's, Investors Business Daily, Newsweek,
Financial World, Financial Planning, Investment Advisor, USA Today, Pensions and
Investments, SmartMoney, Forbes, Global Finance, Registered Representative,
Institutional Investor, the Investment Company Institute, Johnson's Charts,
Morningstar, Lipper Analytical 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.
From time to time, the Fund may discuss or quote its current portfolio manager
as well as other investment personnel, including such persons' views on: the
economy; securities markets; portfolio securities and their issuers; investment
philosophies, strategies, techniques and criteria used in the selection of
securities to be purchased or sold for the Fund; the Fund's portfolio holdings;
the investment research and analysis process; the formulation and evaluation of
investment recommendations; and the assessment and evaluation of credit,
interest rate, market and economic risks and similar or related matters.
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.
From time to time the Fund may also discuss or quote the views of its
distributor, its investment adviser and other financial planning, legal, tax,
accounting, insurance, estate planning and other professionals, or from surveys,
regarding individual and family financial planning. Such views may include
information regarding: retirement planning; tax management strategies; estate
planning; general investment techniques (e.g., asset allocation and disciplined
saving and investing); business succession; ideas and information provided
through the MFS Heritage Planning(sm) program, an inter-generational financial
planning assistance program; issues with respect to insurance (e.g., disability
and life insurance and Medicare supplemental insurance); issues regarding
financial and health care management for elderly family members; and similar or
related matters.
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 open-end
mutual fund in America.
-- 1924 -- Massachusetts Investors Trust is the first mutual fund to make full
public disclosure of its operations in shareholder reports.
-- 1932 -- One of the first internal research departments is established to
provide in-house analytical capability for an investment management firm.
-- 1933 -- Massachusetts Investors Trust is the first mutual fund to register
under the Securities Act of 1933 (the "Truth in Securities Act" or the
"Full Disclosure Act").
-- 1936 -- Massachusetts Investors Trust is the first mutual fund to allow
shareholders to take capital gain distributions either in additional shares
or in cash.
-- 1976 -- MFS(R) Municipal Bond Fund is among the first municipal bond funds
established.
-- 1979 -- Spectrum becomes the first combination fixed/variable annuity with
no initial sales charge.
-- 1981 -- MFS(R) World Governments Fund is established as America's first
globally diversified fixed income mutual fund.
-- 1984 -- MFS(R) Municipal High Income Fund is the first open-end mutual fund
to seek high tax-free income from lower-rated municipal securities.
24
<PAGE> 70
-- 1986 -- MFS(R) Managed Sectors Fund becomes the first mutual fund to target
and shift investments among industry sectors for shareholders.
-- 1986 -- MFS(R) Municipal Income Trust is the first closed-end, high-yield
municipal bond fund traded on the New York Stock Exchange.
-- 1987 -- MFS(R) Multimarket Income Trust is the first closed-end,
multimarket high income fund listed on the New York Stock Exchange.
-- 1989 -- MFS(R) Regatta becomes America's first non-qualified
market-value-adjusted fixed/variable annuity.
-- 1990 -- MFS(R) World Total Return Fund is the first global balanced fund.
-- 1993 -- MFS(R) World Growth Fund is the first global emerging markets fund
to offer the expertise of two sub-advisers.
-- 1993 -- MFS becomes money manager of MFS Union Standard Trust, the first
trust to invest in companies deemed to be union-friendly by an Advisory
Board of senior labor officials, senior managers of companies with
significant labor contracts, academics and other national labor leaders or
experts.
8. DISTRIBUTION PLAN
The Trustees have adopted a Distribution Plan for Class A, Class B and Class C
Shares (the "Distribution Plan") pursuant to Section 12(b) of the 1940 Act and
Rule 12b-1 thereunder (the "Rule") after having concluded that there is a
reasonable likelihood that the Distribution Plan would benefit the Fund and the
respective class of shareholders. The provisions of the Distribution Plan are
severable with respect to each class of shares offered by the Fund. The
Distribution Plan is designed to promote sales, thereby increasing the net
assets of the Fund. Such an increase may reduce the expense ratio to the extent
the Fund's fixed costs are spread over a larger net asset base. Also, an
increase in net assets may lessen the adverse effects that could result were the
Fund required to liquidate portfolio securities to meet redemptions. There is,
however, no assurance that the net assets of the Fund will increase or that the
other benefits referred to above will be realized.
The Distribution Plan is described in the Prospectus under the caption
"Distribution Plan," which is incorporated herein by reference. The following
information supplements this Prospectus discussion.
SERVICE FEES: With respect to Class A shares, no service fees will be paid: (i)
to any dealer who is the holder or dealer of record for investors who own Class
A shares having an aggregate net asset value less than $750,000, or such other
amount as may be determined from time to time by MFD (MFD, however, may waive
this minimum amount requirement from time to time); or (ii) to any insurance
company which has entered into an agreement with the Fund and MFD that permits
such insurance company to purchase Class A shares from the Fund at their net
asset value in connection with annuity agreements issued in connection with the
insurance company's separate accounts. Dealers may from time to time be required
to meet certain other criteria in order to receive service fees.
With respect to Class B shares, except in the case of the first year service
fee, no service fees will be paid to any securities dealer who is the holder or
dealer of record for investors who own Class B shares having an aggregate net
asset value of less than $750,000 or such other amount as may be determined by
MFD from time to time. MFD, however, may waive this minimum amount requirement
from time to time. Dealers may from time to time be required to meet certain
other criteria in order to receive service fees.
MFD or its affiliates shall be entitled to receive any service fee payable under
the Distribution Plan for which there is no dealer of record or for which
qualification standards have not been met as partial consideration for personal
services and/or account maintenance services performed by MFD or its affiliates
for shareholder accounts.
DISTRIBUTION FEES: The purpose of distribution payments to MFD under the
Distribution Plan is to compensate MFD for its distribution services to the
Fund. MFD pays commissions to dealers as well as expenses of printing
prospectuses and reports used for sales purposes, expenses with respect to the
preparation and printing of sales literature and other distribution related
expenses, including, without limitation, the cost necessary to provide
distribution-related services, or personnel, travel, office expenses and
equipment.
DISTRIBUTION AND SERVICE FEES PAID DURING THE FUND'S LAST FISCAL YEAR: During
the fiscal year ended November 30, 1996, the Fund paid the following
Distribution Plan expenses:
<TABLE>
<CAPTION>
AMOUNT OF AMOUNT OF AMOUNT OF
DISTRIBUTION DISTRIBUTION DISTRIBUTION
AND SERVICE AND SERVICE AND SERVICE
FEES PAID BY FEES RETAINED FEES RECEIVED
CLASSES OF SHARES FUND BY MFD BY DEALERS
<S> <C> <C> <C>
Class A Shares $ 682,511 $148,049 $534,462
Class B Shares $ 946,025 $726,154 $219,871
Class C Shares $ 133,734 $ 6,237 $127,497
</TABLE>
GENERAL: The Distribution Plan will remain in effect until August 1, 1997, and
will continue in effect thereafter only if such continuance is specifically
approved at least annually by vote of both the Trustees and a majority of the
Trustees who are not "interested persons" or financially interested parties to
such Plan ("Distribution Plan Qualified Trustees"). The Distribution Plan 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. The Distribution Plan 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 the Distribution
25
<PAGE> 71
Plan entered into between the Fund or MFD and other organizations must be
approved by the Board of Trustees, including a majority of the Distribution Plan
Qualified Trustees. Agreements under the Distribution Plan must be in writing,
will be terminated automatically if assigned, and may be terminated at any time
without payment 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. The Distribution Plan may not be amended to increase
materially the amount of permitted distribution expenses without the approval of
a majority of the respective class of the Fund's shares (as defined in
"Investment Restrictions") or may not be materially amended in any case without
a vote of the Trustees and a majority of the Distribution Plan Qualified
Trustees. The selection and nomination of Distribution Plan Qualified Trustees
shall be committed to the discretion of the non-interested Trustees then in
office. No Trustee who is not an "interested person" has any financial interest
in the Distribution Plan or in any related agreement.
9. DESCRIPTION OF SHARES, VOTING RIGHTS AND LIABILITIES
The Declaration of Trust permits the Trustees to issue an unlimited number of
full and fractional Shares of Beneficial Interest (without par value) of one or
more separate series and to divide or combine the shares of any series into a
greater or lesser number of shares without thereby changing the proportionate
beneficial interests in that series. The Trustees have currently authorized
shares of the Fund and one other series. The Declaration of Trust further
authorizes the Trustees to classify or reclassify any series of shares into one
or more classes. Pursuant thereto, the Trustees have authorized the issuance of
four classes of each of the Trust's two series, (Class A, Class B, Class C and
Class I shares). Each share of a class of the Fund represents an equal
proportionate interest in the assets of the Fund allocable to that class. Upon
liquidation of the Fund, 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.
10. INDEPENDENT AUDITORS AND
FINANCIAL STATEMENTS
Ernst & Young LLP are the Fund's independent auditors, providing audit services,
tax services, and assistance and consultation with respect to the preparation of
filings with the SEC.
The Portfolio of Investments and the Statement of Assets and Liabilities at
November 30, 1996, the Statement of Operations for the year ended November 30,
1996 the Statement of Changes in Net Assets for each of the two years in the
period ended November 30, 1996 the Notes to the Financial Statements and the
Report of Independent Auditors, each of which is included in the Annual Report
to Shareholders of the Fund, are incorporated by reference into this SAI in
reliance upon the report of Ernst & Young LLP, independent auditors, given upon
their authority as experts in accounting and auditing. A copy of the Annual
Report accompanies this SAI.
26
<PAGE> 72
APPENDIX A
PERFORMANCE INFORMATION
The performance results and quotations below should not be considered as
representative of the performance of the Fund in the future since the net asset
value and public offering price of shares of the Fund will vary. See
"Determination of Net Asset Value and Performance" in the SAI.
PERFORMANCE RESULTS -- CLASS A SHARES
<TABLE>
<CAPTION>
VALUE OF VALUE OF
INITIAL CAPITAL VALUE OF
$10,000 GAIN REINVESTED TOTAL
YEAR ENDED INVESTMENT DISTRIBUTIONS DIVIDENDS VALUE
- --------------------------------------------------------------- ---------- ------------- ---------- -------
<S> <C> <C> <C> <C>
December 31, 1987.............................................. $ 9,875 $ 156 $ 1,851 $11,882
December 31, 1988.............................................. 9,242 276 2,884 12,402
December 31, 1989.............................................. 9,525 284 3,495 13,304
December 31, 1990.............................................. 9,983 937 4,766 15,686
December 31, 1991.............................................. 10,507 1,287 5,997 17,791
December 31, 1992.............................................. 9,567 1,171 7,293 18,031
December 31, 1993.............................................. 10,257 1,303 9,786 21,346
December 31, 1994.............................................. 9,076 1,841 9,027 19,944
December 31, 1995.............................................. 9,168 1,860 12,004 23,032
December 31, 1996.............................................. 9,401 1,939 12,935 24,275
</TABLE>
EXPLANATORY NOTES: The results in the table assume that income dividends and
capital gain distributions were invested in additional shares. The results also
assume that the initial investment in Class A shares was reduced by the current
maximum applicable sales charge. No adjustment has been made for income taxes,
if any, payable by shareholders.
PERFORMANCE QUOTATIONS
All performance quotations are for the period ended November 30, 1996.
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS CURRENT
------------------------------ 30-DAY DISTRIBUTION
1 YEAR 5 YEAR 10 YEAR YIELD RATE
------ ------ -------- ------ ------------
<S> <C> <C> <C> <C> <C>
Class A shares with sales charge................................ 2.27% 6.96% 9.64% 4.22% 12.83%
Class A shares without sales charge............................. 7.36% 8.00% 10.18%
Class B shares with CDSC........................................ 2.65% 7.16%(1) 9.88%(1)
Class B shares without CDSC..................................... 6.39% 7.43%(1) 9.88%(1) 3.66% 12.98%
Class C shares with CDSC........................................ 5.63% 7.50%(2) 9.92%(2)
Class C shares without CDSC..................................... 6.56% 7.50%(2) 9.92%(2) 3.73% 13.05%
</TABLE>
(1) Class B share performance includes the performance of the Fund's Class A
shares for periods prior to the commencement of offering of Class B shares
on September 7, 1993. Sales charges, expenses and expense ratios, and
therefore performance, for Class A and Class B shares differ. Class B share
performance has been adjusted to reflect that Class B shares generally are
subject to CDSC (unless the performance quotation does not give effect to
the CDSC) whereas Class A shares generally are subject to an initial sales
charge. Class B share performance has not, however, been adjusted to reflect
differences in operating expenses (e.g., Rule 12b-1 fees), which generally
are lower for Class A shares.
(2) Class C share performance includes the performance of the Fund's Class A
shares for periods prior to the commencement of offering of Class C shares
on January 3, 1994. Sales charges, expenses and expense ratios, and
therefore performance, for Class A and Class C shares differ. Class C share
performance has been adjusted to reflect that Class C shares generally are
subject to a CDSC (unless the performance quotation does not give effect to
the CDSC) whereas Class A shares generally are subject to an initial sales
charge. Class C share performance has not, however, been adjusted to reflect
differences in operating expenses (e.g., Rule 12b-1 fees), which generally
are lower for Class A shares.
A-1
<PAGE> 73
INVESTMENT ADVISER
Massachusetts Financial Services Company
500 Boylston Street, Boston, MA 02116
617-954-5000
DISTRIBUTOR
MFS Fund Distributors, Inc.
500 Boylston Street, Boston, MA 02116
(617)954-5000
CUSTODIAN AND DIVIDEND DISBURSING AGENT
State Street Bank and Trust Company
225 Franklin Street, Boston, MA 02110
SHAREHOLDER SERVICING AGENT
MFS Service Center, Inc.
500 Boylston Street, Boston, MA 02116
Toll free: (800) 225-2606
Mailing Address:
P.O. Box 2281, Boston, MA 02107-9906
INDEPENDENT AUDITORS
Ernst & Young LLP
200 Clarendon Street
Boston, MA 02116
LOGO MWG-13-4/96/500 20/220/320
MFS(R)
WORLD
GOVERNMENTS FUND
500 BOYLSTON STREET
BOSTON, MA 02116
<PAGE> 74
<PAGE>
[LOGO] MFS(SM) Annual Report
INVESTMENT MANAGEMENT for Year Ended
November 30, 1996
MFS(R) WORLD GOVERNMENTS FUND
[GRAPHIC OMITTED]
- --------------------------------------------------------------------------------
AMERICA LEARNS HOW "WE INVENTED THE MUTUAL FUND", (see page 31)
- --------------------------------------------------------------------------------
<PAGE>
TABLE OF CONTENTS
Letter from the Chairman ................................................... 1
A Discussion with the Portfolio Manager .................................... 3
Portfolio Manager's Profile ................................................ 7
Fund Facts ................................................................. 8
Performance Summary ........................................................ 8
Tax Form Summary ...........................................................10
Portfolio of Investments ...................................................11
Financial Statements .......................................................14
Notes to Financial Statements ..............................................21
Independent Auditors' Report ...............................................30
MFS Family of Funds ........................................................32
Trustees and Officers ......................................................33
- --------------------------------------------------------------------------------
HIGHLIGHTS
o FOR THE 12 MONTHS ENDED NOVEMBER 30, 1996, CLASS A SHARES OF THE FUND
PROVIDED A TOTAL RETURN AT NET ASSET VALUE OF 7.36%, CLASS B SHARES 6.39%,
AND CLASS C SHARES 6.56%.
o THE BEST-PERFORMING BOND MARKETS THIS PAST YEAR WERE THE HIGHER- YIELDING
MARKETS, SUCH AS AUSTRALIA, CANADA, SPAIN, AND ITALY, WHILE THE CORE MARKETS
-- THE UNITED STATES, JAPAN, AND GERMANY -- WERE THE WORST PERFORMERS.
o WHILE ALL COUNTRIES ARE TRYING TO REDUCE DEFICITS, SUCCESS HAS BEEN ELUSIVE
FOR SOME, PARTLY DUE TO THEIR WEAK ECONOMIES. TAX REVENUES ARE NOT GROWING
RAPIDLY, AND SOCIAL PAYMENTS SUCH AS UNEMPLOYMENT BENEFITS ARE RISING IN
SOME COUNTRIES.
o OUR OUTLOOK FOR JAPAN CALLS FOR A CONTINUATION OF SLOW, SOMEWHAT CHOPPY
GROWTH WITH VERY LOW INFLATION -- AT ESSENTIALLY ZERO, AND POSSIBLY EVEN
NEGATIVE.
- --------------------------------------------------------------------------------
<PAGE>
LETTER FROM THE CHAIRMAN
- ----------------------------
[Photo of A. Keith Brodkin]
- ----------------------------
A. Keith Brodkin
Dear Shareholders:
The U.S. economy appears to have settled into a pattern of moderate growth and
inflation -- two factors that we think can be important contributors to a
favorable long-term investment climate. During the first quarter of 1996, real
(inflation-adjusted) economic growth was 2.3% on an annualized basis, followed
by a rate of 4.7% in the second quarter. However, this unexpectedly high level
was followed by a more moderate 2.0% pace during the third quarter. Overall,
real growth in gross domestic product has surpassed our expectations this year,
and we now expect that growth for all of 1996 could exceed 2.5%. While the
consumer appears to be carrying an excessive debt load, this sector, which
represents two-thirds of the economy, provided some support to the automobile
and housing markets through much of the year. Consumer spending has also been
positively impacted by widespread job growth and, more recently, modestly
increasing wages. Retail sales, which have been flat for several months, appear
to be improving during the holiday shopping season. The economies of Europe and
Japan, meanwhile, continue to be in the doldrums, weakening U.S. export markets.
Finally, the capital spending plans of American corporations are far from
robust. Thus, while economic growth should continue, we expect some slackening
toward the end of the year.
In the bond markets, persistent signs of economic weakness led to decreases in
short-term interest rates by the Federal Reserve Board in late 1995 and early
1996. Should signs of more rapid economic growth and, particularly, of higher
inflation resurface, we would expect the Fed to maintain its anti- inflationary
stance. Through the middle of the year, bond markets traded in a narrow range as
investors shifted between concern for the lack of a budget resolution in
Washington and hope that sluggish economic reports and low inflation might lead
to lower interest rates. Later, fixed-income markets began reacting to
conflicting signals regarding the economy's strength with more volatile trading
patterns marked by a downward bias in interest rates. Interest rates may move
higher over the coming months, but we believe that, at current levels,
fixed-income markets are equitably valued.
Outside the United States, we see similar economic backdrops, with slow to
moderate growth and low inflation in the developed countries of Europe and
Japan. We believe the long-term underperformance of many of these markets
relative to the United States has created some attractive valuations. European
markets such as the United Kingdom and Germany have recently eased monetary
policy, a trend which may continue as German and other central banks seek
economic stimulus. Meanwhile, corporate earnings growth is expected to improve
in these markets, which may lead to their outperforming the U.S. market.
Finally, as you may notice, this report to shareholders incorporates a number
of changes which we hope you will find informative and useful. Following a
discussion with the Portfolio Manager, we have added new information on the
Fund's holdings, including charts illustrating the portfolio's concentration in
the types of investments that meet its criteria. Near the back of the report,
telephone numbers and addresses are listed if you would like to contact MFS.
We appreciate your support and welcome any questions or comments you may have.
Respectfully,
/s/ A. Keith Brodkin
A. Keith Brodkin
Chairman and President
December 12, 1996
<PAGE>
A DISCUSSION WITH THE PORTFOLIO MANAGER
- ---------------------------------
[Photo of Richard O. Hawkins]
- ---------------------------------
Richard O. Hawkins
For the 12 months ended November 30, 1996, Class A shares of the Fund provided a
total return of 7.36%, Class B shares 6.39%, and Class C shares 6.56%. All of
these returns assume the reinvestment of distributions but exclude the effects
of any sales charges and compare to a 6.43% return for the J.P. Morgan Global
Government Bond Index (the Morgan Index), an aggregate index of actively traded
government bonds issued by 13 countries, including the United States, with
remaining maturities of at least one year.
Q. WHAT DO YOU SEE AS SOME OF THE REASONS FOR THIS PERFORMANCE, RICHARD?
A. The best-performing bond markets this past year were the higher-yielding
markets of Australia, Canada, Spain, Sweden, and Italy. In local currency terms,
the core markets -- the United States, Japan, and Germany -- were the worst
performers. This mix of performance reflected the relatively better fundamental
trends in the noncore markets. Since our focus is to identify and benefit from
improving fundamental conditions, we have been overweighted in the noncore
markets. The strong local bond returns were reduced by the rise in the U.S.
dollar. Since a good portion of the portfolio was hedged back into the dollar
for most of this period, the Fund's Class A return exceeded the Morgan Index
benchmark.
Q. HOW WOULD YOU DESCRIBE THE OVERALL ECONOMIC ENVIRONMENT YOU FACED OVER THE
PAST YEAR, PARTICULARLY AS IT RELATES TO THE FUND?
A. Roughly speaking, the year can be divided into two halves. During the first
half, concerns about accelerating U.S. growth, and its potential boost to
other major economies, set off a rise in interest rates based on fears of
higher inflation and one or more rate hikes by the Federal Reserve Board. It
was during this period that the majority of the U.S. dollar rise was seen. In
the second half, the U.S. economy slowed, inflation fears receded, and rates
declined. In Europe, generally, and Japan, the story is more one of gradual
economic recovery.
Q. LET'S LOOK AT SOME SPECIFIC MARKETS. HOW HAS THE U.S. MARKET PERFORMED OVER
THE PAST YEAR, AND WHAT IS YOUR OUTLOOK FOR THE UNITED STATES GOING FORWARD?
A. As we mentioned, U.S. rates rose due to the strength of the economy. At the
beginning of the year, when rates were at their low, the market was also
expecting, or hoping for, further efforts in Washington to curtail the deficit.
When the election season got underway, these plans were put on hold,
disappointing the market. On the other hand, despite solid growth, it became
clear by the second half that underlying inflation had actually continued to
fall, a fact which contributed to the rate decline seen since the summer. Going
forward, the outlook is fairly neutral. Growth should remain on track and
inflation subdued. Month-to-month oscillations in the economy may cause rates to
shift, but the overall prospect for next year would seem to be for rates to
fluctuate in a range around current levels.
Q. WHAT ABOUT OTHER DOLLAR-BLOC MARKETS? THEY PERFORMED WELL OVER THE LAST
YEAR. DO YOU BELIEVE THEY CAN CONTINUE TO DO WELL?
A. We believe Australia and Canada have good potential to outperform the
United States again next year. In Canada, inflation is likely to remain below
U.S. levels, and the government is making great progress on the budget
deficit. In Australia, the story is similar, in that the government is working
to cut the budget deficit and increase national savings, while inflation is
tame.
Q. LET'S GO TO JAPAN. WHAT SIGNS ARE WE SEEING THAT THE RECOVERY IS CONTINUING
OR SLOWING DOWN, AND HOW ARE YOUR OBSERVATIONS REFLECTED IN THE FUND?
A. Japan is in a situation similar to the U.S. economy's in the early 1990s, but
their problems are proportionally bigger. Even though the stock market and real
estate bubbles in Japan burst early in this decade, the banks, which were
lending against stocks and buildings as collateral, have not yet fully written
down their bad debt. Officials, seeking rightly to avoid an outright depression,
are moving very slowly to deregulate the economy. The weaker yen has clearly
helped revive the export sector, but Japanese consumers and businesspeople
remain nervous. Our outlook calls for a continuation of slow, somewhat choppy
growth with very low inflation -- essentially zero, and possibly even negative.
These conditions are quite positive for fixed-income investments, but we are
underweighted in Japan because we feel other markets offer better prospects.
Q. EUROPE, MEANWHILE, IS STILL MOVING TOWARD MONETARY UNION IN JANUARY 1999.
TO GET READY, EUROPEAN COUNTRIES ARE SUPPOSED TO BE CUTTING THEIR BUDGETS AND
REDUCING DEFICITS. HOW'S THIS COMING?
A. All countries are making efforts to reduce deficits, but success has been
elusive for some. The weak economic environment has been partly at fault, since
tax revenues are not growing rapidly, and social payments such as unemployment
benefits are rising in some countries. Ironically, the German deficit has, if
anything, deteriorated this year. An economic upturn in 1997 may help, but the
underlying problem remains low potential growth. European businesses have high
cost structures in the form of direct payments, such as wages and taxes, and
indirect costs from rigid regulations. On this front, progress has been
generally slow, so longer-term issues still need to be addressed.
This is good and bad news for bond markets. For most of the year, European
bonds were overweighted to take advantage of low growth, declining deficits, and
falling official interest rates. Over this period, German interest rates dropped
relative to U.S. rates by 1.00%. Other European markets, where the portfolio was
overweighted, outperformed Germany's. As the year draws to a close, however, the
room for further outperformance by Europe as a whole appears more limited. At
present, the Fund is back to a neutral weighting in Europe overall.
Q. WHAT CAN YOU TELL US ABOUT THE FUND'S CURRENCY SIDE? WHERE ARE YOUR LARGEST
CURRENCY WEIGHTINGS, AND WHAT IS YOUR OUTLOOK FOR THESE MARKETS?
A. Just as low growth and falling inflation have generally supported foreign
bonds this past year, these same forces weighed down their respective
currencies. A sizable portion of the foreign bonds in the portfolio were
judiciously hedged back into U.S. dollars for most of the year, helping to
protect against the stronger dollar. In 1997, it is harder to see the case for a
similar rise in the U.S. dollar. The United States still needs to borrow immense
sums from the rest of the world every year, although foreigners have been
willing lenders in 1996. The question remains how long their interest will be
sustained. Also, while stronger U.S. growth pushed the dollar up relative to
currencies of countries with weaker economies this year, next year that
advantage could be less apparent. Our current weightings are neutral, reflecting
the fine balance between these factors.
Q. CAN YOU TALK ABOUT SOME COUNTRIES THAT PERFORMED AS WELL AS OR BETTER THAN
EXPECTED OVER THE PAST YEAR, AND WHY YOU THINK THEY DID WELL?
A. Overall, our weightings decisions were correct, favoring the noncore bond
markets and U.S. dollar-related currencies, as we have already discussed. Our
expectations of even higher rates in the United States did not materialize in
the second half of the year, however. We overestimated the consumers'
willingness to spend and underestimated their desire to increase savings. As
measured in the national statistics, savings rose very rapidly by historical
standards in 1996. In our view, one of the risks for the U.S. bond market in
1997 is the possibility that consumer spending growth could return to higher
levels. Emerging market debt performed very well this past year. In particular,
dollar-denominated Brady bonds rallied as new investors entered the markets and
issuers refinanced some of these bonds. The Fund participated to some extent in
this move, but not to the degree that some other funds in our category did.
Let me explain our approach to emerging market debt. First, emerging debt can
be divided into investment-grade (rated "BBB" or higher) and below-
investment-grade debt. The Fund aims to represent a relatively high-quality
portfolio, so we do not believe it should be too heavily exposed to the below-
investment-grade sector. In addition, emerging markets, even if the issuer is
highly rated, are at times quite volatile -- a volatility that comes with the
territory. However, using an approach similar to that applied in the major
markets, we have identified what we believe are attractive investment
opportunities in these markets.
Q. AS YOU LOOK AHEAD, WHAT CHANGES DO YOU SEE IN THE OVERALL MARKET OR ECONOMIC
ENVIRONMENT, PARTICULARLY AS IT RELATES TO THE FUND, AND HOW ARE YOU POSITIONING
THE FUND TO TRY TO TAKE ADVANTAGE OF THOSE CHANGES?
A. As always, we will focus on fundamental trends. Currently, nearly all
countries in which we invest are characterized by improving budget trends and
low or falling inflation -- a positive environment for global bonds. Since there
remains a wide range of growth prospects and policy issues among these
countries, and major events such as the formation of a single European currency
loom on the horizon, we believe global bond investing should continue to offer
the kinds of diversification and return opportunities so clearly demonstrated
this year. Respectfully,
/s/ Richard O. Hawkins
Richard O. Hawkins
Portfolio Manager
- --------------------------------------------------------------------------------
PORTFOLIO MANAGER'S PROFILE
RICHARD O. HAWKINS IS SENIOR VICE PRESIDENT OF MASSACHUSETTS FINANCIAL
SERVICES AND DIRECTOR OF THE INTERNATIONAL FIXED INCOME DEPARTMENT. HE IS
PORTFOLIO MANAGER OF MFS WORLD GOVERNMENTS FUND AND HEADS THE TEAM THAT
MANAGES THE FOREIGN BOND AND CURRENCY POSITIONS OF MFS WORLD TOTAL RETURN
FUND, THE MFS MERIDIAN AND MFS INTERNATIONAL FUNDS, FOUR CLOSED- END FUNDS,
AND MFS VARIABLE ANNUITIES.
MR. HAWKINS IS A 1978 GRADUATE OF BROWN UNIVERSITY AND RECEIVED A MASTER'S
DEGREE IN BUSINESS ADMINISTRATION FROM THE UNIVERSITY OF PENNSYLVANIA'S
WHARTON SCHOOL OF BUSINESS IN 1986.
HE JOINED MFS IN AUGUST 1988 AND WAS NAMED VICE PRESIDENT IN 1991,
SENIOR VICE PRESIDENT IN 1994, AND INTERNATIONAL FIXED INCOME DEPARTMENT
HEAD IN 1995.
- --------------------------------------------------------------------------------
COUNTRY WEIGHTINGS
Ireland 10%
Germany 12%
Australia 10%
United States 23%
Italy 11%
Other Countries* 34%
*For a more complete breakdown, refer to the Portfolio of Investments.
<PAGE>
- --------------------------------------------------------------------------------
FUND FACTS
STRATEGY: THE FUND'S OBJECTIVE IS TO SEEK NOT ONLY PRESERVATION,
BUT GROWTH OF CAPITAL, TOGETHER WITH MODERATE CURRENT
INCOME.
COMMENCEMENT OF
INVESTMENT OPERATIONS: FEBRUARY 26, 1981
SIZE: $401 MILLION NET ASSETS AS OF NOVEMBER 30, 1996
- --------------------------------------------------------------------------------
PERFORMANCE SUMMARY
The information below and on the following page illustrates the historical
performance of MFS World Governments Fund Class A shares in comparison to
various market indicators. Class A share results reflect the deduction of the
4.75% maximum sales charge; benchmark comparisons are unmanaged and do not
reflect any fees or expenses. You cannot invest in an index. All results are
historical and assume the reinvestment of dividends and capital gains. The
performance of Class B and C would be greater or less than the line shown, based
on differences in loads and fees.
The following line graphs, comparing the performance of the Fund to a benchmark
index, now include a new index, the J. P. Morgan Global Government Bond Index,
an unmanaged index of actively traded government bonds issued from 13 countries
(including the United States) with remaining maturities of at least one year.
MFS believes that this index is more representative of the countries in which
the Fund invests than the Salomon Brothers World Government Bond Index (an
unmanaged index representing a wider universe of government bonds), the index
which the Fund has been using in previous reports as a benchmark. For this
report only, the Salomon index is also included in the graphs.
GROWTH OF A HYPOTHETICAL $10,000 INVESTMENT
(For the 5-Year Period Ended November 30, 1996)
MFS J.P. Morgan Salomon Brothers
World Governments Consumer Global World
Fund Price Index - Government Government
Class A U.S. Bond Index Bond Index
----------------- ------------- ----------- ----------------
11/91 $ 9,528 $10,000 $10,000 $10,000
11/92 10,292 10,305 10,881 11,036
11/93 12,003 10,581 12,207 12,469
11/94 11,448 10,864 12,458 12,835
11/95 13,042 11,143 14,715 15,161
11/96 14,002 11,524 15,662 16,004
<PAGE>
GROWTH OF A HYPOTHETICAL $10,000 INVESTMENT
(For the 10-Year Period Ended November 30, 1996)
MFS J.P. Morgan Salomon Brothers
World Governments Consumer Global World
Fund Price Index - Government Government
Class A U.S. Bond Index Bond Index
----------------- ------------- ----------- ----------------
11/86 $ 9,528 $10,000 $10,000 $10,000
11/88 12,850 10,891 12,167 12,969
11/90 16,050 12,113 14,279 14,556
11/92 18,459 12,856 17,263 17,859
11/94 20,532 13,553 19,766 20,769
11/96 25,112 14,377 24,849 25,898
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS
1 Year 3 Years 5 Years 10 Years
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
MFS World Governments Fund (Class A)
including 4.75% sales charge + 2.27% + 3.57% + 6.96% + 9.64%
- ----------------------------------------------------------------------------------------------------------------
MFS World Governments Fund (Class A) at net asset value + 7.36% + 5.27% + 8.00% +10.18%
- ----------------------------------------------------------------------------------------------------------------
MFS World Governments Fund (Class B) with CDSC + 2.65% + 3.59% + 7.16% + 9.88%
- ----------------------------------------------------------------------------------------------------------------
MFS World Governments Fund (Class B) without CDSC + 6.39% + 4.39% + 7.43% + 9.88%
- ----------------------------------------------------------------------------------------------------------------
MFS World Governments Fund (Class C) with CDSC + 5.63% + 4.45% + 7.50% + 9.92%
- ----------------------------------------------------------------------------------------------------------------
MFS World Governments Fund (Class C) without CDSC + 6.56% + 4.45% + 7.50% + 9.92%
- ----------------------------------------------------------------------------------------------------------------
Average general world income fund** +13.19% + 6.71% + 7.69% + 8.84%
- ----------------------------------------------------------------------------------------------------------------
Salomon Brothers World Government Bond Index*** + 5.56% + 8.68% + 9.86% + 9.98%
- ----------------------------------------------------------------------------------------------------------------
J.P. Morgan Global Government Bond Index + 6.43% + 8.66% + 9.39% + 9.53%
- ----------------------------------------------------------------------------------------------------------------
Consumer Price Index* + 3.42% + 2.89% + 2.88% + 3.70%
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
* The Consumer Price Index is a popular measure of change in prices.
** Source: Lipper Analytical Services.
*** The Salomon Brothers World Government Bond Index is unmanaged and consists
of complete universes of government bonds with remaining maturities of at
least five years.
Investment return and principal value will fluctuate, and shares, when redeemed,
may be worth more or less than their original cost. Past performance is no
guarantee of future results.
Class B SEC results with contingent deferred sales charge (CDSC), reflect the
applicable CDSC which declines over six years as follows: 4%, 4%, 3%, 3%, 2%,
1%, 0%. Class C shares have no initial sales charge but, along with Class B
shares, have higher annual fees and expenses than Class A shares. As of April 1,
1996, Class C shares redeemed within 12 months of purchase will be subject to a
1% CDSC.
Class B and Class C share performance includes the performance of the Fund's
Class A shares for periods prior to the commencement of offering of Class B
shares on September 7, 1993 and of Class C shares on January 3, 1994. Sales
charges and operating expenses for Class A, Class B, and Class C shares differ.
The Class A share performance, which is included within the Class B and Class C
share performance with CDSC, has been adjusted to reflect the CDSC generally
applicable to Class B and Class C shares rather than the initial sales charge
generally applicable to Class A shares. Class B and Class C share performance
has not been adjusted, however, to reflect differences in operating expenses
(e.g., Rule 12b-1 fees), which generally are lower for Class A shares. Fund
results reflect any applicable expense subsidies and waivers, without which the
performance results would have been less favorable. Subsidies and waivers may be
rescinded at any time. See the prospectus for details.
- --------------------------------------------------------------------------------
TAX FORM SUMMARY
In January 1997, shareholders will be mailed a tax form summary reporting the
federal tax status of all distributions paid during the calendar year 1996.
