<PAGE> 1
As filed with the Securities and Exchange Commission on March 30, 1998
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. 26
AND
REGISTRATION STATEMENT
UNDER
THE INVESTMENT COMPANY ACT OF 1940
AMENDMENT NO. 27
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)
/X/ immediately upon filing pursuant to paragraph (b)
/ / on [date] pursuant to paragraph (b)
/ / 60 days after filing pursuant to paragraph (a)(i)
/ / on [date] pursuant to paragraph (a)(i)
/ / 75 days after filing pursuant to paragraph (a)(ii)
/ / on [date] pursuant to paragraph (a)(ii) of rule 485.
If appropriate, check the following box:
/ / this post-effective amendment designates a new effective date for a
previously filed post-effective amendment
================================================================================
<PAGE> 2
MFS SERIES TRUST VII
ON BEHALF OF MFS WORLD GOVERNMENTS FUND AND
MFS CAPITAL OPPORTUNITIES FUND
CROSS REFERENCE SHEET
(Pursuant to Rule 404 showing location in Prospectus and/or Statement of
Additional Information of the responses to the Items in Parts A and B of Form
N-1A)
STATEMENT OF
ITEM NUMBER ADDITIONAL
FORM N-1A, PART A PROSPECTUS CAPTION INFORMATION CAPTION
- ----------------- ------------------ -------------------
1 (a), (b) Front Cover Page *
2 (a) Expense Summary *
(b), (c) * *
3 (a) Condensed Financial *
Information
(b) * *
(c) Information Concerning *
Shares of the Fund -
Performance Information
(d) Condensed Financial *
Information
4 (a) Front Cover Page; The *
Fund; Investment Objective
and Policies; Certain Securities
and Investment Techniques
(b) Investment Objective and *
Policies; Certain Securities
and Investment Techniques;
Additional Risk Factors
<PAGE> 3
STATEMENT OF
ITEM NUMBER ADDITIONAL
FORM N-1A, PART A PROSPECTUS CAPTION INFORMATION CAPTION
(c) Investment Objective and *
Policies; Certain Securities
and Investment Techniques;
Additional Risk Factors
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) 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
<PAGE> 4
STATEMENT OF
ITEM NUMBER ADDITIONAL
FORM N-1A, PART A PROSPECTUS CAPTION INFORMATION CAPTION
(b), (c), (d) * *
(e) Shareholder Services *
(f) Information Concerning *
Shares of the Fund -
Distributions; Shareholder
Services - Distribution Options
(g) Information Concerning *
Shares of the Fund - Tax
Status; Information
Concerning Shares of the
Fund - Distributions
(h) The Fund *
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 Plan; Expense
Summary
(f) Information Concerning *
Shares of the Fund -
Distribution Plan
<PAGE> 5
STATEMENT OF
ITEM NUMBER ADDITIONAL
FORM N-1A, PART A PROSPECTUS CAPTION INFORMATION CAPTION
(g) Expense Summary; *
Information Concerning
Shares of the Fund -
Purchases; Information
Concerning Shares of the
Fund - Exchanges;
Information Concerning
Shares of the Fund -
Redemptions and Repurchases;
Information Concerning
Shares of the Fund -
Distribution Plan; Information
Concerning Shares of the Fund -
Distributions; Information
Concerning Shares of the
Fund - Performance
Information; Shareholder
Services
8 (a) Information Concerning *
Shares of the Fund - Redemptions
and Repurchases; Information
Concerning Shares of the Fund -
Purchases; 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 * *
<PAGE> 6
STATEMENT OF
ITEM NUMBER ADDITIONAL
FORM N-1A, PART B PROSPECTUS CAPTION INFORMATION CAPTION
10 (a), (b) * Front Cover Page
11 * Front Cover Page
12 The Fund Definitions
13 (a), (b), (c) * Investment Objective,
Policies and
Restrictions;
Certain Securities and
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 -
Administrator
(e) * Portfolio Transactions and
Brokerage Commissions
(f) Information Concerning Distribution Plan
Shares of the Fund -
Distribution Plan
(g) * *
<PAGE> 7
STATEMENT OF
ITEM NUMBER ADDITIONAL
FORM N-1A, PART B PROSPECTUS CAPTION INFORMATION CAPTION
(h) * Management of the Fund -
Custodian; Independent
Auditors and Financial
Statements; Back Cover
Page
(i) * Management of the Fund -
Shareholder Servicing
Agent
17 (a), (c), * Portfolio Transactions and
(d), (e) Brokerage Commissions
(b) * *
18 (a) Information Concerning Description of Shares
Shares of the Fund - Voting Rights and
Description of Liabilities
Shares, Voting Rights and
Liabilities
(b) * *
19 (a) Information Concerning Shareholder Services
Shares of the Fund -
Purchases; Shareholder
Services
(b) Information Concerning Management of the Fund -
Shares of the Fund - Net Distributor; Determination
Asset Value; Information of Net Asset Value and
Concerning Shares of the Performance - Net Asset
Fund - Purchases Value
(c) Information Concerning *
Shares of the Fund -
Redemptions and Repurchases
20 * Tax Status
21 (a) * Management of the Fund -
Distributor; Distribution
Plan
<PAGE> 8
STATEMENT OF
ITEM NUMBER ADDITIONAL
FORM N-1A, PART B PROSPECTUS CAPTION INFORMATION CAPTION
(b) * Management of the Fund -
Distributor; Distribution
Plan
(c) * *
22 (a) * *
(b) * Determination of Net
Asset Value and
Performance; Appendix A
23 * Independent Auditors
and Financial Statements
- -----------------------
* Not Applicable
** Contained in Annual Report
<PAGE> 9
[MASSACHUSETTS
WORLD
GOVERNMENTS
FUND LOGO AND
DATE]
PROSPECTUS
CLASS A SHARES OF BENEFICIAL INTEREST
CLASS B SHARES OF BENEFICIAL INTEREST
CLASS C SHARES OF BENEFICIAL INTEREST
- -------------------------------------------------------------
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 income
and capital appreciation. 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 MAY INVEST UP TO 35% OF ITS
TOTAL ASSETS IN LOWER-RATED NON-CONVERTIBLE DEBT SECURITIES,
COMMONLY KNOWN AS "JUNK BONDS," THAT ENTAIL GREATER RISKS,
INCLUDING DEFAULT RISKS, THAN THOSE FOUND IN HIGHER RATED
SECURITIES. INVESTORS SHOULD CAREFULLY CONSIDER THESE RISKS
BEFORE INVESTING (SEE "ADDITIONAL RISK FACTORS -- LOWER-RATED
FIXED INCOME SECURITIES"). The Fund's investment adviser and
distributor are Massachusetts Financial Services Company
("MFS" or the "Adviser") and MFS Fund Distributors, Inc.
("MFD"), respectively, both of which are located at 500
Boylston Street, Boston, Massachusetts 02116.
INVESTMENT PRODUCTS ARE NOT INSURED BY THE FDIC OR ANY OTHER
GOVERNMENT AGENCY, AND ARE NOT DEPOSITS OR OTHER OBLIGATIONS
OF, OR GUARANTEED BY, ANY FINANCIAL INSTITUTION. SHARES OF
MUTUAL FUNDS ARE SUBJECT TO INVESTMENT RISK, INCLUDING
POSSIBLE LOSS OF THE PRINCIPAL AMOUNT INVESTED, AND WILL
FLUCTUATE IN VALUE. YOU MAY RECEIVE MORE OR LESS THAN YOU
PAID WHEN YOU REDEEM YOUR SHARES.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR
ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
INVESTORS SHOULD READ THIS PROSPECTUS AND RETAIN IT FOR
FUTURE REFERENCE.
<PAGE> 10
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, 1998, 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 43 for a further description of the
information set forth in the SAI. A copy of the SAI may be obtained without
charge by contacting the Shareholder Servicing Agent (see back cover for address
and phone number). The SEC maintains an Internet World Wide Web Site
(http://www.sec.gov) that contains the SAI, materials that are incorporated by
reference into this Prospectus and the SAI, and other information regarding the
Fund. This Prospectus is available on the Adviser's Internet World Wide Web site
at http://www.mfs.com.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
1. Expense Summary......................................... 3
2. Condensed Financial Information......................... 4
3. The Fund................................................ 9
4. Investment Objective and Policies....................... 9
5. Certain Securities and Investment Techniques............ 11
6. Additional Risk Factors................................. 19
7. Management of the Fund.................................. 22
8. Information Concerning Shares of the Fund............... 24
Purchases............................................ 24
Exchanges............................................ 31
Redemptions and Repurchases.......................... 32
Distribution Plan.................................... 35
Distributions........................................ 38
Tax Status........................................... 38
Net Asset Value...................................... 39
Description of Shares, Voting Rights and
Liabilities....................................... 39
Performance Information.............................. 40
9. Shareholder Services.................................... 41
APPENDIX A.............................................. A-1
APPENDIX B.............................................. B-1
APPENDIX C.............................................. C-1
</TABLE>
2
<PAGE> 11
1. EXPENSE SUMMARY
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
SHAREHOLDER TRANSACTION EXPENSES: ------- ------- -------
<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.................... 0.25%(2) 1.00%(3) 1.00%(3)
Other Expenses(4).................. 0.35% 0.35% 0.35%
----- ------ ------
Total Operating Expenses........... 1.35% 2.10% 2.10%
</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."
3
<PAGE> 12
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....................... $ 61 $ 61 $ 21 $ 31 $ 21
3 years...................... 88 96 66 66 66
5 years...................... 118 133 113 113 113
10 years...................... 202 224(2) 224(2) 243 243
</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. 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.
4
<PAGE> 13
FINANCIAL HIGHLIGHTS
CLASS A, CLASS B AND CLASS C SHARES
<TABLE>
<CAPTION>
YEAR ENDED NOVEMBER 30,
----------------------------------------------------
1997 1996 1995 1994 1993***
-------- -------- -------- -------- --------
CLASS A
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE DATA (FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD):
Net asset value - beginning of period...... $ 11.70 $ 12.46 $ 11.39 $ 13.37 $ 11.50
-------- -------- -------- -------- --------
Income from investment operations# -
Net investment income.................... $ 0.64 $ 0.65 $ 0.76 $ 0.63 $ 0.58
Net realized and unrealized gain (loss)
on investments and foreign currency
transactions........................... (0.68) 0.17 0.76 (1.17) 1.29
-------- -------- -------- -------- --------
Total from investment operations... $ (0.04) $ 0.82 $ 1.52 $ (0.54) $ 1.87
-------- -------- -------- -------- --------
Less distributions declared to shareholders -
From net investment income............... $ (0.25) $ (1.58) $ -- $ (1.15) $ --
From net realized gain on investments
and foreign currency transactions...... (0.06) -- (0.45) (0.29) --
In excess of net realized gain on
investments and foreign currency
transactions........................... (0.01) -- -- -- --
-------- -------- -------- -------- --------
Total distributions declared to
shareholders..................... $ (0.32) $ (1.58) $ (0.45) $ (1.44) $ --
-------- -------- -------- -------- --------
Net asset value - end of period............ $ 11.34 $ 11.70 $ 12.46 $ 11.39 $ 13.37
======== ======== ======== ======== ========
Total return+.............................. (0.29)% 7.36% 13.93% (4.63)% 17.77%*
RATIOS (TO AVERAGE NET ASSETS)/SUPPLEMENTAL DATA:
Expenses##............................... 1.35% 1.42% 1.51% 1.54% 1.54%*
Net investment income.................... 5.75% 5.70% 6.42% 5.45% 5.66%*
PORTFOLIO TURNOVER......................... 335% 370% 277% 358% 179%*
NET ASSETS AT END OF PERIOD (000
OMITTED)................................. $187,152 $283,770 $343,188 $370,110 $443,304
</TABLE>
*Annualized.