- --------------------------------------------------------------------------------
<PAGE>
PORTFOLIO OF INVESTMENTS - November 30, 1996
Bonds - 81.8%
- -----------------------------------------------------------------------------
Principal Amount
Issuer (000 Omitted) Value
- -----------------------------------------------------------------------------
Foreign Bonds - 69.8%
Australia - 9.9%
Commonwealth of Australia, 8.75s, 2001 AUD 11,915 $ 10,378,455
Commonwealth of Australia, 9.75s, 2002 9,000 8,228,220
Commonwealth of Australia, 9.5s, 2003 16,400 15,093,915
Queensland Treasury Corp., 8s, 2003 7,200 6,121,825
--------------
$ 39,822,415
- ---------------------------------------------------------------------------
Belgium - 3.5%
Kingdom of Belgium, 9s, 1998 BEF 130,000 $ 4,462,411
Kingdom of Belgium, 8.75s, 2002 90,000 3,352,908
Kingdom of Belgium, 7.25s, 2004 95,000 3,318,487
Kingdom of Belgium, 8.5s, 2007 75,000 2,836,407
--------------
$ 13,970,213
- -----------------------------------------------------------------------------
Canada - 3.1%
Government of Canada, 7.5s, 2003 CAD 9,800 $ 8,041,622
Government of Canada, 9s, 2004 4,750 4,238,142
--------------
$ 12,279,764
- -----------------------------------------------------------------------------
Denmark - 5.1%
Kingdom of Denmark, 6s, 1999 DKK 23,494 $ 4,129,524
Kingdom of Denmark, 8s, 2001 77,248 14,507,941
Kingdom of Denmark, 7s, 2007 11,411 1,970,822
--------------
$ 20,608,287
- -----------------------------------------------------------------------------
Germany - 12.0%
Federal Republic of Germany,
6.875s, 1999 DEM 13,530 $ 9,395,345
Federal Republic of Germany,
7.125s, 2002 15,547 11,175,038
German Unity Fund, 8.75s, 2000 14,962 11,182,587
Treuhandanstalt Obligationen,
6.375s, 1999 23,615 16,314,004
--------------
$ 48,066,974
- -----------------------------------------------------------------------------
Ireland - 9.6%
Republic of Ireland, 6.25s, 1999 IEP 4,300 $ 7,301,294
Republic of Ireland, 9.25s, 2003 15,750 31,001,905
--------------
$ 38,303,199
- -----------------------------------------------------------------------------
Italy - 5.8%
Republic of Italy, 8.313s, 1999 ITL 3,475,000 $ 2,442,426
Republic of Italy, 8.313s, 2006 27,805,000 20,762,979
--------------
$ 23,205,405
- -----------------------------------------------------------------------------
Mexico - 2.7%
United Mexican States, 7.563s, 2001## $ 11,000 $ 11,018,700
- -----------------------------------------------------------------------------
New Zealand - 3.1%
Government of New Zealand, 8s, 2001 NZD 17,000 $ 12,566,203
- -----------------------------------------------------------------------------
Spain - 7.8%
Government of Spain, 8.4s, 2001 ESP 2,297,530 $ 19,173,823
Government of Spain, 8s, 2004 1,454,300 12,014,562
--------------
$ 31,188,385
- -----------------------------------------------------------------------------
Sweden - 2.9%
Kingdom of Sweden, 11s, 1999 SEK 42,500 $ 7,063,840
Kingdom of Sweden, 10.25s, 2000 27,800 4,719,007
--------------
$ 11,782,847
- -----------------------------------------------------------------------------
United Kingdom - 4.3%
United Kingdom Treasury, 7s, 2001 GBP 10,200 $ 17,119,452
- -----------------------------------------------------------------------------
Total Foreign Bonds $279,931,844
- -----------------------------------------------------------------------------
U.S. Bonds - 12.0%
U.S. Treasury Obligations - 12.0%
U.S. Treasury Notes, 6.875s, 2006 $ 8,300 $ 8,772,021
U.S. Treasury Stripped Interest
Payments, 2006 50,295 27,311,191
U.S. Treasury Stripped Interest
Payments, 2016 43,000 11,837,470
--------------
$ 47,920,682
- -----------------------------------------------------------------------------
Total U.S. Bonds $ 47,920,682
- -----------------------------------------------------------------------------
Total Bonds (Identified Cost, $319,772,034) $327,852,526
- -----------------------------------------------------------------------------
Short-Term Obligations - 16.2%
- -----------------------------------------------------------------------------
Eurolira Time Deposit, due 4/21/97 ITL 29,660,000 $ 19,656,822
Federal Farm Credit Bank, due 12/04/96 $ 7,155 7,151,870
Federal Home Loan Mortgage Corp.,
due 12/02/96 - 12/05/96 17,175 17,167,532
Federal National Mortgage Assn., due
12/06/96 11,760 11,751,507
General Electric Co., due 12/03/96 9,125 9,122,323
- -----------------------------------------------------------------------------
Total Short-Term Obligations (Identified Cost, $64,407,059) $ 64,850,054
- -----------------------------------------------------------------------------
Call Options Purchased - 0.3%
- -----------------------------------------------------------------------------
Principal Amount
of Contracts
Description/Expiration Month/Strike Price (000 Omitted)
- -----------------------------------------------------------------------------
Japanese Government Bonds
December/108.155 JPY 1,321,000 $ 499,338
December/111.174 852,000 276,048
January/111.279 1,074,000 434,970
February/116.80 1,338,000 167,250
- -----------------------------------------------------------------------------
Total Call Options Purchased (Premiums Paid, $380,655) $ 1,377,606
- -----------------------------------------------------------------------------
Deutsche Marks
December/1.495 DEM 38,802 $ 237,355
Deutsche Marks/British Pounds
December/2.535 36,986 70,126
January/2.45 53,162 1,771,896
January/2.51 54,464 1,021,420
Japanese Government Bonds
December/111.774 JPY 1,321,000 34,346
Swiss Francs/Deutsche Marks
January/0.829 CHF 21,947 380,030
February/0.84 35,649 334,711
February/0.84 22,238 208,192
- -----------------------------------------------------------------------------
Total Put Options Purchased (Premiums Paid, $1,415,969) $ 4,058,076
- -----------------------------------------------------------------------------
Total Investments (Identified Cost, $385,975,717) $ 398,138,262
- -----------------------------------------------------------------------------
Call Options Written
- -----------------------------------------------------------------------------
Deutsche Marks/British Pounds
January/2.3682 DEM 51,387 $ (617)
Japanese Government Bonds
December/111.774 JPY 1,321,000 (113,605)
Swiss Francs/Deutsche Marks
February/0.8265 CHF 35,076 (24,413)
- -----------------------------------------------------------------------------
Total Call Options Written (Premiums Received, $398,581) $ (138,635)
- -----------------------------------------------------------------------------
Put Options Written - (0.6)%
- -----------------------------------------------------------------------------
Deutsche Marks/British Pounds
January/2.45 DEM 53,162 $ (1,765,092)
Japanese Government Bonds
December/108.155 JPY 1,321,000 --
December/111.174 852,000 --
January/111.279 1,074,000 (2,148)
February/116.8 1,338,000 (36,126)
Swiss Francs/Deutsche Marks
January/0.829 CHF 21,947 (379,987)
- -----------------------------------------------------------------------------
Total Put Options Written (Premiums Received, $1,312,648) $ (2,183,353)
- -----------------------------------------------------------------------------
Other Assets, Less Liabilities - 1.3% $ 5,158,527
- -----------------------------------------------------------------------------
Net Assets - 100.0% $ 400,974,801
- -----------------------------------------------------------------------------
##SEC Rule 144A restriction.
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
BEF = Belgian Francs FIM = Finnish Markkaa NLG = Dutch Guilders
CAD = Canadian Dollars FRF = French Francs NOK = Norwegian Kroner
CHF = Swiss Francs GBP = British Pounds NZD = New Zealand Dollars
DEM = Deutsche Marks HKD = Hong Kong Dollars SEK = Swedish Kronor
DKK = Danish Kroner IEP = Irish Punts THB = Thai Bahts
ECU = European Currency Units ITL = Italian Lire
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS
Statement of Assets and Liabilities
- ------------------------------------------------------------------------------
November 30, 1996
- ------------------------------------------------------------------------------
Assets:
Investments, at value (identified cost, $385,975,717) $398,138,262
Cash 30,325
Net receivable for forward foreign currency exchange
contracts sold 11,888,836
Receivable for investments sold 12,891,772
Receivable for Fund shares sold 291,824
Net receivable for interest rate swap agreements 1,307,519
Interest receivable 9,938,290
Other assets 4,232
------------
Total assets $434,491,060
------------
Liabilities:
Payable for investments purchased $ 12,969,017
Payable for Fund shares reacquired 428,121
Written options outstanding, at value (premiums received,
$1,711,229) 2,321,988
Net payable for forward foreign currency exchange contracts
purchased 16,327,375
Net payable for forward foreign currency exchange contracts 1,031,570
Payable to affiliates -
Management fee 24,717
Distribution fee 6,340
Shareholder servicing agent fee 5,535
Accrued expenses and other liabilities 401,596
------------
Total liabilities $ 33,516,259
------------
Net assets $400,974,801
============
Net assets consists of:
Paid-in capital $380,188,634
Unrealized appreciation on investments and translation of
assets and liabilities in foreign currencies 7,310,863
Accumulated undistributed net realized gain on investments
and foreign currency transactions 2,011,498
Accumulated undistributed net investment income 11,463,806
------------
Total $400,974,801
============
Shares of beneficial interest outstanding 34,437,816
==========
Class A shares:
Net asset value per share
(net assets of $283,770,256 / 24,245,272 shares of
beneficial interest outstanding) $11.70
======
Offering price per share (100 / 95.25 of net asset value per
share) $12.28
======
Class B shares:
Net asset value and offering price per share
(net assets of $102,717,351 / 8,933,379 shares of
beneficial interest outstanding) $11.50
======
Class C shares:
Net asset value and offering price per share
(net assets of $14,487,194 / 1,259,165 shares of beneficial
interest outstanding) $11.51
======
On sales of $100,000 or more, the offering price of Class A shares is reduced. A
contingent deferred sales charge may be imposed on redemptions of Class A, Class
B, and Class C shares.
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS - continued
Statement of Operations
- ------------------------------------------------------------------------------
Year Ended November 30, 1996
- ------------------------------------------------------------------------------
Net investment income:
Interest income $ 29,740,001
------------
Expenses -
Management fee $ 3,491,716
Trustees' compensation 31,891
Shareholder servicing agent fee (Class A) 461,884
Shareholder servicing agent fee (Class B) 208,126
Shareholder servicing agent fee (Class C) 20,060
Distribution and service fee (Class A) 682,511
Distribution and service fee (Class B) 946,025
Distribution and service fee (Class C) 133,734
Custodian fee 418,321
Auditing 58,183
Postage 51,347
Printing 29,326
Legal 5,202
Miscellaneous 245,201
------------
Total expenses $ 6,783,527
Fees paid indirectly (26,799)
------------
Net expenses $ 6,756,728
------------
Net investment income $ 22,983,273
============
Realized and unrealized gain (loss) on investments:
Realized gain (loss) (identified cost basis) -
Investment transactions $ 12,574,227
Written option transactions 3,859,882
Foreign currency transactions (4,903,783)
Futures contracts (4,184)
------------
Net realized gain on investments and foreign currency
transactions $ 11,526,142
------------
Change in unrealized appreciation (depreciation) -
Investments and interest rate swap agreements $ 4,296,226
Written options (1,201,514)
Translation of assets and liabilities in foreign currencies (10,225,655)
------------
Net unrealized loss on investments and foreign currency
translation $ (7,130,943)
------------
Net realized and unrealized gain on investments and
foreign currency $ 4,395,199
------------
Increase in net assets from operations $ 27,378,472
============
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS - continued
Statement of Changes in Net Assets
- ------------------------------------------------------------------------------
Year Ended November 30, 1996 1995
- ------------------------------------------------------------------------------
Increase (decrease) in net assets:
From operations -
Net investment income $ 22,983,273 $ 27,703,556
Net realized gain on investments and foreign
currency transactions 11,526,142 6,230,363
Net unrealized gain (loss) on investments
and foreign currency
translation (7,130,943) 23,059,591
------------- -------------
Increase in net assets from operations $ 27,378,472 $ 56,993,510
------------- -------------
Distributions declared to shareholders -
From net investment income (Class A) $ (43,075,354) $ --
From net investment income (Class B) (11,027,123) --
From net investment income (Class C) (1,482,641) --
From net realized gain on investments and
foreign currency transactions (Class A) -- (14,380,757)
From net realized gain on investments and
foreign currency transactions (Class B) -- (2,952,759)
From net realized gain on investments and
foreign currency transactions (Class C) -- (346,641)
------------- -------------
Total distributions declared to
shareholders $ (55,585,118) $ (17,680,157)
------------- -------------
Fund share (principal) transactions -
Net proceeds from sale of shares $ 82,946,761 $ 89,711,602
Net asset value of shares issued to
shareholders in reinvestment
of distributions 43,475,232 14,249,917
Cost of shares reacquired (143,219,840) (149,551,002)
------------- -------------
Decrease in net assets from Fund share
transactions $ (16,797,847) $ (45,589,483)
------------- -------------
Total decrease in net assets $ (45,004,493) $ (6,276,130)
Net assets:
At beginning of year 445,979,294 452,255,424
------------- -------------
At end of year (including accumulated
undistributed net investment income of
$11,463,806 and $41,131,061, respectively) $ 400,974,801 $ 445,979,294
============= =============
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS - continued
<TABLE>
<CAPTION>
Financial Highlights
- -----------------------------------------------------------------------------------------------------------
Year Ended
Year Ended November 30, December 31,
-------------------------------------------------------------------------------
1996 1995 1994 1993(++) 1992 1991
- -----------------------------------------------------------------------------------------------------------
Class A
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value -
beginning of period $12.46 $11.39 $13.37 $11.50 $12.63 $12.00
------ ------ ------ ------ ------ ------
Income from investment
operations# -
Net investment income $ 0.65 $ 0.76 $ 0.63 $ 0.58 $ 0.87 $ 0.94
Net realized and unrealized
gain (loss) on investments
and foreign currency
transactions 0.17 0.76 (1.17) 1.29 (0.70) 0.67
------ ------ ------ ------ ------ ------
Total from investment
operations $ 0.82 $ 1.52 $ (0.54) $ 1.87 $ 0.17 $ 1.61
------ ------ ------ ------ ------ ------
Less distributions declared to
shareholders -
From net investment income $(1.58) -- $(1.15) -- $(1.30) $(0.75)
From net realized gain
on investments and
foreign currency
transactions -- (0.45) (0.29) -- -- --
From paid-in capital -- -- -- -- -- (0.23)
------ ------ ------ ------ ------ ------
Total distributions
declared to
shareholders $(1.58) $(0.45) $(1.44) $ -- $(1.30) $(0.98)
------ ------ ------ ------ ------ ------
Net asset value - end of
period $11.70 $12.46 $11.39 $13.37 $11.50 $12.63
====== ====== ====== ====== ====== ======
Total return++ 7.36% 13.93% (4.63)% 17.77%+ 1.35% 13.42%
Ratios (to average net assets)/Supplemental data:
Expenses## 1.42% 1.51% 1.54% 1.54%+ 1.53% 1.61%
Net investment income 5.70% 6.42% 5.45% 5.66%+ 6.78% 7.75%
Portfolio turnover 370% 277% 358% 179%+ 163% 208%
Net assets at end of period
(000 omitted) $283,770 $343,188 $370,110 $443,304 $340,347 $286,089
+ Annualized.
++ Total returns for Class A shares do not include the applicable sales charge. If the charge had been
included, the results would have been lower.
(++) For the 11 months ended November 30, 1993.
# Per share data for the periods subsequent to November 30, 1993 is based on average shares outstanding.
## For fiscal years ending after September 1, 1995, the Fund's expenses are calculated without reduction for
fees paid indirectly.
</TABLE>
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS - continued
<TABLE>
<CAPTION>
Financial Highlights - continued
- --------------------------------------------------------------------------------------------------------------
Year Ended December 31, 1990 1989 1988 1987 1986
- --------------------------------------------------------------------------------------------------------------
Class A
- --------------------------------------------------------------------------------------------------------------
Per share data (for a share outstanding throughout each period):
<S> <C> <C> <C> <C> <C>
Net asset value - beginning of period $11.45 $11.11 $11.87 $11.45 $10.70
------ ------ ------ ------ ------
Income from investment operations
Net investment income $ 0.98 $ 1.07 $ 0.94 $ 0.91 $ 0.82
Net realized and unrealized gain (loss) on
investments and foreign currency
transactions 1.07 (0.26) (0.42) 1.86 2.35
------ ------ ------ ------ ------
Total from investment operations $ 2.05 $ 0.81 $ 0.52 $ 2.77 $ 3.17
------ ------ ------ ------ ------
Less distributions declared to shareholders -
From net investment income $(0.95) $(0.47) $(0.90) $(0.90) $(0.82)
From net realized gain on investment and
foreign currency transactions (0.50) -- (0.32) (1.40) (1.52)
From paid-in capital (0.05) -- (0.06) (0.05) (0.08)
------ ------ ------ ------ ------
Total distributions declared to
shareholders $(1.50) $(0.47) $(1.28) $(2.35) $(2.42)
------ ------ ------ ------ ------
Net asset value - end of period $12.00 $11.45 $11.11 $11.87 $11.45
====== ====== ====== ====== ======
Total return++ 17.90% 7.27% 3.68% 23.29% 29.36%
Ratios (to average net assets)/Supplemental data:
Expenses 1.44% 1.42% 1.12% 1.13% 1.17%
Net investment income 8.06% 8.42% 7.91% 7.54% 6.57%
Portfolio turnover 220% 282% 232% 378% 371%
Net assets at end of period (000 omitted) $145,202 $124,935 $190,590 $182,738 $142,183
++ Total returns for Class A shares do not include the applicable sales charge. If the charge had been included,
the results would have been lower.
</TABLE>
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS - continued
<TABLE>
<CAPTION>
Financial Highlights - continued
- ------------------------------------------------------------------------------------------
Year Ended November 30, 1996 1995 1994 1993*
- ------------------------------------------------------------------------------------------
Class B
- ------------------------------------------------------------------------------------------
Per share data (for a share outstanding throughout each period):
<S> <C> <C> <C> <C>
Net asset value - beginning of period $12.28 $11.32 $13.35 $13.22
------ ------ ------ ------
Income from investment operations# -
Net investment income $ 0.54 $ 0.65 $ 0.56 $ 0.07
Net realized and unrealized gain
(loss) on investments and
foreign currency transactions 0.17 0.76 (1.19) 0.06
------ ------ ------ ------
Total from investment
operations $ 0.71 $ 1.41 $(0.63) $ 0.13
------ ------ ------ ------
Less distributions declared to shareholders -
From net investment income $(1.49) $ -- $(1.11) $ --
From net realized gain on
investments and foreign
currency transactions -- (0.45) (0.29) --
------ ------ ------ ------
Total distributions
declared to shareholders $(1.49) $(0.45) $(1.40) $ --
------ ------ ------ ------
Net asset value - end of period $11.50 $12.28 $11.32 $13.35
====== ====== ====== ======
Total return 6.39% 13.01% (5.39)% 4.32%+
Ratios (to average net assets)/Supplemental data:
Expenses## 2.27% 2.33% 2.38% 2.48%+
Net investment income 4.89% 5.59% 4.81% 4.72%+
Portfolio turnover 370% 277% 358% 179%+
Net assets at end of period
(000 omitted) $102,717 $90,978 $73,458 $24,590
+ Annualized.
* For the period from the commencement of offering of Class B shares, September 7, 1993 to
November 30, 1993.
# Per share data for the periods subsequent to November 30, 1993 is based on average shares
outstanding.
## For fiscal years ending after September 1, 1995, the Fund's expenses are calculated
without reduction for fees paid indirectly.
</TABLE>
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS - continued
<TABLE>
<CAPTION>
Financial Highlights - continued
- -----------------------------------------------------------------------------------------
Year Ended November 30, 1996 1995 1994**
- -----------------------------------------------------------------------------------------
Class C
- -----------------------------------------------------------------------------------------
Per share data (for a share outstanding throughout each period):
<S> <C> <C> <C>
Net asset value - beginning of period $12.29 $11.31 $12.30
------ ------ ------
Income from investment operations# -
Net investment income $ 0.55 $ 0.66 $ 0.50
Net realized and unrealized gain (loss) on
investments and foreign currency transactions 0.17 0.77 (1.35)
------ ------ ------
Total from investment operations $ 0.72 $ 1.43 $(0.85)
------ ------ ------
Less distributions declared to shareholders -
From net investment income $(1.50) $ -- $(0.14)
From net realized gain on investments and foreign
currency transactions -- (0.45) --
------ ------ ------
Total distributions declared to shareholders $(1.50) $(0.45) $(0.14)
------ ------ ------
Net asset value - end of period $11.51 $12.29 $11.31
====== ====== ======
Total return 6.56% 13.11% (6.92)%
Ratios (to average net assets)/Supplemental data:
Expenses## 2.20% 2.26% 2.32%+
Net investment income 4.97% 5.67% 5.06%+
Portfolio turnover 370% 277% 358%
Net assets at end of period (000 omitted) $14,487 $11,813 $ 8,687
+ Annualized.
** For the period from the commencement of offering of Class C shares, January
3, 1994 to November 30, 1994.
# Per share data is based on average shares outstanding.
## For fiscal years ending after September 1, 1995, the Fund's expenses are
calculated without reduction for fees paid indirectly.
</TABLE>
See notes to financial statements
<PAGE>
NOTES TO FINANCIAL STATEMENTS
(1) Business and Organization
MFS World Governments Fund (the Fund) is a non-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
General - The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. Investments
in foreign securities are vulnerable to the effects of changes in the relative
values of the local currency and the U.S. dollar and to the effects of changes
in each country's legal, political and economic environment.
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 market 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.
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, 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 result 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 part of an income producing strategy reflecting the view of the
Fund's management on the direction of interest rates.
Futures Contracts - The Fund may enter into 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 interest or exchange rates or
securities prices. Investments in interest rate futures for purposes other than
hedging may be made to modify the duration of the portfolio without incurring
the additional transaction costs involved in buying and selling the underlying
securities. Investments in currency futures for purposes other than hedging may
be made to change the Fund's relative position in one or more currencies without
buying and selling portfolio assets. Should interest or exchange rates or
securities prices move unexpectedly, the Fund may not achieve the anticipated
benefits of the futures contracts and may realize a loss.
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 into 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. The Fund 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.
Swap Agreements - The Fund may enter into swap agreements. A swap is an exchange
of cash payments between the Fund and another party which is based on a specific
financial index. Cash payments are exchanged at specified intervals and the
expected income or expense is recorded on the accrual basis. The value of the
swap is adjusted daily and the change in value is recorded as unrealized
appreciation or depreciation. Risks may arise upon entering into these
agreements from the potential inability of counterparties to meet the terms of
their contract and from unanticipated changes in the value of the financial
index on which the swap agreement is based. The Fund uses swaps for both hedging
and non-hedging purposes. For hedging purposes, the Fund may use swaps to reduce
its exposure to interest and foreign exchange rate fluctuations. For non-hedging
purposes, the Fund may use swaps to take a position on anticipated changes in
the underlying financial index.
Investment Transactions and Income - Investment transactions are recorded on the
trade date. Interest income is recorded on the accrual basis. All premium and
original issue discount are amortized or accreted for financial statement and
tax reporting purposes as required by federal income tax regulations. Dividend
income is recorded on the ex-dividend date for dividends received in cash.
Dividend and interest payments received in additional securities are recorded on
the ex-dividend or ex-interest date in an amount equal to the value of the
security on such date.
The Fund uses the effective interest method for reporting interest income on
payment-in-kind (PIK) bonds, whereby interest income on PIK bonds is recorded
ratably by the Fund at a constant yield to maturity. Legal fees and other
related expenses incurred to preserve and protect the value of a security owned
are added to the cost of the security; other legal fees are expensed. Capital
infusions, which are generally non-recurring, incurred to protect or enhance the
value of high-yield debt securities, are reported as an addition to the cost
basis of the security. Costs that are incurred to negotiate the terms or
conditions of capital infusions or that are expected to result in a plan of
reorganization are reported as realized losses. Ongoing costs incurred to
protect or enhance an investment, or costs incurred to pursue other claims or
legal actions, are reported as operating expenses.
Fees Paid Indirectly - The Fund's custodian bank calculates its fee based on the
Fund's average daily net assets. The fee is reduced according to a fee
arrangement, which provides for custody fees to be reduced based on a formula
developed to measure the value of cash deposited with the custodian by the Fund.
This amount is shown as a reduction of expenses on the Statement of Operations.
Tax Matters and Distributions - The Fund's policy is to comply with the
provisions of the Internal Revenue Code (the Code) applicable to regulated
investment companies and to distribute to shareholders all of its taxable
income, including any net realized gain on investments. Accordingly, no
provision for federal income or excise tax is provided. The Fund files a tax
return annually using tax accounting methods required under provisions of the
Code which may differ from generally accepted accounting principles, the basis
on which these financial statements are prepared. Accordingly, the amount of net
investment income and net realized gain reported on these financial statements
may differ from that reported on the Fund's tax return and, consequently, the
character of distributions to shareholders reported in the financial highlights
may differ from that reported to shareholders on Form 1099-DIV. Foreign taxes
have been provided for on interest and dividend income earned on foreign
investments in accordance with the applicable country's tax rates and to the
extent unrecoverable are recorded as a reduction of investment income.
Distributions to shareholders are recorded on the ex- dividend date. The Fund
distinguishes between distributions on a tax basis and a financial reporting
basis and requires that only distributions in excess of tax basis earnings and
profits are reported in the financial statements as a tax return of capital.
Differences in the recognition or classification of income between the financial
statements and tax earnings and profits which result in temporary
over-distributions for financial statement purposes, are classified as
distributions in excess of net investment income or accumulated net realized
gains. During the year ended November 30, 1996, $2,934,590 was reclassified from
accumulated net realized gain on investments to accumulated undistributed net
investment income due to differences between book and tax accounting for
currency transactions. This change had no effect on the net assets or net asset
value per share. At November 30, 1996, accumulated undistributed net investment
income (realized gain on investments and foreign currency transactions) under
book accounting were different from tax accounting due to temporary differences
in accounting for foreign currency and foreign tax credits.
Multiple Classes of Shares of Beneficial Interest - The Fund offers Class A,
Class B, and Class C shares. The three classes of shares differ in their
respective shareholder servicing agent, distribution and service fees. All
shareholders bear the common expenses of the Fund pro rata based on the average
daily net assets of each class, without distinction between share classes.
Dividends are declared separately for each class. No class has preferential
dividend rights; differences in per share dividend rates are generally due to
differences in separate class expenses.
(3) Transactions with Affiliates
Investment Adviser - The Fund has an investment advisory agreement with
Massachusetts Financial Services Company (MFS) to provide overall investment
advisory and administrative services, and general office facilities. The
management fee was computed daily and paid monthly at an effective annual rate
of 0.90% of average daily net assets through June 30, 1996. Effective July 1,
1996, the management fee is computed daily and paid monthly at an effective
annual rate of 0.75% of average daily net assets.
The Fund pays no compensation directly to its Trustees who are officers of the
investment adviser, or to officers of the Fund, all of whom receive remuneration
for their services to the Fund from MFS. Certain officers and Trustees of the
Fund are officers or directors of MFS, MFS Fund Distributors, Inc. (MFD), and
MFS Service Center, Inc. (MFSC). The Fund has an unfunded defined benefit plan
for all of its independent Trustees and Mr. Bailey. Included in Trustees'
compensation is a net periodic pension expense of $10,211 for the year ended
November 30, 1996.
Distributor - MFD, a wholly owned subsidiary of MFS, as distributor, received
$86,771 for the year ended November 30, 1996, as its portion of the sales charge
on sales of Class A shares of the Fund. The Trustees have adopted separate
distribution plans for Class A, Class B, and Class C shares pursuant to Rule
12b-1 of the Investment Company Act of 1940 as follows:
The Class A distribution plan provides that the Fund will pay MFD up to 0.35%
per annum of its average daily net assets attributable to Class A shares in
order that MFD may pay expenses on behalf of the Fund related to the
distribution and servicing of its shares. These expenses include a service fee
to each securities dealer who enters 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 which are attributable to that securities dealer, a distribution fee to
MFD of up to 0.10% per annum of the Fund's average daily net assets attributable
to Class A shares, commissions to dealers and payments to MFD wholesalers for
sales at or above a certain dollar level, and other such distribution-related
expenses that are approved by the Fund. MFD retains the service fee for accounts
not attributable to a securities dealer which amounted to $148,049 for the year
ended November 30, 1996. Payment of the 0.10% per annum Class A distribution fee
will commence on such date as the Trustees of the Trust may determine. Fees
incurred under the distribution plan during the year ended November 30, 1996
were 0.22% of average daily net assets attributable to Class A shares on an
annualized basis.
The Class B and Class C distribution plans provide that the Fund will pay MFD a
distribution fee of 0.75% per annum, and a service fee of up to 0.25% per annum,
of the Fund's average daily net assets attributable to Class B and Class C
shares. MFD will pay to securities dealers who enter into a sales agreement with
MFD all or a portion of the service fee attributable to Class B and Class C
shares, and will pay to such securities dealers all of the distribution fee
attributable to Class C shares. The service fee is intended to be additional
consideration for services rendered by the dealer with respect to Class B and
Class C shares. MFD retains the service fee for accounts not attributable to a
securities dealer, which amounted to $16,637 and $6,237 for Class B and Class C
shares, respectively, for the year ended November 30, 1996. Fees incurred under
the distribution plans during the year ended November 30, 1996 were 1.00% of
average daily net assets attributable to Class B and Class C shares on an
annualized basis.
Purchases over $1 million of Class A shares and certain purchases into
retirement plans are subject to a contingent deferred sales charge in the event
of a shareholder redemption within 12 months following such purchase. A
contingent deferred sales charge is imposed on shareholder redemptions of Class
B shares in the event of a shareholder redemption within six years of purchase.
A contingent deferred sales charge is imposed on shareholder redemptions of
Class C shares in the event of a shareholder redemption within 12 months of
purchases made on or after April 1, 1996. MFD receives all contingent deferred
sales charges. Contingent deferred sales charges imposed during the year ended
November 30, 1996 were $9,358, $212,515 and $609 for Class A, Class B, and Class
C shares, respectively.
Shareholder Servicing Agent - MFSC, a wholly owned subsidiary of MFS, earns a
fee for its services as shareholder servicing agent. The fee is calculated as a
percentage of the 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 $ 258,265,376 $ 375,899,606
============== ==============
Investments (non-U.S. government securities) $1,181,673,546 $1,338,600,377
============== ==============
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 $386,214,567
============
Gross unrealized appreciation $ 13,812,148
Gross unrealized depreciation (1,888,453)
------------
Net unrealized appreciation $ 11,923,695
============
(5) Shares of Beneficial Interest
The Fund's Declaration of Trust permits the Trustees to issue an unlimited
number of full and fractional shares of beneficial interest (without par value).
Transactions in Fund shares were as follows:
Class A Shares
Year Ended November 30, 1996 Year Ended November 30, 1995
---------------------------- ----------------------------
Shares Amount Shares Amount
- -----------------------------------------------------------------------------
Shares sold 3,456,886 $ 38,473,626 3,654,873 $ 43,257,969
Shares issued to
shareholders in
reinvestment of
distributions 3,084,576 33,899,680 1,062,150 11,588,708
Shares
reacquired (9,837,787) (109,032,589) (9,674,268) (113,405,139)
---------- ------------ ---------- ------------
Net decrease (3,296,325) $(36,659,283) (4,957,245) $(58,558,462)
========== ============ ========== ============
Class B Shares
Year Ended November 30, 1996 Year Ended November 30, 1995
---------------------------- ----------------------------
Shares Amount Shares Amount
- -----------------------------------------------------------------------------
Shares sold 3,389,303 $ 37,175,577 3,283,886 $ 38,572,444
Shares issued to
shareholders in
reinvestment of
distributions 799,999 8,704,007 223,471 2,421,082
Shares
reacquired (2,665,621) (29,293,670) (2,588,468) (30,297,163)
--------- ------------ ------- ------------
Net increase 1,523,681 $ 16,585,914 918,889 $ 10,696,363
========= ============ ======= ============
Class C Shares
Year Ended November 30, 1996 Year Ended November 30, 1995
---------------------------- ----------------------------
Shares Amount Shares Amount
- -----------------------------------------------------------------------------
Shares sold 663,887 $ 7,297,558 670,695 $ 7,881,189
Shares issued to
shareholders in
reinvestment of
distributions 80,105 871,545 22,172 240,127
Shares
reacquired (446,199) (4,893,581) (499,286) (5,848,700)
------- ------------ ------- ------------
Net increase 297,793 $ 3,275,522 193,581 $ 2,272,616
======= ============ ======= ============
(6) Line of Credit
The Fund entered into an agreement which enables it to participate with other
funds managed by MFS in an unsecured line of credit with a bank which permits
borrowings up to $350 million, collectively. Borrowings may be made to
temporarily finance the repurchase of Fund shares. Interest is charged to each
fund, based on its borrowings, at a rate equal to the bank's base rate. In
addition, a commitment fee, based on the average daily unused portion of the
line of credit, is allocated among the participating funds at the end of each
quarter. The commitment fee allocated to the Fund for the year ended November
30, 1996 was $4,428.
(7) Financial Instruments
The Fund 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 interest rate swaps. 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, 1996,
is as follows:
<TABLE>
Written Option Transactions
<CAPTION>
1996 Calls 1996 Puts
-------------------------------- --------------------------------
Principal Amounts Principal Amounts
of Contracts of Contracts
(000 Omitted) Premiums (000 Omitted) Premiums
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
OUTSTANDING, BEGINNING OF PERIOD -
Australian Dollars 9,064 $ 57,652 20,306 $ 202,885
Deutsche Marks -- -- 43,731 159,788
Deutsche Marks/British Pounds 32,282 207,191 -- --
Italian Lire/Deutsche Marks 61,372,554 1,017,097 61,372,554 2,259,799
Japanese Yen -- -- 3,244,000 428,772
Japanese Yen/Deutsche Marks -- -- 7,367,471 262,659
Options Written -
Australian Dollars 11,378 61,663 -- --
Canadian Dollars 37,260 38,244 55,892 168,693
Deutsche Marks 232,635 1,281,857 37,819 103,816
Deutsche Marks/British Pounds 201,659 746,201 53,162 685,137
Italian Lire/Deutsche Marks 51,325,696 403,061 -- --
Japanese Yen 6,768,052 355,264 20,815,137 1,691,763
New Zealand Dollars -- -- 29,833 44,362
Spanish Pesetas -- -- 5,202,789 129,176
Swiss Francs/Deutsche Marks 35,076 106,449 21,947 246,856
Options terminated in closing
transactions -
Australian Dollars (20,442) (119,315) (8,559) (52,303)
Deutsche Marks (232,635) (1,281,857) (37,819) (103,816)
Deutsche Marks/British Pounds (120,874) (505,107) -- --
Italian Lire/Deutsche Marks (112,698,250) (1,420,158) (61,372,554) (2,259,799)
Japanese Yen (5,447,052) (260,036) (17,173,000) (1,603,282)
Japanese Yen/Deutsche Marks -- -- (7,367,471) (262,659)
New Zealand Dollars -- -- (29,833) (44,362)
Options expired -
Australian Dollars -- -- (11,747) (150,582)
Canadian Dollars (37,260) (38,244) (55,892) (168,693)
Deutsche Marks -- -- (43,731) (159,788)
Deutsche Marks/British Pounds (61,680) (251,381) -- --
Japanese Yen -- -- (2,301,137) (136,598)
Spanish Pesetas -- -- (5,202,789) (129,176)
----------- ------------ ----------- ------------
OUTSTANDING, END OF PERIOD 1,407,463 $ 398,581 4,660,109 $ 1,312,648
=========== ============ =========== ============
OPTIONS OUTSTANDING AT END OF PERIOD
CONSIST OF:
Deutsche Marks/British Pounds 51,387 $ 196,904 53,162 $ 685,137
Japanese Yen 1,321,000 95,228 4,585,000 380,655
Swiss Francs/Deutsche Marks 35,076 106,449 21,947 246,856
----------- ------------ ----------- ------------
OUTSTANDING, END OF PERIOD 1,407,463 $ 398,581 4,660,109 $ 1,312,648
=========== ============ =========== ============
</TABLE>
At November 30, 1996, the Fund had sufficient cash and/or securities at least
equal to the value of the written options.
<PAGE>
<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 2/20/97 AUD 30,718,131 $ 24,029,512 $ 24,987,970 $ (958,458)
2/24/96 BEF 445,685,159 14,670,348 14,126,437 543,911
2/20/97 CAD 23,697,665 17,737,774 17,664,169 73,605
2/07/97 CHF 90,390,058 75,677,248 69,696,249 5,980,999
12/12/96 - 4/28/97 DEM 509,047,214 337,735,526 332,447,531 5,287,995
2/03/97 DKK 120,183,688 21,069,333 20,475,575 593,758
5/09/97 ECU 15,325,665 19,511,872 19,332,698, 179,174
2/07/97 FIM 90,037,327 19,924,236 19,599,415 324,821
2/24/97 GBP 29,141,019 47,684,757 48,893,531 (1,208,774)
2/04/97 HKD 171,000,000 22,009,705 22,117,311 (107,606)
2/24/97 IEP 21,188,013 33,990,524 35,566,474 (1,575,950)
12/12/96 - 4/28/97 ITL 87,539,668,825 57,275,314 57,700,956 (425,642)
1/29/97 - 4/21/97 JPY 14,993,454,576 137,320,672 133,731,002 3,589,670
2/03/97 NLG 14,819,043 9,050,350 8,621,230 429,120
12/13/96 NZD 46,098,882 31,682,185 32,749,245 (1,067,060)
2/03/97 SEK 86,967,170 13,192,252 12,962,979 229,273
------------ ------------ ------------
$882,561,608 $870,672,772 $ 11,888,836
============ ============ ============
Purchases 2/20/97 AUD 16,312,572 $ 12,854,307 $ 13,269,625 $ 415,318
2/20/97 CAD 27,734,943 20,825,000 20,673,543 (151,457)
1/31/97 - 2/07/97 CHF 109,673,081 89,904,208 84,559,302 (5,344,906)
12/12/96 - 4/28/97 DEM 515,900,293 343,143,120 336,756,502 (6,386,618)
2/03/97 DKK 38,326,941 6,600,719 6,529,723 (70,996)
2/07/97 FIM 90,037,327 19,951,088 19,599,415 (351,673)
2/07/97 FRF 96,753,967 19,159,202 18,579,858 (579,344)
12/13/96 - 2/24/97 GBP 26,959,491 44,467,390 45,250,295 782,905
2/07/97 - 4/28/97 ITL 57,088,589,626 36,613,272 37,513,180 899,908
1/21/97 - 4/14/97 JPY 18,871,719,244 173,784,696 168,044,424 (5,740,272)
2/03/97 NLG 15,655,430 9,196,499 9,107,813 (88,686)
5/09/97 NOK 123,697,455 19,511,871 19,377,701 (134,170)
12/13/96 NZD 28,933,122 20,035,429 20,554,466 519,037
2/03/97 SEK 56,160,144 8,501,827 8,371,006 (130,821)
12/24/96 - 1/31/97 THB 212,765,000 8,254,215 8,288,615 34,400
------------ ------------ ------------
$832,802,843 $816,475,468 $(16,327,375)
============ ============ ============
</TABLE>
Forward foreign currency purchases and sales under master netting arrangements
and closed forward foreign currency exchange contracts excluded above amounted
to a net payable of $1,031,570 at November 30, 1996.
At November 30, 1996, the Fund had sufficient cash and/or securities to cover
any commitments under these contracts.
<TABLE>
Interest Rate Swaps
<CAPTION>
Cash Flows
Notional Principal Cash Flows Paid Received by Unrealized
Expiration Amount of Contracts by the Fund the Fund Appreciation
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
10/22/01 ITL 29,660,000,000 Floating - 6 Month LIBOR Fixed - 8.055% $1,307,519
==========
</TABLE>
At November 30, 1996, the Fund has segregated sufficient securities to cover
margin requirements on open interest rate swaps.
<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 schedule of portfolio investments as of
November 30, 1996, and the related statement of operations for the year then
ended, the statement of changes in net assets for each of the two years in the
period then ended, and the financial highlights for each of the three years in
the period then ended. These financial statements and financial highlights are
the responsibility of the Fund's management. Our responsibility is to express
an opinion on these financial statements and financial highlights based on our
audits. The financial highlights for the periods prior to the year ended
November 30, 1994 indicated herein, were audited by other auditors whose
report dated January 19, 1994 expressed an unqualified opinion on those
financial highlights.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements and
financial highlights are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. Our procedures included confirmation of securities
owned as of November 30, 1996, by correspondence with the custodian and
brokers or by other appropriate auditing procedures where replies from brokers
were not received. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of MFS
World Governments Fund at November 30, 1996, the results of its operations for
the year then ended, the changes in its net assets for each of the two years
in the period then ended, and the financial highlights for each of the three
years in the period then ended, in conformity with generally accepted
accounting principles.
/s/ ERNST & YOUNG LLP
Boston, Massachusetts
January 8, 1997
--------------------------------------------
This report is prepared for the general information of shareholders. It is
authorized for distribution to prospective investors only when preceded or
accompanied by a current prospectus.
<PAGE>
MFS(R) WORLD GOVERNMENTS FUND
<TABLE>
<S> <C>
TRUSTEES CUSTODIAN
A. Keith Brodkin* - Chairman and President State Street Bank and Trust Company
Richard B. Bailey* - Private Investor; INVESTOR INFORMATION
Former Chairman and Director (until 1991), For MFS stock and bond market outlooks,
Massachusetts Financial Services Company; call toll free: 1-800-637-4458 anytime from
Director, Cambridge Bancorp; Director; a touch-tone telephone.
Cambridge Trust Company
For information on MFS mutual funds,
Peter G. Harwood - Private Investor call your financial adviser or, for an
information kit, call toll free:
J. Atwood Ives - Chairman and Chief Executive 1-800-637-2929 any business day from
Officer, Eastern Enterprises 9 a.m. to 5 p.m. Eastern time (or leave
a message anytime).
Lawrence T. Perera - Partner
Hemenway & Barnes INVESTOR SERVICE
MFS Service Center, Inc.
William J. Poorvu - Adjunct Professor, P.O. Box 2281
Harvard University Graduate School of Boston, MA 02107-9906
Business Administration
For current account service, call toll free:
Charles W. Schmidt - Private Investor 1-800-225-2606 any business day from
8 a.m. to 8 p.m. Eastern time.
Arnold D. Scott* - Senior Executive Vice President,
Director and Secretary, Massachusetts Financial For service to speech- or hearing-impaired,
Services Company call toll free: 1-800-637-6576 any business
day from 9 a.m. to 5 p.m. Eastern time.
Jeffrey L. Shames* - President and Director, (To use this service, your phone must be
Massachusetts Financial Services Company equipped with a Telecommunications
Device for the Deaf.)
Elaine R. Smith - Independent Consultant
For share prices, account balances, and
David B. Stone - Chairman, North American exchanges, call toll free: 1-800-MFS-TALK
Management Corp. (investment advisers) (1-800-637-8255) anytime from a touch-tone
telephone.
INVESTMENT ADVISER
Massachusetts Financial Services Company WORLD WIDE WEB
500 Boylston Street www.mfs.com
Boston, MA 02116-3741
DISTRIBUTOR
MFS Fund Distributors, Inc.
500 Boylston Street ------------------------------------------------
Boston, MA 02116-3741 [DALBAR For the third year in a row,
LOGO] MFS earned a #1 ranking in
PORTFOLIO MANAGER TOP RATED DALBAR, Inc. Broker/Dealer
Richard O. Hawkins* SERVICE Survey, Main Office Operations
Service Quality Category. The
TREASURER firm achieved a 3.48 overall score on a
W. Thomas London* scale of 1 to 4 in the 1996 survey. A total
of 110 firms responded, offering input on the
ASSISTANT TREASURER quality of service they received from 29
James O. Yost* mutual fund companies nationwide. The survey
contained questions about service quality in
SECRETARY 15 categories, including "knowledge of phone
Stephen E. Cavan* service contacts," "accuracy of transaction
processing," and "overall ease of doing
ASSISTANT SECRETARY business with the firm."
James R. Bordewick, Jr.* ------------------------------------------------
AUDITORS
Ernst & Young LLP
*Affiliated with the Investment Adviser
</TABLE>
<PAGE>
MFS(R) WORLD -------------
GOVERNMENTS FUND [LOGO: NUMBER 1 DALBAR BULK RATE
TOP-RATED SERVICE] U.S. POSTAGE
PAID
500 Boylston Street PERMIT #55638
Boston, MA 02116 BOSTON, MA
-------------
[LOGO: M F S(SM)]
INVESTMENT MANAGEMENT
WE INVENTED THE MUTUAL FUND(SM)
(C)1997 MFS Fund Distributors, Inc., 500 Boylston Street, Boston, MA 02116
MWG-2 1/97 39M 20/220/320
<PAGE> 75
MFS VALUE FUND
SUPPLEMENT TO THE APRIL 1, 1997 PROSPECTUS AND STATEMENT OF
ADDITIONAL INFORMATION
THE FOLLOWING INFORMATION SHOULD BE READ IN CONJUNCTION WITH THE FUND'S
PROSPECTUS AND STATEMENT OF ADDITIONAL INFORMATION ("SAI"), DATED APRIL 1, 1997,
AND CONTAINS A DESCRIPTION OF CLASS I SHARES.
CLASS I SHARES ARE AVAILABLE FOR PURCHASE ONLY BY CERTAIN INVESTORS AS
DESCRIBED UNDER THE CAPTION "ELIGIBLE PURCHASERS" BELOW.
<TABLE>
EXPENSE SUMMARY
<CAPTION>
CLASS I
-------
<S> <C>
SHAREHOLDER TRANSACTION EXPENSES:
Maximum Initial Sales Charge Imposed on Purchases of Fund
Shares (as a percentage of offering price)........................................... None
Maximum Contingent Deferred Sales Charge (as a percentage
of original purchase price or redemption proceeds, as applicable).................... None
ANNUAL OPERATING EXPENSES OF THE FUND (AS A PERCENTAGE OF AVERAGE NET ASSETS):
Management Fees........................................................................ 0.75%
Rule 12b-1 Fees........................................................................ None
Other Expenses(1)(2)................................................................... 0.30%
----
Total Operating Expenses............................................................... 1.05%
<FN>
(1) "Other Expenses" is based on Class A expenses incurred during the fiscal
year ended November 30, 1996.
(2) The Fund has an expense offset arrangement which reduces the Fund's
custodian fee based upon the amount of cash maintained by the Fund with
its custodian and dividend disbursing agent, and may enter into other such
arrangements and directed brokerage arrangements (which would also have
the effect of reducing the Fund's expenses). Any such fee reductions are
not reflected under "Other Expenses."
</TABLE>
EXAMPLE OF EXPENSES
-------------------
An investor would pay the following dollar amounts of expenses on a $1,000
investment in Class I shares of the Fund, assuming (a) a 5% annual return and
(b) redemption at the end of each of the time periods indicated:
PERIOD CLASS I
------ -------
1 year........................................ $11
3 years....................................... 33
The purpose of the expense table above is to assist investors in
understanding the various costs and expenses that a shareholder of the Fund will
bear directly or indirectly. A more complete description of the Fund's
management fee is set forth under the caption "Management of the Fund" in the
Prospectus.
THE "EXAMPLE" SET FORTH ABOVE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST
OR FUTURE EXPENSES OF THE FUND; ACTUAL EXPENSES MAY BE GREATER OR LESS THAN
THOSE SHOWN.
ELIGIBLE PURCHASERS
Class I shares are available for purchase only by the following purchasers
("Eligible Purchasers"):
(i) certain retirement plans established for the benefit of employees of
Massachusetts Financial Services Company ("MFS"), the Fund's investment
adviser, and employees of MFS' affiliates;
-1-
<PAGE> 76
(ii) any fund distributed by MFS Fund Distributors, Inc. ("MFD"), the Fund's
distributor, if the fund seeks to achieve its investment objective by
investing primarily in shares of the Fund and other funds distributed by
MFD;
(iii) any retirement plan, endowment or foundation which (a) purchases shares
directly through MFD (rather than through a third party broker or dealer
or other financial intermediary); (b) has, at the time of purchase of
Class I shares, aggregate assets of at least $100 million; and (c) invests
at least $10 million in Class I shares of the Fund either alone or in
combination with investments in Class I shares of other MFS funds
distributed by MFD (additional investments may be made in any amount);
provided that MFD may accept purchases from smaller plans, endowments or
foundations or in smaller amounts if it believes, in its sole discretion,
that such entity's aggregate assets will equal or exceed $100 million, or
that such entity will make additional investments which will cause its
total investment to equal or exceed $10 million, within a reasonable
period of time; and
(iv) bank trust departments which initially invest, on behalf of their trust
clients, at least $100,000 in Class I shares of the Fund (additional
investments may be made in any amount); provided that MFD may accept
smaller initial purchases if it believes, in its sole discretion, that the
bank trust department will make additional investments, on behalf of its
trust clients, which will cause its total investment to equal or exceed
$100,000 within a reasonable period of time.
In no event will the Fund, MFS, MFD or any of their affiliates pay any sales
commissions or compensation to any third party in connection with the sale of
Class I shares; the payment of any such sales commission or compensation would,
under the Fund's policies, disqualify the purchaser as an eligible investor of
Class I shares.
SHARE CLASSES OFFERED BY THE FUND
Four classes of shares of the Fund currently are offered for sale: Class A
shares, Class B shares, Class C shares and Class I shares. Class I shares are
available for purchase only by Eligible Purchasers, as defined above, and are
described in this Supplement. Class A shares, Class B shares and Class C shares
are described in the Fund's Prospectus and are available for purchase by the
general public.
Class A shares are offered at net asset value plus an initial sales charge
up to a maximum of 5.75% of the offering price (or a contingent deferred sales
charge (a "CDSC") upon redemption of 1.00% during the first year in the case of
purchases of $1 million or more and certain purchases by retirement plans), and
are subject to an annual distribution fee and service fee up to a maximum of
0.35% per annum. Class B shares are offered at net asset value without an
initial sales charge but are subject to a CDSC upon redemption (declining from
4.00% during the first year to 0% after six years) and an annual distribution
fee and service fee up to a maximum of 1.00% per annum; Class B shares convert
to Class A shares approximately eight years after purchase. Class C shares are
offered at net asset value without an initial sales charge but are subject to a
CDSC upon redemption of 1.00% during the first year and an annual distribution
fee and service fee up to a maximum of 1.00% per annum. Class I shares are
offered at net asset value without an initial sales charge or CDSC and are not
subject to a distribution or service fee. Class C and Class I shares do not
convert to any other class of shares of the Fund.
OTHER INFORMATION
Eligible Purchasers may only purchase Class I shares directly through MFD.
Eligible Purchasers may exchange Class I shares of the Fund for Class I shares
of any other MFS Fund available for purchase by such Eligible Purchasers at
their net asset value (if available for sale), may exchange Class I shares of
the Fund for shares of the MFS Money Market Fund (if available for sale) and may
redeem Class I shares of the Fund at net asset value. Distributions paid by the
Fund with respect to Class I shares generally will be greater than those paid
with respect to Class A shares, Class B shares and Class C shares because
expenses attributable to Class A shares, Class B shares and Class C shares
generally will be higher.
THE DATE OF THIS SUPPLEMENT IS APRIL 1, 1997
-2-
<PAGE> 77
<TABLE>
<S> <C>
PROSPECTUS
April 1, 1997
Class A Shares of Beneficial Interest
MFS(R) VALUE FUND Class B Shares of Beneficial Interest
(A member of the MFS Family of Funds(R)) Class C Shares of Beneficial Interest
</TABLE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
1. Expense Summary.................................................................. 2
2. The Fund......................................................................... 3
3. Condensed Financial Information.................................................. 4
4. Investment Objective and Policies................................................ 7
5. Investment Techniques and Risk Factors........................................... 7
6. Additional Risk Factors.......................................................... 11
7. Management of the Fund........................................................... 13
8. Information Concerning Shares of the Fund........................................ 14
Purchases.................................................................... 14
Exchanges.................................................................... 19
Redemptions and Repurchases.................................................. 20
Distribution Plan............................................................ 22
Distributions................................................................ 24
Tax Status................................................................... 24
Net Asset Value.............................................................. 25
Description of Shares, Voting Rights and Liabilities......................... 25
Performance Information...................................................... 26
9. Shareholder Services............................................................. 26
Appendix A....................................................................... A-1
Appendix B....................................................................... B-1
</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
This Prospectus pertains to MFS Value Fund ("the Fund"), a diversified series of
MFS Series Trust VII (the "Trust"). The investment objective of the Fund is to
seek capital appreciation. 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 "Information Concerning Shares of the
Fund -- 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.
INVESTMENT PRODUCTS ARE NOT INSURED BY THE FDIC OR ANY OTHER GOVERNMENT AGENCY,
AND ARE NOT DEPOSITS OR OTHER OBLIGATIONS OF, OR GUARANTEED BY, ANY FINANCIAL
INSTITUTION. SHARES OF MUTUAL FUNDS ARE SUBJECT TO INVESTMENT RISK, INCLUDING
POSSIBLE LOSS OF THE PRINCIPAL AMOUNT INVESTED, AND WILL FLUCTUATE IN VALUE. YOU
MAY RECEIVE MORE OR LESS THAN YOU PAID WHEN YOU REDEEM YOUR SHARES.
This Prospectus sets forth concisely the information concerning the Trust and
the Fund that a prospective investor ought to know before investing. The Trust,
on behalf of the Fund, has filed with the Securities and Exchange Commission
(the "SEC") a Statement of Additional Information, dated April 1, 1997, as
amended or supplemented from time to time (the "SAI"), 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 SAI. A copy of the SAI may be obtained without
charge by contacting the Shareholder Servicing Agent (see back cover for address
and phone number). The SEC maintains an Internet World Wide Web site that
contains the SAI, materials that are incorporated by reference into this
Prospectus and the SAI, and other information regarding the Fund. This
Prospectus is available on the Adviser's Internet World Wide Web site at
http://www.mfs.com.
INVESTORS SHOULD READ THIS PROSPECTUS AND RETAIN IT FOR FUTURE REFERENCE.
<PAGE> 78
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)............... 5.75% 0.00% 0.00%
Maximum Contingent Deferred Sales Charge (as a percentage
of original purchase price or redemption proceeds, as
applicable).............................................. See Below(1) 4.00% 1.00%
ANNUAL OPERATING EXPENSES (AS A PERCENTAGE OF AVERAGE NET
ASSETS):
Management Fees............................................ 0.75% 0.75% 0.75%
Rule 12b-1 Fees............................................ 0.25%(2) 1.00%(3) 1.00%(3)
Other Expenses(4).......................................... 0.30% 0.30% 0.30%(5)
---- ---- ----
Total Operating Expenses................................... 1.30% 2.05% 2.05%
</TABLE>
- ---------------
(1) Purchases of $1 million or more and certain purchases by retirement plans
are not subject to an initial sales charge; however, a contingent deferred
sales charge (a "CDSC") of 1% will be imposed on such purchases in the event
of certain redemption transactions within 12 months following such purchases
(see "Purchases" below).
(2) The Fund has adopted a distribution plan for its shares in accordance with
Rule 12b-1 under the Investment Company Act of 1940, as amended (the "1940
Act") (the "Distribution Plan"), which provides that it will pay
distribution/service fees aggregating up to (but not necessarily all of)
0.35% per annum of the average daily net assets attributable to Class A
shares. Payment of the 0.10% per annum Class A distribution fee will
commence on such date as the Trust's Board of Trustees may determine. The
0.25% per annum service fee is reduced to 0.15% per annum for shares
purchased prior to October 1, 1989. Distribution expenses paid under this
Plan, together with the initial sales charge, may cause long-term
shareholders to pay more than the maximum sales charge that would have been
permissible if imposed entirely as an initial sales charge. See "Information
Concerning Shares of the Fund -- Distribution Plan" below.
(3) The Fund's Distribution Plan provides that it will pay distribution/service
fees aggregating up to 1.00% per annum of the average daily net assets
attributable to the Class B and Class C shares, respectively. Distribution
expenses paid under the Distribution Plan, with respect to Class B or Class
C shares, together with any CDSC payable upon redemption of Class B and
Class C shares, may cause long-term shareholders to pay more than the
maximum sales charge that would have been permissible if imposed entirely as
an initial sales charge. See "Information Concerning Shares of the Fund --
Distribution Plan" below.
(4) The Fund has an expense offset arrangement which reduces the Fund's
custodian fee based upon the amount of cash maintained by the Fund with its
custodian and dividend disbursing agent, and may enter into other such
arrangements and directed brokerage arrangements (which would also have the
effect of reducing the Fund's expenses). Any such fee reductions are not
reflected under "Other Expenses."
(5) Based on Class A expenses during the last fiscal year except for the
shareholder servicing agent fees component of "Other Expenses" which has
been estimated for Class C shares.
2
<PAGE> 79
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>
CLASS B CLASS C
---------------- ----------------
PERIOD CLASS A (1) (1)
------------------------------ -------
<S> <C> <C> <C> <C> <C>
1 year....................... $ 70 $ 61 $ 21 $ 31 $ 21
3 years...................... 96 94 64 64 64
5 years...................... 125 130 110 110 110
10 years...................... 205 218(2) 218(2) 238 238
</TABLE>
- ---------------
(1) Assumes no redemption.
(2) Class B shares convert to Class A shares approximately eight years after
purchase; therefore, years nine and ten reflect Class A expenses.
The purpose of the expense table 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 Plan."
THE "EXAMPLE" SET FORTH ABOVE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST
OR FUTURE EXPENSES OF THE FUND; ACTUAL EXPENSES MAY BE GREATER OR LESS THAN
THOSE SHOWN.
2. THE FUND
The Fund is a diversified series of the Trust, an open-end management investment
company which was organized 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 objectives and
policies. Shares of the Fund are continuously sold to the public and the Fund
buys securities (stocks, bonds and other instruments) for its portfolio. Three
classes of shares of the Fund are currently offered for sale to the general
public. Class A shares are offered at net asset value plus an initial sales
charge up to a maximum of 5.75% of the offering price (or a CDSC of 1.00% upon
redemption during the first year in the case of purchases of $1 million or more
and certain purchases by retirement plans) and are subject to an annual
distribution fee and service fee up to a maximum of 0.35% per annum. Class B
shares are offered at net asset value without an initial sales charge but are
subject to a CDSC upon redemption (declining from 4.00% during the first year to
0% after six years) and an annual distribution fee and service fee up to a
maximum of 1.00% per annum; Class B shares will convert to Class A shares
approximately eight years after purchase. Class C shares are offered at net
asset value without an initial sales charge but are subject to a CDSC of 1.00%
upon redemption during the first year and an annual distribution fee and service
fee up to a maximum of 1.00% per annum. Class C shares do not convert to any
other class of shares of the Fund. In addition, the Fund offers an additional
class of shares, Class I shares, exclusively to certain institutional investors.
Class I shares are made available by means of a separate Prospectus Supplement
provided to institutional investors eligible to purchase Class I shares and are
offered at net asset value without an initial sales charge or CDSC upon
redemption and without an annual distribution and service fee.
The Trust's Board of Trustees provides broad supervision over the affairs of the
Fund. The Adviser is responsible for the management of the Fund's assets and the
officers of the Trust 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 depend 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> 80
3. CONDENSED FINANCIAL INFORMATION
The following information has been audited for at least the latest five years of
the Fund and should be read in conjunction with the financial statements
included in the Fund's Annual Report to shareholders which are incorporated by
reference into the SAI in reliance upon the report of the Fund's independent
auditors, given upon their authority as experts in accounting and auditing. The
Fund's independent auditors are Deloitte & Touche LLP.
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
YEAR ENDED NOVEMBER 30,
--------------------------------------------------------------
1996 1995 1994 1993 1992 1991
------- ------- ------- ------- ------- -------
CLASS A
--------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
PER SHARE DATA (FOR A SHARE OUTSTANDING THROUGHOUT EACH
PERIOD):
Net asset value -- beginning of period.................... $ 12.39 $ 9.44 $ 10.82 $ 10.17 $ 8.73 $ 7.46
------- ------- ------- ------- ------- -------
Income from investment operations# --
Net investment income (loss).......................... $ 0.05 $ 0.01 $ (0.01) $ 0.02 $ -- $ 0.14
Net realized and unrealized gain on investments and
foreign currency transactions....................... 2.04 3.64 0.26 1.96 2.03 1.21
------- ------- ------- ------- ------- -------
Total from investment operations.................. $ 2.09 $ 3.65 $ 0.25 $ 1.98 $ 2.03 $ 1.35
------- ------- ------- ------- ------- -------
Less distributions declared to shareholders --
From net investment income.............................. $ -- $ -- $ (0.03) $ -- $ (0.07) $ (0.08)
From net realized gain on investments and foreign
currency transactions................................. (1.14) (0.70) (1.60) (1.33) (0.52) --
------- ------- ------- ------- ------- -------
Total distributions declared to shareholders.......... $ (1.14) $ (0.70) $ (1.63) $ (1.33) $ (0.59) $ (0.08)
------- ------- ------- ------- ------- -------
Net asset value -- end of period.......................... $ 13.34 $ 12.39 $ 9.44 $ 10.82 $ 10.17 $ 8.73
======= ======= ======= ======= ======= =======
TOTAL RETURN++............................................ 18.50% 41.67% 1.92% 22.10% 24.60% 18.26%
RATIOS (TO AVERAGE NET ASSETS)/SUPPLEMENTAL DATA:
Expenses##.............................................. 1.32% 1.35% 1.37% 1.42% 1.53% 1.50%
Net investment income (loss)............................ 0.43% 0.06% (0.05)% 0.09% -- 1.65%
PORTFOLIO TURNOVER........................................ 112% 109% 91% 95% 111% 132%
AVERAGE COMMISSION RATE###................................ $ 0.0304 -- -- -- -- --
Net assets at end of period (000 omitted)................. $427,478 $227,555 $141,790 $132,207 $112,958 $104,600
</TABLE>
- ---------------
# Per share data for the periods subsequent to November 30, 1993 is based on
average shares outstanding.
## For fiscal years ending after September 1, 1995, the Fund's expenses are
calculated without reduction for fees paid indirectly.
### Average commission rate is calculated with fiscal years beginning on or
after September 1, 1995.
++ Total returns for Class A shares do not include the applicable sales
charge (except for reinvestment dividends prior to October 1, 1989). If
the charge had been included, the results would have been lower.
4
<PAGE> 81
FINANCIAL HIGHLIGHTS -- (CONTINUED)
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
NOVEMBER 30, YEAR ENDED MAY 31,
------------ ----------------------------------------
1990 1990 1989 1988 1987
------------ ------- ------- ------- -------
CLASS A
--------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE DATA (FOR A SHARE OUTSTANDING THROUGHOUT EACH
PERIOD):
Net asset value -- beginning of period......................... $ 8.99 $ 10.52 $ 8.70 $ 9.60 $ 9.81
------------ ------- ------- ------- -------
Income from investment operations --
Net investment income...................................... $ 0.09 $ 0.33 $ 0.21 $ 0.10 $ 0.04
Net realized and unrealized gain (loss) on investments and
foreign currency transactions............................ (1.38) 0.17 2.17 (0.86) 1.60
------------ ------- ------- ------- -------
Total from investment operations....................... $ (1.29) $ 0.50 $ 2.38 $ (0.76) $ 1.64
------------ ------- ------- ------- -------
Less distributions declared to shareholders --
From net investment income................................... $ (0.11) $ (0.34) $ (0.17) $ (0.03) $ (0.04)
From net realized gain on investments and foreign currency
transactions............................................... (0.05) (1.69) (0.39) (0.11) (1.81)
From paid-in capital......................................... (0.08) -- -- -- --
------------ ------- ------- ------- -------
Total distributions declared to shareholders............... $ (0.24) $ (2.03) $ (0.56) $ (0.14) $ (1.85)
------------ ------- ------- ------- -------
Net asset value -- end of period............................... $ 7.46 $ 8.99 $ 10.52 $ 8.70 $ 9.60
============ ======= ======= ======= =======
TOTAL RETURN++................................................. (29.48)%+ 5.13% 28.47% (7.63)% 17.95%
RATIOS (TO AVERAGE NET ASSETS)/SUPPLEMENTAL DATA:
Expenses..................................................... 1.51%+ 1.26% 1.41% 1.33% 1.31%
Net investment income........................................ 2.30%+ 3.38% 2.29% 1.12% 0.38%
PORTFOLIO TURNOVER............................................. 36% 88% 80% 99% 135%
Net assets at end of period (000 omitted)...................... $ 100,398 $125,191 $133,219 $116,218 $148,227
</TABLE>
- ---------------
+ Annualized.
++ 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.
5
<PAGE> 82
FINANCIAL HIGHLIGHTS -- (CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED NOVEMBER 30,
-------------------------------------------------------
1996 1995 1994 1993* 1996**
-------- ------- ------- ------ -------
CLASS C
CLASS B -------
-------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE DATA (FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD):
Net asset value -- beginning of period.......................... $ 12.15 $ 9.34 $ 10.79 $10.61 $ 12.00
-------- ------- ------- ------ -------
Income from investment operations# --
Net investment loss......................................... $ (0.04) $ (0.08) $ (0.09) $(0.01) $ (0.01)
Net realized and unrealized gain on investments and foreign
currency transactions..................................... 2.00 3.59 0.27 0.19 1.04
-------- ------- ------- ------ -------
Total from investment operations........................ $ 1.96 $ 3.51 $ 0.18 $ 0.18 $ 1.03
-------- ------- ------- ------ -------
Less distributions declared to shareholders --
From net realized gain on investments and foreign curency
transactions................................................ $ (1.10) $ (0.70) $ (1.60) $ -- $ --
In excess of net investment income............................ -- -- (0.03) -- --
-------- ------- ------- ------ -------
Total distributions declared to shareholders................ $ (1.10) $ (0.70) $ (1.63) $ -- $ --
-------- ------- ------- ------ -------
Net asset value -- end of period................................ $ 13.01 $ 12.15 $ 9.34 $10.79 $ 13.03
======== ======= ======= ====== =======
TOTAL RETURN.................................................... 17.50% 40.53% 1.15% 1.70% 7.95%++
RATIOS (TO AVERAGE NET ASSETS)/SUPPLEMENTAL DATA:
Expenses##.................................................... 2.16% 2.17% 2.25% 2.46%+ 2.11%+
Net investment loss........................................... (0.33)% (0.77)% (0.96)% (1.37)%+ (0.17)%+
PORTFOLIO TURNOVER.............................................. 112% 109% 91% 95% 112%
AVERAGE COMMISSION RATE###...................................... $ 0.0304 -- -- -- $0.0304
Net assets at end of period (000 omitted)....................... $244,247 $46,068 $17,189 $1,097 $31,919
</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, April 1, 1996, to November 30, 1996.
+ Annualized.
++ Not annualized.
# Per share data for the periods subsequent to November 30, 1993 is based on average shares outstanding.
## For fiscal years ending after September 1, 1995, the Fund's expenses are calculated without reduction for
fees paid indirectly.
### Average commission rate is calculated for funds with fiscal years beginning on or after September 1, 1995.
</TABLE>
6
<PAGE> 83
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 non-convertible fixed income
securities rated lower than "investment grade" (rated at least Baa by Moody's
Investors Service, Inc. ("Moody's") or BBB by Standard & Poor's Ratings Services
("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 net 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 Appendix B 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"). 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 temporary defensive measure when the Adviser determines
security markets to be overvalued.
5. INVESTMENT TECHNIQUES AND RISK FACTORS
Consistent with the Fund's Investment objective and policies, the Fund may
engage in the following investment techniques, many of which are described more
fully in the SAI. See "Investment Objective, Policies and Restrictions" in the
SAI.
RESTRICTED SECURITIES: The Fund may 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"). A determination is
made, based upon a continuing review of the trading markets for a specific Rule
144A security, whether such security is liquid and thus not subject to the
Fund's limitations on investing not more than 15% of its net assets in illiquid
investments. The Board of Trustees has adopted guidelines and delegated to MFS
the daily function of determining and monitoring the liquidity of Rule 144A
securities. The Board, however, retains oversight, focusing on factors such as
valuation, liquidity and availability of information. Investing in Rule 144A
securities could have the effect of decreasing the level of liquidity in the
Fund to the extent that qualified institutional buyers become for a time
uninterested in purchasing Rule 144A securities held in the Fund's portfolio.
Subject to the Fund's 15% limitation on investments in illiquid investments, the
Fund may also invest in restricted securities that may not be sold under Rule
144A, which presents certain risks. As a result, the Fund may 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.
FOREIGN SECURITIES: The Fund may invest up to 50% (but generally expects to
invest between 10% and 25%) 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
7
<PAGE> 84
and could be subject to extended settlement periods. The Fund may hold foreign
currency received in connection with investments in foreign securities when, in
the judgment of the Adviser, it would be beneficial to convert such currency
into U.S. dollars at a later date, based on anticipated changes in the relevant
exchange rate. The Fund may also hold foreign currency in anticipation of
purchasing foreign securities.
EMERGING MARKET SECURITIES: The Fund may invest in securities of issuers whose
principal activities are located in emerging market countries. Emerging market
countries include any country determined by the Adviser to have an emerging
market economy, taking into account a number of factors, including whether the
country has a low- to middle-income economy according to the International Bank
for Reconstruction and Development, the country's foreign currency debt rating,
its political and economic stability and the development of its financial and
capital markets. The Adviser determines whether an issuer's principal activities
are located in an emerging market country by considering such factors as its
country of organization, the principal trading market for its securities and the
source of its revenues and assets. The issuer's principal activities generally
are deemed to be located in a particular country if: (a) the security is issued
or guaranteed by the government of that country or any of its agencies,
authorities or instrumentalities; (b) the issuer is organized under the laws of,
and maintains a principal office in, that country; (c) the issuer has its
principal securities trading market in that country; (d) the issuer derives 50%
or more of its total revenues from goods sold or services performed in that
country; or (e) the issuer has 50% or more of its assets in that country.
BRADY BONDS: The Fund may invest in Brady Bonds, which are securities created
through the exchange of existing commercial bank loans to public and private
entities in certain emerging markets for new bonds in connection with debt
restructurings under a debt restructuring plan introduced by former U.S.
Secretary of the Treasury, Nicholas F. Brady (the "Brady Plan"). Brady Plan debt
restructurings have been implemented to date in Argentina, Brazil, Bulgaria,
Costa Rica, Dominican Republic, Ecuador, Jordan, Mexico, Nigeria, Panama, the
Philippines, Poland, Uruguay and Venezuela. Brady Bonds have been issued only
recently, and for that reason do not have a long payment history. Brady Bonds
may be collateralized or uncollateralized, are issued in various currencies (but
primarily the U.S. dollar) and are actively traded in over-the-counter secondary
markets. U.S. dollar-denominated, collateralized Brady Bonds, which may be
fixed-rate bonds or floating-rate bonds, are generally collateralized in full as
to principal by U.S. Treasury zero coupon bonds having the same maturity as the
bonds. Brady Bonds are often viewed as having three or four valuation
components: the collateralized repayment of principal at final maturity; the
collateralized interest payments; the uncollateralized interest payments; and
any uncollateralized repayment of principal at maturity (these uncollateralized
amounts constituting the "residual risk"). In light of the residual risk of
Brady Bonds and the history of defaults of countries issuing Brady Bonds with
respect to commercial bank loans by public and private entities, investments in
Brady Bonds may be viewed as speculative.
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, U.S. Government securities or an irrevocable letter of
credit maintained on a current basis at an amount at least equal to the market
value of the securities loaned. The Fund would 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 or a letter of credit).
REPURCHASE AGREEMENTS: The Fund may enter into repurchase agreements in order to
earn income on available cash or as a temporary defensive measure. Under a
repurchase agreement, the Fund acquires securities subject to the seller's
agreement to repurchase at a specified time and price. If the seller becomes
subject to a proceeding under the bankruptcy laws or its assets are
8
<PAGE> 85
otherwise subject to a stay order, the Fund's right to liquidate the securities
may be restricted (during which time the value of the securities could decline).
As discussed in the SAI, the Fund has adopted certain procedures intended to
minimize risk.
LOANS AND OTHER DIRECT INDEBTEDNESS: The Fund may invest a portion of its assets
in loans. By purchasing a loan, the Fund acquires some or all of the interest of
a bank or other lending institution in a loan to a corporate borrower. Many such
loans are secured, and most impose restrictive covenants which must be met by
the borrower. These loans are made generally to finance internal growth,
mergers, acquisitions, stock repurchases, leveraged buy-outs and other corporate
activities. Such loans may be in default at the time of purchase. The Fund may
also purchase trade or other claims against companies, which generally represent
money owed by the company to a supplier of goods and services. These claims may
also be purchased at a time when the company is in default. Certain of the loans
acquired by the Fund may involve revolving credit facilities or other standby
financing commitments which obligate the Fund to pay additional cash on a
certain date or on demand.
The highly leveraged nature of many such loans may make such loans especially
vulnerable to adverse changes in economic or market conditions. Loans and other
direct investments may not be in the form of securities or may be subject to
restrictions on transfer, and only limited opportunities may exist to resell
such instruments. As a result, the Fund may be unable to sell such investments
at an opportune time or may have to resell them at less than fair market value.
"WHEN-ISSUED" SECURITIES: 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.
INDEXED SECURITIES: The Fund may invest in indexed securities whose value is
linked to foreign currencies, precious metals, interest rates, commodities,
indexes or other financial indicators. Most indexed securities are short to
intermediate term fixed-income securities whose values at maturity (i.e.,
principal value) or interest rates rise or fall according to the change in one
or more specified underlying instruments. Indexed securities may be positively
or negatively indexed (i.e., their principal value or interest rates may
increase or decrease if the underlying instrument appreciates), and may have
return characteristics similar to direct investments in the underlying
instrument or to one or more options on the underlying instrument. Indexed
securities may be more volatile than the underlying instrument itself.
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.
9
<PAGE> 86
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 SAI. The trading of yield curve options is subject to all the risks
associated with trading other types of options, as discussed below under
"Additional Risk Factors" and in the SAI. 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 INDEXES: The Fund may write (sell) covered call and put options
and purchase call and put options on stock indexes. The Fund may write 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. 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.
The Fund may also purchase put or call options on stock indexes 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.
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.
10
<PAGE> 87
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 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.
6. ADDITIONAL 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
11
<PAGE> 88
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.
EMERGING MARKET SECURITIES: The risks of investing in foreign securities may be
intensified in the case of investments in emerging markets. Securities of many
issuers in emerging markets may be less liquid and more volatile than securities
of comparable domestic issuers. Emerging markets also have different clearance
and settlement procedures, and in certain markets there have been times when
settlements have been unable to keep pace with the volume of securities
transactions, making it difficult to conduct such transactions. Delays in
settlement could result in temporary periods when a portion of the assets of the
Fund is uninvested and no return is earned thereon. The inability of the Fund to
make intended security purchases due to settlement problems could cause the Fund
to miss attractive investment opportunities. Inability to dispose of portfolio
securities due to settlement problems could result in losses to the Fund due to
subsequent declines in value of the portfolio security, a decrease in the level
of liquidity in the Fund's portfolio, or, if the Fund has entered into a
contract to sell the security, in possible liability to the purchaser. Certain
markets may require payment for securities before delivery and in such markets,
the Fund bears the risk that the securities will not be delivered and that the
Fund's payments will not be returned. Securities prices in emerging markets can
be significantly more volatile than in the more developed nations of the world,
reflecting the greater uncertainties of investing in less established markets
and economies. In particular, countries with emerging markets may have
relatively unstable governments, present the risk of nationalization of
businesses, restrictions on foreign ownership, or prohibitions of repatriation
of assets, and may have less protection of property rights than more developed
countries. The economies of countries with emerging markets may be predominantly
based on only a few industries, may be highly vulnerable to changes in local or
global trade conditions, and may suffer from extreme and volatile debt burdens
or inflation rates. Local securities markets may trade a small number of
securities and may be unable to respond effectively to increases in trading
volume, potentially making prompt liquidation of substantial holdings difficult
or impossible at times. Securities of issuers located in countries with emerging
markets may have limited marketability and may be subject to more abrupt or
erratic price movements.
Certain emerging markets may require governmental approval for the repatriation
of investment income, capital or the proceeds of sales of securities by foreign
investors. In addition, if a deterioration occurs in an emerging market's
balance of payments or for other reasons, a country could impose temporary
restrictions on foreign capital remittances. The Fund could be adversely
affected by delays in, or a refusal to grant, any required governmental approval
for repatriation of capital, as well as by the application to the Fund of any
restrictions on investments.
Investment in certain 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.
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 for 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 SAI 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.
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
12
<PAGE> 89
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 primary consideration in placing portfolio security
transactions with broker-dealers for execution is to obtain, and maintain the
availability of, execution at the most favorable prices and in the most
effective manner possible. Consistent with the foregoing primary consideration,
the Conduct Rules of the National Association of Securities Dealers, Inc. (the
"NASD"), and such other policies as the Trustees may determine, the Adviser may
consider sales of shares of the Fund and of the other investment company clients
of MFD, 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 SAI. 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. For the fiscal year ended November
30, 1996, the Fund had a portfolio turnover rate in excess of 100%. Transaction
costs incurred by the Fund and the realized capital gains and losses of the Fund
may be greater than that of a fund with a lesser portfolio turnover rate.
----------------------------------
The investment objective and policies described above are not fundamental and
may be changed without shareholder approval.
The SAI includes a discussion of other investment policies and a listing of
specific investment restrictions which govern the Fund's investment policies.
The specific investment restrictions listed in the SAI may be changed without
shareholder approval unless indicated otherwise. See "Investment Restrictions"
in the SAI. 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.
7. MANAGEMENT OF THE FUND
INVESTMENT ADVISER -- The Adviser manages the Fund pursuant to an Investment
Advisory Agreement, dated September 1, 1993, as amended. Under the Advisory
Agreement, the Adviser provides the Fund with overall investment advisory
services. John F. Brennan, Jr., a Vice President of the Adviser, has been the
Fund's portfolio manager since September 1991. Mr. Brennan has been employed by
the Adviser as a portfolio manager 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, 1996,
MFS received management fees of $3,552,972.
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 and seven variable accounts, each of which is a registered
investment company established by Sun Life Assurance Company of Canada (U.S.)
("Sun Life of Canada (U.S.)") in connection with the sale of various
fixed/variable annuity contracts. MFS and its wholly owned subsidiary, MFS Asset
Institutional Advisors, Inc., provide investment advice to substantial private
clients.
MFS is America's oldest mutual fund organization. MFS and its predecessor
organizations have a history of money management dating from 1924 and the
founding of the first mutual fund in the United States, Massachusetts Investors
Trust. Net assets under the management of the MFS organization were
approximately $52.8 billion on behalf of approximately 2.3 million investor
accounts as of February 28, 1997. MFS is a subsidiary of Sun Life of Canada
(U.S.) which in turn is a wholly owned subsidiary of
13
<PAGE> 90
Sun Life Assurance Company of Canada ("Sun Life"). The Directors of MFS are A.
Keith Brodkin, Jeffrey L. Shames, Donald A. Stewart, John D. McNeil and Arnold
D. Scott. Mr. Brodkin is the Chairman, Mr. Shames is the President and Mr. Scott
is the Secretary and a Senior Executive Vice President of MFS. Messrs. McNeil
and Stewart are the Chairman and the President, respectively, of Sun Life. Sun
Life, a mutual life insurance company, is one of the largest international life
insurance companies and has been operating in the United States since 1895,
establishing a headquarters office here in 1973. The executive officers of MFS
report 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.