***For the 11 months ended November 30, 1993.
#Per share data for the periods subsequent to November 30, 1993, are based on
average shares outstanding.
##For fiscal years ending after September 1, 1995, the Fund's expenses are
calculated without reduction for fees paid indirectly.
++Total returns for Class A shares do not include the applicable sales charge.
If the charge had been included, the results would have been lower.
5
<PAGE> 14
FINANCIAL HIGHLIGHTS -- CONTINUED
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------
1992 1991 1990 1989 1988
------- ------- ------- ------- -------
CLASS A
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE DATA (FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD):
Net asset value - beginning of period........ $ 12.63 $ 12.00 $ 11.45 $ 11.11 $ 11.87
------- ------- ------- ------- -------
Income from investment operations -
Net investment income...................... $ 0.87 $ 0.94 $ 0.98 $ 1.07 $ 0.94
Net realized and unrealized gain (loss) on
investments and foreign currency
transactions............................. (0.70) 0.67 1.07 (0.26) (0.42)
------- ------- ------- ------- -------
Total from investment operations..... $ 0.17 $ 1.61 $ 2.05 $ 0.81 $ 0.52
------- ------- ------- ------- -------
Less distributions declared to shareholders -
From net investment income................. $ (1.30) $ (0.75) $ (0.95) $ (0.47) $ (0.90)
From net realized gain on investments and
foreign currency transactions............ -- -- (0.50) -- (0.32)
From paid-in capital....................... -- (0.23) (0.05) -- (0.06)
------- ------- ------- ------- -------
Total distributions declared to
shareholders....................... $ (1.30) $ (0.98) $ (1.50) $ (0.47) $ (1.28)
------- ------- ------- ------- -------
Net asset value - end of period.............. $ 11.50 $ 12.63 $ 12.00 $ 11.45 $ 11.11
======= ======= ======= ======= =======
Total return+................................ 1.35% 13.42% 17.90% 7.27% 3.68%
RATIOS (TO AVERAGE NET ASSETS)/SUPPLEMENTAL DATA:
Expenses................................... 1.53% 1.61% 1.44% 1.42% 1.12%
Net investment income...................... 6.78% 7.75% 8.06% 8.42% 7.91%
PORTFOLIO TURNOVER........................... 163% 208% 220% 282% 232%
NET ASSETS AT END OF PERIOD (000 OMITTED).... $340,347 $286,089 $145,202 $124,935 $190,590
</TABLE>
+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.
6
<PAGE> 15
FINANCIAL HIGHLIGHTS -- CONTINUED
<TABLE>
<CAPTION>
YEAR ENDED NOVEMBER 30,
--------------------------------------------
1997 1996 1995 1994 1993***
------ ------- ------ ------ -------
CLASS B
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE DATA (FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD):
Net asset value - beginning of period.......... $11.50 $ 12.28 $11.32 $13.35 $13.22
------ ------- ------ ------ ------
Income from investment operations# -
Net investment income........................ $ 0.55 $ 0.54 $ 0.65 $ 0.56 $ 0.07
Net realized and unrealized gain (loss) on
investments and foreign currency
transactions............................... (0.68) 0.17 0.76 (1.19) 0.06
------ ------- ------ ------ ------
Total from investment operations....... $(0.13) $ 0.71 $ 1.41 $(0.63) $ 0.13
------ ------- ------ ------ ------
Less distributions declared to
shareholders -
From net investment income................... $(0.17) $(1.49) $ -- $(1.11) $ --
From net realized gain on investments and
foreign currency transactions.............. (0.06) -- (0.45) (0.29) --
In excess of net realized gain on investments
and foreign currency transactions.......... (0.01) -- -- -- --
------ ------- ------ ------ ------
Total distributions declared to
shareholders......................... $(0.24) $(1.49) $(0.45) $(1.40) $ --
------ ------- ------ ------ ------
Net asset value - end of period................ $11.13 $ 11.50 $12.28 $11.32 $13.35
------ ------- ------ ------ ------
Total return................................... (1.08)% 6.39% 13.01% (5.39)% 4.32%*
RATIOS (TO AVERAGE NET ASSETS)/SUPPLEMENTAL DATA:
Expenses##................................... 2.10% 2.27% 2.33% 2.38% 2.48%*
Net investment income........................ 5.03% 4.89% 5.59% 4.81% 4.72%*
PORTFOLIO TURNOVER............................. 335% 370% 277% 358% 179%*
NET ASSETS AT END OF PERIOD (000 OMITTED)...... $77,962 $102,717 $90,978 $73,458 $24,590
</TABLE>
*Annualized.
***For the period from the inception of Class B shares, September 7, 1993,
through November 30, 1993.
#Per share data for the periods subsequent to November 30, 1993, are based on
average shares outstanding.
##For fiscal years ending after September 1, 1995, the Fund's expenses are
calculated without reduction for fees paid indirectly.
7
<PAGE> 16
FINANCIAL HIGHLIGHTS -- CONTINUED
<TABLE>
<CAPTION>
YEAR ENDED NOVEMBER 30,
-----------------------------------
1997 1996 1995 1994**
-------- ------ ------ ------
CLASS C
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
PER SHARE DATA (FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD):
Net asset value - beginning of period................... $11.51 $12.29 $11.31 $12.30
-------- ------ ------ -----
Income from investment operations# -
Net investment income................................. $ 0.55 $ 0.55 $ 0.66 $0.50
Net realized and unrealized gain (loss) on investments
and foreign currency transactions................... (0.68) 0.17 0.77 (1.35)
-------- ------ ------ -----
Total from investment operations................ $ (0.13) $ 0.72 $ 1.43 $(0.85)
-------- ------ ------ -----
Less distributions declared to shareholders -
From net investment income............................ $ (0.18) $(1.50) $ -- $(0.14)
From net realized gain on investments and foreign
currency transactions............................... (0.06) -- (0.45) --
In excess of net realized gain on investments and
foreign currency transactions....................... (0.01) -- -- --
-------- ------ ------ -----
Total distributions declared to shareholders.... $ (0.25) $(1.50) $(0.45) $(0.14)
-------- ------ ------ -----
Net asset value - end of period......................... $11.13 $11.51 $12.29 $11.31
-------- ------ ------ -----
Total return............................................ (1.10)% 6.56% 13.11% (6.92)%
RATIOS (TO AVERAGE NET ASSETS)/SUPPLEMENTAL DATA:
Expenses##............................................ 2.10% 2.20% 2.26% 2.32%*
Net investment income................................. 5.02% 4.97% 5.67% 5.06%*
PORTFOLIO TURNOVER...................................... 335% 370% 277% 358%*
NET ASSETS AT END OF PERIOD (000 OMITTED)............... $9,534 $14,487 $11,813 $8,687
</TABLE>
*Annualized.
**For the period from the inception of Class C shares, January 3, 1994, through
November 30, 1994.
#Per share data are based on average shares outstanding.
##For fiscal years ending after September 1, 1995, the Fund's expenses are
calculated without reduction for fees paid indirectly.
8
<PAGE> 17
3. 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.
4. INVESTMENT OBJECTIVE AND POLICIES
INVESTMENT OBJECTIVE -- The Fund's investment objective is to seek income and
capital appreciation. Any investment involves risk and there can be no assurance
that the Fund will achieve its investment objective. Prior to September 15,
1997, the Fund's investment objective was to seek not only preservation, but
also growth of capital, together with moderate current income.
INVESTMENT POLICIES -- The Fund seeks to achieve its investment objective by
investing, under normal conditions, at least 65% of its total assets in debt
securities, such as bonds, debentures, mortgage securities, notes, commercial
paper and other obligations, issued or
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guaranteed by a government or any of its political subdivisions, agencies or
instrumentalities. The Fund may invest up to 35% of its total assets in
non-convertible debt securities issued by non-governmental issuers, such as
corporations and trusts, which may be rated below the four highest grades of
Standard & Poor's Rating Services ("S&P"), Fitch IBCA ("Fitch"), Duff & Phelps
Credit Rating Co. ("Duff & Phelps")(AAA, AA, A or BBB) or Moody's Investors
Services, Inc. ("Moody's") (Aaa, Aa, A or Baa) and comparable unrated
securities. For a discussion of the risks of investing in these securities, see
"Additional Risk Factors -- Lower Rated Fixed Income Securities" below. For a
description of these rating categories, see Appendix B to this Prospectus, and
for a chart showing the Fund's holdings of fixed income securities broken down
by rating categories for its fiscal year ended November 30, 1997, see Appendix C
to this Prospectus.
The Fund attempts to provide investors with an opportunity to enhance the value
and increase the protection of their investment against inflation 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 investing 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 invested broadly among a number of foreign countries.
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 high grade 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% 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 remainder of the Fund's assets will be diversified
among countries where opportunities for total return are expected to be most
attractive. 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 net assets in the securities of any one
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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/or 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.
5. CERTAIN SECURITIES AND INVESTMENT TECHNIQUES
CONSISTENT WITH THE FUND'S INVESTMENT OBJECTIVE AND POLICIES, THE FUND MAY
ENGAGE IN THE FOLLOWING SECURITIES TRANSACTIONS AND INVESTMENT TECHNIQUES, MANY
OF WHICH ARE DESCRIBED MORE FULLY IN THE SAI. SEE "INVESTMENT OBJECTIVE,
POLICIES AND RESTRICTIONS" IN THE SAI.
EMERGING MARKET SECURITIES: Consistent with the Fund's objective and policies,
the Fund may invest in securities of issuers whose principal activities are
located in emerging market countries. Emerging market countries include any
country determined by the Adviser to have an emerging market economy, taking
into account a number of factors, including whether the country has a low- to
middle-income economy according to the International Bank for Reconstruction and
Development, the country's foreign currency debt rating, its political and
economic stability and the development of its financial and capital markets. The
Adviser determines whether an issuer's principal activities are located in an
emerging market country by considering such factors as its country of
organization, the principal trading market for its securities and the source of
its revenues and location of its assets. The issuer's principal activities
generally are deemed to be located in a particular country if: (a) the security
is issued or guaranteed by the government of that country or any of its
agencies, authorities or instrumentalities; (b) the issuer is organized under
the laws of, and maintains a principal office in, that country; (c) the issuer
has its principal securities trading market in that country; (d) the issuer
derives 50% or more of its total revenues from goods sold or services performed
in that country; or (e) the issuer has 50% or more of its assets in that
country.
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<PAGE> 20
BRADY BONDS: The Fund may invest in Brady Bonds, which are securities created
through the exchange of existing commercial bank loans to public and private
entities in certain emerging markets for new bonds in connection with debt
restructurings under a debt restructuring plan introduced by former U.S.
Secretary of the Treasury, Nicholas F. Brady (the "Brady Plan"). Brady Plan debt
restructurings have been implemented to date in Argentina, Brazil, Bulgaria,
Costa Rica, Croatia, Dominican Republic, Ecuador, Jordan, Mexico, Morocco,
Nigeria, Panama, Peru, the Philippines, Poland, Slovenia, Uruguay and Venezuela.
Brady Bonds have been issued only recently, and for that reason do not have a
long payment history. Brady Bonds may be collateralized or uncollateralized, are
issued in various currencies (but primarily the U.S. dollar) and are actively
traded in over-the-counter secondary markets. U.S. dollar-denominated,
collateralized Brady Bonds, which may be fixed-rate bonds or floating-rate
bonds, are generally collateralized in full as to principal by U.S. Treasury
zero coupon bonds having the same maturity as the bonds. Brady Bonds are often
viewed as having three or four valuation components: the collateralized
repayment of principal at final maturity; the collateralized interest payments;
the uncollateralized interest payments; and any uncollateralized repayment of
principal at maturity (these uncollateralized amounts constituting the "residual
risk"). In light of the residual risk of Brady Bonds and the history of defaults
of countries issuing Brady Bonds with respect to commercial bank loans by public
and private entities, investments in Brady Bonds may be viewed as speculative.
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 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.
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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
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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.
"WHEN-ISSUED" SECURITIES: The Fund may purchase some securities on a "when
issued" or on a "forward delivery" basis, which means that the securities will
be delivered to the Fund at a future date usually beyond customary settlement
time. The commitment to purchase a security for which payment will be made on a
future date may be deemed a separate security. The Fund does not pay for the
securities until received, and does not start earning interest on the securities
until the contractual settlement date. While awaiting delivery of securities
purchased on such bases, the Fund will segregate liquid assets sufficient to
cover its commitments. Although the Fund does not intend to make such purchases
for speculative purposes, purchases of securities on such bases may involve more
risk than other types of purchases.
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 of
the liquidity determination, focusing on factors such as valuation, liquidity
and availability of information. Investing in Rule 144A securities could
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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. However, the writing of Options constitutes only a
partial hedge, up to the amount of the premium, less any transaction costs.
However, the writing of an Option constitutes only a partial hedge, up to the
amount of the premium, less any transaction costs. In contrast, 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.
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<PAGE> 24
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
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<PAGE> 25
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.
OPTIONS ON FUTURES CONTRACTS: The Fund may also purchase and write options on
Futures Contracts ("Options on Futures Contracts") for the purpose of protecting
against declines in the value of portfolio securities or against increases in
the cost of securities to be acquired. Purchases of Options on Futures Contracts
may present less risk in hedging the portfolio of the Fund than the purchase or
sale of the underlying Futures Contracts, since the potential loss is limited to
the amount of the premium paid for the option, plus related transaction costs.
The writing of such options, however, does not present less risk than the
trading of Futures Contracts, and will constitute only a partial hedge, up to
the amount of the premium received, less related transaction costs. In addition,
if an option is exercised, the Fund may suffer a loss on the transaction. The
Fund may also purchase and write Options on Futures Contracts for non-hedging
purposes, to the extent permitted by applicable law.
FORWARD CONTRACTS: The Fund may enter into forward foreign currency exchange
contracts for the purchase and sale of a fixed quantity of a foreign currency at
a future date ("Forward Contracts"). The Fund may enter into Forward Contracts
for hedging purposes as well as for non-hedging purposes. By entering into
transactions in Forward Contracts, however, the Fund may be required to forego
the benefits of advantageous changes in exchange rates and, in the case of
Forward Contracts entered into for non-hedging purposes, the Fund may sustain
losses which will reduce its gross income. The Fund may also enter into a
Forward Contract on one currency in order to hedge against risk of loss arising
from fluctuations in the value of a second currency (referred to as a "cross
hedge") if, in the judgment of the Adviser, a reasonable degree of correlation
can be expected between movements in the values of the two currencies. Forward
Contracts are traded over-the-counter, and not on organized commodities or
securities exchanges. As a result, such contracts operate in a manner distinct
from exchange-traded instruments, and their use involves certain risks beyond
those associated with transactions in Futures Contracts or options traded on
exchanges. The Fund has established procedures which require 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.
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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 changes in the value of 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 and could involve the loss of all or a portion of
the principal amount of or interest on the instrument.
SWAPS AND RELATED TRANSACTIONS: As one way of managing its exposure to different
types of investments, the Fund may enter into interest rate swaps, currency
swaps and other types of available swap agreements, such as caps, collars and
floors. Swaps involve the exchange by the Fund with another party of cash
payments based upon different interest rate indexes, currencies, and other
prices or rates, such as the value of mortgage prepayment rates. For example, in
the typical interest rate swap, the Fund might exchange a sequence of cash
payments based on a floating rate index for cash payments based on a fixed rate.
Payments made by both parties to a swap transaction are based on a notional
principal amount determined by the parties.
The Fund may also purchase and sell caps, floors and collars. In a typical cap
or floor agreement, one party agrees to make payments only under specified
circumstances, usually in return for payment of a fee by the counterparty. For
example, the purchase of an interest rate cap entitles the buyer, to the extent
that a specified index exceeds a predetermined interest rate, to receive
payments of interest on a contractually-based principal amount from the
counterparty selling such interest rate cap. The sale of an interest rate floor
obligates the seller to make payments to the extent that a specified interest
rate falls below an agreed-upon level. A collar arrangement combines elements of
buying a cap and selling a floor.
Swap agreements could be used to shift the Fund's investment exposure from one
type of investment to another. For example, if the Fund agreed to exchange
payments in dollars for payments in 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, or no investment of cash. 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
18
<PAGE> 27
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. 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,
19
<PAGE> 28
discouraged certain investments abroad by U.S. investors such as the Fund. While
no such restrictions are currently in effect, they could be reinstituted. In
such event it might become necessary for the Fund to invest all or substantially
all of its assets in U.S. securities, or the Fund might be liquidated.
Over-the-counter transactions also involve certain risks which may not be
present in an exchange environment.
Because of the Fund's international investment policies and the risks discussed
above, as well as other considerations, an investment in shares of the Fund may
not be appropriate for all investors, and an investment in shares of the Fund
should not be considered a complete investment program. Each prospective
purchaser should take into account his investment objectives as well as his
other investments when considering the purchase of shares of the Fund.
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
20
<PAGE> 29
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.
LOWER RATED FIXED INCOME SECURITIES: As indicated above, the Fund may also
invest up to 35% of its total assets in non-convertible debt securities rated Ba
or lower by Moody's or BB or lower by S&P, Fitch or Duff &Phelps and comparable
unrated securities (commonly known as "junk bonds"). No minimum rating standard
is required by the Fund. These securities are considered speculative and, while
generally providing greater income than investments in higher rated securities,
will involve greater risk of principal and income (including the possibility of
default or bankruptcy of the issuers of such securities) and may involve greater
volatility of price (especially during periods of economic uncertainty or
change) than securities in the higher rating categories. 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. The market for these lower rated fixed income securities may be less
liquid than the market for investment grade fixed income securities. Therefore,
judgment may at times play a greater role in valuing these securities than in
the case of investment grade fixed income securities.
The Fund may also invest in non-convertible fixed income securities rated Baa by
Moody's or BBB by S&P, Fitch or Duff & Phelps and comparable unrated securities.
These securities, while normally exhibiting adequate protection parameters, have
speculative characteristics, and changes in economic conditions or other
circumstances are more likely to lead to a weakened capacity to make principal
and interest payments than in the case of higher grade fixed income securities.
These lower rated and comparable unrated securities may also include zero coupon
bonds, described above.
21
<PAGE> 30
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,
1997, 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 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. Except with respect to the Fund's policy on borrowing and investing
in illiquid securities, 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. James T. Swanson, a Senior Vice President of the
Adviser, has been the Fund's portfolio manager since January 12, 1998. Mr.
Swanson has been employed as a portfolio manager by the Adviser since 1985.
Subject to such policies as the Trustees may determine, the Adviser makes
investment decisions for the Fund. For its services and facilities, the Adviser
receives a management fee computed and paid monthly at the annual rate of 0.75%
of the first $500 million of the Fund's average daily net assets and 0.70% of
the Fund's average daily net assets in excess of $500 million for the Fund's
then-current fiscal year. For the Fund's fiscal year ended November 30, 1997,
MFS received fees under the Advisory Agreement of $2,485,005, equivalent, on an
annual basis, to 0.75% of the Fund's average daily net assets.
22
<PAGE> 31
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 Special Value Trust, MFS/Sun Life Series Trust and seven
variable accounts, each of which is a registered investment company established
by Sun Life Assurance Company of Canada (U.S.), a subsidiary of Sun Life
Assurance Company of Canada ("Sun Life"), in connection with the sale of various
fixed/variable annuity contracts. MFS and its wholly owned subsidiary, MFS
Institutional Advisors, Inc., provide investment advice to substantial private
clients.
MFS is America's oldest mutual fund organization. MFS and its predecessor
organizations have a history of money management dating from 1924 and the
founding of the first mutual fund in the United States, Massachusetts Investors
Trust. Net assets under the management of the MFS organization were
approximately $77.6 billion on behalf of approximately 2.9 million investor
accounts as of February 28, 1998. As of such date, the MFS organization managed
approximately $20.4 billion of assets invested in fixed income securities. MFS
is a subsidiary of Sun Life of Canada (U.S.) Financial Services Holdings, Inc.,
which in turn is an indirect wholly owned subsidiary of Sun Life. The Directors
of MFS are John W. Ballen, Jeffrey L. Shames, Arnold D. Scott, John D. McNeil
and Donald A. Stewart. Mr. Ballen is an Executive Vice President of MFS, Mr.
Shames is the Chairman, Chief Executive Officer and President of MFS 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.
Mr. Shames, the Chairman of MFS, is a Trustee of the Trust. Leslie J. Nanberg,
Stephen C. Bryant, W. Thomas London, Stephen E. Cavan, James R. Bordewick, Jr.,
James O. Yost, Ellen Moynihan and Mark E. Bradley, all of whom are officers of
MFS, are also officers of the Trust.
In certain instances there may be securities which are suitable for the Fund's
portfolio as well as for portfolios of other clients of MFS. Some simultaneous
transactions are inevitable when several clients receive investment advice from
MFS, particularly when the same security is suitable for more than one client.
While in some cases this arrangement could have a detrimental effect on the
price or availability of the security as far as the Fund is concerned, in other
cases, however, it may produce increased investment opportunities for the Fund.
ADMINISTRATOR -- MFS provides the Fund with certain financial, legal,
compliance, shareholder communications and other administrative services
pursuant to a Master Administrative Services Agreement dated March 1, 1997, as
amended. Under this Agreement, the Fund pays MFS an administrative fee of up to
0.015% per annum of the Fund's average daily net assets. This fee reimburses MFS
for a portion of the costs it incurs to provide such services.
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<PAGE> 32
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. As used in the Prospectus and any appendices
thereto, the term "dealer" includes any broker, dealer, bank (including bank
trust departments), registered investment adviser, financial planner and any
other financial institutions having a selling agreement or other similar
agreement with MFD. Dealers may also charge their customers fees relating to 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 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.