MFS has established a strategic alliance with Foreign & Colonial Management Ltd.
("Foreign & Colonial"). Foreign & Colonial is a subsidiary of two of the world's
oldest financial services institutions, the London-based Foreign & Colonial
Investment Trust PLC, which pioneered the idea of investment management in 1868,
and HYPO-BANK (Bayerische Hypotheken-und Wechsel-Bank AG), the oldest publicly
listed bank in Germany, founded in 1835. As part of this alliance, the portfolio
managers and investment analysts of MFS and Foreign & Colonial share their views
on a variety of investment related issues, such as the economy, securities
markets, portfolio securities and their issuers, investment recommendations,
strategies and techniques, risk analysis, trading strategies and other portfolio
management matters. MFS has access to the extensive international equity
investment expertise of Foreign & Colonial and Foreign & Colonial has access to
the extensive U.S. equity investment expertise of MFS. MFS and Foreign &
Colonial each have investment personnel working in each other's offices in
Boston and London, respectively.
In certain instances there may be securities which are suitable for the Fund's
portfolio as well as for portfolios of other clients of MFS or clients of
Foreign & Colonial. Some simultaneous transactions are inevitable when several
clients receive investment advice from MFS and Foreign & Colonial, particularly
when the same security is suitable for more than one client. While in some cases
this arrangement could have a detrimental effect on the price or availability of
the security as far as the Fund is concerned, in other cases, however, it may
produce increased investment opportunities for the Fund.
ADMINISTRATOR -- MFS provides the Fund with certain administrative services
pursuant to a Master Administrative Services Agreement dated March 1, 1997.
Under this Agreement, MFS provides the Fund with certain financial, legal,
compliance, shareholder communications and other administrative services. As a
partial reimbursement for the cost of providing these services, the Fund pays
MFS an administrative fee up to 0.015% per annum of the Fund's average daily net
assets, provided that the administrative fee is not assessed on the Fund assets
that exceed $3 billion.
DISTRIBUTOR -- MFD, a wholly owned subsidiary of MFS, is the distributor of
shares of the Fund and also serves as distributor for each of the other MFS
Funds.
SHAREHOLDER SERVICING AGENT -- MFS Service Center, Inc. (the "Shareholder
Servicing Agent"), a wholly owned subsidiary of MFS, performs transfer agency
and certain other services for the Fund.
8. INFORMATION CONCERNING SHARES OF THE FUND
PURCHASES
Class A, Class B and Class C shares of the Fund may be purchased at the public
offering price through any dealer and other financial institutions ("dealers")
having a selling agreement with MFD. Dealers may also charge their customers
fees relating to an investment in the Fund.
This Prospectus offers to the general public Class A, Class B and Class C
shares, which bear sales charges and distribution fees in different forms and
amounts, as described below:
CLASS A SHARES: Class A shares are generally offered at net asset value plus an
initial sales charge, but in certain cases are offered at net asset value
without an initial sales charge but subject to a CDSC.
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<PAGE> 91
PURCHASES SUBJECT TO INITIAL SALES CHARGE. Class A shares are offered at net
asset value plus an initial sales charge as follows:
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SALES CHARGE* AS PERCENTAGE
OF: DEALER
----------------------------- ALLOWANCE AS A
OFFERING NET AMOUNT PERCENTAGE OF
AMOUNT OF PURCHASE PRICE INVESTED OFFERING 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**
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
*Because of rounding in the calculation of offering price, actual sales charges
may be more or less than those calculated using the percentages above.
**A CDSC will apply to such purchases, as discussed below.
MFD allows discounts to dealers (which are alike for all dealers) from the
applicable public offering price as shown in the above table. In the case of the
maximum sales charge, the dealer retains 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 other MFS Funds owned or being
purchased, the existence of an agreement to purchase additional shares during a
13-month period (or 36-month period for purchases of $1 million or more) or
other special purchase programs. A description of the Right of Accumulation,
Letter of Intent and Group Purchase privileges by which the sales charge may be
reduced is set forth in the SAI.
PURCHASES SUBJECT TO A CDSC (but not to an initial sales charge). In the
following four circumstances, Class A shares are offered at net asset value
without an initial sales charge, but subject to a CDSC equal to 1% of the lesser
of the value of the shares redeemed (exclusive of reinvested dividend and
capital gain distributions) or the total cost of such shares, in the event of a
share redemption within 12 months following the purchase:
(i) on investments of $1 million or more in Class A shares;
(ii) on investments in Class A shares by certain retirement plans subject to
the Employee Retirement Income Security Act of 1974, as amended ("ERISA"),
if, prior to July 1, 1996: (a) the plan had established an account with
the Shareholder Servicing Agent and (b) the sponsoring organization had
demonstrated to the satisfaction of MFD that either (i) the employer had
at least 25 employees or (ii) the aggregate purchases by the retirement
plan of Class A shares of the MFS Funds would be in an aggregate amount of
at least $250,000 within a reasonable period of time, as determined by MFD
in its sole discretion;
(iii) on investments in Class A shares by certain retirement plans subject to
ERISA, if: (a) the retirement plan and/or sponsoring organization
subscribes to the MFS FUNDamental 401(k) Program or any similar
recordkeeping system made available by the Shareholder Servicing Agent
(the "MFS Participant Recordkeeping System"); (b) the plan establishes an
account with the Shareholder Servicing Agent on or after July 1, 1996; and
(c) the aggregate purchases by the retirement plan of Class A shares of
the MFS Funds will be in an aggregate amount of at least $500,000 within a
reasonable period of time, as determined by MFD in its sole discretion;
and
(iv) on investments in Class A shares by certain retirement plans subject to
ERISA, if: (a) the plan establishes an account with the Shareholder
Servicing Agent on or after July 1, 1996 and (b) the plan has, at the time
of purchase, a market value of $500,000 or more invested in shares of any
class or classes of the MFS Funds. THE RETIREMENT PLAN WILL QUALIFY UNDER
THIS CATEGORY ONLY IF THE PLAN OR ITS SPONSORING ORGANIZATION INFORMS THE
SHAREHOLDER SERVICING AGENT PRIOR TO THE PURCHASE THAT THE PLAN HAS A
MARKET VALUE OF $500,000 OR MORE INVESTED IN SHARES OF ANY CLASS OR CLASSES
OF THE MFS FUNDS. THE SHAREHOLDER SERVICING AGENT HAS NO OBLIGATION
INDEPENDENTLY TO DETERMINE WHETHER SUCH A PLAN QUALIFIES UNDER THIS
CATEGORY.
15
<PAGE> 92
In the case of such purchases, MFD will pay commissions to dealers on new
investments in Class A shares made through such dealers, as follows:
<TABLE>
<CAPTION>
COMMISSION PAID
BY MFD
TO DEALERS CUMULATIVE PURCHASE AMOUNT
- --------------- -------------------------------------
<C> <S>
1.00% On the first $2,000,000, plus
0.80% Over $2,000,000 to $3,000,000, plus
0.50% Over $3,000,000 to $50,000,000, plus
0.25% Over $50,000,000
</TABLE>
For purposes of determining the level of commissions to be paid to dealers with
respect to a shareholder's new investment in Class A shares made on or after
April 1, 1996, purchases for each shareholder account (and certain other
accounts for which the shareholder is a record or beneficial holder) will be
aggregated over a 12-month period (commencing from the date of the first such
purchase).
See "Redemptions and Repurchases -- Contingent Deferred Sales Charge" for
further discussion of the CDSC.
WAIVERS OF INITIAL SALES CHARGE AND CDSC. In certain circumstances, the initial
sales charge imposed upon purchases of Class A shares and the CDSC imposed upon
redemption of Class A shares is waived. These circumstances are described in
Appendix A to this Prospectus. In addition to these circumstances, the CDSC
imposed upon the redemption of Class A shares is waived with respect to shares
held by certain retirement plans qualified under Section 401(a) or 403(b) of the
Internal Revenue Code of 1986, as amended (the "Code"), and subject to ERISA,
where:
(i) the retirement plan and/or sponsoring organization does not subscribe to
the MFS Participant Recordkeeping System; and
(ii) the retirement plan and/or sponsoring organization demonstrates to the
satisfaction of, and certifies to, the Shareholder Servicing Agent that the
retirement plan has, at the time of certification or will have pursuant to
a purchase order placed with the certification, a market value of $500,000
or more invested in shares of any class or classes of the MFS Funds and
aggregate assets of at least $10 million;
provided, however, that the CDSC will not be waived (i.e., it will be imposed)
in the event that there is a change in law or regulations which results in a
material adverse change to the tax advantaged nature of the plan, or in the
event that the plan and/or sponsoring organization: (i) becomes insolvent or
bankrupt; (ii) is terminated or partially terminated under ERISA or is
liquidated or dissolved; or (iii) is acquired by, merged into, or consolidated
with, any other entity.
CLASS B SHARES: Class B shares are offered at net asset value without an initial
sales charge but subject to a CDSC upon redemption as follows:
<TABLE>
<CAPTION>
YEAR OF CONTINGENT
REDEMPTION DEFERRED SALES
AFTER PURCHASE CHARGE
---------------------------------------------------- ---------------
<S> <C>
First............................................... 4%
Second.............................................. 4%
Third............................................... 3%
Fourth.............................................. 3%
Fifth............................................... 2%
Sixth............................................... 1%
Seventh and following............................... 0%
</TABLE>
The CDSC imposed is assessed against the lesser of the value of the shares
redeemed (exclusive of reinvested dividends and capital gain distributions) or
the total cost of such shares. No CDSC is assessed against shares acquired
through the automatic
16
<PAGE> 93
reinvestment of dividends or capital gain distributions. See "Redemptions and
Repurchases -- Contingent Deferred Sales Charge" for further discussion of the
CDSC.
Except as described below, MFD will pay commissions to dealers of 3.75% of the
purchase price of Class B shares purchased through dealers. MFD will also
advance to dealers the first year service fee payable under the Fund's
Distribution Plan (see "Distribution Plan" below) at a rate equal to 0.25% of
the purchase price of such shares. Therefore, the total amount paid to a dealer
upon the sale of Class B shares is 4% of the purchase price of the shares
(commission rate of 3.75% plus a service fee equal to 0.25% of the purchase
price).
Class B shares purchased by a retirement plan whose sponsoring organization
subscribes to the MFS Participant Recordkeeping System and which has established
its account with the Shareholder Servicing Agent on or after July 1, 1996, will
be subject to the CDSC described above, only under limited circumstances, as
explained below under "Waivers of CDSC." With respect to such purchases, MFD
pays an amount to dealers equal to 3.00% of the amount purchased through such
dealers (rather than the 4.00% payment described above), which is comprised of a
commission of 2.75% plus the advancement of the first year service fee equal to
0.25% of the purchase price payable under the Fund's Distribution Plan. As
discussed above, such retirement plans are eligible to purchase Class A shares
of the Fund at net asset value without an initial sales charge but subject to a
1% CDSC if the plan has, at the time of purchase, a market value of $500,000 or
more invested in shares of any class or classes of the MFS Funds. IN THIS EVENT,
THE PLAN OR ITS SPONSORING ORGANIZATION SHOULD INFORM THE SHAREHOLDER SERVICING
AGENT THAT THE PLAN IS ELIGIBLE TO PURCHASE CLASS A SHARES UNDER THIS CATEGORY;
THE SHAREHOLDER SERVICING AGENT HAS NO OBLIGATION INDEPENDENTLY TO DETERMINE
WHETHER SUCH A PLAN QUALIFIES UNDER THIS CATEGORY FOR THE PURCHASE OF CLASS A
SHARES.
WAIVERS OF CDSC. In certain circumstances, the CDSC imposed upon redemption of
Class B shares is waived. These circumstances are described in Appendix A to
this Prospectus. In addition to these circumstances, the CDSC imposed upon the
redemption of Class B shares is waived with respect to shares held by a
retirement plan whose sponsoring organization subscribes to the MFS Participant
Recordkeeping System and which has established an account with the Shareholder
Servicing Agent on or after July 1, 1996; provided, however, that the CDSC will
not be waived (i.e., it will be imposed) in the event that there is a change in
law or regulations which results in a material adverse change to the tax
advantaged nature of the plan, or in the event that the plan and/or sponsoring
organization: (i) becomes insolvent or bankrupt; (ii) is terminated or partially
terminated under ERISA or is liquidated or dissolved; or (iii) is acquired by,
merged into, or consolidated with, any other entity.
CONVERSION OF CLASS B SHARES. Class B shares of the Fund that remain outstanding
for approximately eight years will convert to Class A shares of the same Fund.
Shares purchased through the reinvestment of distributions paid in respect of
Class B shares will be treated as Class B shares for purposes of the payment of
the distribution and service fees under the Fund's Distribution Plan. See
"Distribution Plan" below. However, for purposes of conversion to Class A
shares, all shares in a shareholder's account that were purchased through the
reinvestment of dividends and distributions paid in respect of Class B shares
(and which have not converted to Class A shares as provided in the following
sentence) will be held in a separate sub-account. Each time any Class B shares
in the shareholder's account (other than those in the sub-account) convert to
Class A shares, a portion of the Class B shares then in the sub-account will
also convert to Class A shares. The portion will be determined by the ratio that
the shareholder's Class B shares not acquired through reinvestment of dividends
and distributions that are converting to Class A shares 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 but are subject to a CDSC of 1.00% upon redemption during the first
year. Class C shares do not convert to any other class of shares of the Fund.
The maximum investment in Class C shares that may be made is $1,000,000 per
transaction.
17
<PAGE> 94
The CDSC imposed is assessed against the lesser of the value of the shares
redeemed (exclusive of reinvested dividend and capital gain distributions) or
the total cost of such shares. No CDSC is assessed against shares acquired
through the automatic reinvestment of dividend or capital gain distributions. In
certain circumstances, the CDSC imposed upon redemption of Class C shares is
waived. These circumstances are described in Appendix A to this Prospectus. See
"Redemptions and Repurchases -- Contingent Deferred Sales Charge" below for
further discussion of the CDSC.
MFD will pay dealers 1.00% of the purchase price of Class C shares purchased
through dealers and, as compensation therefor, MFD will retain the 1.00% per
annum distribution and service fee paid under the Fund's Distribution Plan to
MFD for the first year after purchase (see "Distribution Plan" below).
Class C shares are not currently available for purchase by any retirement plan
qualified under Sections 401(a) or 403(b) of the Internal Revenue Code of 1986,
as amended (the "Code"), if the retirement plan and/or the sponsoring
organization subscribe to the MFS FUNDamental 401(k) Plan or another similar
recordkeeping program made available by the Shareholder Servicing Agent.
WAIVERS OF CDSC: In certain circumstances, the CDSC imposed upon redemption of
Class C shares is waived. These circumstances are described in Appendix A to the
Prospectus.
GENERAL: The following information applies to purchases of all classes of the
Fund's shares.
MINIMUM INVESTMENT. Except as described below, the minimum initial investment is
$1,000 per account and the minimum additional investment is $50 per account.
Accounts being established for monthly automatic investments and under payroll
savings programs and tax-deferred retirement programs (other than IRA's)
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 for sale at any time.
SUBSEQUENT INVESTMENT BY TELEPHONE: Each shareholder may purchase additional
shares of any MFS Fund by telephoning the Shareholder Servicing Agent toll-free
at (800) 225-2606. The minimum purchase amount is $50 and the maximum purchase
amount is $100,000. Shareholders wishing to avail themselves of this telephone
purchase privilege must so elect on their Account Application and designate
thereon a bank and account number from which purchases will be made. If a
telephone purchase request is received by the Shareholder Servicing Agent on any
business day prior to the close of regular trading on the Exchange (generally,
4:00 p.m., Eastern time), the purchase will occur at the closing net asset value
of the shares purchased on that day. The Shareholder Servicing Agent may be
liable for any losses resulting from unauthorized telephone transactions if it
does not follow reasonable procedures designed to verify the identity of the
caller. The Shareholder Servicing Agent will request personal or other
information from the caller, and will normally also record calls. Shareholders
should verify the accuracy of confirmation statements immediately after their
receipt.
RIGHT TO REJECT PURCHASE ORDERS/MARKET TIMING. Purchases and exchanges should be
made for investment purposes only. The Fund and MFD each reserves the right to
reject or restrict any specific purchase or exchange request. In the event that
the Fund or MFD rejects an exchange request, neither the redemption nor the
purchase side of the exchange will be processed.
The Fund is not designed for professional market timing organizations or other
entities using programmed or frequent exchanges. The Fund defines a "market
timer" as an individual, or organization acting on behalf of one or more
individuals, if (i) the individual or organization makes three or more exchange
requests out of the Fund per calendar year and (ii) any one of such exchange
requests represents shares equal in value to 1/2 of 1% or more of the Fund's net
assets at the time of the request. Accounts under common ownership or control,
including accounts administered by market timers, will be aggregated for
purposes of this definition.
18
<PAGE> 95
As noted above, the Fund and MFD each reserves the right to reject or restrict
any specific purchase and exchange request and, in addition, may impose specific
limitations with respect to market timers, including delaying for up to seven
days on the purchase side of an exchange request by market timers or
specifically rejecting or otherwise restricting purchase and exchange requests
by market timers. In the event that any individual or entity is determined
either by the Fund or MFD, in its sole discretion, to be a market timer with
respect to any calendar year, the Fund and/or MFD will reject all exchange
requests into that Fund during the remainder of that calendar year. Other funds
in the MFS Funds may have different and/or more or less restrictive policies
with respect to market timers than the Fund. These policies are disclosed in the
prospectuses of these other MFS Funds.
DEALER CONCESSIONS. Dealers may receive different compensation with respect to
sales of Class A, Class B and Class C shares. In addition, from time to time,
MFD may pay dealers 100% of the applicable sales charge on sales of Class A
shares of certain specified MFS Funds sold by such dealer during a specified
sales period. In addition, MFD or its affiliates may, from time to time, pay
dealers an additional commission equal to 0.50% of the net asset value of all of
the Class B and Class C shares of certain specified MFS Funds sold by such
dealer during a specified sales period. In addition, from time to time, MFD, at
its expense, may provide additional commissions, compensation or promotional
incentives ("concessions") to dealers which sell shares of the Fund. Such
concessions provided by MFD may include financial assistance to dealers in
connection with preapproved conferences or seminars, sales or training programs
for invited registered representatives, payment for travel expenses, including
lodging, incurred by registered representatives for such seminars or training
programs, seminars for the public, advertising and sales campaigns regarding one
or more MFS Funds, and/or other dealer-sponsored events. From time to time, MFD
may make expense reimbursements for special training of a dealer's registered
representatives in group meetings or to help pay the expenses of sales contests.
Other concessions may be offered to the extent not prohibited by state laws or
any self-regulatory agency, such as the NASD.
SPECIAL INVESTMENT PROGRAMS. For shareholders who elect to participate in
certain investment programs (e.g., the Automatic Investment Plan) or other
shareholder services, MFD or its affiliates may either (i) give a gift of
nominal value, such as a hand-held calculator or (ii) make a nominal charitable
contribution on their behalf.
RETIREMENT PLAN ACCOUNTS. Following the termination of any agreement between a
plan sponsor and the Shareholder Servicing Agent or its affiliates with respect
to the MFS FUNDamental 401(k) Plan or another similiar recordkeeping system made
available by the Shareholder Servicing Agent, the Shareholder Servicing Agent
for each Fund in which the plan invests shall combine all plan participant
accounts into a single omnibus or pooled account.
RESTRICTIONS ON ACTIVITIES OF NATIONAL BANKS. The Glass-Steagall Act prohibits
national banks from engaging in the business of underwriting, selling or
distributing securities. Although the scope of the prohibition has not been
clearly defined, MFD believes that such Act should not preclude banks from
entering into agency agreements with MFD. If, however, a bank were prohibited
from so acting, the Trustees would consider what actions, if any, would be
necessary to continue to provide efficient and effective shareholder services in
respect of shareholders who invested in the Fund through a national bank. It is
not expected that shareholders would suffer any adverse financial consequence as
a result of these occurrences. In addition, state securities laws on this issue
may differ from the interpretation of federal law expressed herein and banks and
financial institutions may be required to register as broker-dealers pursuant to
state law.
------------------------
A shareholder whose shares are held in the name of, or controlled by, a dealer
might not receive many of the privileges and services from the Fund (such as
Right of Accumulation, Letter of Intent and certain recordkeeping services) that
the Fund ordinarily provides.
EXCHANGES
Subject to the requirements set forth below, some or all of the shares in an
account with the Fund for which payment has been received by the Fund (i.e., an
established account) may be exchanged for shares of the same class of any of the
other MFS Funds at net asset value (if available for sale). Shares of one class
may not be exchanged for shares of any other class.
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EXCHANGES AMONG MFS FUNDS (EXCLUDING EXCHANGES FROM MFS MONEY MARKET FUNDS): No
initial sales charges or CDSC will be imposed in connection with an exchange
from shares of an MFS Fund to shares of any other MFS Fund, except with respect
to exchanges from an MFS money market fund to another MFS Fund which is not an
MFS money market fund (discussed below). With respect to an exchange involving
shares subject to a CDSC, the CDSC will be unaffected by the exchange and the
holding period for purposes of calculating the CDSC will carry over to the
acquired shares.
EXCHANGES FROM AN MFS MONEY MARKET FUND: Special rules apply with respect to the
imposition of an initial sales charge or a CDSC for exchanges from an MFS money
market fund to another MFS Fund which is not an MFS money market fund. These
rules are described under the caption "Exchanges" in the Prospectuses of those
MFS money market funds.
EXCHANGES INVOLVING THE MFS FIXED FUND: Class A shares of any MFS Fund held by
certain qualified retirement plans may be exchanged for units of participation
of the MFS Fixed Fund (a bank collective investment fund) (the "Units"), and
Units may be exchanged for Class A shares of any MFS Fund. With respect to
exchanges between Class A shares subject to a CDSC and Units, the CDSC will
carry over to the acquired shares or Units and will be deducted from the
redemption proceeds when such shares or Units are subsequently redeemed,
assuming the CDSC is then payable (the period during which the Class A shares
and the Units were held will be aggregated for purposes of calculating the
applicable CDSC). In the event that a shareholder initially purchases Units and
then exchanges into Class A shares subject to an initial sales charge of an MFS
Fund, the initial sales charge shall be due upon such exchange, but will not be
imposed with respect to any subsequent exchanges between such Class A shares and
Units with respect to shares on which the initial sales charge has already been
paid. In the event that a shareholder initially purchases Units and then
exchanges into Class A shares subject to a CDSC of an MFS Fund, the CDSC period
will commence upon such exchange, and the applicability of the CDSC with respect
to subsequent exchanges shall be governed by the rules set forth above in this
paragraph.
GENERAL: A shareholder should read the prospectus of the other MFS Fund into
which an exchange is made and consider the differences in objectives, policies
and restrictions before making any exchange. Exchanges will be made only after
instructions in writing or by telephone (an "Exchange Request") are received for
an established account by the Shareholder Servicing Agent in proper form (i.e.,
if in writing -- signed by the record owner(s) exactly as the shares are
registered; if by telephone -- proper account identification is given by the
dealer or shareholder of record) and each exchange must involve either shares
having an aggregate value of at least $1,000 ($50 in case of retirement plan
participants whose sponsoring organizations subscribe to the MFS FUNDamental
401(k) Plan or another similar 401(k) recordkeeping system made available by the
Shareholder Servicing Agent) or all the shares in the account. If an Exchange
Request is received by the Shareholder Servicing Agent on any business day prior
to the close of regular trading on the Exchange (generally, 4:00 p.m., Eastern
time), the exchange will occur on that day if all the requirements set forth
above have been complied with at that time and subject to the Fund's right to
reject purchase orders. No more than five exchanges may be made in any one
Exchange Request by telephone. Additional information concerning this exchange
privilege and prospectuses for any of the other MFS Funds may be obtained from
dealers or the Shareholder Servicing Agent. For federal and (generally) state
income tax purposes, an exchange is treated as a sale of the shares exchanged
and, therefore, an exchange could result in a gain or loss to the shareholder
making the exchange. Exchanges by telephone are automatically available to most
non-retirement plan accounts and certain retirement plan accounts. For further
information regarding exchanges by telephone, see "Redemptions by Telephone."
The exchange privilege (or any aspect of it) may be changed or discontinued and
is subject to certain limitations, including certain restrictions on purchases
by market timers.
REDEMPTIONS AND REPURCHASES
A shareholder may withdraw all or any portion of the value of his account on any
date on which the Fund is open for business by redeeming shares at their net
asset value (a redemption) or by selling such shares to the Fund through a
dealer (a repurchase). Certain redemptions and repurchases are, however, subject
to a CDSC. See "Contingent Deferred Sales Charge" below. Because the net asset
value of shares of the account fluctuates, redemptions or repurchases, which are
taxable transactions, are likely to result in gains or losses to the
shareholder. When a shareholder withdraws an amount from his account, the
shareholder is deemed to have tendered for redemption a sufficient number of
full and fractional shares in his account to cover the amount
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withdrawn. The proceeds of a redemption or repurchase will normally be available
within seven days, except for shares purchased or received in exchange for
shares purchased by check (including certified checks or cashier's checks).
Payment of redemption proceeds may be delayed for up to 15 days from the
purchase date in an effort to assure that such check has cleared. See "Tax
Status."
REDEMPTION BY MAIL: Each shareholder may redeem all or any portion of the shares
in his account by mailing or delivering to the Shareholder Servicing Agent (see
back cover for address) a stock power with a written request for redemption or
letter of instruction, together with his share certificates (if any were
issued), all in "good order" for transfer. "Good order" generally means that the
stock power, written request for redemption, letter of instruction or
certificate must be endorsed by the record owner(s) exactly as the shares are
registered and the signature(s) must be guaranteed in the manner set forth below
under the caption "Signature Guarantee." In addition, in some cases "good order"
will require the furnishing of additional documents. The Shareholder Servicing
Agent may make certain de minimis exceptions to the above requirements for
redemption. Within seven days after receipt of a redemption request in "good
order" by the Shareholder Servicing Agent, the Fund will make payment in cash of
the net asset value of the shares next determined after such redemption request
was received, reduced by the amount of any applicable CDSC described above and
the amount of any income tax required to be withheld, except during any period
in which the right of redemption is suspended or date of payment is postponed
because the Exchange is closed or trading on such Exchange is restricted or to
the extent otherwise permitted by the 1940 Act if an emergency exists.
REDEMPTION BY TELEPHONE: Each shareholder may redeem an amount from his account
by telephoning the Shareholder Servicing Agent toll-free at (800) 225-2606.
Shareholders wishing to avail themselves of this telephone redemption privilege
must so elect on their Account Application, designate thereon a bank and account
number to receive the proceeds of such redemption, and sign the Account
Application Form with the signature(s) guaranteed in the manner set forth below
under the caption "Signature Guarantee." The proceeds of such a redemption,
reduced by the amount of any applicable CDSC and the amount of any income tax
required to be withheld, are mailed by check to the designated account, without
charge, if the redemption proceeds do not exceed $1,000, and are wired in
federal funds to the designated account if the redemption proceeds exceed
$1,000. If a telephone redemption request is received by the Shareholder
Servicing Agent by the close of regular trading on the Exchange on any business
day, shares will be redeemed at the closing net asset value of the Fund on that
day. Subject to the conditions described in this section, proceeds of a
redemption are normally mailed or wired on the next business day following the
date of receipt of the order for redemption. The Shareholder Servicing Agent may
be liable for any losses resulting from unauthorized telephone transactions if
it does not follow reasonable procedures designed to verify the identity of the
caller. The Shareholder Servicing Agent will request personal or other
information from the caller, and will normally also record calls. Shareholders
should verify the accuracy of confirmation statements immediately after their
receipt.
REPURCHASE THROUGH A DEALER: If a shareholder desires to sell his shares through
his dealer (a repurchase), the shareholder can place a repurchase order with his
dealer, who may charge the shareholder a fee. IF THE DEALER RECEIVES THE
SHAREHOLDER'S ORDER PRIOR TO THE CLOSE OF REGULAR TRADING ON THE EXCHANGE AND
COMMUNICATES IT TO MFD BEFORE THE CLOSE OF BUSINESS ON THE SAME DAY, THE
SHAREHOLDER WILL RECEIVE THE NET ASSET VALUE CALCULATED ON THAT DAY, REDUCED BY
THE AMOUNT OF ANY APPLICABLE CDSC AND THE AMOUNT OF ANY INCOME TAX REQUIRED TO
BE WITHHELD.
CONTINGENT DEFERRED SALES CHARGE: Investments in Class A, Class B and Class C
shares ("Direct Purchases") will be subject to a CDSC for a period of: (i) with
respect to Class A and Class C shares, 12 months (however, the CDSC on Class A
shares is only imposed with respect to purchases of $1 million or more of Class
A shares or purchases by certain retirement plans of Class A shares) or (ii)
with respect to Class B shares, six years. Purchases of Class A shares made
during a calendar month, regardless of when during the month the investment
occurred, will age one month on the last day of the month and each subsequent
month. Class B shares purchased on or after January 1, 1993 and Class C share
purchases will be aggregated on a calendar month basis -- all transactions made
during a calendar month, regardless of when during the month they have occurred,
will age one year at the close of business on the last day of such month in the
following calendar year and each subsequent year. For Class B and Class C shares
of the Fund purchased prior to January 1, 1993, transactions will be aggregated
on a calendar year basis -- all
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<PAGE> 98
transactions made during a calendar year, regardless of when during the year
they have occurred, will age one year at the close of business on December 31 of
that year and each subsequent year.
At the time of a redemption, the amount by which the value of a shareholder's
account for a particular class of shares represented by Direct Purchases exceeds
the sum of the six calendar year aggregations (12 months in the case of
purchases of Class C shares and of purchases of $1 million or more of Class A
shares or purchases by certain retirement plans of Class A shares) of Direct
Purchases may be redeemed without charge ("Free Amount"). Moreover, no CDSC is
ever assessed on additional shares acquired through the automatic reinvestment
of dividends or capital gain distributions ("Reinvested Shares"). Therefore, at
the time of redemption of a particular class, (i) any Free Amount is not subject
to the CDSC, and (ii) the amount of redemption equal to the then-current value
of Reinvested Shares is not subject to the CDSC, but (iii) any amount of the
redemption in excess of the aggregate of the then-current value of Reinvested
Shares and the Free Amount is subject to a CDSC. The CDSC will first be applied
against the amount of Direct Purchases which will result in any such charge
being imposed at the lowest possible rate. The CDSC to be imposed upon
redemptions will be calculated as set forth in "Purchases" above.
The applicability of a CDSC will be unaffected by exchanges or transfers of
registration, except as described in Appendix A hereto.
GENERAL: The following information applies to redemptions and repurchases of all
classes of the Fund's shares.
SIGNATURE GUARANTEE. In order to protect shareholders against fraud, the Fund
requires, in certain instances as indicated above, that the shareholder's
signature be guaranteed. In these cases the shareholder's signature must be
guaranteed by an eligible bank, broker, dealer, credit union, national
securities exchange, registered securities association, clearing agency or
savings association. Signature guarantees shall be accepted in accordance with
policies established by the Shareholder Servicing Agent.
REINSTATEMENT PRIVILEGE. Shareholders of the Fund who have redeemed their shares
have a one-time right to reinvest the redemption proceeds in the same class of
shares of any of the MFS Funds (if shares of such Fund are available for sale)
at net asset value (with a credit for any CDSC paid) within 90 days of the
redemption pursuant to the Reinstatement Privilege. If the shares credited for
any CDSC paid are then redeemed within six years of the initial purchase in the
case of Class B shares or within 12 months of the initial purchase for Class C
share and certain Class A share purchases, a CDSC will be imposed upon
redemption. Such purchases under the Reinstatement Privilege are subject to all
limitations in the SAI regarding this privilege.
IN-KIND DISTRIBUTIONS. The Trust agrees to redeem the shares of the Fund solely
in cash up to the lesser of $250,000 or 1% of the net asset value of the Fund
during any 90-day period for any one shareholder. The Fund has reserved the
right to pay other redemptions, either totally or partially, by a distribution
in-kind of securities (instead of cash) from the Fund's portfolio. The
securities distributed in such a distribution would be valued at the same amount
as that assigned to them in calculating the net asset value for the shares being
sold. If a shareholder received a distribution in-kind, the shareholder could
incur brokerage or transaction charges when converting the securities to cash.
INVOLUNTARY REDEMPTIONS/SMALL ACCOUNTS. Due to the relatively high cost of
maintaining small accounts, the Fund reserves the right to redeem shares in any
account for their then-current value if at any time the total investment in such
account drops below $500 because of redemptions, except in the case of accounts
being established for monthly automatic investments and certain payroll savings
programs, Automatic Exchange Plan accounts and tax-deferred retirement plans,
for which there is a lower minimum investment requirement. See "Purchases --
General -- Minimum Investment" above. Shareholders will be notified that the
value of their account is less than the minimum investment requirement and
allowed 60 days to make an additional investment before the redemption is
processed.
DISTRIBUTION PLAN
The Trustees have adopted a Distribution Plan for Class A, Class B and Class C
shares pursuant to Section 12(b) of the 1940 Act and Rule 12b-1 thereunder (the
"Distribution Plan"), after having concluded that there is a reasonable
likelihood that the Plan would benefit the Fund and its shareholders.
In certain circumstances, the fees described below may not be imposed or are
being waived. These circumstances, if any, are described below under the heading
"Current Level of Distribution and Service Fees."
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FEATURES COMMON TO EACH CLASS OF SHARES: There are features of the Distribution
Plan that are common to each class of shares, as described below.
SERVICE FEES. The Distribution Plan provides that the Fund may pay MFD a service
fee of up to 0.25% of the average daily net assets attributable to the class of
shares to which the Distribution Plan relates (i.e., Class A shares, Class B
shares or Class C shares, as appropriate) (the "Designated Class") annually in
order that MFD may pay expenses on behalf of the Fund relating to the servicing
of shares of the Designated Class. The service fee is used by MFD to compensate
dealers which enter into a sales agreement with MFD in consideration for all
personal services and/or account maintenance services rendered by the dealer
with respect to shares of the Designated Class owned by investors for whom such
dealer is the dealer or holder of record. MFD may from time to time reduce the
amount of the service fees paid for shares sold prior to a certain date. Service
fees may be reduced for a dealer that is the holder or dealer of record for an
investor who owns shares of the Fund having an aggregate net asset value at or
above a certain dollar level. Dealers may from time to time be required to meet
certain criteria in order to receive service fees. MFD or its affiliates are
entitled to retain all service fees payable under the Distribution Plan for
which there is no dealer of record or for which qualification standards have not
been met as partial consideration for personal services and/or account
maintenance services performed by MFD or its affiliates to shareholder accounts.
DISTRIBUTION FEES. The Distribution Plan provides that the Fund may pay MFD a
distribution fee based on the average daily net assets attributable to the
Designated Class as partial consideration for distribution services performed
and expenses incurred in the performance of MFD's obligations under its
distribution agreement with the Fund. See "Management of the Fund --
Distributor" in the SAI. The amount of the distribution fee paid by the Fund
with respect to each class differs under the Distribution Plan, as does the use
by MFD of such distribution fees. Such amounts and uses are described below in
the discussion of the provisions of the Distribution Plan relating to each class
of shares. While the amount of compensation received by MFD in the form of
distribution fees during any year may be more or less than the expense incurred
by MFD under its distribution agreement with the Fund, the Fund is not liable to
MFD for any losses MFD may incur in performing services under its distribution
agreement with the Fund.
OTHER COMMON FEATURES. Fees payable under the Distribution Plan are charged to,
and therefore reduce, income allocated to shares of the Designated Class. The
provisions of the Distribution Plan relating to operating policies as well as
initial approval, renewal, amendment and termination are substantially identical
as they relate to each class of shares covered by the Distribution Plan.
FEATURES UNIQUE TO EACH DISTRIBUTION PLAN: The Distribution Plan has certain
features that are unique to each class of shares, as described below.
CLASS A SHARES. Class A shares are generally offered pursuant to an initial
sales charge, a substantial portion of which is paid to or retained by the
dealer making the sale (the remainder of which is paid to MFD). See "Purchases
- -- Class A Shares" above. In addition to the initial sales charge, the dealer
also generally receives the ongoing 0.25% per annum service fee, as discussed
above.
The distribution fee paid to MFD under the Distribution Plan is equal, on an
annual basis, to 0.10% of the Fund's average daily net assets attributable to
Class A shares. As noted above, MFD may use the distribution fee to cover
distribution-related expenses incurred by it under its distribution agreement
with the Fund, including commissions to dealers and payments to wholesalers
employed by MFD (e.g., MFD pays commissions to dealers with respect to purchases
of Class A shares which are sold at net asset value but which are subject to a
1% CDSC for one year after purchase). See "Purchases -- Class A Shares" above.
In addition, to the extent that the aggregate service and distribution fees paid
under the Distribution Plan do not exceed 0.35% per annum of the average daily
net assets of the Fund attributable to Class A shares, the Fund is permitted to
pay such distribution-related expenses or other distribution-related expenses.
CLASS B SHARES. Class B shares are offered at net asset value without an initial
sales charge but subject to a CDSC. See "Purchases -- Class B Shares" above. MFD
will advance to dealers the first year service fee described above at a rate
equal to 0.25% of the purchase price of such shares and, as compensation
therefor, MFD may retain the service fee paid by the Fund with
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<PAGE> 100
respect to such shares for the first year after purchase. Dealers will become
eligible to receive the ongoing 0.25% per annum service fee with respect to such
shares commencing in the thirteenth month following purchase.
Under the Distribution Plan, the Fund pays MFD a distribution fee equal, on an
annual basis, to 0.75% of the Fund's average daily net assets attributable to
Class B shares. As noted above, this distribution fee may be used by MFD to
cover its distribution-related expenses under its distribution agreement with
the Fund (including the 3.75% commission it pays to dealers upon purchase of
Class B shares, as described under "Purchases -- Class B Shares" above).
CLASS C SHARES. Class C shares are offered at net asset value without an initial
sales charge but subject to a CDSC. See "Purchases -- Class C Shares" above. MFD
will pay a commission to dealers of 1.00% of the purchase price of Class C
shares purchased through dealers at the time of purchase. In compensation for
this 1.00% commission paid by MFD to dealers, MFD will retain the 1.00% per
annum Class C distribution and service fees paid by the Fund with respect to
such shares for the first year after purchase, and dealers will become eligible
to receive from MFD the ongoing 1.00% per annum distribution and service fees
paid by the Fund to MFD with respect to such shares commencing in the thirteenth
month following purchase.