24
<PAGE> 33
PURCHASES SUBJECT TO A CDSC (but not an initial sales charge). In the following
five 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;
(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; AND
(v) on investments in Class A shares by certain retirement plans subject to
ERISA, as amended, if: (a) the plan establishes an account with the
Shareholder Servicing Agent on or after July 1, 1997; (b) such plan's
records are maintained on a pooled basis by the Shareholder Servicing Agent;
and (c) the sponsoring organization demonstrates to the satisfaction of MFD
that, at the time of purchase, the employer has at least 200 eligible
employees and the plan has aggregate assets of at least $2,000,000.
25
<PAGE> 34
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
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, purchases for each
shareholder account (and certain other accounts for which the shareholder is a
record or beneficial holder) will be aggregated over a 12-month period
(commencing from the date of the first such purchase).
See "Redemptions and Repurchases -- Contingent Deferred Sales Charge" for
further discussion of the CDSC.
WAIVERS OF INITIAL SALES CHARGE AND CDSC. In certain circumstances, the initial
sales charge imposed upon purchases of Class A shares and the CDSC imposed upon
redemptions of Class A shares is waived. These circumstances are described in
Appendix A to this Prospectus. In addition to these circumstances, the CDSC
imposed upon the redemption of Class A shares is waived with respect to shares
held by certain retirement plans qualified under Section 401(a) or 403(b) of the
Code and subject to ERISA, where:
(i) the retirement plan and/or sponsoring organization does not subscribe to
the MFS Participant Recordkeeping System; and
(ii) the retirement plan and/or sponsoring organization demonstrates to the
satisfaction of, and certifies to, the Shareholder Servicing Agent that the
retirement plan has, at the time of certification or will have pursuant to
a purchase order placed with the certification, a market value of $500,000
or more invested in shares of any class or classes of the MFS Funds and
aggregate assets of at least $10 million;
provided, however, that the CDSC will not be waived (i.e., it will be imposed)
(a) with respect to plans which establish an account with the Shareholder
Servicing Agent on or after November 1, 1997, in the event that the Plan makes a
complete redemption of all of its shares in the MFS Funds, or (b) with respect
to plans which established an account with the Shareholder Servicing Agent prior
to November 1, 1997, in the event that there is a change in law or regulations
which results in a material adverse change to the tax advantaged nature of the
plan, or in the event that the plan and/or sponsoring organization: (i) becomes
insolvent or bankrupt; (ii) is terminated under ERISA or is liquidated or
dissolved; or (iii) is acquired by, merged into, or consolidated with any other
entity.
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<PAGE> 35
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 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
27
<PAGE> 36
addition to these circumstances, the CDSC imposed upon the redemption of Class B
shares is waived with respect to shares held by a retirement plan whose
sponsoring organization subscribes to the MFS Participant Recordkeeping System
and which has established an account with the Shareholder Servicing Agent on or
after July 1, 1996; provided, however, that the CDSC will not be waived (i.e.,
it will be imposed) in the event that there is a change in law or regulations
which results in a material adverse change to the tax advantaged nature of the
plan, or in the event that the plan and/or sponsoring organization: (i) becomes
insolvent or bankrupt; (ii) is terminated under ERISA or is liquidated or
dissolved; or (iii) is acquired by, merged into, or consolidated with any other
entity.
CONVERSION OF CLASS B SHARES. Class B shares of the Fund that remain outstanding
for approximately eight years will convert to Class A shares of the 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).
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<PAGE> 37
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.
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
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organization acting on behalf of one or more individuals, if (i) the individual
or organization makes three or more exchange requests out of the Fund per
calendar year and (ii) any one of such exchange requests represents shares equal
in value to 1/2 of 1% or more of the Fund's net assets at the time of the
request. Accounts under common ownership or control, including accounts
administered by market timers, will be aggregated for purposes of this
definition.
As noted above, the Fund and MFD each reserves the right to reject or restrict
any specific purchase and exchange request and, in addition, may impose specific
limitations with respect to market timers, including delaying for up to seven
days the purchase side of an exchange request by market timers or specifically
rejecting or otherwise restricting purchase or exchange requests by market
timers. 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 or arrange for the sale of
shares of the Fund. Such concessions provided by MFD may include financial
assistance to dealers in connection with preapproved conferences or seminars,
sales or training programs for invited registered representatives and other
employees, payment for travel expenses, including lodging, incurred by
registered representatives and other employees for such seminars or training
programs, seminars for the public, advertising and sales campaigns regarding one
or more MFS Funds, and/or other dealer-sponsored events. From time to time, MFD
may make expense reimbursements for special training of a dealer's registered
representatives and other employees in group meetings or to help pay the
expenses of sales contests. Other concessions may be offered to the extent not
prohibited by state laws or any self-regulatory agency, such as the NASD.
SPECIAL INVESTMENT PROGRAMS. For shareholders who elect to participate in
certain investment programs (e.g., the Automatic Investment Plan) or other
shareholder services, MFD or its affiliates may either (i) give a gift of
nominal value, such as a hand-held calculator or (ii) make a nominal charitable
contribution on their behalf.
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.
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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
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<PAGE> 40
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"
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
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<PAGE> 41
fractional shares in his account to cover the amount withdrawn. The proceeds of
a redemption or repurchase will normally be available within seven days, except
for shares purchased or received in exchange for shares purchased by check
(including certified checks or cashier's checks). Payment of redemption proceeds
may be delayed for up to 15 days from the purchase date in an effort to assure
that such check has cleared. See "Tax Status" below.
REDEMPTION BY MAIL: Each shareholder may redeem all or any portion of the shares
in his account by mailing or delivering to the Shareholder Servicing Agent (see
back cover for address) a stock power with a written request for redemption or
letter of instruction, together with his share certificates (if any were
issued), all in "good order" for transfer. "Good order" generally means that the
stock power, written request for redemption, letter of instruction or
certificate must be endorsed by the record owner(s) exactly as the shares are
registered and the signature(s) must be guaranteed in the manner set forth below
under the caption "Signature Guarantee." In addition, in some cases "good order"
will require the furnishing of additional documents. The Shareholder Servicing
Agent may make certain de minimis exceptions to the above requirements for
redemption. Within seven days after receipt of a redemption request in "good
order" by the Shareholder Servicing Agent, the Fund will make payment in cash of
the net asset value of the shares next determined after such redemption request
was received, reduced by the amount of any applicable CDSC described above and
the amount of any income tax required to be withheld, except during any period
in which the right of redemption is suspended or date of payment is postponed
because the Exchange is closed or trading on such Exchange is restricted or to
the extent otherwise permitted by the 1940 Act if an emergency exists.
REDEMPTION BY TELEPHONE: Each shareholder may redeem an amount from his account
by telephoning the Shareholder Servicing Agent toll-free at (800) 225-2606.
Shareholders wishing to avail themselves of this telephone redemption privilege
must so elect on their Account Application, designate thereon a bank and account
number to receive the proceeds of such redemption, and sign the Account
Application Form with the signature(s) guaranteed in the manner set forth below
under the caption "Signature Guarantee." The proceeds of such a redemption,
reduced by the amount of any applicable CDSC and the amount of any income tax
required to be withheld, are mailed by check to the designated account, without
charge, if the redemption proceeds do not exceed $1,000, and are wired in
federal funds to the designated account if the redemption proceeds exceed
$1,000. If a telephone redemption request is received by the Shareholder
Servicing Agent by the close of regular trading on the Exchange on any business
day, shares will be redeemed at the closing net asset value of the Fund on that
day. Subject to the conditions described in this section, proceeds of a
redemption are normally mailed or wired on the next business day following the
date of receipt of the order for redemption. The Shareholder Servicing Agent 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.
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<PAGE> 42
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 C and Class B shares purchased on or after January 1, 1993 will be
aggregated on a calendar month basis -- all transactions made during a calendar
month, regardless of when during the month they have occurred, will age one year
at the close of business on the last day of such month in the following calendar
year and each subsequent year. For Class B shares of the Fund purchased prior to
January 1, 1993, transactions will be aggregated on a calendar year basis -- all
transactions made during a calendar year, regardless of when during the year
they have occurred, will age one year at the close of business on December 31 of
that year and each subsequent year.
At the time of a redemption, the amount by which the value of a shareholder's
account for a particular class of shares represented by Direct Purchases exceeds
the sum of the six calendar year aggregations (12 months in the case of
purchases of Class C shares and of purchases of $1 million or more of Class A
shares or purchases by certain retirement plans of Class A shares) of Direct
Purchases may be redeemed without charge ("Free Amount"). Moreover, no CDSC is
ever assessed on additional shares acquired through the automatic reinvestment
of dividends or capital gain distributions ("Reinvested Shares"). Therefore, at
the time of redemption of a particular class, (i) any Free Amount is not subject
to the CDSC, and (ii) the amount of 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.
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<PAGE> 43
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 or exchanges, except in the case
of accounts being established for monthly automatic investments and certain
payroll savings programs, Automatic Exchange Plan accounts and tax-deferred
retirement plans, for which there is a lower minimum investment requirement. See
"Purchases -- General -- Minimum Investment" 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.
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<PAGE> 44
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 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.
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<PAGE> 45
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 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
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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 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 paid in cash or reinvested in
additional shares. The Fund expects that none of its distributions will be
eligible for the dividends received deduction for corporations. 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 advisers 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 dividends and
distributions for that year, including the portion taxable as ordinary income,
the portion taxable as long-term capital
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gain (as well as the rate category or categories under which such gain is
taxable), the portion, if any, representing a return of capital (which is
generally free of current taxes but which 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 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.
The Fund intends to withhold U.S. federal income tax at the rate of 30% (or any
lower rate permitted under an applicable treaty) on taxable dividends and other
payments that are subject to such withholding and that are made to persons who
are neither citizens nor residents of the U.S. The Fund is also required in
certain circumstances to apply backup withholding at the rate of 31% on taxable
dividends and redemption proceeds paid to any shareholder (including a
shareholder who is neither a citizen nor a resident of the U.S.) who does not
furnish to the Fund certain information and certifications or who is otherwise
subject to backup withholding. Backup withholding will not, however, be applied
to payments that have been subject to 30% withholding. Prospective investors
should read the Fund's Account Application for additional information regarding
backup withholding of federal income tax and should consult their own tax
advisers as to the tax consequences to them of an investment in the Fund.
NET ASSET VALUE
The net asset value per share of each class of shares of the Fund is determined
each day during which the Exchange is open for trading. This determination is
made once 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
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<PAGE> 48
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 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
40
<PAGE> 49
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, and purchased by, the public on different dates
(the class "inception date"). The calculation of total rate of return for a
class of shares which has a later class inception date than another class of
shares of the Fund is based both on (i) the performance of the Fund's newer
class from its inception date and (ii) the performance of the Fund's oldest
class from its inception date up to the class inception date of the newer class.
See the SAI for further information on the calculation of total rate of return
for share classes with different class inception dates.
All performance quotations are based on historical performance and are not
intended to indicate future performance. Yield 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, 1997, please
see the Fund's Annual Report. A copy of the Annual Report may be obtained
without charge by contacting the Shareholder Servicing Agent (see back cover for
address and phone number). In addition to information provided in shareholder
reports, the Fund may, in its discretion, from time to time, make a list of all
or a portion of its holdings available to investors upon request.
9. SHAREHOLDER SERVICES
Shareholders with questions concerning the shareholder services described below
or concerning other aspects of the Fund, should contact the Shareholder
Servicing Agent (see back cover for address and phone number).
ACCOUNT AND CONFIRMATION STATEMENTS -- Each shareholder will receive
confirmation statements showing the transaction activity in his 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.
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<PAGE> 50
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.
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
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<PAGE> 51
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. 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, 1998, contains more detailed information about
the Trust and the Fund, including, but not limited to, information related to:
(i) the Fund's investment objective,
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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> 53
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). As used in the Prospectus and any appendices thereto, the
term "dealer" includes any broker, dealer, bank (including bank trust
departments), registered investment adviser, financial planner and any other
financial institutions having a selling agreement or other similar agreement
with MFD.
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;
- 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.
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<PAGE> 54
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;
- 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.
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<PAGE> 55
7. LOAN REPAYMENTS
- Shares acquired pursuant to repayments by retirement plan participants
of loans from 401(a) or ESP Plans with respect to which such Plan or
its sponsoring organization subscribes to the MFS FUNDamental 401(k)
Program or the MFS Recordkeeper Plus Program (but not the MFS
Recordkeeper Program).
II. WAIVERS OF CLASS A SALES CHARGES
In addition to the waivers set forth in Section I above, in the following
circumstances the initial sales charge imposed on purchases of Class A
shares and the CDSC imposed on certain redemptions of Class A shares are
waived:
1. WRAP ACCOUNT AND FUND "SUPERMARKET" INVESTMENTS
- Shares acquired by investments through certain dealers (including
registered investment advisers and financial planners) which have
established certain operational arrangements with MFD which include a
requirement that such shares be sold for the sole benefit of clients
participating in a "wrap" account, mutual fund "supermarket" account or
a similar program under which such clients pay a fee to such dealer.
2. INVESTMENT BY INSURANCE COMPANY SEPARATE ACCOUNTS
- Shares acquired by insurance company separate accounts.
3. RETIREMENT PLANS
ADMINISTRATIVE SERVICES ARRANGEMENTS
- Shares acquired by retirement plans or trust accounts whose third party
administrators or dealers have entered into an administrative services
agreement with MFD or one of its affiliates to perform certain
administrative services, subject to certain operational and minimum
size requirements specified from time to time by MFD or one 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
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<PAGE> 56
- 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.
4. PURCHASES OF AT LEAST $5 MILLION (CDSC WAIVER ONLY)
- Shares acquired of Eligible Funds (as defined below) if the
shareholder's investment equals or exceeds $5 million in one or more
Eligible Funds (the "Initial Purchase") (this waiver applies to the
shares acquired from the Initial Purchase and all shares of Eligible
Funds subsequently acquired by the shareholder); provided that the
dealer through which the Initial Purchase is made enters into an
agreement with MFD to accept delayed payment of commissions with
respect to the Initial Purchase and all subsequent investments by the
shareholder in the Eligible Funds subject to such requirements as may
be established from time to time by MFD (for a schedule of the amount
of commissions paid by MFD to the dealer on such investments, see
"Purchases -- Class A Shares -- Purchases Subject to a CDSC" in the
Prospectus). The Eligible Funds are all funds included in the MFS
Family of Funds, except for Massachusetts Investors Trust,
Massachusetts Investors Growth Stock Fund, MFS Municipal Bond Fund, MFS
Municipal Limited Maturity Fund, MFS Money Market Fund, MFS Government
Money Market Fund and MFS Cash Reserve Fund.
5. BANK TRUST DEPARTMENTS AND LAW FIRMS
- Shares acquired by certain bank trust departments or law firms acting
as trustee or manager for trust accounts which have entered into an
administrative services agreement with MFD and are acquiring such
shares for the benefits of their trust account clients.
III. WAIVERS OF CLASS B AND CLASS C SALES CHARGES
In addition to the waivers set forth in Section I above, in the following
circumstances the CDSC imposed on redemptions of Class B and Class C shares
is waived:
1. SYSTEMATIC WITHDRAWAL PLAN
- Systematic Withdrawal Plan redemptions with respect to up to 10% per
year (or 15% per year, in the case of accounts registered as IRAs where
the redemption is made pursuant to Section 72(t) of the Internal
Revenue Code of 1986, as amended) of the account value at the time of
establishment.
2. DEATH OF OWNER
- 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.
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<PAGE> 57
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-5
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APPENDIX B
DESCRIPTION OF BOND RATINGS
The ratings of Moody's, S&P, Fitch and Duff & Phelps represent their opinions as
to the quality of various debt instruments. IT SHOULD BE EMPHASIZED, HOWEVER,
THAT RATINGS ARE NOT ABSOLUTE STANDARDS OF QUALITY. CONSEQUENTLY, DEBT
INSTRUMENTS WITH THE SAME MATURITY, COUPON AND RATING MAY HAVE DIFFERENT YIELDS
WHILE DEBT INSTRUMENTS OF THE SAME MATURITY AND COUPON WITH DIFFERENT RATINGS
MAY HAVE THE SAME YIELD.
MOODY'S INVESTORS SERVICE, INC.
AAA: Bonds which are rated Aaa are judged to be of the best quality. They carry
the smallest degree of investment risk and are generally referred to as "gilt
edged." Interest payments are protected by a large or by an exceptionally stable
margin and principal is secure. While the various protective elements are likely
to change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
AA: Bonds which are rated Aa are judged to be of high quality by all standards.
Together with the Aaa group they comprise what are generally known as high grade
bonds. They are rated lower than the best bonds because margins of protection
may not be as large as in Aaa securities or fluctuation of protective elements
may be of greater amplitude or there may be other elements present which make
the long-term risks appear somewhat larger than the Aaa securities.
A: Bonds which are rated A possess many favorable investment attributes and are
to be considered as upper-medium-grade obligations. Factors giving security to
principal and interest are considered adequate, but elements may be present
which suggest a susceptibility to impairment sometime in the future.
BAA: Bonds which are rated Baa are considered as medium-grade obligations,
(i.e., they are neither highly protected nor poorly secured). Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
BA: Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well-assured. Often the protection of interest
and principal payments may be very moderate and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B: Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
CAA: Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
CA: Bonds which are rated Ca represent obligations which are speculative in a
high degree. Such issues are often in default or have other marked shortcomings.
C: Bonds which are rated C are the lowest rated class of bonds, and issues so
rated can be regarded as having extremely poor prospects of ever attaining any
real investment standing.
ABSENCE OF RATING: Where no rating has been assigned or where a rating has been
suspended or withdrawn, it may be for reasons unrelated to the quality of the
issue.
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<PAGE> 59
Should no rating be assigned, the reason may be one of the following:
1. An application for rating was not received or accepted.
2. The issue or issuer belongs to a group of securities that are not rated
as a matter of policy.
3. There is a lack of essential data pertaining to the issue or issuer.
4. The issue was privately placed, in which case the rating is not
published in Moody's publications.
Suspension or withdrawal may occur if new and material circumstances arise, the
effects of which preclude satisfactory analysis; if there is no longer available
reasonable up-to-date data to permit a judgment to be formed; if a bond is
called for redemption; or for other reasons.
STANDARD & POOR'S RATINGS SERVICES
AAA: An obligation rated AAA has the highest rating assigned by S&P. The
obligor's capacity to meet its financial commitment on the obligation is
EXTREMELY STRONG.
AA: An obligation rated AA differs from the highest rated obligations only in
small degree. The obligor's capacity to meet its financial commitment on the
obligation is VERY STRONG.
A: An obligation rated A is somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than obligations in higher
rated categories. However, the obligor's capacity to meet its financial
commitment on the obligation is still STRONG.
BBB: An obligation rated BBB exhibits ADEQUATE protection parameters. However,
adverse economic conditions or changing circumstances are more likely to lead to
a weakened capacity of the obligor to meet its financial commitment on the
obligation.
Obligations rated BB, B, CCC, CC, and C are regarded as having significant
speculative characteristics. BB indicates the least degree of speculation and C
the highest. While such obligations will likely have some quality and protective
characteristics, these may be outweighed by large uncertainties or major
exposures to adverse conditions.
BB: An obligation rated BB is LESS VULNERABLE to nonpayment than other
speculative issues. However, it faces major ongoing uncertainties or exposure to
adverse business, financial, or economic conditions which could lead to the
obligor's inadequate capacity to meet its financial commitment on the
obligation.
B: An obligation rated B is MORE VULNERABLE to nonpayment than obligations rated
BB, but the obligor currently has the capacity to meet its financial commitment
on the obligation. Adverse business, financial, or economic conditions will
likely impair the obligor's capacity or willingness to meet its financial
commitment on the obligation.
CCC: An obligation rated CCC is CURRENTLY VULNERABLE to nonpayment, and is
dependent upon favorable business, financial, and economic conditions for the
obligor to meet its financial commitment on the obligation. In the event of
adverse business, financial, or economic conditions the obligor is not likely to
have the capacity to meet its financial commitment on the obligation.
B-2
<PAGE> 60
CC: An obligation rated CC is CURRENTLY HIGHLY VULNERABLE to nonpayment.
C: The C rating may be used to cover a situation where a bankruptcy petition has
been filed or similar action has been taken, but payments on this obligation are
being continued.
D: An obligation rated D is in payment default. The D rating category is used
when payments on an obligation are not made on the date due even if the
applicable grace period has not expired, unless Standard & Poor's believes that
such payments will be made during such grace period. The D rating also will be
used upon the filing of a bankruptcy petition or the taking of a similar action
if payments on an obligation are jeopardized.
PLUS (+) OR MINUS (-) The ratings from AA to CCC may be modified by the addition
of a plus or minus sign to show relative standing within the major rating
categories.
R: This symbol is attached to the ratings of instruments with significant
noncredit risks. It highlights risks to principal or volatility of expected
returns which are not addressed in the credit rating. Examples include:
obligations linked or indexed to equities, currencies, or commodities;
obligations exposed to severe prepayment risk -- such as interest-only or
principal-only mortgage securities; and obligations with unusually risky
interest terms, such as inverse floaters.
FITCH IBCA
AAA: Highest credit quality. AAA ratings denote the lowest expectation of credit
risk. They are assigned only in case of exceptionally strong capacity for timely
payment of financial commitments. This capacity is highly unlikely to be
adversely affected by foreseeable events.
AA: Very high credit quality. AA ratings denote a very low expectation of credit
risk. They indicate very strong capacity for timely payment of financial
commitments. This capacity is not significantly vulnerable to foreseeable
events.
A: High credit quality. A ratings denote a low expectation of credit risk. The
capacity for timely payment of financial commitments is considered strong. This
capacity may, nevertheless, be more vulnerable to changes in circumstances or in
economic conditions than is the case for higher ratings.
BBB: Good credit quality. BBB ratings indicate that there is currently a low
expectation of credit risk. The capacity for timely payment of financial
commitments is considered adequate, but adverse changes in circumstances and in
economic conditions are more likely to impair this capacity. This is the lowest
investment-grade category.