This ongoing 1.00% fee is comprised of the 0.25% per annum service fee paid to
MFD under the Distribution Plan (which MFD in turn pays to dealers), as
discussed above, and a distribution fee paid to MFD (which MFD also in turn pays
to dealers) under the Distribution Plan equal, on an annual basis, to 0.75% of
the Fund's average daily net assets attributable to Class C shares.
CURRENT LEVEL OF DISTRIBUTION AND SERVICE FEES. The Fund's Class A, Class B and
Class C distribution and service fees for its current fiscal year are 0.25%,
1.00% and 1.00% per annum, respectively. Payment of the 0.10% per annum
distribution fee under the Class A Distribution Plan will commence on such date
as the Trustees may determine. The 0.25% per annum Class A service fee is
reduced to 0.15% per annum for shares purchased prior to October 1, 1989.
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 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 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. Because the Fund
intends to distribute all of its net investment income and net realized capital
gains to its shareholders in accordance with the timing requirements imposed by
the Code, it is not expected that the Fund will be required to pay any federal
income or excise taxes, although the Fund's foreign source income may be subject
to foreign withholding taxes.
Shareholders of the Fund normally will have to pay federal income taxes and any
state or local taxes on the dividends and capital gain distributions they
receive from the Fund, whether paid in cash or 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. Shortly after the end of each calendar year, each shareholder will
receive a statement setting forth the federal income tax status of all dividends
and distributions for that year, including the portion taxable as ordinary
income, the portion taxable as long-term capital gain, the portion, if any,
representing a return of capital (which is free of current taxes but results in
a basis reduction), and the amount, if any, of federal income tax withheld.
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Fund distributions will reduce the Fund's net asset value per share.
Shareholders who buy shares shortly 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 payments at the rate of 30%
on dividends and other payments that are subject to such withholding and that
are made to persons who are neither citizens nor residents of the U.S.,
regardless of whether a lower rate may be permitted under an applicable treaty.
The Fund is also required in certain circumstances to apply backup withholding
at a rate of 31% on taxable dividends and redemption proceeds paid to any
shareholder (including a shareholder who is neither a citizen nor a resident of
the U.S.) who does not furnish to the Fund certain information and
certifications or who is otherwise subject to backup withholding. Backup
withholding will not, however, be applied to payments that have been subject to
30% withholding. Prospective investors should read the Fund's Account
Application for additional information regarding backup withholding of federal
income tax and should consult their own tax advisers as to the tax consequences
to them of an investment in the Fund.
NET ASSET VALUE
The net asset value per share of each class of shares of the Fund is determined
each day during which the Exchange is open for trading. This determination is
made once 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 SAI. 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 three classes of shares which it
offers to the general public, entitled Class A, Class B and Class C shares of
Beneficial Interest (without par value). The Fund also has a class of shares
which it offers exclusively to certain institutional investors, entitled Class I
shares. The Trust has reserved the right to create and issue additional classes
and series of shares, in which case each class of shares of a series would
participate equally in the earnings, dividends and assets attributable to that
class of that particular series. Shareholders are entitled to one vote for each
share held and shares of each series would be entitled to vote separately to
approve investment advisory agreements or changes in investment restrictions,
but shares of all series would vote together in the election of Trustees and
selection of accountants. Additionally, each class of shares of a series will
vote separately on any material increases in the fees under the Distribution
Plan or on any other matter that affects solely that class of shares, but will
otherwise vote together with all other classes of shares of the series on all
other matters. The Trust does not intend to hold annual shareholder meetings.
The Declaration of Trust provides that a Trustee may be removed from office in
certain instances (see "Description of Shares, Voting Rights and Liabilities" in
the SAI).
Each share of a class of the Fund represents an equal proportionate interest in
the Fund with each other class share, subject to the liabilities of 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.
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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 will give effect to the imposition of any applicable CDSC assessed upon
redemptions of the Fund's Class B and Class C shares. Such total rate of return
quotations may be accompanied by quotations which do not reflect the reduction
in value of the initial investment due to the sales charge or the deduction of a
CDSC, and which will thus be higher. The Fund offers multiple classes of shares
which were initially offered for sale to the public on different dates. The
calculation of total rate of return for a class of shares which initially was
offered for sale to the public subsequent to another class of shares of the Fund
is based both on (i) the performance of the Fund's newer class from the date it
initially was offered for sale to the public and (ii) the performance of the
Fund's oldest class from the date it initially was offered for sale to the
public up to the date that the newer class initially was offered for sale to the
public. See the SAI for further information on the calculation of total rate of
return for share classes initially offered for sale to the public on different
dates.
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 SAI. For
further information about the Fund's performance for the fiscal year ended
November 30, 1996, please see the Fund's Annual Report. A copy of the Annual
Report may be obtained without charge by contacting the Shareholder Servicing
Agent (see back cover for address and phone number). In addition to information
provided in shareholder reports, the Fund may, in its discretion, from time to
time, make a list of all or a portion of its holdings available to investors
upon request.
9. SHAREHOLDER SERVICES
Shareholders with questions concerning the shareholder services described below
or concerning other aspects of the Fund should contact the Shareholder Servicing
Agent (see back cover for address and phone number).
ACCOUNT AND CONFIRMATION STATEMENTS -- Each shareholder will receive
confirmation statements showing the transaction activity in his account. At the
end of each calendar year, each shareholder will receive income tax information
regarding 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:
-- 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, or
the shareholder does not respond to mailings from the Shareholder Servicing
Agent with regard to uncashed distribution checks, such shareholder's
distribution option will automatically be converted to having all dividends and
other distributions reinvested in additional shares. Any request to change a
distribution option must be received by the Shareholder Servicing Agent by the
record date for a dividend or distribution in order to be effective for that
dividend or distribution. No interest will accrue on amounts represented by
uncashed distribution or redemption checks.
26
<PAGE> 103
INVESTMENT AND WITHDRAWAL PROGRAMS -- For the convenience of shareholders, the
Fund makes available the following programs designed to enable shareholders to
add to their investment in an account with the Fund or withdraw from it with a
minimum of paper work. The programs involve no extra charge to shareholders
(other than a sales charge in the case of certain Class A share purchases) and
may be changed or discontinued at any time by a shareholder or the Fund.
LETTER OF INTENT: If a shareholder (other than a group purchaser as
described in the SAI) anticipates purchasing $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 Class A, Class B and Class C
shares of that shareholder in the MFS Funds or MFS Fixed Fund (a bank collective
investment fund), reaches a discount level.
DISTRIBUTION INVESTMENT PROGRAM: Shares of a particular class of the Fund
may be sold at net asset value (and without any applicable CDSC) through the
automatic reinvestment of dividend and capital gain distributions from the same
class of 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
based upon the value of his account. Each payment under a Systematic Withdrawal
Plan (a "SWP") must be at least $100, except in certain limited circumstances.
The aggregate withdrawals of Class B and Class C shares in any year pursuant to
a SWP will not be subject to a CDSC and generally are limited to 10% of the
value of the account at the time of the establishment of the SWP. The CDSC will
not be waived in the case of SWP redemptions of Class A shares which are subject
to a CDSC.
DOLLAR COST AVERAGING PROGRAMS --
AUTOMATIC INVESTMENT PLAN: Cash investments of $50 or more may be made
through a shareholder's checking account on any day of the month. If the
shareholder does not specify a date, the investment will automatically occur on
the first business day of the month. Required forms are available from the
Shareholder Servicing Agent or investment dealers.
AUTOMATIC EXCHANGE PLAN: Shareholders having account balances of at least
$5,000 in any MFS Fund may 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 six different funds. A
shareholder should consider the objectives and policies of a fund and review its
prospectus before electing to exchange money into such fund through the
Automatic Exchange Plan. No transaction fee is imposed in connection with
exchange transactions under the Automatic Exchange Plan. However, exchanges of
shares of MFS Money Market Fund, MFS Government Money Market Fund or Class A
shares of MFS Cash Reserve Fund will be subject to any applicable sales charge.
For federal and (generally) state income tax purposes, an exchange is treated as
a sale of the shares exchanged and, therefore, could result in a capital gain or
loss to the shareholder making the exchange. See the SAI for further information
concerning the Automatic Exchange Plan. Investors should consult their tax
advisers for information regarding the potential capital gain and loss
consequences of transactions under the Automatic Exchange Plan.
Because a dollar cost averaging program involves periodic purchases of shares
regardless of fluctuating share offering prices, a shareholder should consider
his financial ability to continue his purchases through periods of low price
levels. Maintaining a dollar cost averaging program concurrently with a
withdrawal program could be disadvantageous because of the sales charges
included in 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.
27
<PAGE> 104
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 SAI, dated April 1, 1997, contains more detailed information about
the Fund, including, but not limited to, information related to: (i) investment
policies and restrictions, (ii) Trustees, officers and investment adviser, (iii)
portfolio transactions and brokerage commissions, (iv) the Distribution Plan,
(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.
28
<PAGE> 105
APPENDIX A
WAIVERS OF SALES CHARGES
This Appendix sets forth the various circumstances in which all applicable sales
charges are waived (Section I), the initial sales charge and the CDSC for Class
A shares are waived (Section II), and the CDSC for Class B and Class C shares is
waived (Section III).
I. WAIVERS OF ALL APPLICABLE SALES CHARGES
In the following circumstances, the initial sales charge imposed on purchases of
Class A shares and the CDSC imposed on certain redemptions of Class A shares and
on redemptions of Class B and Class C shares, as applicable, are waived:
1. DIVIDEND REINVESTMENT
- Shares acquired through dividend or capital gain reinvestment; and
- Shares acquired by automatic reinvestment of distributions of dividends
and capital gains of any fund in the MFS Family of Funds ("MFS Funds")
pursuant to the Distribution Investment Program.
2. CERTAIN ACQUISITIONS/LIQUIDATIONS
- Shares acquired on account of the acquisition or liquidation of assets of
other investment companies or personal holding companies.
3. AFFILIATES OF AN MFS FUND/CERTAIN DEALERS. SHARES ACQUIRED BY:
- Officers, eligible directors, employees (including retired employees) and
agents of MFS, Sun Life or any of their subsidiary companies;
- Trustees and retired trustees of any investment company for which MFD
serves as distributor;
- Employees, directors, partners, officers and trustees of any sub-adviser
to any MFS Funds;
- Employees or registered representatives of dealers and other financial
institutions ("dealers") which have a sales agreement with MFD;
- Certain family members of any such individual and their spouses
identified above and certain trusts, pension, profit-sharing or other
retirement plans for the sole benefit of such persons, provided the
shares are not resold except to the MFS Fund which issued the Shares; and
- Institutional Clients of MFS Institutional Advisors, Inc. ("MFSI")
4. INVOLUNTARY REDEMPTIONS (CDSC WAIVER ONLY)
- Shares redeemed at an MFS Fund's direction due to the small size of a
shareholder's account. See "Redemptions and Repurchases -- General --
Involuntary Redemptions/Small Accounts" in the Prospectus.
5. RETIREMENT PLANS (CDSC WAIVER ONLY). Shares redeemed on account of
distributions made under the following circumstances:
INDIVIDUAL RETIREMENT ACCOUNTS ("IRAS")
- Death or disability of the IRA owner.
A-1
<PAGE> 106
SECTION 401(A) PLANS ("401(A) PLANS") AND SECTION 403(B) EMPLOYER SPONSORED
PLANS ("ESP PLANS")
- Death, disability or retirement of 401(a) or ESP Plan participant;
- Loan from 401(a) or ESP Plan (repayment of loans, however, will
constitute new sales for purposes of assessing sales charges);
- Financial hardship (as defined in Treasury Regulation Section
1.401(k)-1(d)(2), as amended from time to time);
- Termination of employment of 401(a) or ESP Plan participant (excluding,
however, a partial or other termination of the Plan);
- Tax-free return of excess 401(a) or ESP Plan contributions;
- To the extent that redemption proceeds are used to pay expenses (or
certain participant expenses) of the 401(a) or ESP Plan (e.g.,
participant account fees), provided that the Plan sponsor subscribes to
the MFS FUNDamental 401(k) Plan or another similar recordkeeping system
made available by MFS Service Center, Inc. ("the Shareholder Servicing
Agent"); and
- Distributions from a 401(a) or ESP Plan that has invested its assets in
one or more of the MFS Funds for more than 10 years from the later to
occur of: (i) January 1, 1993 or (ii) the date such 401(a) or ESP Plan
first invests its assets in one or more of the MFS Funds. The sales
charges will be waived in the case of a redemption of all of the 401(a)
or ESP Plan's shares in all MFS Funds (i.e., all the assets of the 401(a)
or ESP Plan invested in the MFS Funds are withdrawn), unless immediately
prior to the redemption, the aggregate amount invested by the 401(a) or
ESP Plan in shares of the MFS Funds (excluding the reinvestment of
distributions) during the prior four years equals 50% or more of the
total value of the 401(a) or ESP Plan's assets in the MFS Funds, in which
case the sales charges will not be waived.
SECTION 403(B) SALARY REDUCTION ONLY PLANS ("SRO PLANS")
- Death or disability of SRO Plan participant.
6. CERTAIN TRANSFERS OF REGISTRATION (CDSC WAIVER ONLY). Shares transferred:
- To an IRA rollover account where any sales charges with respect to the
shares being reregistered would have been waived had they been redeemed;
and
- From a single account maintained for a 401(a) Plan to multiple accounts
maintained by the Shareholder Servicing Agent on behalf of individual
participants of such Plan, provided that the Plan sponsor subscribes to
the MFS FUNDamental 401(k) Plan or another similar recordkeeping system
made available by the Shareholder Servicing Agent.
II. WAIVERS OF CLASS A SALES CHARGES
In addition to the waivers set forth in Section I above, in the following
circumstances the initial sales charge imposed on purchases of Class A shares
and the CDSC imposed on certain redemptions of Class A shares are waived:
1. INVESTMENT OF REDEMPTION PROCEEDS FROM UNAFFILIATED MUTUAL FUNDS
- Shares acquired through the investment of redemption proceeds from
another open-end management investment company not distributed or managed
by MFD or its affiliates if: (i) the investment is made through a dealer
and appropriate documentation is submitted to MFD; (ii) the redeemed
shares were subject to an initial sales charge or deferred sales charge
(whether or not actually imposed); (iii) the redemption occurred no more
than 90 days prior to the purchase of Class A shares; and (iv) the MFS
Fund, MFD or its affiliates have not agreed with such company or its
affiliates, formally or informally, to waive sales charges on Class A
shares or provide any other incentive with respect to such redemption and
sale.
A-2
<PAGE> 107
2. WRAP ACCOUNT INVESTMENTS
- Shares acquired by investments through certain dealers which have entered
into an agreement with MFD which includes a requirement that such shares
be sold for the sole benefit of clients participating in a "wrap" account
or a similar program under which such clients pay a fee to such dealer.
3. INVESTMENT BY INSURANCE COMPANY SEPARATE ACCOUNTS
- Shares acquired by insurance company separate accounts.
4. RETIREMENT PLANS
ADMINISTRATIVE SERVICES ARRANGEMENTS
- Shares acquired by retirement plans whose third party administrators or
dealers have entered into an administrative services agreement with MFD
or one of its affiliates to perform certain administrative services,
subject to certain operational and minimum size requirements specified
from time to time by MFD or one or more of its affiliates.
REINVESTMENT OF DISTRIBUTIONS FROM QUALIFIED RETIREMENT PLANS
- Shares acquired through the automatic reinvestment in Class A shares of
Class A or Class B distributions which constitute required withdrawals
from qualified retirement plans.
SHARES REDEEMED ON ACCOUNT OF DISTRIBUTIONS MADE UNDER THE FOLLOWING
CIRCUMSTANCES:
IRAS
- Distributions made on or after the IRA owner has attained the age of
59 1/2 years old; and
- Tax-free returns of excess IRA contributions.
401(A) PLANS
- Distributions made on or after the 401(a) Plan participant has attained
the age of 59 1/2 years old; and
- Certain involuntary redemptions and redemptions in connection with
certain automatic withdrawals from a 401(a) Plan.
ESP PLANS AND SRO PLANS
- Distributions made on or after the ESP or SRO Plan participant has
attained the age of 59 1/2 years old.
III. WAIVERS OF CLASS B AND CLASS C SALES CHARGES
In addition to the waivers set forth in Section I above, in the following
circumstances the CDSC imposed on redemptions of Class B and Class C shares is
waived:
1. SYSTEMATIC WITHDRAWAL PLAN
- Systematic Withdrawal Plan redemptions with respect to up to 10% per year
of the account value at the time of establishment.
2. DEATH OF OWNER
- Shares redeemed on account of the death of the account owner if the
shares are held solely in the deceased individual's name or in a living
trust for the benefit of the deceased individual.
A-3
<PAGE> 108
3. DISABILITY OF OWNER
- Shares redeemed on account of the disability of the account owner if
shares are held either solely or jointly in the disabled individual's
name or in a living trust for the benefit of the disabled individual (in
which case a disability certification form is required to be submitted to
the Shareholder Servicing Agent).
4. RETIREMENT PLANS. Shares redeemed on account of distributions made under
the following circumstances:
IRAS, 401(A) PLANS, ESP PLANS AND SRO PLANS
- Distributions made on or after the IRA owner or the 401(a), ESP or SRO
Plan participant, as applicable, has attained the age of 70 1/2 years
old, but only with respect to the minimum distribution under applicable
Internal Revenue Code ("Code") rules.
SALARY REDUCTION SIMPLIFIED EMPLOYEE PENSION PLANS ("SAR-SEP PLANS")
- Distributions made on or after the SAR-SEP Plan participant has attained
the age of 70 1/2 years old, but only with respect to the minimum
distribution under applicable Code rules; and
- Death or disability of a SAR-SEP Plan participant.
A-4
<PAGE> 109
APPENDIX B
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 SERVICES
AAA: Debt rated AAA has the highest rating assigned by S&P. Capacity to pay
interest and repay principal is extremely strong.
AA: Debt rated AA has a very strong capacity to pay interest and repay
principal and differs from the higher rated issues only in small degree.
B-1
<PAGE> 110
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.
B-2
<PAGE> 111
<TABLE>
<S> <C>
[MFS LOGO]
Investment adviser
Massachusetts Financial Services Company MFS [Registered Trademark] VALUE FUND
500 Boylston Street
Boston, MA 02116 Prospectus
(617) 954-5000 April 1, 1996
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 Auditors
Deloitte & Touche LLP
125 Summer Street
Boston, MA 02110
[MFS LOGO]
MFS [Registered Trademark] VALUE FUND
500 Boylston Street
Boston, MA 02116 MVF-1-4/97 295M 23/223/323
</TABLE>
<PAGE> 112
LOGO
<TABLE>
<S> <C>
MFS(R) VALUE FUND STATEMENT OF
(A member of the MFS Family of Funds(R)) ADDITIONAL INFORMATION
April 1, 1997
</TABLE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PAGE
------
<S> <C>
1. Definitions............................................................................. 2
2. Investment Objective, Policies and Restrictions......................................... 2
3. Management of the Fund.................................................................. 13
Trustees............................................................................. 13
Officers............................................................................. 13
Trustee Compensation Table........................................................... 13
Investment Adviser................................................................... 14
Administrator........................................................................ 15
Custodian............................................................................ 15
Shareholder Servicing Agent.......................................................... 15
Distributor.......................................................................... 15
4. Portfolio Transactions and Brokerage Commissions........................................ 16
5. Shareholder Services.................................................................... 17
Investment and Withdrawal Programs................................................... 17
Exchange Privilege................................................................... 20
Tax-Deferred Retirement Plans........................................................ 20
6. Tax Status.............................................................................. 20
7. Determination of Net Asset Value and Performance........................................ 22
8. Distribution Plan....................................................................... 24
9. Description of Shares, Voting Rights and Liabilities.................................... 25
10. Independent Auditors and Financial Statements........................................... 26
Appendix A............................................................................. A-1
</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, as amended or supplemented from time
to time (the "SAI"), sets forth information which may be of interest to
investors but which is not necessarily included in the Fund's Prospectus, dated
April 1, 1997. This SAI should be read in conjunction with the Prospectus, a
copy of which may be obtained without charge by contacting the Shareholder
Servicing Agent (see last page for address and phone number).
THIS SAI IS NOT A PROSPECTUS AND IS AUTHORIZED FOR DISTRIBUTION TO PROSPECTIVE
INVESTORS ONLY IF PRECEDED OR ACCOMPANIED BY A CURRENT PROSPECTUS.
<PAGE> 113
1. DEFINITIONS
<TABLE>
<S> <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
International Trust --Bond
Portfolio" 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 series of the Trust
on September 7, 1993.
"MFS" or the Massachusetts Financial
"Adviser" -- Services Company, a
Delaware corporation.
"MFD" -- MFS Fund Distributors,
Inc., a Delaware
corporation.
"Prospectus" -- The Prospectus of the
Fund, dated April 1, 1997,
as amended or sup-
plemented from time to
time.
</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, U.S. Government securities or an irrevocable
letter of credit maintained on a current basis at an amount at least equal to
the market value of the securities loaned. The Fund would have the right to call
a loan and obtain the securities loaned at any time on customary industry
settlement notice (which will 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 cash collateral or a fee. The Fund
would not, however, have the right to vote any securities having voting rights
during the existence of the loan, but 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.
LOANS AND OTHER DIRECT INDEBTEDNESS: The Fund may purchase loans and other
direct claims against a borrower. In purchasing a loan, the Fund acquires some
or all of the interest of a bank or other lending institution in a loan to a
corporate, governmental or other borrower. Many such loans are secured, although
some may be unsecured. Such loans may be in default at the time of purchase.
Loans that are fully secured offer the Fund more protection than an unsecured
loan in the event of non-payment of scheduled interest or principal. However,
there is no assurance that the liquidation of collateral from a secured loan
would satisfy
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the corporate borrower's obligation, or that the collateral can be liquidated.
These loans are made generally to finance internal growth, mergers,
acquisitions, stock repurchases, leveraged buy-outs and other corporate
activities. Such loans are typically made by a syndicate of lending
institutions, represented by an agent lending institution which has negotiated
and structured the loan and is responsible for collecting interest, principal
and other amounts due on its own behalf and on behalf of the others in the
syndicate, and for enforcing its and their other rights against the borrower.
Alternatively, such loans may be structured as a novation, pursuant to which the
Fund would assume all of the rights of the lending institution in a loan, or as
an assignment, pursuant to which the Fund would purchase an assignment of a
portion of a lender's interest in a loan either directly from the lender or
through an intermediary. The Fund may also purchase trade or other claims
against companies, which generally represent money owed by the company to a
supplier of goods or services. These claims may also be purchased at a time when
the company is in default.
Certain of the loans acquired by the Fund may involve revolving credit
facilities or other standby financing commitments which obligate the Fund to pay
additional cash on a certain date or on demand. These commitments may have the
effect of requiring the Fund to increase its investment in a company at a time
when the Fund might not otherwise decide to do so (including at a time when the
company's financial condition makes it unlikely that such amounts will be
repaid). To the extent that the Fund is committed to advance additional funds,
it will at all times hold and maintain in a segregated account liquid assets 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 liquid assets sufficient to cover any commitments or to limit any potential
risk. However, although the Fund does not intend to make such purchases for
speculative purposes and intends to adhere to the provisions of the SEC policy,
purchases of securities on such 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 fluctuations since the time the commitment to
purchase such securities was made.
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FOREIGN SECURITIES: The Fund may invest up to 50% (and expects generally to
invest between 10% to 25%) 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. Under the terms of most sponsored arrangements,
depositories agree to distribute notices of shareholder meetings and voting
instructions, and to provide shareholder communications and other information to
the ADR holders at the request of the issuer of the deposited securities. The
depository of an unsponsored ADR, on the other hand, is under no obligation to
distribute shareholder communications received from the issuer of the deposited
securities or to pass through voting rights to ADR holders in respect of the
deposited securities. The Fund may invest in either type of ADR. Although the
U.S. investor holds a substitute receipt of ownership rather than direct stock
certificates, the use of the depository receipts in the United States can reduce
costs and delays as well as potential currency exchange and other difficulties.
The Fund may purchase securities in local markets and direct delivery of these
ordinary shares to the local depository of an ADR agent bank in the foreign
country. Simultaneously, the ADR agents create a certificate which settles at
the Fund's custodian in five days. The Fund may also execute trades on the U.S.
markets using existing ADRs. A foreign issuer of the security underlying an ADR
is generally not subject to the same reporting requirements in the United States
as a domestic issuer. Accordingly the information available to a U.S. investor
will be limited to the information the foreign issuer is required to disclose in
its own country and the market value of an ADR may not reflect undisclosed
material information concerning the issuer of the underlying security. ADRs may
also be subject to exchange rate risks if the underlying foreign securities are
denominated in foreign currency.
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 Services ("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. 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
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these lower rated securities, the achievement of its investment 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.
INDEXED SECURITIES: The Fund may purchase securities whose prices are indexed to
the prices of other securities, securities indices, currencies, precious metals
or other commodities, or other financial indicators. Indexed securities
typically, but not always, are debt securities or deposits whose value at
maturity (i.e., principal value) or coupon rate is determined by reference to a
specific instrument or statistic. Gold-indexed securities, for example,
typically provide for a maturity value that depends on the price of gold,
resulting in a security whose price tends to rise and fall together with gold
prices. Currency-indexed securities typically are short-term to
intermediate-term debt securities whose maturity values or interest rates are
determined by reference to the values of one or more specified foreign
currencies, and may offer higher yields than U.S. dollar-denominated securities
of equivalent issuers. Currency-indexed securities may be positively or
negatively indexed; that is, their maturity value may increase when the
specified currency value increases, resulting in a security that performs
similarly to a foreign-denominated instrument, or their maturity value may
decline when foreign currencies increase, resulting in a security whose price
characteristics are similar to a put on the underlying currency.
Currency-indexed securities may also have prices that depend on the values of a
number of different foreign currencies relative to each other.
The performance of indexed securities depends to a great extent on the
performance of the security, currency, or other instrument to which they are
indexed, and may also be influenced by interest rate changes in the U.S. and
abroad. At the same time, indexed securities are subject to the credit risks
associated with the issuer of the security, and their values may decline
substantially if the issuer's creditworthiness deteriorates. Recent issuers of
indexed securities have included banks, corporations, and certain U.S.
government agencies.
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 liquid assets in a segregated account with its custodian. A put
option written by the Fund is covered if the Fund maintains liquid assets 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 liquid
assets in a segregated account with its custodian. Put and call options written
by the Fund may also be covered in such other manner as may be in accordance
with the requirements of the exchange on which, or the 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 liquid assets. Such transactions permit
the Fund to generate additional premium income, which will partially offset
declines in the value of portfolio securities or increases in the cost of
securities to be acquired. Also, effecting a closing transaction will permit the
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 be-
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tween 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 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.
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-the-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 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 liquid assets in a segregated account with its custodian. The Fund
may cover put options on stock indices by main-
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taining liquid assets 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 liquid assets 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 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 liquid assets sufficient to cover the
Fund's net liability under the two options. Therefore, the Fund's liability for
such a covered option is generally limited to the difference between the amount
of the Fund's liability under the option written by the Fund less the value of
the option held by the Fund. Yield curve options may also be covered in such
other manner as may be in accordance with the requirements of the 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. Because these securities are traded over-the-counter, the SEC has
taken the position that yield curve options are illiquid and, therefore, cannot
exceed the SEC illiquidity ceiling. See "Options on Securities" above for a
discussion of the policies the Adviser intends to follow to limit a Fund's
investment in their securities.
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
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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 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
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<PAGE> 120
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 liquid assets in a segregated account with its
custodian. The Fund may cover the writing of put Options on Futures Contracts
(a) through sales of the underlying Futures Contract, (b) through segregation of
liquid assets in an amount equal to the value of the security or index
underlying the Futures Contract, or (c) through the holding of a put on the same
Futures Contract and in the same principal amount as the put written where the
exercise price of the put held (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 liquid assets in a
segregated account with its custodian. Put and Call Options on Futures Contracts
written by the Fund may also be covered in such other manner as may be in
accordance with the 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 liquid assets 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
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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 the
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.
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.
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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 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 liquid assets 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
ensuring that the leveraging effect of such Futures Contract is minimized.
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 SAI, 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 vari-
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ation 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;
(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.
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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 (born 8/4/35)
Massachusetts Financial Services Company, Chairman
RICHARD B. BAILEY* (born 9/14/26)
Private investor; Massachusetts Financial Services Company, former Chairman and
Director (prior to September 30, 1991); Cambridge Bancorp, Director; Cambridge
Trust Company, Director
PETER G. HARWOOD (born 4/3/26)
Private investor
Address: 211 Lindsay Pond Road, Concord, Massachusetts
J. ATWOOD IVES (born 5/1/36)
Eastern Enterprises (diversified services company), Chairman and Chief Executive
Officer
Address: 9 Riverside Road, Weston, Massachusetts
LAWRENCE T. PERERA (born 6/23/35)
Hemenway & Barnes (attorneys), Partner
Address: 60 State Street, Boston, Massachusetts
WILLIAM J. POORVU (born 4/10/35)
Harvard University Graduate School of Business Administration, Adjunct
Professor; CBL & Associates Properties, Inc. (a real estate investment trust),
Director; The Baupost Fund (a registered investment company), Vice Chairman
(since November 1993), Chairman and Trustee (prior to November 1993)
Address: Harvard Business School, Soldiers Field Road, Cambridge, Massachusetts
CHARLES W. SCHMIDT (born 3/18/28)
Private investor; OHM Corporation, Director; The Boston Company, Director;
Boston Safe Deposit and Trust Company, Director; Mohawk Paper Company,
Director
Address: 30 Colpitts Road, Weston, Massachusetts
ARNOLD D. SCOTT* (born 12/16/42)
Massachusetts Financial Services Company, Senior Executive Vice President and
Secretary
JEFFREY L. SHAMES* (born 6/2/55)
Massachusetts Financial Services Company, President
ELAINE R. SMITH (born 4/25/46)
Independent Consultant; Brigham and Women's Hospital, Executive Vice President
and Chief Operating Officer (prior to September 1992)
Address: Weston, Massachusetts
DAVID B. STONE (born 9/2/27)
North American Management Corp. (investment adviser), Chairman; Eastern
Enterprises, Director
Address: 10 Post Office Square, Suite 300, Boston, Massachusetts
OFFICERS
LESLIE J. NANBERG,* Vice President (born 11/4/45)
Massachusetts Financial Services Company, Senior Vice President
STEPHEN C. BRYANT,* Vice President (born 4/24/47)
Massachusetts Financial Services Company, Senior Vice President
W. THOMAS LONDON,* Treasurer (born 3/1/44)
Massachusetts Financial Services Company, Senior Vice President
STEPHEN E. CAVAN,* Secretary and Clerk (born 11/6/53)
Massachusetts Financial Services Company, Senior Vice President, General Counsel
and Assistant Secretary
JAMES R. BORDEWICK, JR.,* Assistant Secretary (born
3/6/59)
Massachusetts Financial Services Company, Senior Vice President and Associate
General Counsel
JAMES O. YOST,* Assistant Treasurer (born 6/12/60)
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 $2,500 per year plus $135 per meeting and $100 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 Messrs. Brodkin, Scott and Shames. The
Fund will accrue its allocable share of compensation expenses each year to cover
current years service and amortize past service cost.
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 $2,498 $ 512 8 $ 247,168
A. Keith Brodkin 0 0 N/A 0
Peter G. Harwood 2,758 334 5 105,995
J. Atwood Ives 2,568 534 17 98,750
Lawrence T. Perera 2,548 1,063 25 98,310
William J. Poorvu 2,668 1,113 25 102,840
Charles W. Schmidt 2,708 1,057 18 105,995
Arnold D. Scott 0 0 N/A 0
Jeffrey L. Shames 0 0 N/A 0
Elaine R. Smith 2,708 528 27 105,995
David B. Stone 2,828 781 11 108,710
</TABLE>
- ---------------
(1) For fiscal year ended November 30, 1996.
(2) Based on normal retirement age of 73.
(3) For calendar year 1996. All Trustees receiving compensation served as
Trustees of 23 funds within the MFS fund complex (having aggregate net
assets at December 31, 1996, of approximately $21 billion) except Mr.
Bailey, who served as Trustee of 81 funds within the MFS fund complex
(having aggregate net assets at December 31, 1996, of approximately $38
billion).
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<PAGE> 125
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>
$2,293 $ 344 $ 573 $ 803 $1,147
2,457 369 614 860 1,228
2,620 393 655 917 1,310
2,784 418 696 974 1,392
2,947 442 737 1,032 1,474
3,111 467 778 1,089 1,555
</TABLE>
- ---------------
(4) Other funds in the MFS fund complex provide similar retirement benefits to
the Trustees.
As of February 28, 1997, all Trustees and officers as a group owned less than 1%
of the outstanding shares of the Fund, not including 1,440,378.98 shares (which
represent approximately 2.2% of the outstanding shares of the Fund) owned of
record by certain employee benefit plans of MFS for which Messrs. Brodkin, Scott
and Shames are Trustees.
As of February 28, 1997, MLPF&S for the sole benefit of its customers 4800 Deer
Lake Drive, Jacksonville, Florida owned 5.14%, 13.24% and 48.01% of the
outstanding Class A, Class B and Class C shares of the Fund, respectively.
As of February 28, 1997, MFS Defined Contribution Plan and The MFS Pension Plan,
located at Massachusetts Financial Services, 500 Boylston Street, Boston,
Massachusetts and New England Trust Company, PO Box 4042, Kalamazoo, Missouri
were the owners of approximately 51.09%, 29.97% and 18.94% of the outstanding
Class I shares of the Fund, respectively.
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
wholly owned 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"). Under the
Advisory Agreement, the Adviser provides the Fund with overall investment
advisory services. Subject to such policies as the Trustees may determine, the
Adviser makes investment decisions for the Fund. For these services and
facilities, 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 Fund's fiscal year ended November 30, 1996, 1995 and 1994, MFS received
management fees under the Advisory Agreement of $3,552,972, $1,526,502 and
$1,141,475, respectively. 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 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 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, 1996, 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.
14
<PAGE> 126
The Advisory Agreement will remain in effect until August 1, 1997, and will
continue in effect thereafter only if such continuance is specifically approved
at least annually by the Board of Trustees or by vote of a majority of the
Fund's outstanding 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.
ADMINISTRATOR
MFS provides the Fund with certain administrative services pursuant to a Master
Administrative Services Agreement dated March 1, 1997. Under this Agreement, MFS
provides the Fund with certain financial, legal, compliance, shareholder
communications and other administrative services. As a partial reimbursement for
the cost of providing these services, the Fund pays MFS an administrative fee up
to 0.015% per annum of the Fund's average daily net assets, provided that the
administrative fee is not assessed on Fund assets that exceed $3 billion.
CUSTODIAN
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.
SHAREHOLDER SERVICING AGENT
MFS Service Center, Inc. (the "Shareholder Servicing Agent"), a wholly owned
subsidiary of MFS, is the Fund's shareholder servicing agent, pursuant to a
Shareholder Servicing Agent Agreement, effective August 1, 1985 as amended (the
"Agency Agreement"), with the Trust. The Shareholder Servicing Agent's
responsibilities under the Agency Agreement include administering and performing
transfer agent functions and 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 calculated as a percentage of the
average daily net assets of the Fund at an effective annual rate of up to 0.13%.
In addition, the Shareholder Servicing Agent will be reimbursed by the Fund for
certain expenses incurred by the Shareholder Servicing Agent on behalf of the
Fund. State Street Bank and Trust Company, the dividend and distribution
disbursing agent of the Fund, has contracted with the Shareholder Servicing
Agent to administer and perform certain dividend and distribution disbursing
functions for the Fund.
DISTRIBUTOR
MFD, a wholly owned subsidiary of MFS, serves as distributor for the continuous
offering of shares of the Fund pursuant to a Distribution Agreement, dated
January 1, 1995 (the "Distribution Agreement"). 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 SAI). 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
15
<PAGE> 127
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, CLASS C AND CLASS I SHARES: As the distributor of the Fund, MFD acts as
agent in selling Class B, Class C and Class I shares of the Fund. The public
offering price of Class B, Class C and Class I shares is their net asset value
next computed after the sale (see "Purchases" in the Prospectus and the
Prospectus Supplement pursuant to which Class I Shares are offered).
GENERAL: Neither MFD nor dealers are permitted to delay 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, 1996, MFD received sales
charges of $511,805 and dealers received sales charges of $3,290,804 (as their
concession on gross sales charges of $3,802,609) for selling Class A shares of
the Fund; the Fund received $159,898,906 representing the aggregate net asset
value of such shares. During the Fund's fiscal year ended November 30, 1995, MFD
received sales charges of $61,017 and dealers received sales charges of $533,959
(as their concession on gross sales charges of $594,976) for selling Class A
shares of the Fund; the Fund received $32,050,722 representing the aggregate net
asset value of such 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 years ended November 30, 1996, 1995 and 1994, the CDSC
imposed on redemption of Class A shares was $139,302, $336 and $135,
respectively.
During the Fund's fiscal years ended November 30, 1996, 1995 and 1994, the CDSC
imposed on redemption of Class B shares was $13,250, $59,989 and $16,318,
respectively.
During the period April 1, 1996 through November 30, 1996, the CDSC imposed on
the redemption of Class C shares was $317.
The Distribution Agreement will remain in effect until August 1, 1997, and will
continue in effect thereafter only if such continuance is specifically approved
at least annually by the Board of Trustees or by vote of a majority of the
Trust's shares (as defined in "Investment Restrictions") and, in either case, by
a majority of the Trustees who are not parties to the Distribution Agreement or
interested persons of any such party. The Distribution Agreement terminates
automatically if it is assigned and may be terminated without penalty by either
party on not more than 60 days' nor less than 30 days' notice.
4. PORTFOLIO TRANSACTIONS AND BROKERAGE COMMISSIONS
Specific decisions to purchase or sell securities for the Fund are made by
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 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 Conduct Rules of the
National Association of Securities Dealers, Inc. (the "NASD") and such other
policies as the Trustees may determine, the Adviser may consider sales of shares
of the Fund and of the other investment company clients of MFD as a factor in
the selection of broker-dealers to execute the Fund's portfolio transactions.
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
16
<PAGE> 128
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
from time to time through such broker-dealers on behalf of the Fund. The Trust's
Trustees (together with the Trustees of the other MFS Funds) have directed the
Adviser to allocate a total of $39,100 of commission business from the MFS Funds
to Pershing Division of Donaldson, Lufkin & Jenrette as consideration for the
annual renewal of certain publications provided by Lipper Analytical Securities
Corporation (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, 1996, 1995, and 1994, the Fund
paid total brokerage commissions of $1,705,286, $679,727 and $539,320,
respectively, on total transactions (excluding transactions involving U.S.