Speculative Grade
BB: Speculative. BB ratings indicate that there is a possibility of credit risk
developing, particularly as the result of adverse economic change over time;
however, business or financial alternatives may be available to allow financial
commitments to be met. Securities rated in this category are not investment
grade.
B: Highly speculative. B ratings indicate that significant credit risk is
present, but a limited margin of safety remains. Financial commitments are
currently being met; however, capacity for continued payment is contingent upon
a sustained, favorable business and economic environment.
B-3
<PAGE> 61
CCC, CC, C: High default risk. Default is a real possibility. Capacity for
meeting financial commitments is solely reliant upon sustained, favorable
business or economic developments. A CC rating indicates that default of some
kind appears probable. C ratings signal imminent default.
DDD, DD, D: Default. Securities are not meeting current obligations and are
extremely speculative. DDD designates the highest potential for recovery of
amounts outstanding on any securities involved. For U.S. corporates, for
example, DD indicates expected recovery of 50% -- 90% of such outstandings, and
D the lowest recovery potential, i.e. below 50%.
DUFF & PHELPS CREDIT RATING CO.
AAA: Highest credit quality. The risk factors are negligible, being only
slightly more than for risk-free U.S. Treasury debt.
AA+, AA, AA-: High credit quality. Protection factors are strong. Risk is modest
but may vary slightly from time to time because of economic conditions.
A+, A, A-: Protection factors are average but adequate. However, risk factors
are more variable and greater in periods of economic stress.
BBB+, BBB, BBB-: Below-average protection factors but still considered
sufficient for prudent investment. Considerable variability in risk during
economic cycles.
BB+, BB, BB-: Below investment grade but deemed likely to meet obligations when
due. Present or prospective financial protection factors fluctuate according to
industry conditions or company fortunes. Overall quality may move up or down
frequently within this category.
B+, B, B-: Below investment grade and possessing risk that obligations will not
be met when due. Financial protection factors will fluctuate widely according to
economic cycles, industry conditions and/or company fortunes. Potential exists
for frequent changes in the rating within this category or into a higher or
lower rating grade.
CCC: Well below investment-grade securities. Considerable uncertainty exists as
to timely payment of principal, interest or preferred dividends. Protection
factors are narrow and risk can be substantial with unfavorable
economic/industry conditions, and/or with unfavorable company developments.
DD: Defaulted debt-obligations. Issuer failed to meet scheduled principal and/or
interest payments.
DP: Preferred stock with dividend arrearages.
B-4
<PAGE> 62
APPENDIX C
PORTFOLIO COMPOSITION CHART
The table below shows the percentages of the Fund's assets at November 30, 1997
invested in bonds assigned to the various rating categories by Moody's, S&P,
Fitch and Duff & Phelps and in unrated bonds determined by MFS to be of
comparable quality. The highest of the four rating services is used with respect
to each rating.
<TABLE>
<CAPTION>
UNRATED
BONDS OF
COMPLIED COMPARABLE
RATING RATINGS QUALITY TOTAL
- ------ ---------------- ------------------ -----
<S> <C> <C> <C>
AAA/Aaa........................................... 30.46 30.46
AA/Aa............................................. 37.23 37.23
A/A...............................................
BBB/Baa........................................... 2.22 2.22
BB/Ba............................................. 11.83 11.83
B/B............................................... 4.43 4.43
CCC/Caa...........................................
CC/Ca.............................................
C/C...............................................
Default...........................................
TOTAL.................................... 86.17 86.17
</TABLE>
The chart does not necessarily indicate what the composition the Fund's
portfolio will be in subsequent years. Rather, the Fund's investment objective,
policies and restrictions indicate the extent to which the Fund may purchase
securities in the various categories.
C-1
<PAGE> 63
THE MFS FAMILY OF FUNDS(R)
America's Oldest Mutual Fund Group
The members of the MFS Family of Funds are grouped below according to the types
of securities in their portfolios. For free prospectuses containing more
complete information, including the exchange privilege and all charges and
expenses, please contact your financial adviser or call MFS at 1-800-225-2606
any business day from 8 a.m. to 8 p.m. Eastern time. This material should be
read carefully before investing or sending money.
STOCK
Massachusetts Investors Trust
Massachusetts Investors Growth Stock Fund
MFS(R) Emerging Growth Fund
MFS(R) Equity Income Fund
MFS(R) Growth Opportunities Fund
MFS(R) Large Cap Growth Fund (1)
MFS(R) Managed Sectors Fund
MFS(R) Mid Cap Growth Fund (2)
MFS(R) New Discovery Fund
MFS(R) Research Fund
MFS(R) Research Growth and Income Fund
MFS(R) Strategic Growth Fund
MFS(R) Union Standard Equity Fund (3)
STOCK AND BOND
MFS(R) bond Fund
MFS(R) Utilities Fund
BOND
MFS(R) Bond Fund
MFS(R) Government Mortgage Fund
MFS(R) Government Securities Fund
MFS(R) High Income Fund
MFS(R) Intermediate Income Fund
MFS(R) Strategic Income Fund
LIMITED MATURITY BOND
MFS(R) Government Limited Maturity Fund
MFS(R) Limited Maturity Fund
MFS(R) Municipal Limited Maturity Fund
WORLD
MFS/Foreign & Colonial Emerging Markets
Equity Fund
MFS(R) International Growth Fund (4)
MFS(R) International Growth and Income Fund (5)
MFS(R) Research International Fund
MFS(R) World Asset Allocation Fund (SM)
MFS(R) World Equity Fund
MFS(R) World Governments Fund
MFS(R) World Growth Fund
MFS(R) World Total Return Fund
NATIONAL TAX-FREE BOND
MFS(R) Municipal Bond Fund
MFS(R) Municipal High Income Fund
MFS(R) Municipal Income Fund
STATE TAX-FREE BOND
Alabama, Arkansas, California, Florida, Georgia
Maryland, Massachusetts,
Mississippi, New York, North Carolina,
Pennsylvania, South Carolina, Tennessee,
Virginia, West Virginia
MONEY MARKET
MFS(R) Cash Reserve Fund
MFS(R) Government Money Market Fund
MFS(R) Money Market Fund
(1) Formerly MFS(R) Capital Growth Fund.
(2) Formerly MFS(R) OTC Fund.
(3) Formerly MFS(R) Value Fund.
(4) Formerly MFS(R)/Foreign & Colonial
International Growth Fund.
(5) Formerly MFS(R)/Foreign & Colonial
International Growth and Income Fund.
<PAGE> 64
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
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
MWG-1-4/98/198M 20/220/320
<PAGE> 65
MFS WORLD GOVERNMENTS FUND
SUPPLEMENT TO THE APRIL 1, 1998 PROSPECTUS AND STATEMENT OF
ADDITIONAL INFORMATION
THE FOLLOWING INFORMATION SHOULD BE READ IN CONJUNCTION WITH THE FUND'S
PROSPECTUS AND STATEMENT OF ADDITIONAL INFORMATION ("SAI"), DATED APRIL 1, 1998,
AND CONTAINS A DESCRIPTION OF CLASS I SHARES.
CLASS I SHARES ARE AVAILABLE FOR PURCHASE ONLY BY CERTAIN INVESTORS AS
DESCRIBED UNDER THE CAPTION "ELIGIBLE PURCHASERS" BELOW.
EXPENSE SUMMARY
<TABLE>
<S> <C>
SHAREHOLDER TRANSACTION EXPENSES: CLASS I
Maximum Initial Sales Charge Imposed on Purchases of Fund
Shares (as a percentage of offering price)........................................... None
Maximum Contingent Deferred Sales Charge (as a percentage
of original purchase price or redemption proceeds, as applicable).................... None
ANNUAL OPERATING EXPENSES OF THE FUND (AS A PERCENTAGE OF AVERAGE NET ASSETS):
Management Fees........................................................................ 0.75%
Rule 12b-1 Fees........................................................................ None
Other Expenses(1)...................................................................... 0.35%
----
Total Operating Expenses............................................................... 1.10%
----
</TABLE>
(1) The Fund has an expense offset arrangement which reduces the Fund's
custodian fee based upon the amount of cash maintained by the Fund with its
custodian and dividend disbursing agent, and may enter into other such
arrangements and directed brokerage arrangements (which would also have the
effect of reducing the Fund's expenses). Any such fee reductions are not
reflected under "Other Expenses."
EXAMPLE OF EXPENSES
An investor would pay the following dollar amounts of expenses on a $1,000
investment in Class I shares of the Fund, assuming (a) a 5% annual return and
(b) redemption at the end of each of the time periods indicated:
<TABLE>
<CAPTION>
PERIOD CLASS I
------ -------
<S> <C>
1 year........................................ $ 11
----
3 years....................................... 35
----
5 years....................................... 61
----
10 years...................................... 134
----
</TABLE>
The purpose of the expense table above is to assist investors in
understanding the various costs and expenses that a shareholder of the Fund will
bear directly or indirectly. 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.
-1-
<PAGE> 66
CONDENSED FINANCIAL INFORMATION
The following information should be read in conjunction with the financial
statements included in the Fund's Annual Report to Shareholders which are
incorporated by reference into the SAI in reliance upon the report of the Fund's
independent auditors, given upon their authority as experts in accounting and
auditing. The Fund's independent auditors are Ernst & Young LLP.
<TABLE>
<CAPTION>
YEAR ENDED
NOVEMBER 30, 1997***
CLASS I
-------
<S> <C>
Per share data (for a share outstanding throughout each period):
Net asset value - beginning of period $ 11.24
---------
Income from investment operations# -
Net investment income $ 0.61
---------
Net realized and unrealized loss on investments and foreign currency transactions (0.48)
---------
Total from investment operations $ 0.13
---------
Net asset value - end of period $ 11.37
---------
Total return 1.16%**
---------
Ratios (to average net assets)/Supplemental data:
Expenses ## 0.99%*
---------
Net investment income 5.54%*
---------
Portfolio turnover 335%
---------
Net assets, end of period (000 omitted) $ 2,023
---------
</TABLE>
- --------------------------
* Annualized.
** Not annualized.
*** For the period from the inception of Class I shares, January 2, 1997,
through November 30, 1997.
# Per share data are based on average shares outstanding.
## The Fund's expenses are calculated without reduction for fees paid
indirectly.
ELIGIBLE PURCHASERS
Class I shares are available for purchase only by the following purchasers
("Eligible Purchasers"):
(i) certain retirement plans established for the benefit of employees of
Massachusetts Financial Services Company ("MFS"), the Fund's investment
adviser, and employees of MFS' affiliates;
(ii) any fund distributed by MFS Fund Distributors, Inc. ("MFD"), the Fund's
distributor, if the fund seeks to achieve its investment objective by
investing primarily in shares of the Fund and other funds distributed by
MFD;
(iii) any retirement plan, endowment or foundation which (a) purchases shares
directly through MFD (rather than through a third party broker or dealer
or other financial intermediary); (b) has, at the time of purchase of
Class I shares, aggregate assets of at least $100 million; and (c)
invests at least $10 million in Class I shares of the Fund either alone
or in combination with investments in Class I shares of other MFS funds
distributed by MFD (additional investments may be made in any amount);
provided that MFD may accept purchases from smaller plans, endowments or
foundations or in smaller amounts if it believes, in its sole discretion,
that such entity's aggregate assets will equal or exceed $100 million, or
that such entity will make additional investments which will cause its
total investment to equal or exceed $10 million, within a reasonable
period of time; and
(iv) bank trust departments or law firms acting as trustee or manager for
trust accounts which initially invest, on behalf of their trust clients,
at least $100,000 in Class I shares of the Fund (additional investments
may be made in any amount);
-2-
<PAGE> 67
provided that MFD may accept smaller initial purchases if it believes, in
its sole discretion, that the bank trust department or law firm will make
additional investments, on behalf of its trust clients, which will cause
its total investment to equal or exceed $100,000 within a reasonable
period of time.