Government securities, purchased options transactions, and short-term
obligations) of $830,127,346, $272,156,668 and $271,784,382, respectively. Not
all of the Fund's transactions are equity security transactions which involve
the payment of 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 by the Adviser to be
equitable to each. It is recognized that in some cases this system could have a
detrimental effect on the price or volume of the security as far as the Fund is
concerned. In other cases, however, the Fund believes that its ability to
participate in volume transactions will produce better executions for the Fund.
5. SHAREHOLDER SERVICES
INVESTMENT AND WITHDRAWAL PROGRAMS -- The Fund makes available the following
programs designed to enable shareholders to add to their investment or withdraw
from it with a minimum of paper work. These are described below and, in certain
cases, in the 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
17
<PAGE> 129
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 Class A, Class B and Class C 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.
SUBSEQUENT INVESTMENT BY TELEPHONE: Each shareholder may purchase additional
shares of any MFS Fund by telephoning the Shareholder Servicing Agent toll-free
at (800) 225-2606. The minimum purchase amount is $50 and the maximum purchase
amount is $100,000. Shareholders wishing to avail themselves of this telephone
purchase privilege must so elect on their Account Application and designate
thereon a bank and account number from which purchases will be made. If a
telephone purchase request is received by the Shareholder Servicing Agent on any
business day prior to the close of regular trading on the Exchange (generally,
4:00 p.m., Eastern time), the purchase will occur at the closing net asset value
of the shares purchased on that day. The Shareholder Servicing Agent may be
liable for any losses resulting from unauthorized telephone transactions if it
does not follow reasonable procedures designed to verify the identity of the
caller. The Shareholder Servicing Agent will request personal or other
information from the caller, and will normally also record calls. Shareholders
should verify the accuracy of confirmation statements immediately after their
receipt.
DISTRIBUTION INVESTMENT PROGRAM: Distributions of dividends and capital gains
made by the Fund with respect to a particular class of shares may be
automatically invested in shares of the same class of one of the other MFS
Funds, if shares of 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 based upon
the value of his account. Each payment under a Systematic Withdrawal Plan
("SWP") must be at least $100, except in certain limited circumstances. The
aggregate withdrawals of Class B and Class C shares in any year pursuant to a
SWP generally are limited to 10% of the value of the account at the time of 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 and Class C 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 and Class C 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 $5,000
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 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
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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 six 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.
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 Class C shares and 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.
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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 and if the purchaser is
eligible to purchase the class of shares) 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, unit holders 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 unit holders 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.
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
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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 are taxable to the Fund's shareholders as ordinary
income for federal income tax purposes, whether the distributions are paid in
cash or in additional shares. A portion of the Fund's ordinary income dividends
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 net long-term capital
gains over net short-term capital losses), whether paid in cash or in additional
shares, are taxable to shareholders as long-term capital gains without regard to
the length of time shareholders have held their shares. Any Fund dividend that
is declared in October, November or December of any calendar year, that is
payable to shareholders of record in such a month, and that is paid the
following January will be treated as if received by shareholders on December 31
of the year in which the dividend is declared. The Fund will notify shareholders
regarding the federal tax status of its distributions after the end of each
calendar year.
Any Fund distribution will have the effect of reducing the per share net asset
value of shares in the Fund by the amount of the distribution. Shareholders
purchasing shares shortly before the record date of any distribution may thus
pay the full price for the shares and then effectively receive a portion of the
purchase price back as a taxable distribution.
In general, any gain or loss realized upon a taxable disposition of shares of
the Fund by a shareholder that holds such shares as a capital asset will be
treated as a long-term capital gain or loss if the shares have been held for
more than twelve months and otherwise as a short-term capital gain or loss.
However, any loss realized upon a disposition of shares in the Fund held for six
months or less will be treated as a long-term capital loss to the extent of any
distributions of net capital gains made with respect to those shares. Any loss
realized upon a disposition of shares may also be disallowed under rules
relating to wash sales. Gain may be increased (or loss reduced) upon a
redemption of Class A shares of the Fund within ninety days after their purchase
followed by any purchase without payment of an additional sales charge
(including purchases by exchange or by reinvestment) of Class A shares of the
Fund or of another MFS Fund (or any other shares of an MFS Fund generally sold
subject to a sales charge).
The Fund's current dividend and accounting policies will affect the amount,
timing and character of distributions to shareholders, 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. Foreign exchange gains and losses realized by the Fund will generally be
treated as ordinary income and losses. The use of foreign currencies for
non-hedging purposes and investment by the Fund in certain "passive foreign
investment companies" may be limited in order to avoid imposition of taxes on
the Fund. Investment income received by the Fund from foreign securities may be
subject to foreign taxes withheld at the source; the Fund does not expect to be
able to pass through to shareholders foreign tax credits or deductions with
respect to such foreign taxes. The United States has entered into tax treaties
with many foreign countries that may entitle the Fund to a reduced rate of tax
or an exemption from tax on such income; the Fund intends to qualify for treaty
reduced rates where available. It is not possible, however, to determine the
Fund's effective rate of foreign tax in advance since the amount of the Fund's
assets to be invested within various countries is not known.
Dividends and certain other payments to persons who are not citizens or
residents of the United States ("Non-U.S. Persons") are generally subject to
U.S. Federal income tax withholding at the rate of 30%. The Fund intends to
withhold U.S. federal income tax at the rate of 30% on taxable dividends and
other 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 appropriate
to such claims. Distributions received from the Fund by Non-U.S.
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Persons may also be subject to tax under the laws of their own jurisdictions.
The Fund is also required in certain circumstances to apply backup withholding
at the rate of 31% on taxable dividends and redemption proceeds paid to any
shareholder (including a Non-U.S. Person) who does not furnish to the Fund
certain information and certifications or who is otherwise subject to backup
withholding. Backup withholding will not, however, be applied to payments that
have been subject to 30% withholding.
As long as it qualifies as a regulated investment company under the Code, the
Fund will not be required to pay Massachusetts income or excise taxes.
7. DETERMINATION OF NET ASSET VALUE AND PERFORMANCE
NET ASSET VALUE: The net asset value per share of each class of the Fund is
determined each day during which the Exchange is open for trading. (As of the
date of this SAI, the Exchange is open for trading every weekday except for the
following holidays or the day on which they are observed: New Year's Day,
Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day and Christmas Day.) This determination is made once during each
day as of the close of regular trading on the Exchange by deducting the amount
of the liabilities attributable to the class from the value of the assets
attributable to the class and dividing the difference by the number of shares of
the class outstanding.
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 in its
capacity as the Fund's distributor, or its agent, the Shareholder Servicing
Agent, 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 and 1% maximum for Class C shares) and
therefore may result in a higher rate of return, (ii) a total rate of return
assuming an initial account value of $1,000, which will result in a higher rate
of return since the value of the initial account will not be reduced by the
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 which may or may not reflect the effect of the maximum or other
sales charge or CDSC.
The Fund offers multiple classes of shares which were initially offered for sale
to the public on different dates. The calculation of the total rate of return
for a class of shares which initially was offered for sale to the public
subsequent to another class of shares of the Fund is based both on (i) the
performance of the Fund's newer class from the date it initially was offered for
sale to the public and (ii) the performance of the Fund's oldest class from the
date it initially was offered for sale to the public up to the date that the
newer class initially was offered for sale to the public.
As discussed in the Prospectus, the sales charges, expenses and expense ratios,
and therefore the performance, of the Fund's classes of shares differ. In
calculating total rate of return for a newer class of shares in accordance with
certain formulas required by the SEC, the performance will be adjusted to take
into account the fact that the newer class is subject to a different sales
charge than the oldest class (e.g., if the newer class is Class A shares, the
total rate of return quoted will reflect the deduction of the initial sales
charge applicable to Class A shares; if the newer class is Class B shares, the
total rate of return quoted will reflect
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the deduction of the CDSC applicable to Class B shares). However, the
performance will not be adjusted to take into account the fact that the newer
class of shares bears different class specific expenses than the oldest class of
shares (e.g., Rule 12b-1 fees). Therefore, the total rate of return quoted for a
newer class of shares will differ from the return that would have been quoted
had the newer class of shares been outstanding for the entire period over which
the calculation is based (i.e., the total rate of return quoted for the newer
class will be higher than the return that would have been quoted had the newer
class of shares been outstanding for the entire period over which the
calculation is based if the class specific expenses for the newer class are
higher than the class specific expenses of the oldest class, and the total rate
of return quoted for the newer class will be lower than the return that would be
quoted had the newer class of shares been outstanding for this entire period if
the class specific expenses for the newer class are lower than the class
specific expenses of the oldest class).
Total rate of return quotations for each class are presented in Appendix A
attached hereto under the heading "Performance Quotations."
PERFORMANCE RESULTS: The performance results for Class A shares presented in
Appendix A attached hereto under the heading "Performance Results" assume an
initial investment of $10,000 in Class A shares and cover the period from
January 1, 1987 to December 31, 1996. It has been assumed that dividends and
capital gain distributions were reinvested in additional shares. These
performance results, as well as any 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).
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.
From time to time, the Fund may discuss or quote its current portfolio manager
as well as other investment personnel, including such persons' views on: the
economy; securities markets; portfolio securities and their issuers; investment
philosophies, strategies, techniques and criteria used in the selection of
securities to be purchased or sold for the Fund; the Fund's portfolio holdings;
the investment research and analysis process; the formulation and evaluation of
investment recommendations; and the assessment and evaluation of credit,
interest rate, market and economic risks and similar or related matters.
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.
From time to time the Fund may also discuss or quote the views of its
distributor, its investment adviser and other financial planning, legal, tax,
accounting, insurance, estate planning and other professionals, or from surveys,
regarding individual and family financial planning. Such views may include
information regarding: retirement planning; tax management strategies; estate
planning; general investment techniques (e.g., asset allocation and disciplined
saving and investing); business succession; ideas and information provided
through the MFS Heritage Planning(sm) program, an intergenerational financial
planning assistance program; issues with respect to insurance (e.g., disability
and life insurance and Medicare supplemental insurance); issues regarding
financial and health care management for elderly family members; and similar or
related matters.
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 open-end
mutual fund in America.
-- 1924 -- Massachusetts Investors Trust is the first mutual fund to make
full public disclosure of its operations in shareholder reports.
-- 1932 -- One of the first internal research departments is established to
provide in-house analytical capability for an investment management firm.
23
<PAGE> 135
-- 1933 -- Massachusetts Investors Trust is the first mutual fund to register
under the Securities Act of 1933 (the "Truth in Securities Act" or the
"Full Disclosure Act").
-- 1936 -- Massachusetts Investors Trust is the first mutual fund to allow
shareholders to take capital gain distributions either in additional
shares or 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.
-- 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 open-end 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(R) 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(R) World Growth Fund is the first global emerging markets fund
to offer the expertise of two sub-advisers.
-- 1993 -- MFS becomes money manager of MFS(R) Union Standard Trust, the
first trust to invest in companies deemed to be union-friendly by an
Advisory Board of Senior labor officials, senior managers of companies
with significant labor contracts, academics and other national labor
leaders or experts.
8. DISTRIBUTION PLAN
The Trustees have adopted a Distribution Plan for Class A, Class B and Class C
shares (the "Distribution Plan") pursuant to Section 12(b) of the 1940 Act and
Rule 12b-1 thereunder (the "Rule") after having concluded that there is a
reasonable likelihood that the Distribution Plan would benefit the Fund and each
respective class of shareholders. The provisions of the Distribution Plan are
severable with respect to each Class of shares offered by the Fund. The
Distribution Plan is designed to promote sales, thereby increasing the net
assets of the Fund. Such an increase may reduce the Fund's expense ratio to the
extent that the Fund's fixed costs are spread over a larger net asset base.
Also, an increase in net assets may lessen the adverse effect that could result
were the Fund required to liquidate portfolio securities to meet redemptions.
There is, however, no assurance that the net assets of the Fund will increase or
that the other benefits referred to above will be realized.
The Distribution Plan is described in the Prospectus under the caption
"Distribution Plan," which is incorporated herein by reference. The following
information supplements this Prospectus discussion.
SERVICE FEES. With respect to the Class A shares, no service fees will be paid:
(i) to any dealer who is the holder or dealer of record for investors who own
Class A shares having an aggregate net asset value less than $750,000, or such
other amount as may be determined from time to time by MFD (MFD, however, may
waive this minimum amount requirement from time to time); or (ii) to any
insurance company which has entered into an agreement with the Fund and MFD that
permits such insurance company to purchase Class A shares from the Fund at their
net asset value in connection with annuity agreements issued in connection with
the insurance company's separate accounts. Dealers may from time to time be
required to meet certain other criteria in order to receive service fees.
With respect to Class B shares, except in the case of the first year service
fee, no service fees will be paid to any securities dealer who is the holder or
dealer of record for investors who own Class B shares having an aggregate net
asset value of less than $750,000 or such other amount as may be determined by
MFD from time to time. MFD, however, may waive this minimum requirement from
time to time. Dealers may from time to time be required to meet certain other
criteria in order to receive service fees.
MFD or its affiliates shall be entitled to receive any service fee payable under
the Distribution Plan for which there is no dealer of record or for which
qualification standards have not been met as partial consideration for personal
services and/or account maintenance services performed by MFD or its affiliates
for shareholder accounts.
DISTRIBUTION FEES: The purpose of distribution payments to MFD under the
Distribution Plan is to compensate MFD for its distribution services to the
Fund. MFD pays commissions to dealers as well as expenses of printing
prospectuses and reports used for sales purposes, expenses with respect to the
preparation and printing of sales literature and other distribution related
expenses, including, without limitation, the cost necessary to provide
distribution-related services, or personnel, travel, office expenses and
equipment.
24
<PAGE> 136
DISTRIBUTION AND SERVICE FEES PAID DURING THE FUND'S LAST FISCAL YEAR: During
the fiscal year ended November 30, 1996, the Fund paid the following
Distribution Plan expenses:
<TABLE>
<CAPTION>
AMOUNT OF AMOUNT OF AMOUNT OF
DISTRIBUTION DISTRIBUTION DISTRIBUTION
AND SERVICE AND SERVICE AND SERVICE
FEES PAID BY FEES RETAINED FEES RECEIVED
CLASSES OF SHARES FUND BY MFD BY DEALERS
<S> <C> <C> <C>
Class A Shares $ 799,582 $ 1,808 $797,774
Class B Shares $ 1,330,028 $1,163,467 $166,561
Class C Shares $ 106,620 $ 8,002 $ 98,618
</TABLE>
GENERAL: The Distribution Plan will remain in effect until August 1, 1997, and
will continue in effect thereafter only if such continuance is specifically
approved at least annually by vote of Both the Trustees and a majority of the
Trustees who are not "interested persons" or financially interested parties of
such Plan ("Distribution Plan Qualified Trustees"). The Distribution Plan also
requires that the Fund and MFD each shall provide the Trustees, and the Trustees
shall review, at least quarterly, a written report of the amounts expended (and
purposes therefor) under such Plan. The Distribution Plan may be terminated at
any time by vote of a majority of the Distribution Plan Qualified Trustees or by
vote of the holders of a majority of the respective class of the Fund's shares
(as defined in "Investment Restrictions"). All agreements relating to the
Distribution Plan entered into between the Fund or MFD and other organizations
must be approved by the Board of Trustees, including a majority of the
Distribution Plan Qualified Trustees. Agreements under the Distribution Plan
must be in writing, will be terminated automatically if assigned, and may not be
terminated at any time without payment of any penalty, by vote of a majority of
the Distribution Plan Qualified Trustees or by vote of the holders of a majority
of the respective class of the Fund's shares. The Distribution Plan may not be
amended to increase materially the amount of permitted distribution expenses
without the approval of a majority of the respective class of the Fund's shares
(as defined in "Investment Restrictions") or may be materially amended in any
case without a vote of the Trustees and a majority of the Distribution Plan
Qualified Trustees. The selection and nomination of Distribution Plan Qualified
Trustees shall be committed to the discretion of the non-interested Trustees
then in office. No Trustee who is not an "interested person" has any financial
interest in the Distribution Plan or in any related agreement.
9. DESCRIPTION OF SHARES, VOTING RIGHTS AND LIABILITIES
The Declaration of Trust permits the Trustees to issue an unlimited number of
full and fractional Shares of Beneficial Interest (without par value) of one or
more separate series and to divide or combine the shares of any series into a
greater or lesser number of shares without thereby changing the proportionate
beneficial interests in that series. The Trustees have currently authorized
shares of the Fund and one other series. The Declaration of Trust further
authorizes the Trustees to classify or reclassify any series of the shares into
one or more classes. Pursuant thereto, the Trustees have authorized the issuance
of four classes of shares of each of the Trust's two series, Class A, Class B,
Class C and Class I shares. Each share of a class of the Fund represents an
equal proportionate interest in the assets of the Fund allocable to that class.
Upon liquidation of the Fund, shareholders of each class of the Fund are
entitled to share pro rata in the 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
25
<PAGE> 137
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 AUDITORS AND
FINANCIAL STATEMENTS
Deloitte & Touche LLP are 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.
The Portfolio of Investments at November 30, 1996, the Statement of Assets and
Liabilities at November 30, 1996, the Statement of Operations for the year ended
November 30, 1996, the Statement of Changes in Net Assets for the years ended
November 30, 1996 and 1995, the Notes to Financial Statements and the
Independent Auditors' Report, each of which is included in the Annual Report to
shareholders of the Fund, are incorporated by reference into this SAI and have
been so incorporated in reliance upon the report of Deloitte & Touche LLP,
independent auditors, given upon their authority as experts in accounting and
auditing. A copy of the Annual Report accompanies this SAI.
26
<PAGE> 138
APPENDIX A
PERFORMANCE INFORMATION
The performance results and quotations below should not be considered as
representative of the performance of the Fund in the future since the net asset
value and public offering price of shares of the Fund will vary. See
"Determination of Net Asset Value and Performance" in the SAI.
PERFORMANCE RESULTS -- CLASS A SHARES
<TABLE>
<CAPTION>
VALUE OF VALUE OF
INITIAL CAPITAL VALUE OF
$10,000 GAIN REINVESTED TOTAL
YEAR ENDED INVESTMENT DISTRIBUTIONS DIVIDENDS VALUE
- --------------------------------------------------------- ---------- ------------- ---------- -------
<S> <C> <C> <C> <C>
December 31, 1987........................................ $ 8,309 $ 1,270 $ 78 $ 9,657
December 31, 1988........................................ 9,901 2,009 315 12,225
December 31, 1989........................................ 9,846 4,324 786 14,956
December 31, 1990........................................ 8,364 3,859 963 13,186
December 31, 1991........................................ 9,692 5,403 1,249 16,344
December 31, 1992........................................ 9,967 8,034 1,283 19,284
December 31, 1993........................................ 10,691 10,103 3,372 24,166
December 31, 1994........................................ 9,659 10,862 3,046 23,567
December 31, 1995........................................ 12,667 14,925 6,399 33,991
December 31, 1996........................................ 13,501 17,152 9,005 39,658
</TABLE>
Explanatory Notes: The results in the table assume that income dividends and
capital gain distributions were invested in additional shares. The results also
assume that the initial investment in Class A shares was reduced by the current
maximum applicable sales charge. No adjustment has been made for any income
taxes, if any, payable by shareholders.
PERFORMANCE QUOTATIONS
All performance quotations are for the period ended November 30, 1996.
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS
----------------------------------
10 YEAR
OR
LIFE OF
1 YEAR 5 YEAR FUND
------ ------ --------
<S> <C> <C> <C>
Fund Class A with sales charge................................................ 11.66% 19.66% 14.44%
Fund Class A without sales charge............................................. 18.50% 21.08% 15.12%
Fund Class B with CDSC........................................................ 13.50% 20.24%(1) 14.81%(1)
Fund Class B without CDSC..................................................... 17.50% 20.43%(1) 14.81%(1)
Fund Class C with CDSC........................................................ 14.66%(2) 20.50%(2) 14.84%(2)
Fund Class C without CDSC..................................................... 15.66%(2) 20.50%(2) 14.84%(2)
</TABLE>
(1) Class B share performance includes the performance of the Fund's Class A
shares for periods prior to the commencement of offering of Class B shares
on September 7, 1993. Sales charges, expenses and expense ratios, and
therefore performance, for Class A and Class B shares differ. Class B share
performance has been adjusted to reflect that Class B shares generally are
subject to a CDSC (unless the performance quotation does not give effect to
the CDSC) whereas Class A shares generally are subject to an initial sales
charge. Class B share performance has not, however, been adjusted to reflect
differences in operating expenses (e.g., Rule 12b-1 fees), which generally
are lower for Class A shares.
(2) Class C share performance includes the performance of the Fund's Class A
shares for periods prior to the commencement of offering of Class C shares
on April 1, 1996. Sales charges, expenses and expense ratios, and therefore
performance, for Class A and Class C shares differ. Class C share
performance has been adjusted to reflect that Class C shares generally are
subject to a CDSC (unless the performance quotation does not give effect to
the CDSC) whereas Class A shares generally are subject to an initial sales
charge. Class C share performance has not, however, been adjusted to reflect
differences in operating expenses (e.g., Rule 12b-1 fees), which generally
are lower for Class A shares.
A-1
<PAGE> 139
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 AUDITORS
Deloitte & Touche LLP
125 Summer Street, Boston, MA 02110
LOGO MVF-1-3-4/97/525 23/223/323
MFS(R)
VALUE FUND
500 Boylston Street
Boston, MA 02116
<PAGE> 140
<PAGE>
[LOGO] MFS(SM) Annual Report
INVESTMENT MANAGEMENT for Year Ended
November 30, 1996
MFS(R) VALUE FUND
[GRAPHIC OMITTED]
- --------------------------------------------------------------------------------
AMERICA LEARNS HOW "WE INVENTED THE MUTUAL FUND" (see page 30)
- --------------------------------------------------------------------------------
<PAGE>
TABLE OF CONTENTS
Letter from the Chairman .................................................. 1
A Discussion with the Portfolio Manager ................................... 3
Portfolio Manager's Profile ............................................... 5
Fund Facts ................................................................ 6
Performance Summary ....................................................... 8
Portfolio of Investments .................................................. 10
Financial Statements ...................................................... 16
Notes to Financial Statements ............................................. 22
Independent Auditors' Report .............................................. 29
MFS Family of Funds(R) .................................................... 32
Trustees and Officers ..................................................... 33
HIGHLIGHTS
- --------------------------------------------------------------------------------
o FOR THE 12 MONTHS ENDED NOVEMBER 30, 1996, CLASS A SHARES OF THE FUND
PROVIDED A TOTAL RETURN AT NET ASSET VALUE OF 18.50%, CLASS B SHARES
17.50%, AND CLASS C SHARES, WHICH BECAME AVAILABLE ON APRIL 1, 1996,
7.95%.
o WHILE TECHNOLOGY, FINANCIAL SERVICES, AND ENERGY WERE AMONG THE
TOP-PERFORMING SECTORS IN THE FUND OVER THE PAST YEAR, TWO OF THE LARGER
HOLDINGS, HARRAH'S ENTERTAINMENT AND HARVARD INDUSTRIES, EXPERIENCED
SIGNIFICANT PRICE DECLINES.
o THE FUND'S LARGEST SECTOR IS LEISURE, WITH MAJOR EXPOSURE TO THE LODGING
INDUSTRY AND RADIO/TELEVISION BROADCASTERS.
o OUR OUTLOOK FOR THE EQUITY MARKET IN 1997 IS CAUTIOUS. WHILE INFLATION IS
SUBDUED, LOW UNEMPLOYMENT LEVELS MAY MAKE FURTHER INTEREST RATE REDUCTIONS
DIFFICULT. VALUATION LEVELS, BY ALL HISTORIC MEASURES, ARE FULL, AND
EARNINGS GROWTH HAS DECELERATED.
- --------------------------------------------------------------------------------
<PAGE>
LETTER FROM THE CHAIRMAN
- ----------------------------
[Photo of A. Keith Brodkin]
- ----------------------------
A. Keith Brodkin
Dear Shareholders:
The U.S. economy appears to have settled into a pattern of moderate growth and
inflation -- two factors that we think can be important contributors to a
favorable long-term investment climate. During the first quarter of 1996, real
(inflation-adjusted) economic growth was 2.3% on an annualized basis, followed
by a rate of 4.7% in the second quarter. However, this unexpectedly high level
was followed by a more moderate 2.0% pace during the third quarter. Overall,
real growth in gross domestic product has surpassed our expectations this
year, and we now expect that growth for all of 1996 could exceed 2.5%. While
the consumer appears to be carrying an excessive debt load, this sector, which
represents two-thirds of the economy, provided some support to the automobile
and housing markets through much of the year. Consumer spending has also been
positively impacted by widespread job growth and, more recently, modestly
rising wages. Retail sales, which have been flat for several months, appear to
be improving during the holiday shopping season. The economies of Europe and
Japan, meanwhile, continue to be in the doldrums, weakening U.S. export
markets. Finally, the capital spending plans of American corporations are far
from robust. Thus, while economic growth should continue, we expect some
slackening toward the end of the year.
We believe U.S. equity investors should lower their expectations for 1997.
The expected slowdown in corporate earnings growth and interest rate increases
earlier in the year have raised some near-term concerns, as was seen in July's
stock market correction. Further increases in interest rates and an
acceleration of inflation, coupled with an additional slowdown in corporate
earnings growth, could have a negative effect on the stock market in the near
term. However, to the extent that some earnings disappointments are taken as a
sign that the economy is not overheating, this may prove beneficial for the
equity market's longer-term health. We believe many of the technology-driven
productivity gains that U.S. companies have made in recent years will continue
to enhance corporate America's competitiveness and profitability. Therefore,
while we have some near-term concerns, we remain quite constructive on the
long-term viability of the equity market.
Finally, as you may notice, this report to shareholders incorporates a number
of changes which we hope you will find informative and useful. Following a
discussion with the Portfolio Manager, we have added new information on the
Fund's holdings, including a chart illustrating the portfolio's concentration in
the types of investments that meet its criteria. Near the back of the report,
telephone numbers and addresses are listed if you would like to contact MFS.
We appreciate your support and welcome any questions or comments you may
have.
Respectfully,
/s/ A. Keith Brodkin
A. Keith Brodkin
Chairman and President
December 12, 1996
<PAGE>
A DISCUSSION WITH THE PORTFOLIO MANAGER
- -------------------------------
[Photo of John F. Brennan, Jr.]
- -------------------------------
John F. Brennan, Jr.
For the 12 months ended November 30, 1996, Class A shares of the Fund provided
a total return of 18.50%, Class B shares 17.50%, and Class C shares, which
became available on April 1, 1996, 7.95%. These returns, which include the
reinvestment of distributions but exclude the effects of any sales charges,
compare to a 27.85% return over the same period for the Standard & Poor's 500
Composite Index (the S&P 500), a popular, unmanaged index of common stock
performance.
Q. WHAT DO YOU THINK WERE SOME OF THE MAJOR REASONS FOR THE FUND'S PERFORMANCE
OVER THE PAST YEAR, JOHN?
A. Technology, financial services, and energy were among the top-performing
sectors over the past year. Relative to the S&P 500, the Fund was
significantly underweighted in energy (3.7% of the Fund versus 10.0% of the
index) and somewhat underweighted in financial services (11.8% versus 15.0%)
and technology (9.6% versus 12.6%). Two large holdings in the portfolio,
Harrah's Entertainment and Harvard Industries, experienced significant price
declines.
The rapid rise of the stock market, particularly the S&P 500, has made it
increasingly difficult to find compelling investments, and our cash position
has risen to 15% of net assets. This higher cash level has also impeded
performance relative to the S&P 500.
Q. HOW WOULD YOU DESCRIBE THE BUSINESS AND ECONOMIC ENVIRONMENT YOU FACED OVER
THE PAST YEAR, PARTICULARLY AS IT RELATES TO THE FUND?
A. Moderate growth and low inflation prevailed throughout 1996. We believe
earnings growth for the S&P 500 is likely to be at less than 5% for all of
1996, while long-term interest rates have increased from 6.0% at the beginning
of the year to 6.4% currently, after peaking at over 7.0% during the third
quarter. While low inflation and interest rates continue to favor financial
services holdings and blue-chip growth companies, we do not believe the stock
market can continue its ascent unless earnings growth accelerates without
igniting inflation, or interest rates decline significantly while earnings
remain solid. Given the higher level of risk, we have positioned the Fund
conservatively.
Q. WE NOTICE THAT LEISURE IS THE LARGEST SECTOR IN THE FUND. WHAT IS IT YOU
LIKE ABOUT THIS SECTOR, AND COULD YOU DISCUSS ANY SUB-GROUPS WITHIN THE
LEISURE SECTOR THAT YOU FIND PARTICULARLY ATTRACTIVE?
A. In the leisure sector, our major exposure is to the lodging industry and
radio/television broadcasters. The lodging industry is experiencing very tight
supply, which is resulting in higher prices and occupancy levels. The
deregulation of the radio and television broadcast industries has precipitated
a major industry consolidation which has improved the revenue and cost
outlooks for these companies.
Q. COULD YOU GIVE US SOME OF YOUR FAVORITE HOLDINGS IN THE LEISURE SECTOR AND
TELL US WHAT YOU THINK MAKES THEM ATTRACTIVE?
A. LIN Television, Harrah's Entertainment, and Promus Hotels are major
holdings in this sector. LIN is a television broadcaster which has shown solid
operating performance in 1996, and we believe it will be a major player in the
ongoing consolidation of that industry. Harrah's Entertainment is a large,
diversified casino operator. While 1996 has not been a good year for its
stock, we believe the company's long-term expansion plan is intact. Promus
Hotels should continue to benefit from the expansion of its lodging brands.
Q. HOWEVER, YOUR LARGEST HOLDING IS NOT A LEISURE COMPANY BUT TYCO
INTERNATIONAL. WHAT MAKES THIS COMPANY ATTRACTIVE TO YOU?
A. Tyco International is a multi-industry company. Its main operations are
fire protection systems and service, flow control products, and health care
supplies. We believe internal growth, new acquisitions, and strong management
incentives should combine to produce earnings growth of 20% to 25% over the
next three to five years. While Tyco has performed well over the past few
years, we believe further earnings growth should result in solid stock price
appreciation.
Q. IN GENERAL, WHAT CHARACTERISTICS OR QUALITIES DO YOU LOOK FOR IN SELECTING
STOCKS FOR THE FUND?
A. Our primary objective is to find companies with good earnings growth,
generally 15% to 20% per year. Management incentive programs are considered a
key factor in determining the likelihood of achieving growth targets. Once an
expected growth rate is determined, our objective is to buy the stock at a
significant discount to its expected fair value. Turnaround candidates and
restructurings are also part of the portfolio, and these investments are
analyzed based on their earnings potential.
Q. CAN YOU TALK ABOUT SOME OTHER STOCKS OR SECTORS THAT PERFORMED AS WELL AS
OR BETTER THAN EXPECTED AND TELL US WHY YOU THINK THEY DID WELL?
A. Both the pharmaceutical and lodging industries performed well last year.
The pharmaceutical industry was aided by strong earnings growth and the
expectation of low inflation and low economic growth, which enhanced valuation
levels. In the lodging industry, supply tightened significantly, which
resulted in higher room prices and stronger occupancy levels.
Q. NOW, COULD YOU TALK ABOUT SOME STOCKS OR SECTORS THAT DID NOT PERFORM AS
WELL AS YOU EXPECTED?
A. Harrah's Entertainment and Harvard Industries performed poorly over the
past year. Harrah's was hurt by competitive pressures in several casino
markets, and Harvard felt the impact of the General Motors strike as well as
cost overruns on several newly launched products. However, we believe the
long-term prospects continue to be good for both companies, and we expect
results to resume a positive trend in 1997.
Q. CAN YOU TELL US ABOUT SOME SECTORS YOU MIGHT BE AVOIDING, AND WHY?
A. We avoided the basic materials sector because we did not feel the prospects
for an economic pickup were good, paricularly with higher interest rates
prevailing for most of the year. However, the recent decline in interest rates
may improve the outlook for this sector in 1997.
Q. AS YOU LOOK AHEAD, WHAT CHANGES DO YOU SEE IN THE OVERALL MARKET OR
ECONOMIC ENVIRONMENT, PARTICULARLY AS IT RELATES TO THE FUND, AND HOW ARE YOU
POSITIONING THE FUND TO TRY AND TAKE ADVANTAGE OF THOSE CHANGES?
A. Our outlook for the equity market in 1997 is cautious. While inflation is
currently subdued, low unemployment levels may make further interest rate
reductions difficult. Valuation levels, by all historic measures, are full,
and earnings growth has decelerated. We are therefore taking a cautious
approach to our investment selections.
Respectfully,
/s/ John F. Brennan, Jr.
John F. Brennan, Jr.
Portfolio Manager
- --------------------------------------------------------------------------------
PORTFOLIO MANAGER'S PROFILE
JOHN BRENNAN HAS BEEN A MEMBER OF THE MFS INVESTMENT STAFF SINCE 1985. A
GRADUATE OF THE UNIVERSITY OF RHODE ISLAND AND THE STANFORD UNIVERSITY
GRADUATE SCHOOL OF BUSINESS ADMINISTRATION, HE BEGAN HIS CAREER AT MFS
AS AN INDUSTRY SPECIALIST AND WAS PROMOTED TO ASSISTANT VICE PRESIDENT -
INVESTMENTS IN 1987. IN 1988, HE WAS NAMED VICE PRESIDENT - INVESTMENTS,
AND IN 1995 SENIOR VICE PRESIDENT. HE BECAME PORTFOLIO MANAGER OF MFS
VALUE FUND IN 1991.
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
FUND FACTS
STRATEGY: THE FUND'S INVESTMENT OBJECTIVE IS TO SEEK CAPITAL
APPRECIATION, PRIMARILY BY INVESTING IN COMMON STOCKS.
COMMENCEMENT OF
INVESTMENT OPERATIONS: JUNE 13, 1983
SIZE: $703.6 MILLION NET ASSETS AS OF NOVEMBER 30, 1996
- --------------------------------------------------------------------------------
LARGEST SECTORS
Other .................................. 37.3%
Leisure ................................ 22.3%
Financial Services ..................... 11.8%
Technology ............................. 9.6%
Utilities & Communications ............. 9.5%
Health Care ............................ 9.1%
- --------------------------------------------------------------------------------
TAX FORM SUMMARY
IN JANUARY 1997, SHAREHOLDERS WILL BE MAILED A TAX FORM SUMMARY
REPORTING THE FEDERAL TAX STATUS OF ALL DISTRIBUTIONS PAID DURING THE
CALENDAR YEAR 1996.
THE FUND HAS DESIGNATED $5,678,940 AS A LONG-TERM CAPITAL GAIN
DISTRIBUTION FOR TAX PURPOSES. THIS DISTRIBUTION WAS MADE TO
SHAREHOLDERS OF RECORD AS OF DECEMBER 28, 1995, PAYABLE DECEMBER 29,
1995.
FOR THE YEAR ENDED NOVEMBER 30, 1996, THE AMOUNT OF DISTRIBUTIONS FROM
INCOME ELIGIBLE FOR THE 70% DIVIDENDS-RECEIVED DEDUCTION FOR
CORPORATIONS CAME TO 8.20%.
- --------------------------------------------------------------------------------
<PAGE>
PORTFOLIO CONCENTRATION AS OF NOVEMBER 30, 1996
TOP TEN HOLDINGS
<TABLE>
<S> <C>
TYCO INTERNATIONAL LTD. BE AEROSPACE
Manufacturer of fire protection, packaging, Manufacturer of interior products for commercial
and electronic equipment aircraft
HOST MARRIOTT SYBASE, INC.
Hotel owner/operator On-line software and services company
CELLULAR COMMUNICATIONS INTERNATIONAL ADT LTD.
Cellular telephone company Commercial and residential security company
MCI COMMUNICATIONS CORP. ST. JUDE MEDICAL
Telecommunications company Manufacturer of medical instruments
HARRAH'S ENTERTAINMENT, INC. CABLETRON SYSTEMS
Owner of gaming operations in several states Computer network company
</TABLE>
<PAGE>
PERFORMANCE SUMMARY
The information below and on the following page illustrates the historical
performance of MFS Value Fund Class A shares in comparison to various market
indicators. Class A share results reflect the deduction of the 5.75% maximum
sales charge; benchmark comparisons are unmanaged and do not reflect any fees
or expenses. You cannot invest in an index. All results are historical and
assume the reinvestment of dividends and capital gains.
The performance of Class B and Class C shares will be greater or less than
the line shown, based on differences in loads and fees.
GROWTH OF A HYPOTHETICAL $10,000 INVESTMENT
(For the 5-Year Period Ended November 30, 1996)
MFS Value Fund Consumer S&P 500
Class A Price Index - U.S. Composite Index
-------------- ------------------ ---------------
11/91 $ 9,428 $10,000 $10,000
10/92 11,170 10,290 11,465
10/93 14,579 10,573 13,175
10/94 15,700 10,849 13,677
10/95 19,855 11,154 27,274
11/96 24,539 11,524 23,020
GROWTH OF A HYPOTHETICAL $10,000 INVESTMENT
(For the 10-Year Period Ended November 30, 1996)
MFS Value Fund Consumer S&P 500
Class A Price Index - U.S. Composite Index
-------------- ------------------ ---------------
11/86 $ 9,429 $10,000 $10,000
11/88 11,804 10,891 11,735
11/90 12,527 12,113 14,808
11/92 18,460 12,856 21,097
11/94 22,968 13,553 23,463
11/96 38,561 14,377 41,017
<PAGE>
PEFORMANCE SUMMARY -- continued
AVERAGE ANNUAL TOTAL RETURNS
<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
MFS Value Fund (Class A) including 5.75% sales charge +11.66% +17.27% +19.66% +14.44%
- ------------------------------------------------------------------------------------------------------------------------------
MFS Value Fund (Class A) at net asset value +18.50% +19.61% +21.08% +15.21%
- ------------------------------------------------------------------------------------------------------------------------------
MFS Value Fund (Class B) with CDSC +13.50% +17.93% +20.24% +14.81%
- ------------------------------------------------------------------------------------------------------------------------------
MFS Value Fund (Class B) without CDSC +17.50% +18.65% +20.43% +14.81%
- ------------------------------------------------------------------------------------------------------------------------------
MFS Value Fund (Class C) with CDSC +14.66% +18.64% +20.50% +14.84%
- ------------------------------------------------------------------------------------------------------------------------------
MFS Value Fund (Class C) without CDSC +15.66% +18.64% +20.50% +14.84%
- ------------------------------------------------------------------------------------------------------------------------------
Average capital appreciation fund** +18.05% +14.99% +15.37% +12.29%
- ------------------------------------------------------------------------------------------------------------------------------
Consumer Price Index* + 3.42% + 2.89% + 2.88% + 3.70%
- ------------------------------------------------------------------------------------------------------------------------------
Standard & Poor's 500 Composite Index** +27.85% +20.88% +18.15% +15.16%
- ------------------------------------------------------------------------------------------------------------------------------
*The Consumer Price Index is a popular measure of change in prices.
**Source: Lipper Analytical Services.
</TABLE>
Investment return and principal value will fluctuate, and shares, when
redeemed, may be worth more or less than their original cost. Past performance
is no guarantee of future results.
Class B results, including the contingent deferred sales charge (CDSC),
reflect the applicable CDSC which declines over six years as follows: 4%, 4%,
3%, 3%, 2%, 1%, 0%. Class C shares have no initial sales charge but, along
with Class B shares, have higher annual fees and expenses than Class A shares.
As of April 1, 1996, Class C shares redeemed within 12 months of purchase will
be subject to a 1% CDSC.
Class B and Class C share performance includes the performance of the Fund's
Class A shares for periods prior to the commencement of offering of Class B
shares on September 7, 1993 and of Class C shares on April 1, 1996. Sales
charges and operating expenses for Class A, Class B, and Class C shares
differ. The Class A share performance, which is included within the Class B
and Class C share performance, including the CDSC, has been adjusted to
reflect the CDSC generally applicable to Class B and Class C shares rather
than the initial sales charge generally applicable to Class A shares. Class B
and Class C share performance has not been adjusted, however, to reflect
differences in operating expenses (e.g., Rule 12b-1 fees), which generally are
lower for Class A shares. Fund results reflect any applicable expense
subsidies and waivers, without which the performance results would have been
less favorable. Subsidies and waivers may be rescinded at any time. See the
prospectus for details.
<PAGE>
PORTFOLIO OF INVESTMENTS - November 30, 1996
Stocks - 85.1%
- -----------------------------------------------------------------------------
Issuer Shares Value
- -----------------------------------------------------------------------------
U.S. Stocks - 71.8%
Advertising - 0.9%
Outdoor Systems, Inc.* 257,250 $ 6,527,719
- -----------------------------------------------------------------------------
Aerospace - 2.5%
BE Aerospace, Inc.* 609,400 $ 14,054,288
Raytheon Co. 66,500 3,399,813
------------
$ 17,454,101
- -----------------------------------------------------------------------------
Agricultural Products - 0.8%
AGCO Corp. 84,060 $ 2,343,173
Case Corp. 56,200 2,950,500
------------
$ 5,293,673
- -----------------------------------------------------------------------------
Automotive - 1.5%
Goodrich (B.F.) Co. 185,700 $ 8,333,288
Harvard Industries, Inc.*++ 378,400 1,892,000
------------
$ 10,225,288
- -----------------------------------------------------------------------------
Banks and Credit Companies - 1.3%
Wells Fargo & Co. 33,333 $ 9,487,405
- -----------------------------------------------------------------------------
Business Services - 3.2%
ADT Ltd.* 584,900 $ 11,990,450
Alco Standard Corp. 206,900 10,707,075
------------
$ 22,697,525
- -----------------------------------------------------------------------------
Cellular Telephones - 0.9%
Telephone & Data Systems, Inc. 167,200 $ 6,249,100
- -----------------------------------------------------------------------------
Chemicals - 1.2%
Betzdearborn, Inc. 24,653 $ 1,426,792
Dexter Corp. 212,700 6,965,925
------------
$ 8,392,717
- -----------------------------------------------------------------------------
Computer Software - Systems - 3.3%
Adobe Systems, Inc. 145,700 $ 5,755,150
Cerner Corp.* 320,300 4,764,463
Sybase, Inc.* 706,600 12,453,825
------------
$ 22,973,438
- -----------------------------------------------------------------------------
Consumer Goods and Services - 4.4%
Philip Morris Cos., Inc. 77,400 $ 7,981,875
Tyco International Ltd. 360,000 19,710,000
UST, Inc. 97,070 3,166,909
------------
$ 30,858,784
- -----------------------------------------------------------------------------
Defense Electronics - 0.4%
Loral Space & Communications Corp.* 141,900 $ 2,625,150
- -----------------------------------------------------------------------------
Electronics - 2.8%
Atmel Corp.* 269,500 $ 8,859,813
Intel Corp. 54,700 6,940,063
Kulicke & Soffa Industries* 72,800 1,474,200
LTX Corp.* 387,100 2,298,406
------------
$ 19,572,482
- -----------------------------------------------------------------------------
Entertainment - 8.0%
American Radio Systems Corp., "A"* 240,660 $ 6,618,150
Argosy Gaming Corp.* 191,400 1,076,625
Casino America, Inc.* 472,510 1,594,721
Central European Media Enterprises Ltd.* 199,200 5,577,600
Chancellor Broadcast Co., "A"* 42,600 1,235,400
Cox Radio, Inc., "A"* 112,200 1,963,500
EZ Communications, Inc.* 172,700 6,044,500
Emmis Broadcasting Co., "A"* 10,400 357,500
Golden Bear Golf, Inc.* 2,800 38,150
Harrah's Entertainment, Inc.* 878,700 15,596,925
Harveys Casino Resorts 100,000 1,662,500
LIN Television Corp.* 255,900 10,267,988
Showboat, Inc. 175,300 3,264,963
Starsight Telecast, Inc.* 95,000 712,500
------------
$ 56,011,022
- -----------------------------------------------------------------------------
Financial Institutions - 3.5%
Beneficial Corp. 119,200 $ 7,405,300
Federal Home Loan Mortgage Corp. 75,500 8,625,875
Union Planters Corp. 216,000 8,937,000
------------
$ 24,968,175
- -----------------------------------------------------------------------------
Food and Beverage Products - 1.2%
Earthgrains Co. 38,300 $ 1,982,025
Interstate Bakeries Corp. 146,700 6,619,838
------------
$ 8,601,863
- -----------------------------------------------------------------------------
Forest and Paper Products - 1.0%
Kimberly Clark Corp. 70,100 $ 6,852,275
- -----------------------------------------------------------------------------
Insurance - 3.0%
Chubb Corp. 108,000 $ 5,859,000
Cigna Corp. 15,500 2,191,313
ITT Hartford Group, Inc. 104,400 7,138,350
Penncorp Financial Group, Inc. 173,200 5,953,750
------------
$ 21,142,413
- -----------------------------------------------------------------------------
Machinery - 0.9%
Greenfield Industries, Inc. 2,400 $ 70,200
Stewart & Stevenson Services, Inc. 252,400 6,246,900
------------
$ 6,317,100
- -----------------------------------------------------------------------------
Medical and Health Products - 2.9%
Pharmacia & Upjohn, Inc. 209,300 $ 8,084,213
Rhone-Poulenc Rorer, Inc. 136,300 10,137,313
Uromed Corp.* 255,600 2,332,350
------------
$ 20,553,876
- -----------------------------------------------------------------------------
Medical and Health Technology and Services - 3.7%
Pacificare Health Systems, Inc., "B"* 40,100 $ 3,328,300
Regency Health Services, Inc.* 219,800 2,307,900
St. Jude Medical, Inc. 280,800 11,723,400
United Healthcare Corp. 199,500 8,603,438
------------
$ 25,963,038
- -----------------------------------------------------------------------------
Oil Services - 0.4%
Tidewater, Inc. 64,200 $ 2,808,750
- -----------------------------------------------------------------------------
Oils - 1.7%
Occidental Petroleum Corp. 224,300 $ 5,383,200
Texaco, Inc. 69,600 6,899,100
------------
$ 12,282,300
- -----------------------------------------------------------------------------
Photographic Products - 0.6%
Eastman Kodak Co. 50,000 $ 4,050,000
- -----------------------------------------------------------------------------
Printing and Publishing - 1.9%
Gannett Co. 63,900 $ 5,016,150
Pulitzer Publishing Co. 93,633 4,260,315
Scripps (E.W.) Co. 100,300 3,485,425
Tribune Co. 6,900 596,850
------------
$ 13,358,740
- -----------------------------------------------------------------------------
Railroads - 2.0%
Burlington Northern - Santa Fe 77,900 $ 7,001,263
Wisconsin Central Transportation
Corp.* 174,900 7,127,175
------------
$ 14,128,438
- -----------------------------------------------------------------------------
Restaurants and Lodging - 6.1%
Felcor Suite Hotels, Inc. 98,200 $ 3,498,375
Host Marriott Corp.* 1,087,553 16,585,183
Prime Hospitality Corp.* 615,300 10,229,363
Promus Hotel Corp.* 325,050 10,482,863
Servico, Inc.* 106,500 1,650,750
Showbiz Pizza Time, Inc.* 44,850 734,419
------------
$ 43,180,953
- -----------------------------------------------------------------------------
Special Products and Services - 0.2%
Gillett Holdings, Inc.* 37,656 $ 1,430,928
- -----------------------------------------------------------------------------
Stores - 3.5%
Ann Taylor Stores, Inc.* 245,900 $ 4,979,475
Rite-Aid Corp. 233,300 9,244,548
Sears, Roebuck & Co. 133,700 6,651,575
Talbots, Inc. 139,800 4,036,725
------------
$ 24,912,323
- -----------------------------------------------------------------------------
Supermarkets - 1.4%
Vons Cos., Inc.* 182,500 $ 9,604,063
- -----------------------------------------------------------------------------
Telecommunications - 3.9%
Cabletron Systems, Inc.* 280,600 $ 11,329,225
Cellular Communications
International, Inc.*++ 623,100 16,434,263
------------
$ 27,763,488
- -----------------------------------------------------------------------------
Trucking - 0.4%
Sea Containers Ltd. 199,700 $ 3,095,350
- -----------------------------------------------------------------------------
Utilities - Telephone - 2.3%
MCI Communications Corp. 525,600 $ 16,030,800
- -----------------------------------------------------------------------------
Total U.S. Stocks $505,413,277
- -----------------------------------------------------------------------------
Foreign Stocks - 13.3%
Finland - 0.7%
Huhtamaki Oy Group (Consumer Goods) 115,000 $ 4,984,928
- -----------------------------------------------------------------------------
France - 0.8%
Union des Assurances Federale S.A. (Insurance) 47,900 $ 5,910,750
- -----------------------------------------------------------------------------
Germany - 0.8%
Adidas AG (Sporting Goods) 64,500 $ 5,619,633
- -----------------------------------------------------------------------------
Hong Kong - 1.8%
Cafe de Coral Group (Restaurants) 10,850,000 $ 3,157,350
Giordano International Ltd. (Stores) 4,532,000 3,985,894
Liu Chong Hing Bank Ltd. (Finance) 980,000 1,635,032
Wing Hang Bank Ltd. (Finance) 862,500 3,859,774
------------
$ 12,638,050
- -----------------------------------------------------------------------------
Italy - 0.7%
Fila Holdings S.p.A., ADR (Sporting Goods) 29,000 $ 2,146,000
Olivetti Co., S.p.A. (Office Equipment)* 7,086,200 2,491,508
------------
$ 4,637,508
- -----------------------------------------------------------------------------
Netherlands
Giessen de Noord (Van der), N.V.
(Transportation) 5,100 $ 122,898
- -----------------------------------------------------------------------------
New Zealand - 2.7%
Lion Nathan Ltd. (Beverages) 1,500,900 $ 3,852,810
Sky City Ltd. (Entertainment) 830,950 4,738,926
Tranz-Rail Holdings Ltd., ADR* 577,500 10,322,813
------------
$ 18,914,549
- -----------------------------------------------------------------------------
Philippines - 0.3%
Pilipino Telephone (Telecommunications)* 2,500,000 $ 2,187,500
- -----------------------------------------------------------------------------
South Korea - 1.3%
Korea Electric Power (Utilities - Electric) 118,900 $ 3,801,697
Korea Mobile Telecom (Telecommunications) 5,501 5,502,858
------------
$ 9,304,555
- -----------------------------------------------------------------------------
Spain
Cubiertas Y Mzov (Beverages) 2,900 $ 229,971
- -----------------------------------------------------------------------------
Sweden - 1.3%
Enator AB (Consumer Goods and Services)* 221,300 $ 5,398,923
Nobel Biocare AB (Pharmaceuticals) 197,200 3,373,540
------------
$ 8,772,463
- -----------------------------------------------------------------------------
United Kingdom - 2.9%
British Petroleum PLC, ADR 50,000 $ 6,937,500
Jarvis Hotels Ltd. (Restaurants and Lodging)+ 1,612,600 4,581,074
Kwik-Fit Holdings PLC (Consumer Goods and
Services) 600,000 2,249,100
PowerGen PLC (Utilities - Electric) 700,000 6,824,650
------------
$ 20,592,324
- -----------------------------------------------------------------------------
Total Foreign Stocks $ 93,915,129
- -----------------------------------------------------------------------------
Total Stocks (Identified Cost, $539,762,307) $599,328,406
- -----------------------------------------------------------------------------
Warrants - 0.1%
- -----------------------------------------------------------------------------
Warrants
- -----------------------------------------------------------------------------
Enator AB, Rights (Identified Cost, $0) 221,300 $ 477,344
- -----------------------------------------------------------------------------
Bonds - 0.5%
- -----------------------------------------------------------------------------
Principal Amount
(000 Omitted)
- -----------------------------------------------------------------------------
Continental Airlines, Inc., 11.75s, 1995** $ 3,000 $ 300
Harrah's Jazz Co., 14.25s, 2001** 6,478 3,409,894
Wang-Talon, 0s, 2000 1 990
- -----------------------------------------------------------------------------
Total Bonds (Identified Cost, $2,603,409) $ 3,411,184
- -----------------------------------------------------------------------------
Short-Term Obligations - 13.7%
- -----------------------------------------------------------------------------
Principal Amount
Issuer (000 Omitted) Value
- -----------------------------------------------------------------------------
Federal Farm Credit Corp., due 12/16/96 $11,555 $ 11,529,867
Federal Home Loan Mortgage Corp.,
due 12/02/96 - 12/27/96 47,725 47,664,193
Federal National Mortgage Assn., due
12/03/96 5,370 5,366,107
General Motors Acceptance Corp., due
12/13/96 9,000 8,984,130
Raytheon Co., due 12/05/96 8,290 8,285,119
Student Loan Marketing Assn., due
12/27/96 9,460 9,424,198
Tennessee Valley Authority, due 12/02/96 5,305 5,304,234
- -----------------------------------------------------------------------------
Total Short-Term Obligations, at Amortized Cost $ 96,557,848
- -----------------------------------------------------------------------------
Equity Put Option Purchased - 0.7%
- -----------------------------------------------------------------------------
Principal Amount
of Contracts
Issuer/Expiration Date/Strike Price (000 Omitted)
- -----------------------------------------------------------------------------
Standard & Poor's 500 Index /September
1997/775
(Premiums Paid, $6,394,059) $ 1,253 $ 5,043,325
- -----------------------------------------------------------------------------
Total Investments (Identified Cost,
$645,317,623) $704,818,107
Other Assets, Less Liabilities - (0.1)% (1,174,080)
- -----------------------------------------------------------------------------
Net Assets - 100.0% $703,644,027
- -----------------------------------------------------------------------------
*Non-income producing security.
**Non-income producing security - in default.
##SEC Rule 144A restriction.
+Restricted security.
++Affiliated issuers are those in which the Fund's holdings of an issuer
represent 5% or more of the outstanding voting securities of the issuer.
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS
Statement of Assets and Liabilities
- ------------------------------------------------------------------------------
November 30, 1996
- ------------------------------------------------------------------------------
Assets:
Investments, at value -
Unaffiliated issuers (identified cost, $622,732,158) $686,491,844
Affiliated issuers (identified cost, $22,585,465) 18,326,263
-------------
Total investments, at value (identified cost,
$645,317,623) $704,818,107
Cash 9,997
Receivable for Fund shares sold 3,365,300
Receivable for investments sold 18,692,367
Dividends receivable 579,161
Other assets 32,608
------------
Total assets $727,497,540
------------
Liabilities:
Payable for Fund shares reacquired $ 612,761
Payable for investments purchased 22,654,808
Net payable for closed forward foreign currency exchange
contracts sold 3,014
Payable to affiliates -
Management fee 43,355
Shareholder servicing agent fee 10,076
Distribution fee 328,377
Accrued expenses and other liabilities 201,122
------------
Total liabilities $ 23,853,513
------------
Net assets $703,644,027
============
Net assets consist of:
Paid-in capital $581,747,949
Unrealized appreciation on investments and translation of
assets and liabilities in foreign currencies 59,503,413
Accumulated undistributed net realized gain on investments
and foreign currency transactions 61,880,975
Accumulated undistributed net investment income 511,690
------------
Total $703,644,027
============
Shares of beneficial interest outstanding 53,256,200
==========
Class A shares:
Net asset value per share
(net assets of $427,477,519 / 32,032,997 shares of
beneficial interest outstanding) $13.34
======
Offering price per share (100/94.25) $14.15
======
Class B shares:
Net asset value and offering price per share
(net assets of $244,247,133 / 18,772,807 shares of
beneficial interest outstanding) $13.01
======
Class C shares:
Net asset value and offering price per share
(net assets of $31,919,375 / 2,450,396 shares of beneficial
interest outstanding) $13.03
======
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,
Class B, and Class C shares.
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS - continued
Statement of Operations
- ------------------------------------------------------------------------------
Year Ended November 30, 1996
- ------------------------------------------------------------------------------
Net investment income:
Income -
Dividends $ 5,094,738
Interest 3,225,148
Foreign taxes withheld (127,360)
-----------
Total investment income $ 8,192,526
-----------
Expenses -
Management fee $ 3,552,972
Trustees' compensation 31,046
Shareholder servicing agent fee (Class A) 487,216
Shareholder servicing agent fee (Class B) 292,776
Shareholder servicing agent fee (Class C) 15,993
Distribution and service fee (Class A) 799,582
Distribution and service fee (Class B) 1,330,028
Distribution and service fee (Class C) 106,620
Custodian fee 212,326
Postage 79,085
Printing 75,976
Auditing fees 33,965
Legal fees 5,322
Miscellaneous 308,332
-----------
Total expenses $ 7,331,239
Fees paid indirectly (70,154)
-----------
Net expenses $ 7,261,085
-----------
Net investment income $ 931,441
-----------
Realized and unrealized gain (loss) on investments:
Realized gain (identified cost basis) -
Investment transactions $62,821,828
Foreign currency transactions (615,000)
-----------
Net realized gain on investments and foreign currency
transactions $62,206,828
-----------
Change in unrealized appreciation (depreciation) -
Investments $ 7,978,405
Translation of assets and liabilities in foreign currencies 298,335
-----------
Net unrealized gain on investments and foreign currency
translation $ 8,276,740
-----------
Net realized and unrealized gain on investments and
foreign currency $70,483,568
-----------
Increase in net assets from operations $71,415,009
===========
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS - continued
Statement of Changes in Net Assets
- --------------------------------------------------------------------------------
Year Ended November 30, 1996 1995
- --------------------------------------------------------------------------------
Increase (decrease) in net assets:
From operations -
Net investment income (loss) $ 931,441 $ (109,399)
Net realized gain on investments and foreign
currency transactions 62,206,828 25,733,086
Net unrealized gain on investments and foreign
currency translation 8,276,740 45,785,546
------------ ------------
Increase in net assets from operations $ 71,415,009 $ 71,409,233
------------ ------------
Distributions declared to shareholders -
From net realized gain on investments and
foreign currency transactions (Class A) $(21,105,160) $(10,491,130)
From net realized gain on investments and foreign
currency transactions (Class B) (4,429,633) (1,394,622)
------------ ------------
Total distributions declared to shareholders $(25,534,793) $(11,885,752)
------------ ------------
Fund share (principal) transactions -
Net proceeds from sale of shares $484,011,550 $112,728,051
Net asset value of shares issued to shareholders
in reinvestment of distributions 23,866,258 11,168,786
Cost of shares reacquired (123,736,751) (68,776,712)
------------ ------------
Increase in net assets from Fund share
transactions $384,141,057 $ 55,120,125
------------ ------------
Total increase in net assets $430,021,273 $114,643,606
Net assets:
At beginning of period 273,622,754 158,979,148
------------ ------------
At end of period (including accumulated
undistributed net investment income of
$511,690 and $195,249, respectively) $703,644,027 $273,622,754
============ ============
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS - continued
Financial Highlights
- -------------------------------------------------------------------------------
Year Ended November 30, 1996 1995 1994 1993 1992 1991
- -------------------------------------------------------------------------------
Class A
- -------------------------------------------------------------------------------
Per share data (for a share outstanding throughout each period):
Net asset value -
beginning of period $12.39 $ 9.44 $10.82 $10.17 $ 8.73 $ 7.46
------ ------ ------ ------ ------ ------
Income from
investment
operations# -
Net investment
income (loss) $ 0.05 $ 0.01 $ (0.01) $ 0.02 $ -- $ 0.14
Net realized and
unrealized gain
on investments
and foreign
currency
transactions 2.04 3.64 0.26 1.96 2.03 1.21
------ ------ ------ ------ ------ ------
Total from
investment
operations $ 2.09 $ 3.65 $ 0.25 $ 1.98 $ 2.03 $ 1.35
------ ------ ------ ------ ------ ------
Less distributions
declared to
shareholders -
From net investment
income $ -- $ -- $(0.03) $ -- $(0.07) $(0.08)
From net realized
gain on
investments and
foreign currency
transactions (1.14) (0.70) (1.60) (1.33) (0.52) --
------ ------ ------ ------ ------ ------
Total
distributions
declared to
shareholders $(1.14) $(0.70) $(1.63) $(1.33) $(0.59) $(0.08)
------ ------ ------ ------ ------ ------
Net asset value - end
of period $13.34 $12.39 $ 9.44 $10.82 $10.17 $ 8.73
====== ====== ====== ====== ====== ======
Total return(+) 18.50% 41.67% 1.92% 22.10% 24.60% 18.26%
Ratios (to average net assets)/Supplemental data:
Expenses## 1.32% 1.35% 1.37% 1.42% 1.53% 1.50%
Net investment
income (loss) 0.43% 0.06% (0.05)% 0.09% -- 1.65%
Portfolio turnover 112% 109% 91% 95% 111% 132%
Average commission
rate### $0.0304 -- -- -- -- --
Net assets at end of
period (000 omitted) $427,478 $227,555 $141,790 $132,207 $112,958 $104,600
#Per share data for the periods subsequent to November 30, 1993 is based on
average shares outstanding.
##For fiscal years ending after September 1, 1995, the Fund's expenses are
calculated without reduction for fees paid indirectly.
###Average commission rate is calculated for funds with fiscal years beginning
on or after September 1, 1995.
(+)Total returns for Class A shares do not include the applicable sales charge
(except for reinvested dividends prior to October 1, 1989). If the charge had
been included, the results would have been lower.
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS - continued
Financial Highlights - continued
- -----------------------------------------------------------------------------
Six Months
Ended Year Ended May 31,
November 30, ----------------------------------
1990 1990 1989 1988 1987
- -----------------------------------------------------------------------------
Class A
- -----------------------------------------------------------------------------
Per share data (for a share outstanding throughout each period):
Net asset value - beginning of
period $ 8.99 $10.52 $ 8.70 $ 9.60 $ 9.81
------ ------ ------ ------ ------
Income from investment
operations -
Net investment income $ 0.09 $ 0.33 $ 0.21 $ 0.10 $ 0.04
Net realized and unrealized
gain (loss) on
investments and foreign
currency transactions (1.38) 0.17 2.17 (0.86) 1.60
------ ------ ------ ------ ------
Total from investment
operations $(1.29) $ 0.50 $ 2.38 $(0.76) $ 1.64
------ ------ ------ ------ ------
Less distributions declared to
shareholders -
From net investment income $(0.11) $(0.34) $(0.17) $(0.03) $(0.04)
From net realized gain on
investments and foreign
currency transactions (0.05) (1.69) (0.39) (0.11) (1.81)
From paid-in capital (0.08) -- -- -- --
------ ------ ------ ------ ------
Total distributions
declared to
shareholders $(0.24) $(2.03) $(0.56) $(0.14) $(1.85)
------ ------ ------ ------ ------
Net asset value - end of period $ 7.46 $ 8.99 $10.52 $ 8.70 $ 9.60
====== ====== ====== ====== ======
Total return(+) (29.48)%+ 5.13% 28.47% (7.63)% 17.95%
Ratios (to average net assets)/Supplemental data:
Expenses 1.51%+ 1.26% 1.41% 1.33% 1.31%
Net investment income 2.30%+ 3.38% 2.29% 1.12% 0.38%
Portfolio turnover 36% 88% 80% 99% 135%
Net assets at end of period
(000 omitted) $100,398 $125,191 $133,219 $116,218 $148,227
+Annualized.
(+)Total returns for Class A shares do not include the applicable sales charge
(except for reinvested dividends prior to October 1, 1989). If the charge had
been included, the results would have been lower.
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS - continued
Financial Highlights - continued
- -----------------------------------------------------------------------------
Year Ended November 30, 1996 1995 1994 1993* 1996**
- -----------------------------------------------------------------------------
Class B Class C
- -----------------------------------------------------------------------------
Per share data (for a share outstanding throughout each period):
Net asset value - beginning
of period $12.15 $ 9.34 $10.79 $10.61 $12.00
------ ------ ------ ------ ------
Income from investment
operations# -
Net investment loss $(0.04) $(0.08) $(0.09) $(0.01) $(0.01)
Net realized and
unrealized gain on
investments and foreign
currency transactions 2.00 3.59 0.27 0.19 1.04
------ ------ ------ ------ ------
Total from investment
operations $ 1.96 $ 3.51 $ 0.18 $ 0.18 $ 1.03
------ ------ ------ ------ ------
Less distributions declared
to shareholders -
From net realized gain on
investments and
foreign currency
transactions $(1.10) $(0.70) $(1.60) $ -- $ --
In excess of net
investment income -- -- (0.03) -- --
------ ------ ------ ------ ------
Total distributions
declared to
shareholders $(1.10) $(0.70) $(1.63) $ -- $ --
------ ------ ------ ------ ------
Net asset value - end of
period $13.01 $12.15 $ 9.34 $10.79 $13.03
====== ====== ====== ====== ======
Total return 17.50% 40.53% 1.15% 1.70% 7.95%++
Ratios (to average net assets)/Supplemental data:
Expenses## 2.16% 2.17% 2.25% 2.46%+ 2.11%+
Net investment loss (0.33)% (0.77)% (0.96)% (1.37)%+ (0.17)%+
Portfolio turnover 112% 109% 91% 95% 112%
Average commission rate### $0.0304 -- -- -- $0.0304
Net assets at end of period
(000 omitted) $244,247 $46,068 $17,189 $1,097 $31,919
*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, April 1,
1996, to November 30, 1996.
+Annualized.
++Not annualized.
#Per share data for the periods subsequent to November 30, 1993 is based on
average shares outstanding.
##For fiscal years ending after September 1, 1995, the Fund's expenses are
calculated without reduction for fees paid indirectly.
###Average commission rate is calculated for funds with fiscal years beginning
on or after September 1, 1995.
See notes to financial statements
<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. Effective April 1, 1996, the Fund commenced
offering Class C shares.
(2) Significant Accounting Policies
General - The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Investments in foreign securities are vulnerable to the effects of changes in
the relative values of the local currency and the U.S. dollar and to the
effects of changes in each country's legal, political and economic
environment.
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 market 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.
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, 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.
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 into 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 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.
Fees Paid Indirectly - The Fund's custodian bank calculates its fee based on
the Fund's average daily net assets. This fee is reduced according to an
expense offset arrangement with State Street Bank, the dividend disbursing
agent, which provides for partial reimbursement of custody fees based on a
formula developed to measure the value of cash deposited by the Fund with the
custodian and with the dividend disbursing agent. This amount is shown as a
reduction of expenses on the Statement of Operations.
Tax Matters and Distributions - The Fund's policy is to comply with the
provisions of the Internal Revenue Code (the Code) applicable to regulated
investment companies and to distribute to shareholders all of its taxable
income, including any net realized gain on investments. Accordingly, no
provision for federal income or excise tax is provided. The Fund files a tax
return annually using tax accounting methods required under provisions of the
Code which may differ from generally accepted accounting principles, the basis
on which these financial statements are prepared. Accordingly, the amount of
net investment income and net realized gain reported on these financial
statements may differ from that reported on the Fund's tax return and,
consequently, the character of distributions to shareholders reported in the
financial highlights may differ from that reported to shareholders on Form
1099-DIV. Foreign taxes have been provided for on interest and dividend income
earned on foreign investments in accordance with the applicable country's tax
rates and to the extent unrecoverable are recorded as a reduction of
investment income. Distributions to shareholders are recorded on the ex-
dividend date.
The Fund distinguishes between distributions on a tax basis and a financial
reporting basis and requires that only distributions in excess of tax basis
earnings and profits are reported in the financial statements as a tax return
of capital. Differences in the recognition or classification of income between
the financial statements and tax earnings and profits which result in
temporary over-distributions for financial statement purposes, are classified
as distributions in excess of net investment income or accumulated net
realized gains. During the year ended November 30, 1996, $615,000 was
reclassified to accumulated undistributed net realized gain on investments and
foreign currency transactions from accumulated undistributed net investment
income due to differences between book and tax accounting for foreign currency
transactions. 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 Class A,
Class B, and Class C shares. The three classes of shares differ in their
respective shareholder servicing agent, distribution and service fees. All
shareholders bear the common expenses of the Fund pro rata based on the
average daily net assets of each class, without distinction between share
classes. Dividends are declared separately for each class. No class has
preferential dividend rights; differences in per share dividend rates are
generally due to differences in separate class expenses.
(3) Transactions with Affiliates
Investment Adviser - The Fund has an investment advisory agreement with
Massachusetts Financial Services Company (MFS) to provide overall investment
advisory and administrative services, and general office facilities. The
management fee is computed daily and paid monthly at an annual rate of 0.75%
of average daily net assets.
The Fund pays no compensation directly to its Trustees who are officers of the
investment adviser, or to officers of the Fund, all of whom receive
remuneration for their services to the Fund from MFS. Certain of the officers
and Trustees of the Fund are officers or directors of MFS, MFS Fund
Distributors, Inc. (MFD), and MFS Service Center, Inc. (MFSC). The Fund has an
unfunded defined benefit plan for all its independent Trustees and Mr. Bailey.
Included in Trustees' compensation is a net periodic pension expense of $9,549
for the year ended November 30, 1996.
Distributor - MFD, a wholly owned subsidiary of MFS, as distributor, received
$511,805 for the year ended November 30, 1996 as its portion of the sales
charge on sales of Class A shares of the Fund. The Trustees have adopted
separate distribution plans for Class A, Class B, and Class C shares pursuant
to Rule 12b-1 of the Investment Company Act of 1940 as follows:
The Class A distribution plan provides that the Fund will pay MFD up to 0.35%
per annum of its average daily net assets attributable to Class A shares in
order that MFD may pay expenses on behalf of the Fund related to the
distribution and servicing of its shares. These expenses include a service fee
to each securities dealer that enters into a sales agreement with MFD of up to
0.25% per annum of the Fund's average daily net assets attributable to Class A
shares which are attributable to that securities dealer, a distribution fee to
MFD of up to 0.10% per annum of the Fund's average daily net assets
attributable to Class A shares, commissions to dealers and payments to MFD
wholesalers for sales at or above a certain dollar level, and other such
distribution-related expenses that are approved by the Fund. MFD retains the
service fee for accounts not attributable to a securities dealer which
amounted to $1,808 for the year ended November 30, 1996. Payment of the 0.10%
per annum Class A distribution fee will commence on such date as the Trustees
of the Trust may determine. Fees incurred under the distribution plan during
the year ended November 30, 1996 were 0.25% of average daily net assets
attributable to Class A shares on an annualized basis.
The Class B and Class C distribution plans provide that the Fund will pay MFD
a distribution fee of 0.75% per annum, and a service fee of up to 0.25% per
annum, of the Fund's average daily net assets attributable to Class B and
Class C shares. MFD will pay to securities dealers that enter into a sales
agreement with MFD all or a portion of the service fee attributable to Class B
and Class C shares, and will pay to such securities dealers all of the
distribution fee attributable to Class C shares. The service fee is intended
to be additional consideration for services rendered by the dealer with
respect to Class B and Class C shares. MFD retains the service fee for
accounts not attributable to a securities dealer, which amounted to $165,371
and $8,002 for Class B and Class C shares, respectively, for the year ended
November 30, 1996. Fees incurred under the distribution plans during the year
ended November 30, 1996 were 1.00% of average daily net assets attributable to
Class B and Class C shares on an annualized basis.
Purchases over $1 million of Class A shares are subject to a contingent
deferred sales charge in the event of a shareholder redemption within 12
months following such purchase. A contingent deferred sales charge is imposed
on shareholder redemptions of Class B shares in the event of a shareholder
redemption within six years of purchase. A contingent deferred sales charge is
imposed on shareholder redemptions of Class C shares in the event of a
shareholder redemption within 12 months of purchases made on or after April 1,
1996. MFD receives all contingent deferred sales charges. Contingent deferred
sales charges imposed during the year ended November 30, 1996 were $139,302,
$13,250 and $317 for Class A, Class B and Class C shares, respectively.
Shareholder Servicing Agent - MFSC, a wholly owned subsidiary of MFS, earns a
fee for its services as shareholder servicing agent. The fee is calculated as
a percentage of the 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 U.S. government securities,
purchased option transactions and short-term obligations, aggregated
$743,865,094 and $465,435,387, 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 $645,324,954
============
Gross unrealized appreciation $ 91,201,745
Gross unrealized depreciation (31,708,592)
------------
Net unrealized appreciation $ 59,493,153
============
(5) Shares of Beneficial Interest
The Fund's Declaration of Trust permits the Trustees to issue an unlimited
number of full and fractional shares of beneficial interest (without par
value). Transactions in Fund shares were as follows:
Class A Shares
Year Ended November 30, 1996 1995
------------------------ -----------------------
Shares Amount Shares Amount
- ----------------------- -----------------------------------------------------
Shares sold 19,830,731 $247,848,654 7,410,621 $ 79,382,430
Shares issued to
shareholders in
reinvestment of
distributions 1,739,061 19,947,385 1,133,703 9,953,735
Shares reacquired (7,905,513) (98,473,592) (5,202,592) (54,439,794)
---------- ------------ --------- ------------
Net increase 13,664,279 $169,322,447 3,341,732 $ 34,896,371
========== ============ ========= ============
Class B Shares
Year Ended November 30, 1996 1995
------------------------ -----------------------
Shares Amount Shares Amount
- ---------------------- -----------------------------------------------------
Shares sold 16,436,561 $202,564,032 3,211,010 $ 33,345,621
Shares issued to
shareholders in
reinvestment of
distributions 348,040 3,918,873 139,959 1,215,051
Shares reacquired (1,804,198) (22,222,748) (1,399,842) (14,336,918)
---------- ------------ --------- ------------
Net increase 14,980,403 $184,260,157 1,951,127 $ 20,223,754
========== ============ ========= ============
Class C Shares
Year Ended November 30, 1996
------------------------
Shares Amount
- ---------------------- ------------------------
Shares sold 2,695,641 $33,598,864
Shares issued to
shareholders in
reinvestment of
distributions -- --
Shares reacquired (245,245) (3,040,411)
--------- -----------
Net increase 2,450,396 $30,558,453
========= ===========
(6) Line of Credit
The Fund entered into an agreement which enables it to participate with other
funds managed by MFS in an unsecured line of credit with a bank which permits
borrowings up to $350 million, collectively. Borrowings may be made to
temporarily finance the repurchase of Fund shares. Interest is charged to each
fund, based on its borrowings, at a rate equal to the bank's base rate. In
addition, a commitment fee, based on the average daily unused portion of the
line of credit, is allocated among the participating funds at the end of each
quarter. The commitment fee allocated to the Fund for the year ended November
30, 1996 was $5,346.
(7) Financial Instruments
The Fund 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 forward foreign currency exchange contracts and
futures contracts. The notional or contractual amounts of these instruments
represent the investment the Fund has in particular classes of financial
instruments and do 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, 1996
is as follows:
Forward Foreign Currency Exchange Contracts
<TABLE>
<CAPTION>
Contracts Contracts Net Unrealized
Settlement Date to Deliver In Exchange for at Value Depreciation
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Sales 12/12/96 ITL 3,264,770,000 $2,149,719 $2,152,733 $(3,014)
=======
</TABLE>
ITL = Italian Lire
At November 30, 1996, 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, 1996, is set forth below:
Acquisitions
Beginning ------------------- Ending
Share Share Share Ending
Affiliate Amount Amount Cost Amount Value
- --------------------------------------------------------------------------------
Cellular
Communications
International 28,400 594,700 $17,412,388 623,100 $16,434,263
Harvard Industries,
Inc. 360,000 18,400 137,897 378,400 1,892,000
-----------
$18,326,263
===========
(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,
1996, the Fund owned the following restricted security (constituting 0.65% 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
security be registered. The value of this security is determined by valuations
supplied by a pricing service or brokers.
<TABLE>
<CAPTION>
Share
Description Date of Acquisition Amount Cost Value
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Jarvis Hotels Ltd. 6/21/96 - 8/23/96 1,612,600 $4,219,398 $4,581,074
==========
</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 (a separate series
of MFS Series Trust VII) as of November 30, 1996, the related statement of
operations for the year then ended, the statement of changes in net assets for
the years ended November 30, 1996 and 1995, and the financial highlights for
each of the years in the eleven-year period ended November 30, 1996. 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, 1996 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, 1996, 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, 1997
--------------------------------------------
This report is prepared for the general information of shareholders. It is
authorized for distribution to prospective investors only when preceded or
accompanied by a current prospectus.
<PAGE>
<TABLE>
MFS(R) VALUE FUND
<S> <C>
TRUSTEES AUDITORS
A. Keith Brodkin* - Chairman and President Deloitte & Touche LLP
Richard B. Bailey* - Private Investor; INVESTOR INFORMATION
Former Chairman and Director (until 1991), For MFS stock and bond market outlooks,
Massachusetts Financial Services Company; call toll free: 1-800-637-4458 anytime from
Director, Cambridge Bancorp; Director, a touch-tone telephone.
Cambridge Trust Company
For information on MFS mutual funds,
Peter G. Harwood - Private Investor call your financial adviser or, for an
information kit, call toll free:
J. Atwood Ives - Chairman and Chief Executive 1-800-637-2929 any business day from
Officer, Eastern Enterprises 9 a.m. to 5 p.m. Eastern time (or leave
a message anytime).