In no event will the Fund, MFS, MFD or any of their affiliates pay any sales
commissions or compensation to any third party in connection with the sale of
Class I shares; the payment of any such sales commission or compensation would,
under the Fund's policies, disqualify the purchaser as an eligible investor of
Class I shares.
SHARE CLASSES OFFERED BY THE FUND
Four classes of shares of the Fund currently are offered for sale: Class A
shares, Class B shares, Class C shares and Class I shares. Class I shares are
available for purchase only by Eligible Purchasers, as defined above, and are
described in this Supplement. Class A shares, Class B shares and Class C shares
are described in the Fund's Prospectus and are available for purchase by the
general public.
Class A shares are offered at net asset value plus an initial sales charge
up to a maximum of 4.75% of the offering price (or a contingent deferred sales
charge (a "CDSC") 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 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 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, 1998
-3-
<PAGE> 68
[MFS LOGO]
<TABLE>
<S> <C>
MFS(R) WORLD STATEMENT OF
GOVERNMENTS FUND ADDITIONAL INFORMATION
(A member of the MFS Family of
Funds(R)) April 1, 1998
- --------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Page
----
<C> <S> <C>
1. Definitions................................................. 2
2. Investment Objective, Policies and Restrictions............. 2
3. Management of the Fund...................................... 11
Trustees............................................... 11
Officers............................................... 12
Trustee Compensation Table............................. 12
Investment Adviser..................................... 13
Administrator.......................................... 14
Custodian.............................................. 14
Shareholder Servicing Agent............................ 14
Distributor............................................ 14
4. Portfolio Transactions and Brokerage Commissions............ 15
5. Shareholder Services........................................ 16
Investment and Withdrawal Programs.......................... 16
Exchange Privilege.......................................... 18
Tax-Deferred Retirement Plans............................... 19
6. Tax Status.................................................. 19
7. Determination of Net Asset Value and Performance............ 21
8. Distribution Plan........................................... 24
9. Description of Shares, Voting Rights and Liabilities........ 25
10. Independent Auditors and Financial Statements............... 25
Appendix A.................................................. A-1
</TABLE>
MFS WORLD GOVERNMENTS FUND
A Series of MFS Series Trust VII
500 Boylston Street, Boston, Massachusetts 02116
(617) 954-5000
This Statement of Additional Information, 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,
1998. This SAI should be read in conjunction with the Prospectus, a copy of
which may be obtained without charge by contacting the Shareholder Servicing
Agent (see 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.
<PAGE> 69
1. DEFINITIONS
<TABLE>
<S> <C> <C>
"Fund" -- MFS World Governments Fund,
America's first global bond fund,
is a series of MFS Series Trust
VII (the "Trust"), a Massachu-
setts business trust. The Fund was
previously known as: Massa-
chusetts Financial International
Trust -- Bond Portfolio until its
name was changed effective No-
vember 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, 1998, 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 income and
capital appreciation. 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.
AMERICAN DEPOSITARY RECEIPTS: American Depositary Receipts ("ADRs") are
certificates issued by a U.S. depository (usually a bank) and represent a
specified quantity of shares of an underlying non-U.S. stock on deposit with a
custodian bank as collateral. ADRs may be sponsored or unsponsored. A sponsored
ADR is issued by a depository which has an exclusive relationship with the
issuer of the underlying security. An unsponsored ADR may be issued by any
number of U.S. depositories. Under the terms of most sponsored arrangements,
depositories agree to distribute notices of shareholder meetings and voting
instructions, and to provide shareholder communications and other information to
the ADR holders at the request of the issuer of the deposited securities. The
depository of an unsponsored ADR, on the other hand, is under no obligation to
distribute shareholder communications received from the issuer of the deposited
securities or to pass through voting rights to ADR holders in respect of the
deposited securities. The Fund may invest in either type of ADR. Although the
U.S. investor holds a substitute receipt of ownership rather than direct stock
certificates, the use of the depository receipts in the United States can reduce
costs and delays as well as potential currency exchange and other difficulties.
The Fund may purchase securities in local markets and direct delivery of these
ordinary shares to the local depository of an ADR agent bank in the foreign
country. Simultaneously, the ADR agents create a certificate which settles at
the Fund's custodian in five days. The Fund may also execute trades on the U.S.
markets using existing ADRs. A foreign issuer of the security underlying an ADR
is generally not subject to the same reporting requirements in the United States
as a domestic issuer. Accordingly the information available to a U.S. investor
will be limited to the information the foreign issuer is required to disclose in
its own country and the market value of an ADR may not reflect undisclosed
material information concerning the issuer of the underlying security. ADRs may
also be subject to exchange rate risks if the underlying foreign securities are
denominated in foreign currency.
MORTGAGE PASS-THROUGH SECURITIES: The Fund may invest in mortgage pass-through
securities as described in the Prospectus. Interests in pools of
mortgage-related securities differ from other forms of debt securities, which
normally provide for periodic payment of interest in fixed amounts with
principal payments at maturity or specified call dates. Instead, these
securities provide a monthly payment which consists of both interest and
principal payments. In effect, these payments are a "pass-through" of the
monthly payments made by the individual borrowers on their mortgage loans, net
of any fees paid to the issuer or guarantor of such securities. Additional
payments are caused by prepayments of principal resulting from the sale,
refinancing or foreclosure of the underlying property, net of fees or costs
which may be incurred. Some mortgage pass-through securities (such as securities
issued by the Government National Mortgage Association (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
2
<PAGE> 70
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 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
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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
amount agreed upon on the agreed upon delivery date or upon demand, as the case
may be, the Fund will have the right to liquidate the securities. If at the time
the Fund is contractually entitled to exercise its right to liquidate the
securities, the seller is subject to a proceeding under the bankruptcy laws or
its assets are otherwise subject to a stay order, the Fund's exercise of its
right to liquidate the securities may be delayed and result in certain losses
and costs to the Fund. The Fund has adopted and follows procedures which are
intended to minimize the risks of repurchase agreements. For example, the Fund
only enters into repurchase agreements after the Adviser has determined that the
seller is creditworthy, and the Adviser monitors that seller's creditworthiness
on an ongoing basis. Moreover, under such agreements, the value of the
securities (which are marked to market every business day) is required to be
greater than the repurchase price, and the Fund has the right to make margin
calls at any time if the value of the securities falls below the agreed upon
collateral.
LENDING OF PORTFOLIO SECURITIES: The Fund may seek to increase its income by
lending portfolio securities 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 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. The Fund would also receive a fee from the borrower or
compensation based on investment of the cash collateral, less a fee paid to the
borrower, if the collateral is in the form of cash. The Fund would not, however,
have the right to vote any securities having voting rights during the existence
of the loan, but 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
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current value of the underlying security at the time the Option is written.
The writing of covered put Options is similar in terms of risk/return
characteristics to buy-and-write transactions. Put Options may be used by the
Fund in the same market environments in which call Options are used in
equivalent buy-and-write transactions.
The Fund may also write combinations of Options on the same security, a practice
known as a "straddle." By writing a straddle, the Fund undertakes a simultaneous
obligation to sell or purchase the same security in the event that one of the
Options is exercised. If the price of the security subsequently rises
sufficiently above the exercise price to cover the amount of the premium and
transaction costs, the call will likely be exercised and the Fund will be
required to sell the underlying security at a below market price. This loss may
be offset, however, in whole or in part, by the premiums received on the writing
of the two Options. Conversely, if the price of the security declines by a
sufficient amount, the put will likely be exercised. The writing of straddles
will likely be effective, therefore, only where the price of a security remains
stable and neither the call nor the put is exercised. In an instance where one
of the Options is exercised, the loss on the purchase or sale of the underlying
security may exceed the amount of the premiums received.
By writing a call Option on a portfolio security, the Fund limits its
opportunity to profit from any increase in the market value of the underlying
security above the exercise price of the Option. By writing a put Option, the
Fund assumes the risk that it may be required to purchase the underlying
security for an exercise price above its then current market value, resulting in
a loss unless the security subsequently appreciates in value. The writing of
Options will not be undertaken by the Fund solely for hedging purposes, and may
involve certain risks which are not present in the case of hedging transactions.
Moreover, even where Options are written for hedging purposes, such transactions
will constitute only a partial hedge against declines in the value of portfolio
securities or against increases in the value of securities to be acquired, up to
the amount of the premium.
The Fund may also purchase put and call Options. Put Options are purchased to
hedge against a decline in the value of securities held in the Fund's portfolio.
If such a decline occurs, the put Options will permit the Fund to sell the
securities underlying such Options at the exercise price, or to close out the
Options at a profit. The Fund will purchase call Options to hedge against an
increase in the price of securities that the Fund anticipates purchasing in the
future. If such an increase occurs, the call Option will permit the Fund to
purchase the securities underlying such Option at the exercise price or to close
out the Option at a profit. The premium paid for a call or put Option plus any
transaction costs will reduce the benefit, if any, realized by the Fund upon
exercise of the Option, and, unless the price of the underlying security rises
or declines sufficiently, the Option may expire worthless to the Fund. In
addition, in the event that the price of the security in connection with which
an Option was 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
segregates liquid assets sufficient to cover the Fund's net liability under the
two options. Therefore, the Fund's liability for such a covered option is
generally limited to the difference between the amount of the Fund's liability
under the option written by the Fund less the value of the option held by the
Fund. Yield curve options may also be covered in such other manner as may be in
accordance with the requirements of the counter party with which the option is
traded and applicable laws and regulations. Yield curve options are traded
over-the-counter and because they have been only recently introduced,
established trading markets for these securities have not yet developed. Because
these securities are traded over-the-counter, the SEC has taken the position
that yield curve options are illiquid and, therefore, cannot exceed the SEC
illiquidity ceiling. See "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
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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.
One purpose of the purchase or sale of a Futures Contract, in the case of a
portfolio holding long-term debt securities, is to attempt to protect the Fund
from fluctuations in interest rates without actually buying or selling longterm
debt securities. For example, if the Fund owned long-term bonds and interest
rates were expected to increase, the Fund might enter into Futures Contracts for
the sale of debt securities. If interest rates did increase, the value of the
debt securities in the portfolio would decline, but the value of the Fund's
Futures Contracts should increase at approximately the same rate, thereby
keeping the net asset value of the Fund from declining as much as it otherwise
would have. The Fund could accomplish similar results by selling bonds with long
maturities and investing in bonds with short maturities when interest rates are
expected to increase or by buying bonds with long maturities and selling bonds
with short maturities when interest rates are expected to decline. However,
since the futures market is more liquid than the cash market, the use of Futures
Contracts as an investment technique allows the Fund to maintain a defensive
position without having to sell its portfolio securities.