Laurence T. Perera - Partner, Hemenway &
Barnes INVESTOR SERVICE
MFS Service Center, Inc.
William J. Poorvu - Adjunct Professor, Harvard P.O. Box 2281
University Graduate School of Business Boston, MA 02107-9906
Administration
For general information, call toll free:
Charles W. Schmidt - Private Investor 1-800-225-2606 any business day from
8 a.m. to 8 p.m. Eastern time.
Arnold D. Scott* - Senior Executive Vice
President, Director and Secretary, For service to speech- or hearing-impaired,
Massachusetts Financial Services Company call toll free: 1-800-637-6576 any business
day from 9 a.m. to 5 p.m. Eastern time.
Jeffrey L. Shames* - President and Director, (To use this service, your phone must be equipped
Massachusetts Financial Services Company with a Telecommunications Device for the Deaf.)
Elaine R. Smith - Independent Consultant For share prices, account balances, and
exchanges, call toll free: 1-800-MFS-TALK
David B. Stone - Chairman, North American (1-800-637-8255) anytime from a touch-tone
Management Corp. (investment advisers) telephone.
INVESTMENT ADVISER WORLD WIDE WEB
Massachusetts Financial Services Company www.mfs.com
500 Boylston Street
Boston, MA 02116-3741
DISTRIBUTOR
MFS Fund Distributors, Inc.
500 Boylston Street ------------------------------------------------
Boston, MA 02116-3741 [DALBAR For the third year in a row,
LOGO] MFS earned a #1 ranking in the
PORTFOLIO MANAGER TOP RATED DALBAR, Inc. Broker/Dealer
John F. Brennan, Jr.* SERVICE Survey, Main Office Operations
Service Quality Category. The
TREASURER firm achieved a 3.48 overall score on a
W. Thomas London* scale of 1 to 4 in the 1996 survey. A total
of 110 firms responded, offering input on the
ASSISTANT TREASURER quality of service they received from 29
James O. Yost* mutual fund companies nationwide. The survey
contained questions about service quality in
SECRETARY 15 categories, including "knowledge of phone
Stephen E. Cavan* service contacts," "accuracy of transaction
processing," and "overall ease of doing
ASSISTANT SECRETARY business with the firm."
James R. Bordewick, Jr.* ------------------------------------------------
CUSTODIAN
Investors Bank & Trust Company
*Affiliated with the Investment Adviser
</TABLE>
<PAGE>
MFS(R) VALUE -------------
UND [LOGO: NUMBER 1 DALBAR BULK RATE
TOP-RATED SERVICE] U.S. POSTAGE
PAID
500 Boylston Street PERMIT #55638
Boston, MA 02116 BOSTON, MA
-------------
[LOGO: M F S(SM)]
INVESTMENT MANAGEMENT
WE INVENTED THE MUTUAL FUND(SM)
(C)1997 MFS Fund Distributors, Inc., 500 Boylston Street, Boston MA 02116
MVF-2 1/97 67M 23/223/323
<PAGE> 141
PART C
------
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS
---------------------------------
MFS WORLD GOVERNMENTS FUND
--------------------------
<TABLE>
<S> <C>
(A) FINANCIAL STATEMENTS INCLUDED IN PART A:
For the seven years in the period ended December 31,
1992, for the period from January 1, 1993 to
November 30, 1993 and for the three years ended
November 30, 1996:
Financial Highlights
FINANCIAL STATEMENTS INCLUDED IN PART B:
At November 30, 1996:
Portfolio of Investments*
Statement of Assets and Liabilities*
For the year ended November 30, 1996:
Statement of Operations*
For the two years in the period ended November 30, 1996:
Statement of Changes in Net Assets*
MFS VALUE FUND
--------------
(A) FINANCIAL STATEMENTS INCLUDED IN PART A:
For the four years in the period ended May 31, 1990,
for the six month period ended November 30, 1990 and
for the six years ended November 30, 1996:
Financial Highlights
FINANCIAL STATEMENTS INCLUDED IN PART B:
At November 30, 1996:
Portfolio of Investments**
Statement of Assets and Liabilities**
For the year ended November 30, 1996:
Statement of Operations**
For the two years in the period ended November 30, 1996:
Statement of Changes in Net Assets**
- -----------------------------
* Incorporated herein by reference to MFS World Governments Fund's Annual
Report to Shareholders dated November 30, 1996 filed with the SEC on
February 3, 1997.
** Incorporated herein by reference to MFS Value Fund's Annual Report to
Shareholders dated November 30, 1996 filed with the SEC on February 3, 1997.
</TABLE>
<PAGE> 142
<TABLE>
<S> <C>
(b) EXHIBITS:
1 (a) Declaration of Trust Amended and Restated, January 18, 1995. (5)
(b) Amendment to the Declaration of Trust, dated March 13, 1996. (7)
(c) Amendment to Declaration of Trust, dated June 20, 1996. (9)
(d) Amendment to Declaration of Trust, dated December 19, 1996; filed herewith.
2 By-Laws as Amended and Restated, January 6, 1995. (5)
3 Not Applicable.
4 Form of Share Certificate representing ownership of the Registrant's
Classes of Shares. (8)
5 (a) Investment Advisory Agreement dated May 20, 1982, by and between the
Registrant and Massachusetts Financial Services Company. (6)
(b) Investment Advisory Agreement for MFS Value Fund, dated September
1, 1993. (6)
6 (a) Distribution Agreement dated January 1, 1995. (5)
(b) Dealer Agreement between MFS Fund Distributors, Inc. ("MFD") and a dealer,
dated December 28, 1994 and the Mutual Fund Agreement between MFD and a
bank or NASD affiliate, dated December 28, 1994. (4)
7 Retirement Plan for Non-Interested Person Trustees, dated January 1, 1991.
(6)
8 (a) Custodian Contract between Registrant and State Street Bank and Trust
Company, dated June 28, 1988. (6)
(b) Amendment to Custodian Contract between Registrant and State Street Bank
and Trust Company, dated October 1, 1989. (6)
(c) Amendment to Custodian Contract between Registrant and State Street Bank
and Trust Company dated June 28, 1988. (6)
(d) Amendment to Custodian Contract between Registrant and State Street Bank
and Trust Company dated September 17, 1991. (6)
</TABLE>
<PAGE> 143
<TABLE>
<S> <C>
9 (a) Shareholder Servicing Agent Agreement between Registrant and Massachusetts
Financial Service Center, dated August 1, 1985. (6)
(b) Amendment to Shareholder Servicing Agent Agreement dated January
1, 1997; filed herewith.
(c) Exchange Privilege Agreement dated September 1, 1993, as amended and
restated through and including January 1, 1997. (12)
(d) Loan Agreement by and among the Banks named therein, the MFS
Fund named therein, and The First National Bank of Boston,
dated February 21, 1995. (3)
(e) Dividend Disbursing Agency Agreement dated February 1, 1986. (2)
(f) Master Administrative Services Agreement dated March 1, 1997. (10)
10 Opinion and Consent of Counsel filed with the Registrant's 24f-2 Notice for the
fiscal year ended November 30, 1996 on January 28, 1997.
11 (a) Consent of Ernst & Young LLP - MFS World Governments; filed herewith.
(b) Consent of Deloitte & Touche LLP - MFS Value Fund; filed herewith.
12 Not Applicable.
13 Investment Representation Letter dated February 18, 1991. (6)
14 (a) Forms for Individual Retirement Account Disclosure Statement as currently
in effect. (1)
(b) Forms for MFS 403(b) Custodial Account Agreement as currently in effect.(1)
(c) Forms for MFS Prototype Paired Defined Contribution Plans and Trust
Agreement as currently in effect. (1)
15 Master Distribution Plan pursuant to 12b-1 under the Investment Company Act
of 1940, effective January 1, 1997. (13)
16 Schedule for Computation of Performance Quotations - Aggregate and Average
Annual Total Rate of Return, Distribution Rate and Yield Calculations. (5)
</TABLE>
<PAGE> 144
<TABLE>
<S> <C>
17 Financial Data Schedules; filed herewith.
18 Plan pursuant to Rule 18f-3(d) under the Investment Company Act of
1940. (8)
Power-of-Attorney dated September 21, 1994. (5)
<FN>
- -----------------------------
(1) Incorporated by reference to MFS Series Trust IX (File Nos. 2-50409 and 811-2464 Post-Effective Amendment
No. 32 filed with the SEC via EDGAR on August 28, 1995.
(2) Incorporated by reference to MFS Municipal Series Trust (File Nos. 2-92915 and 811-4096 Post-Effective
Amendment No. 28 filed with the SEC via EDGAR on July 28, 1995.
(3) Incorporated by reference to Amendment No. 8 on Form N-2 for MFS Municipal Income Trust (File No. 811-4841)
filed with the SEC via EDGAR on February 28, 1995.
(4) Incorporated by reference to MFS Municipal Series Trust (File Nos. 2-92915 and 811-4096) Post-Effective
Amendment No. 26 filed with the SEC via EDGAR on February 22, 1995.
(5) Incorporated by reference to Registrant's Post-Effective Amendment No. 19 filed with the SEC via EDGAR on
March 30, 1995.
(6) Incorporated by reference to Registrant's Post-Effective Amendment No. 20 filed with the SEC via EDGAR on
December 31, 1995.
(7) Incorporated by reference to Registrant's Post-Effective Amendment No. 21 filed with the SEC via EDGAR on
March 29, 1996.
(8) Incorporated by reference to MFS Series Trust I (File Nos. 33-7638 and 811-4777) Post-Effective Amendment
No. 25 filed with the SEC via EDGAR on August 27, 1996.
(9) Incorporated by reference to Registrant's Post-Effective Amendment No. 22 filed with the SEC via EDGAR on
August 28, 1996.
(10) Incorporated by reference to MFS/Sun Life Series Trust (File Nos. 2-83616 and 811-3732) Post-Effective
Amendment No. 19 filed with the SEC via EDGAR on March 18, 1997.
(11) Incorporated by reference to MFS Series Trust I (File Nos. 33-7638 and 811-4777) Post-Effective Amendment
No. 27 filed with the SEC via EDGAR on December 27, 1996.
(12) Incorporated by reference to MFS Series Trust VIII (File Nos. 33-37972 and 811-5262) Post-Effective
Amendment No. 13 filed with the SEC via EDGAR on February 27, 1997.
(13) Incorporated by reference to MFS Series Trust IV (File Nos. 2-54607 and 811-2594) Post-Effective Amendment
No. 30 filed with the SEC via EDGAR on December 27, 1996.
</TABLE>
ITEM 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT.
Not Applicable.
<PAGE> 145
ITEM 26. NUMBER OF HOLDERS OF SECURITIES
FOR MFS WORLD GOVERNMENTS FUND
------------------------------
(1) (2)
TITLE OF CLASS NUMBER OF RECORD HOLDERS
Class A Shares of Beneficial Interest 16,561
(without par value) (as at February 28, 1997)
Class B Shares of Beneficial Interest 6,937
(without par value) (as at February 28, 1997)
Class C Shares of Beneficial Interest 681
(without par value) (as at February 28, 1997)
Class I Shares of Beneficial Interest 4
(without par value) (as at February 28, 1997)
FOR MFS VALUE FUND
------------------
(1) (2)
TITLE OF CLASS NUMBER OF RECORD HOLDERS
Class A Shares of Beneficial Interest 34,232
(without par value) (as at February 28, 1997)
Class B Shares of Beneficial Interest 24,603
(without par value) (as at February 28, 1997)
Class C Shares of Beneficial Interest 1,803
(without par value) (as at February 28, 1997)
Class I Shares of Beneficial Interest 5
(without par value) (as at February 28, 1997)
ITEM 27. INDEMNIFICATION
---------------
Reference is hereby made to (a) Article V of Registrant's Declaration of
Trust, amended and restated, January 18, 1995, incorporated by reference to
Registrant's Post-Effective Amendment No. 19 filed with the SEC via EDGAR on
March 30, 1995, and (b) Section 9 of the Shareholder Servicing Agent Agreement,
incorporated by reference to Registrant's Post-Effective Amendment No. 20 filed
with the SEC via EDGAR on December 31, 1995.
The Trustees and officers of the Registrant and the personnel of the
Registrant's Investment adviser and distributor are insured under an errors and
omissions liability insurance policy. The
<PAGE> 146
Registrant and its officers are also insured under the fidelity bond required by
Rule 17g-1 under the Investment Company Act of 1940.
ITEM 28. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER
----------------------------------------------------
MFS serves as investment adviser to the following open-end Funds comprising
the MFS Family of Funds: Massachusetts Investors Trust, Massachusetts Investors
Growth Stock Fund, MFS Growth Opportunities Fund, MFS Government Securities
Fund, MFS Government Limited Maturity Fund, MFS Series Trust I (which has
thirteen series: MFS Managed Sectors Fund, MFS Cash Reserve Fund, MFS World
Asset Allocation Fund, MFS Aggressive Growth Fund, MFS Research Growth and
Income Fund, MFS Core Growth Fund, MFS Equity Income Fund, MFS Special
Opportunities Fund, MFS Convertible Securities Fund, MFS Blue Chip Fund, MFS New
Discovery Fund, MFS Science and Technology Fund and MFS Research International
Fund), MFS Series Trust II (which has four series: MFS Emerging Growth Fund, MFS
Capital Growth Fund, MFS Intermediate Income Fund and MFS Gold & Natural
Resources Fund), MFS Series Trust III (which has two series: MFS High Income
Fund and MFS Municipal High Income Fund), MFS Series Trust IV (which has four
series: MFS Money Market Fund, MFS Government Money Market Fund, MFS Municipal
Bond Fund and MFS OTC Fund), MFS Series Trust V (which has two series: MFS Total
Return Fund and MFS Research Fund), MFS Series Trust VI (which has three series:
MFS World Total Return Fund, MFS Utilities Fund and MFS World Equity Fund), MFS
Series Trust VII (which has two series: MFS World Governments Fund and MFS Value
Fund), MFS Series Trust VIII (which has two series: MFS Strategic Income Fund
and MFS World Growth Fund), MFS Series Trust IX (which has three series: MFS
Bond Fund, MFS Limited Maturity Fund and MFS Municipal Limited Maturity Fund),
MFS Series Trust X (which has four series: MFS Government Mortgage Fund,
MFS/Foreign & Colonial Emerging Markets Equity Fund, MFS/Foreign & Colonial
International Growth Fund and MFS/Foreign & Colonial International Growth and
Income Fund), and MFS Municipal Series Trust (which has 16 series: MFS Alabama
Municipal Bond Fund, MFS Arkansas Municipal Bond Fund, MFS California Municipal
Bond Fund, MFS Florida Municipal Bond Fund, MFS Georgia Municipal Bond Fund, MFS
Maryland Municipal Bond Fund, MFS Massachusetts Municipal Bond Fund, MFS
Mississippi Municipal Bond Fund, MFS New York Municipal Bond Fund, MFS North
Carolina Municipal Bond Fund, MFS Pennsylvania Municipal Bond Fund, MFS South
Carolina Municipal Bond Fund, MFS Tennessee Municipal Bond Fund, MFS Virginia
Municipal Bond Fund, MFS West Virginia Municipal Bond Fund and MFS Municipal
Income Fund) (the "MFS Funds"). The principal business address of each of the
MFS Funds is 500 Boylston Street, Boston, Massachusetts 02116.
MFS also serves as investment adviser of the following no-load, open-end
Funds: MFS Institutional Trust ("MFSIT") (which has seven series), MFS Variable
Insurance Trust ("MVI") (which has twelve series) and MFS Union Standard Trust
("UST"). The principal business address of each of the aforementioned funds is
500 Boylston Street, Boston, Massachusetts 02116.
In addition, MFS serves as investment adviser to the following closed-end
funds: MFS Municipal Income Trust, MFS Multimarket Income Trust, MFS Government
Markets Income Trust, MFS Intermediate Income Trust, MFS Charter Income Trust
and MFS Special Value Trust (the "MFS Closed-End Funds"). The principal business
address of each of the MFS Closed-End Funds is 500 Boylston Street, Boston,
Massachusetts 02116.
<PAGE> 147
Lastly, MFS serves as investment adviser to MFS/Sun Life Series Trust
("MFS/SL"), Money Market Variable Account, High Yield Variable Account, Capital
Appreciation Variable Account, Government Securities Variable Account, World
Governments Variable Account, Total Return Variable Account and Managed Sectors
Variable Account. The principal business address of each of the aforementioned
funds is One Sun Life Executive Park, Wellesley Hills, Massachusetts 02181.
MFS International Ltd. ("MIL"), a limited liability company organized under
the laws of Bermuda and a subsidiary of MFS, whose principal business address is
Cedar House, 41 Cedar Avenue, Hamilton HM12 Bermuda, serves as investment
adviser to and distributor for MFS American Fund (which has six portfolios: MFS
American Funds-U.S. Equity Fund, MFS American Funds-U.S. Emerging Growth Fund,
MFS American Funds-U.S. High Yield Bond Fund, MFS American Funds - U.S. Dollar
Reserve Fund, MFS American Funds-Charter Income Fund and MFS American Funds-U.S.
Research Fund) (the "MIL Funds"). The MIL Funds are organized in Luxembourg and
qualify as an undertaking for collective investments in transferable securities
(UCITS). The principal business address of the MIL Funds is 47, Boulevard Royal,
L-2449 Luxembourg.
MIL also serves as investment adviser to and distributor for MFS Meridian
U.S. Government Bond Fund, MFS Meridian Charter Income Fund, MFS Meridian Global
Government Fund, MFS Meridian U.S. Emerging Growth Fund, MFS Meridian Global
Equity Fund, MFS Meridian Limited Maturity Fund, MFS Meridian World Growth Fund,
MFS Meridian Money Market Fund, MFS Meridian World Total Return Fund, MFS
Meridian U.S. Equity Fund, MFS Meridian Research Fund and MFS Emerging Markets
Debt Fund (collectively the "MFS Meridian Funds"). Each of the MFS Meridian
Funds is organized as an exempt company under the laws of the Cayman Islands.
The principal business address of each of the MFS Meridian Funds is P.O. Box
309, Grand Cayman, Cayman Islands, British West Indies.
MFS International (U.K.) Ltd. ("MIL-UK"), a private limited company
registered with the Registrar of Companies for England and Wales whose current
address is 4 John Carpenter Street, London, England ED4Y 0NH, is involved
primarily in marketing and investment research activities with respect to
private clients and the MIL Funds and the MFS Meridian Funds.
MFS Fund Distributors, Inc. ("MFD"), a wholly owned subsidiary of MFS,
serves as distributor for the MFS Funds, MVI, UST and MFSIT.
Clarendon Insurance Agency, Inc. ("CIAI"), a wholly owned subsidiary of
MFS, serves as distributor for certain life insurance and annuity contracts
issued by Sun Life Assurance Company of Canada (U.S.).
MFS Service Center, Inc. ("MFSC"), a wholly owned subsidiary of MFS, serves
as shareholder servicing agent to the MFS Funds, the MFS Closed-End Funds,
MFSIT, MVI and UST.
MFS Institutional Advisors, Inc. ("MFSI"), a wholly owned subsidiary of
MFS, provides investment advice to substantial private clients.
MFS Retirement Services, Inc. ("RSI"), a wholly owned subsidiary of MFS,
markets MFS products to retirement plans and provides administrative and record
keeping services for retirement plans.
<PAGE> 148
MFS
The Directors of MFS are A. Keith Brodkin, Jeffrey L. Shames, Arnold D.
Scott, Donald A. Stewart and John D. McNeil. Mr. Brodkin is the Chairman, Mr.
Shames is the President, Mr. Scott is a Senior Executive Vice President and
Secretary, Bruce C. Avery, William S. Harris, William W. Scott, Jr., and
Patricia A. Zlotin are Executive Vice Presidents, Stephen E. Cavan is a Senior
Vice President, General Counsel and an Assistant Secretary, Robert T. Burns is a
Senior Vice President, Associate General Counsel and an Assistant Secretary of
MFS, and Thomas B. Hastings is a Vice President and Treasurer of MFS.
MASSACHUSETTS INVESTORS TRUST
MASSACHUSETTS INVESTORS GROWTH STOCK FUND
MFS GROWTH OPPORTUNITIES FUND
MFS GOVERNMENT SECURITIES FUND
MFS SERIES TRUST I
MFS SERIES TRUST V
MFS SERIES TRUST VI
MFS SERIES TRUST X
MFS GOVERNMENT LIMITED MATURITY FUND
A. Keith Brodkin is the Chairman and President, Stephen E. Cavan is the
Secretary, W. Thomas London is the Treasurer, James O. Yost, Vice President of
MFS, is the Assistant Treasurer, James R. Bordewick, Jr., Senior Vice President
and Associate General Counsel of MFS, is the Assistant Secretary.
MFS SERIES TRUST II
A. Keith Brodkin is the Chairman and President, Leslie J. Nanberg, Senior
Vice President of MFS, is a Vice President, Stephen E. Cavan is the Secretary,
W. Thomas London is the Treasurer, James O. Yost is the Assistant Treasurer, and
James R. Bordewick, Jr., is the Assistant Secretary.
MFS GOVERNMENT MARKETS INCOME TRUST
MFS INTERMEDIATE INCOME TRUST
A. Keith Brodkin is the Chairman and President, Leslie J. Nanberg, Senior
Vice President of MFS, is a Vice President, Stephen E. Cavan is the Secretary,
W. Thomas London is the Treasurer, James O. Yost is the Assistant Treasurer, and
James R. Bordewick, Jr., is the Assistant Secretary.
<PAGE> 149
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, Assistant Vice
President of MFS, and Daniel E. McManus, Vice President of MFS, are Assistant
Vice Presidents, Stephen E. Cavan is the Secretary, W. Thomas London is the
Treasurer, James O. Yost is the Assistant Treasurer, and James R. Bordewick,
Jr., is the Assistant Secretary.
MFS SERIES TRUST IV
MFS SERIES TRUST IX
A. Keith Brodkin is the Chairman and President, Robert A. Dennis and
Geoffrey L. Kurinsky, Senior Vice Presidents of MFS, are Vice Presidents,
Stephen E. Cavan is the Secretary, W. Thomas London is the Treasurer, James O.
Yost is the Assistant Treasurer and James R. Bordewick, Jr., is the Assistant
Secretary.
MFS SERIES TRUST VII
A. Keith Brodkin is the Chairman and President, Leslie J. Nanberg and
Stephen C. Bryant, Senior Vice Presidents of MFS, are Vice Presidents, Stephen
E. Cavan is the Secretary, W. Thomas London is the Treasurer, James O. Yost is
the Assistant Treasurer and James R. Bordewick, Jr., is the Assistant Secretary.
MFS SERIES TRUST VIII
A. Keith Brodkin is the Chairman and President, Jeffrey L. Shames, Leslie
J. Nanberg, Patricia A. Zlotin, James T. Swanson and John D. Laupheimer, Jr.,
Vice President of MFS, are Vice Presidents, Stephen E. Cavan is the Secretary,
W. Thomas London is the Treasurer, James O. Yost is the Assistant Treasurer and
James R. Bordewick, Jr., is the Assistant Secretary.
MFS MUNICIPAL SERIES TRUST
A. Keith Brodkin is the Chairman and President, Cynthia M. Brown and Robert
A. Dennis are Vice Presidents, David B. Smith, Geoffrey L. Schechter and David
R. King, Vice Presidents of MFS, are Vice Presidents, Daniel E. McManus, Vice
President of MFS, is an Assistant Vice President, Stephen E. Cavan is the
Secretary, W. Thomas London is the Treasurer, James O. Yost is the Assistant
Treasurer and James R. Bordewick, Jr., is the Assistant Secretary.
<PAGE> 150
MFS VARIABLE INSURANCE TRUST
MFS UNION STANDARD TRUST
MFS INSTITUTIONAL TRUST
A. Keith Brodkin is the Chairman and President, Stephen E. Cavan is the
Secretary, W. Thomas London is the Treasurer, James O. Yost is the Assistant
Treasurer and James R. Bordewick, Jr., is the Assistant Secretary.
MFS MUNICIPAL INCOME TRUST
A. Keith Brodkin is the Chairman and President, Cynthia M. Brown and Robert
J. Manning are Vice Presidents, Stephen E. Cavan is the Secretary, W. Thomas
London is the Treasurer, James O. Yost, is the Assistant Treasurer and James R.
Bordewick, Jr., is the Assistant Secretary.
MFS MULTIMARKET INCOME TRUST
MFS CHARTER INCOME TRUST
A. Keith Brodkin is the Chairman and President, Leslie J. Nanberg and James
T. Swanson are Vice Presidents, Stephen E. Cavan is the Secretary, W. Thomas
London is the Treasurer, James O. Yost, Vice President of MFS, is the Assistant
Treasurer and James R. Bordewick, Jr., is the Assistant Secretary.
MFS SPECIAL VALUE TRUST
A. Keith Brodkin is the Chairman and President, Jeffrey L. Shames and
Robert J. Manning are Vice Presidents, Stephen E. Cavan is the Secretary, W.
Thomas London is the Treasurer, James O. Yost, is the Assistant Treasurer and
James R. Bordewick, Jr., is the Assistant Secretary.
MFS/SUN LIFE SERIES TRUST
John D. McNeil, Chairman and Director of Sun Life Assurance Company of
Canada, is the Chairman, Stephen E. Cavan is the Secretary, W. Thomas London is
the Treasurer, James O. Yost, is the Assistant Treasurer and James R. Bordewick,
Jr., is the Assistant Secretary.
MONEY MARKET VARIABLE ACCOUNT
HIGH YIELD VARIABLE ACCOUNT
CAPITAL APPRECIATION VARIABLE ACCOUNT
GOVERNMENT SECURITIES VARIABLE ACCOUNT
TOTAL RETURN VARIABLE ACCOUNT
WORLD GOVERNMENTS VARIABLE ACCOUNT
MANAGED SECTORS VARIABLE ACCOUNT
John D. McNeil is the Chairman, Stephen E. Cavan is the Secretary, and
James R. Bordewick, Jr., is the Assistant Secretary.
<PAGE> 151
MIL
A. Keith Brodkin is a Director and the Chairman, Arnold D. Scott and
Jeffrey L. Shames are Directors, Ziad Malek, Senior Vice President of MFS, is
the President, Thomas J. Cashman, Jr., a Senior Vice President of MFS, is a
Senior Vice President, Stephen E. Cavan is a Director, Senior Vice President and
the Clerk, James R. Bordewick, Jr. is a Director, Vice President and an
Assistant Clerk, Robert T. Burns is an Assistant Clerk, Joseph W. Dello Russo,
Senior Vice President and Chief Financial Officer of MFS, is the Treasurer and
Thomas B. Hastings is the Assistant Treasurer.
MIL-UK
A. Keith Brodkin is a Director and the Chairman, Arnold D. Scott, Jeffrey
L. Shames, and James R. Bordewick, Jr., are Directors, Stephen E. Cavan is a
Director and the Secretary, Ziad Malek is the President, James E. Russell is the
Treasurer, and Robert T. Burns is the Assistant Secretary.
MIL FUNDS
A. Keith Brodkin is the Chairman, President and a Director, Richard B.
Bailey, John A. Brindle, Richard W. S. Baker and William F. Waters are
Directors, Stephen E. Cavan is the Secretary, W. Thomas London is the Treasurer,
James O. Yost is the Assistant Treasurer and James R. Bordewick, Jr., is the
Assistant Secretary, and Ziad Malek is a Senior Vice President.
MFS MERIDIAN FUNDS
A. Keith Brodkin is the Chairman, President and a Director, Richard B.
Bailey, John A. Brindle, Richard W. S. Baker, Arnold D. Scott, Jeffrey L. Shames
and William F. Waters are Directors, Stephen E. Cavan is the Secretary, W.
Thomas London is the Treasurer, James R. Bordewick, Jr., is the Assistant
Secretary, James O. Yost is the Assistant Treasurer, and Ziad Malek is a Senior
Vice President.
MFD
A. Keith Brodkin is the Chairman and a Director, Arnold D. Scott and
Jeffrey L. Shames are Directors, William W. Scott, Jr., an Executive Vice
President of MFS, is the President, Stephen E. Cavan is the Secretary, Robert T.
Burns is the Assistant Secretary, Joseph W. Dello Russo is the Treasurer, and
Thomas B. Hastings is the Assistant Treasurer.
CIAI
A. Keith Brodkin is the Chairman and a Director, Arnold D. Scott and
Jeffrey L. Shames are Directors, Cynthia Orcott is President, Bruce C. Avery is
the Vice President, Joseph W. Dello Russo is the Treasurer, Thomas B. Hastings
is the Assistant Treasurer, Stephen E. Cavan is the Secretary, and Robert T.
Burns is the Assistant Secretary.
<PAGE> 152
MFSC
A. Keith Brodkin is the Chairman and a Director, Arnold D. Scott and
Jeffrey L. Shames are Directors, Joseph A. Recomendes, a Senior Vice President
of MFS, is Vice Chairman and a Director, Janet A. Clifford is the Executive Vice
President, Joseph W. Dello Russo is the Treasurer, Thomas B. Hastings is the
Assistant Treasurer, Stephen E. Cavan is the Secretary, and Robert T. Burns is
the Assistant Secretary.
MFSI
A. Keith Brodkin is the Chairman and a Director, Jeffrey L. Shames, and
Arnold D. Scott are Directors, Thomas J. Cashman, Jr., is the President and a
Director, Leslie J. Nanberg is a Senior Vice President, a Managing Director and
a Director, George F. Bennett, Carol A. Corley, John A. Gee, Brianne Grady and
Kevin R. Parke are Senior Vice Presidents and Managing Directors, Joseph W.
Dello Russo is the Treasurer, Thomas B. Hastings is the Assistant Treasurer and
Robert T. Burns is the Secretary.
RSI
William W. Scott, Jr. and Bruce C. Avery are Directors, Arnold D. Scott is
the Chairman and a Director, Joseph W. Dello Russo is the Treasurer, Thomas B.
Hastings is the Assistant Treasurer, Stephen E. Cavan is the Secretary, Robert
T. Burns is the Assistant Secretary and Sharon A. Brovelli and Martin E.
Beaulieu are Senior Vice Presidents.
In addition, the following persons, Directors or officers of MFS, have the
affiliations indicated:
A. Keith Brodkin Director, Sun Life Assurance Company of Canada
(U.S.), One Sun Life Executive Park,
Wellesley Hills, Massachusetts
Director, Sun Life Insurance and Annuity
Company of New York, 67 Broad Street,
New York, New York
Donald A. Stewart President and a Director, Sun Life Assurance
Company of Canada, Sun Life Centre, 150
King Street West, Toronto, Ontario,
Canada (Mr. Stewart is also an officer
and/or Director of various subsidiaries
and affiliates of Sun Life)
John D. McNeil Chairman, Sun Life Assurance Company of Canada,
Sun Life Centre, 150 King Street West,
Toronto, Ontario, Canada (Mr. McNeil is also
an officer and/or Director of various
subsidiaries and affiliates of Sun Life)
<PAGE> 153
Joseph W. Dello Russo Director of Mutual Fund Operations, The Boston
Company, Exchange Place, Boston,
Massachusetts (until August, 1994)
ITEM 29. DISTRIBUTORS
------------
(a) Reference is hereby made to Item 28 above.
(b) Reference is hereby made to Item 28 above; the principal
business address of each of these persons is 500 Boylston Street, Boston,
Massachusetts 02116.
(c) Not applicable.
ITEM 30. LOCATION OF ACCOUNTS AND RECORDS
--------------------------------
The accounts and records of the Registrant are located, in
whole or in part, at the office of the Registrant and the following locations:
NAME ADDRESS
---- -------
Massachusetts Financial Services 500 Boylston Street
Company (investment adviser) Boston, Mass. 02116
MFS Fund Distributors, 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 Street
(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> 154
(d) Insofar as indemnification for liability arising under the
Securities Act of 1933 may be permitted to trustees, officers and controlling
persons of the Registrant pursuant to the provisions set forth in Item 27 of
this Part C, or otherwise, the Registrant has been advised that in the opinion
of the Securities and Exchange Commission such indemnification is against public
policy as expressed in the Act and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the Registrant of expenses incurred or paid by a trustee, officer or
controlling person of the Registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the Securities being Registered, the Registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
<PAGE> 155
SIGNATURES
----------
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant certifies that it meets all of
the requirements for effectiveness of this Registration Statement pursuant to
Rule 485(b) under the Securities Act of 1933 and has duly caused this
Post-Effective Amendment to the Registration Statement to be signed on its
behalf by the undersigned, thereto duly authorized, in the City of Boston and
The Commonwealth of Massachusetts on the 26th day of March, 1997.
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 March 26, 1997.
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
<PAGE> 156
LAWRENCE T. PERERA* Trustee
- -----------------------
Lawrence T. Perera
WILLIAM J. POORVU* Trustee
- -----------------------
William J. Poorvu
CHARLES W. SCHMIDT* Trustee
- -----------------------
Charles W. Schmidt
ARNOLD D. SCOTT* Trustee
- -----------------------
Arnold D. Scott
JEFFREY L. SHAMES* Trustee
- -----------------------
Jeffrey L. Shames
ELAINE R. SMITH* Trustee
- -----------------------
Elaine R. Smith
DAVID B. STONE* Trustee
- -----------------------
David B. Stone
*By: JAMES R. BORDEWICK, JR.
-----------------------
Name: James R. Bordewick, Jr.
as Attorney-in-fact
Executed by James R. Bordewick, Jr. on behalf
of those indicated pursuant to a Power of
Attorney dated September 21, 1994;
incorporated by reference to Registrant's
Post-Effective Amendment No. 19 filed with
the SEC via EDGAR on March 30, 1995.
<PAGE> 157
INDEX TO EXHIBITS
-----------------
EXHIBIT NO. DESCRIPTION OF EXHIBIT PAGE NO.
- ----------- ---------------------- --------
1 (d) Amendment to Declaration of Trust, dated December 19, 1996.
9 (b) Amendment to Shareholder Servicing Agent Agreement dated
January 1, 1997.
11 (a) Consent of Ernst & Young LLP - MFS World Governments Fund.
(b) Consent of Deloitte & Touche LLP - MFS Value Fund.
27 Financial Data Schedules.
<PAGE> 1
EXHIBIT NO. 99.1(d)
MFS SERIES TRUST VII
CERTIFICATION OF AMENDMENT
TO THE DECLARATION OF TRUST
REDESIGNATION
OF CLASS P SHARES AS CLASS I SHARES
The undersigned, being a majority of the Trustees of MFS Series Trust VII
(the "Trust"), a business trust organized under the laws of The Commonwealth of
Massachusetts pursuant to an Amended and Restated Declaration of Trust dated
January 18, 1995 as amended (the "Declaration"), acting pursuant to Section 6.10
of the Declaration, do hereby redesignate the shares previously designated as
Class P shares of each series of the Trust as Class I shares.
<PAGE> 2
IN WITNESS WHEREOF, a majority of the Trustees of the Trust have executed
this amendment, in one or more counterparts, all constituting a single
instrument, as an instrument under seal in The Commonwealth of Massachusetts, as
of this 18th day of December, 1996.
A. KEITH BRODKIN CHARLES W. SCHMIDT
- --------------------- -----------------------
A. Keith Brodkin Charles W. Schmidt
76 Farm Road 63 Claypit Hill Road
Sherborn, MA 01770 Wayland, MA 01778
RICHARD B. BAILEY ARNOLD D. SCOTT
- --------------------- -----------------------
Richard B. Bailey Arnold D. Scott
63 Atlantic Avenue 20 Rowes Wharf
Boston, MA 02110 Boston, MA 02110
PETER G. HARWOOD
- --------------------- -----------------------
Peter G. Harwood Jeffrey L. Shames
211 Lindsay Pond Road 36 Lake Avenue
Concord, MA 01742 Newton, MA 02159
J. ATWOOD IVES ELAINE R. SMITH
- --------------------- -----------------------
J. Atwood Ives Elaine R. Smith
1 Bennington Road 75 Scotch Pine Road
Lexington, MA 02173 Weston, MA 02193
LAWRENCE T. PERERA DAVID B. STONE
- --------------------- -----------------------
Lawrence T. Perera David B. Stone
18 Marlborough Street 282 Beacon Street
Boston, MA 02116 Boston, MA 02116
WILLIAM J. POORVU
- ---------------------
William J. Poorvu
975 Memorial Drive
Cambridge, MA 02138
<PAGE> 1
EXHIBIT NO. 99.9(b)
MFS SERIES TRUST VII
500 BOYLSTON o BOSTON o MASSACHUSETTS 02116-3741
(617) o 954-5000
January 1, 1997
MFS Service Center, Inc.
500 Boylston Street
Boston, MA 02116
Dear Sir/Madam:
This will confirm our understanding that Exhibit B to the Shareholder
Servicing Agent Agreement between us, dated August 1, 1985, as amended, is
hereby amended, effective immediately, to read in its entirety as set forth on
Attachment 1 hereto.
Please indicate your acceptance of the foregoing by signing below.
Sincerely,
MFS Series Trust VII
By: W. THOMAS LONDON
----------------------
W. Thomas London
Treasurer
Accepted and Agreed:
MFS SERVICE CENTER, INC.
By: JOSEPH W. DELLO RUSSO
--------------------------
Joseph W. Dello Russo
Treasurer
<PAGE> 2
ATTACHMENT 1
January 1, 1997
EXHIBIT B TO THE SHAREHOLDER
SERVICING AGENT AGREEMENT BETWEEN
MFS SERVICE CENTER, INC. ("MFSC")
AND MFS SERIES TRUST VII (THE "FUND")
The fees to be paid by the Fund on behalf of its series with respect to all
shares of each series of the Fund to MFSC, for MFSC's services as shareholder
servicing agent, shall be 0.13% of the average daily net assets of the Fund.
<PAGE> 1
EXHIBIT NO. 99.11(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. 23 to Registration No. 2-68918
on form N-1A of our report dated January 8, 1997, on the financial statements
and financial highlights of MFS World Governments Fund, a portfolio of MFS
Series Trust VII, included in the November 30, 1996 Annual Report to
Shareholders.
Ernst & Young LLP
Boston, Massachusetts
March 24, 1997
<PAGE> 1
EXHIBIT NO. 99.11(b)
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in this Post-Effective
Amendment No. 23 to Registration Statement No. 2-68918 of MFS Series Trust VII
of our report dated January 3, 1997 appearing in the annual report to
shareholders for the year ended November 30, 1996 of MFS Value Fund, a series of
MFS Series Trust VII, 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, both of which
are part of such Registration Statement.
DELOITTE & TOUCHE LLP
Boston, Massachusetts
March 24, 1997
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