Similarly, when it is expected that interest rates may decline, Futures
Contracts may be purchased to hedge against anticipated purchases of long-term
bonds at higher prices. Since the fluctuations in the value of Futures Contracts
should be similar to that of long-term bonds, the Fund could take advantage of
the anticipated rise in the value of long-term bonds without actually buying
them until the market had stabilized. At that time, the Futures Contracts could
be liquidated and the Fund could buy long-term bonds on the cash market.
Purchases of Futures Contracts would be particularly appropriate when the cash
flow from the sale of new shares of the Fund could have the effect of diluting
dividend earnings. To the extent the Fund enters into Futures Contracts for this
purpose, the assets in the segregated 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
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hedge against any increase in the price of securities which the Fund intends to
purchase. If a put or call option the Fund has written is exercised, the Fund
will incur a loss which will be reduced by the amount of the premium it
receives. Depending on the degree of correlation between changes in the value of
its portfolio securities and changes in the value of its futures positions, the
Fund's losses from existing Options on Futures Contracts may to some extent be
reduced or increased by changes in the value of portfolio securities.
The Fund may purchase Options on Futures Contracts for hedging purposes as an
alternative to purchasing or selling the underlying Futures Contracts. For
example, where a decrease in the value of portfolio securities is anticipated as
a result of a projected market-wide decline, a rise in interest rates or a
decline in the dollar value of foreign currencies in which portfolio securities
are denominated, the Fund may, in lieu of selling Futures Contracts, purchase
put options thereon. In the event that such decrease in portfolio value occurs,
it may be offset, in whole or part, by a profit on the option. Conversely, where
it is projected that the value of securities to be acquired by the Fund will
increase prior to acquisition, due to a market advance, or a decline in interest
rates or a rise in the dollar value of foreign currencies in which securities to
be acquired are denominated, the Fund may purchase call Options on Futures
Contracts, rather than purchasing the underlying Futures Contracts. As in the
case of Options, the writing of Options on Futures Contracts may require the
Fund to forgo all or a portion of the benefits of favorable movements in the
price of portfolio securities, and the purchase of Options on Futures Contracts
may require the Fund to forego all or a portion of such benefits up to the
amount of the premium paid and related transaction costs. The Fund may also
enter into Options on Futures Contracts for non-hedging purposes, to the extent
permitted by applicable law.
FORWARD CONTRACTS: The Fund may enter into forward foreign currency exchange
contracts for the purchase or sale of a specific currency at a future date at a
price set at the time of the contract (a "Forward Contract"). The Fund may enter
into Forward Contracts for hedging purposes as well as for non-hedging purposes.
The Fund may also enter into Forward Contracts for "cross hedging" as noted in
the Prospectus. Transactions in Forward Contracts entered into for hedging
purposes will include forward purchases or sales of foreign currencies for the
purpose of protecting the dollar value of securities denominated in a foreign
currency or protecting the dollar equivalent of interest or dividends to be paid
on such securities. By entering into such transactions, however, the Fund may be
required to forgo the benefits of advantageous changes in exchange rates. The
Fund may also enter into transactions in Forward Contracts for other than
hedging purposes which presents greater profit potential but also involves
increased risk. For example, if the Adviser believes that the value of a
particular foreign currency will increase or decrease relative to the value of
the U.S. dollar, the Fund may purchase or sell such currency, respectively,
through a Forward Contract. If the expected changes in the value of the currency
occur, the Fund will realize profits which will increase its gross income. Where
exchange 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 which require the use of segregated assets
or "cover" in connection with the purchase and sale of such contracts. In those
instances in which the Fund satisfies this requirement through segregation of
assets, it will segregate liquid assets, which will be marked to market on a
daily basis in an amount equal to the value of its commitments under Forward
Contracts.
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 securi-
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ties 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 segregate liquid assets to cover its current obligations under
swap transactions. If the Fund enters into a swap agreement on a net basis
(i.e., the two payment streams are netted out, with the Fund receiving or
paying, as the case may be, only the net amount of the two payments), the Fund
will segregate liquid assets with a daily value at least equal to the excess, if
any, of the Fund's accrued obligations under the swap agreement over the accrued
amount the Fund is entitled to receive under the agreement. If the Fund enters
into a swap agreement on other than a net basis, it will segregate 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
8
<PAGE> 76
changes in the value of the underlying Futures Contract will not be fully
reflected in the value of the option. The risk of imperfect correlation,
however, generally tends to diminish as the maturity or termination date of the
Option, Futures Contract or Forward Contract approaches.
The trading of options, Futures Contracts and Forward Contracts also entails the
risk that, if the Adviser's judgment as to the general direction of interest or
exchange rates is incorrect, the Fund's overall performance may be poorer than
if it had not entered into any such contract. For example, if the Fund has
hedged against the possibility of an increase in interest rates, and rates
instead decline, the Fund will lose part or all of the benefit of the increased
value of the securities being hedged, and may be required to meet ongoing daily
variation margin payments.
It should be noted that the Fund may purchase and sell Options, Futures
Contracts, Options on Futures Contracts and Forward Contracts not only for
hedging purposes, but also for non-hedging purposes, to the extent permitted by
applicable law, including for the purpose of increasing its return. As a result,
the Fund will incur the risk that losses on such transactions will not be offset
by corresponding increases in the value of portfolio securities or decreases in
the cost of securities to be acquired.
POTENTIAL LACK OF A LIQUID SECONDARY MARKET -- Prior to exercise or expiration,
a position in an exchange-traded Option, Futures Contract, Option on a Futures
Contract or Option on a Foreign Currency can only be terminated by entering into
a closing purchase or sale transaction, which requires a secondary market for
such instruments on the exchange on which the initial transaction was entered.
If no such market exists, it may not be possible to close out a position, and
the Fund could be required to purchase or sell the underlying instrument or meet
ongoing variation margin requirements. The inability to close out option or
futures positions also could have an adverse effect on the Fund's ability
effectively to hedge its portfolio.
The liquidity of a secondary market in an Option or Futures Contract may be
adversely affected by "daily price fluctuation limits," established by the
exchanges, which limit the amount of fluctuation in the price of a contract
during a single trading day and prohibit trading beyond such limits once they
have been reached. Such limits could prevent the Fund from liquidating open
positions, which could render its hedging strategy unsuccessful and result in
trading losses. The exchanges on which Options and Futures Contracts are traded
have also established a number of limitations governing the maximum number of
positions which may be traded by a trader, whether acting alone or in concert
with others. Further, the purchase and sale of exchange-traded options and
Futures Contracts is subject to the risk of trading halts, suspensions, exchange
or clearing corporation equipment failures, government intervention, insolvency
of 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,
24-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.
Alter-
9
<PAGE> 77
natively, 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, Options on Futures Contracts and Options on
Foreign Currencies traded on a CFTC-regulated exchange only (i) for bona fide
hedging purposes (as defined in CFTC regulations), or (ii) for non-bona fide
hedging purposes, provided that the aggregate initial margin and premiums
required to establish such non-bona fide hedging positions does not exceed 5% of
the liquidation value of the Fund's assets, after taking into account unrealized
profits and unrealized losses on any such contracts the Fund has entered into,
and excluding, in computing such 5%, the in-the-money amount with respect to an
option that is in-the-money at the time of purchase.
When the Fund purchases a Futures Contract, the Fund segregates an amount of
liquid assets 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, 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
10
<PAGE> 78
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;
(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 combinations thereof with
respect to securities, Futures Contracts and foreign currencies; or
(15) Issue any senior securities except as permitted by the 1940 Act. For
purposes of this restriction, collateral arrangements with respect to any type
of swap, option, Forward Contracts and Futures Contracts and collateral
arrangement with respect to initial and variation margin are not deemed to be
the issuance of a senior security.
As matters of non-fundamental policy (which may be changed without shareholder
approval), the Fund may not:
(1) 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;
(2) 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;
(3) Invest 25% or more of the market value of its total assets in securities
of issuers in any one industry; or
(4) Invest more than 5% of its net assets in gold.
Except with respect to Investment Restriction (1) and the Fund's illiquidity
policy, 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
RICHARD B. BAILEY* (born 9/14/26)
Private Investor; Massachusetts Financial Services Company, former Chairman and
Director (prior to September 30, 1991); Cambridge Bancorp, Director; Cambridge
Trust Company, Director
PETER G. HARWOOD (born 4/3/26)
Private Investor
Address: 211 Lindsay Pond Road, Concord, Massachusetts
J. ATWOOD IVES (born 5/1/36)
Eastern Enterprises (diversified services company), Chairman and Chief Executive
Officer
Address: 9 Riverside Road, Weston, Massachusetts
LAWRENCE T. PERERA (born 6/23/35)
Hemenway & Barnes (attorneys), Partner
Address: 60 State Street, Boston, Massachusetts
WILLIAM J. POORVU (born 4/10/35)
Harvard University Graduate School of Business Administration, Adjunct
Professor; CBL & Associates Properties, Inc. (a real estate investment trust),
Director; The Baupost Fund (a registered investment company), Vice Chairman
(since November 1993), Chairman and Trustee (prior to November 1993)
Address: Harvard Business School, Soldiers Field Road, Cambridge, Massachusetts
CHARLES W. SCHMIDT (born 3/18/28)
Private Investor; OHM Corporation, Director; Mohawk Paper Company, Director
Address: 30 Colpitts Road, Weston, Massachusetts
11
<PAGE> 79
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, Chairman, Chief Executive Officer and
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, Trustee
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
MARK E. BRADLEY* Assistant Treasurer (born 11/23/59)
Massachusetts Financial Services Company, Vice President (since March 1997);
Putnam Investments, Vice President (from September 1994 until March 1997);
Ernst & Young, Senior Tax Manager (until September 1994)
ELLEN MOYNIHAN* Assistant Treasurer (born 11/13/57)
Massachusetts Financial Services Company, Vice President (since September 1996);
Deloitte & Touche LLP, Senior Manager (until September 1996)
- ---------------
* "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. Messrs. Shames and Scott, Directors of MFD,
and Mr. Cavan, the Secretary of MFD, hold similar positions with certain other
MFS affiliates. Mr. Bailey is a Director of Sun Life Assurance Company of Canada
(U.S.), a subsidiary of Sun Life Assurance Company of Canada ("Sun Life").
The Fund pays the compensation of non-interested Trustees and Mr. Bailey (who
currently receive a fee of $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. 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 $2,595 $ 837 8 $283,647
Peter G. Harwood 2,735 618 5 121,105
J. Atwood Ives 2,595 881 17 108,720
Lawrence T. Perera 2,875 1,434 26 127,055
William J. Poorvu 2,735 1,542 25 121,105
Charles W. Schmidt 2,735 1,487 20 121,105
Arnold D. Scott 0 0 N/A 0
Jeffrey L. Shames 0 0 N/A 0
Elaine R. Smith 2,905 873 27 132,035
David B. Stone 2,875 1,265 11 127,055
</TABLE>
- ---------------
(1) For fiscal year ended November 30, 1997.
(2) Based on normal retirement age of 73. See the table below for the estimated
annual benefits payable upon retirement by the Fund to a Trustee based on
his or her estimated credited years of service.
(3) For calendar year 1997. All Trustees receiving compensation served as
Trustees of 27 funds within the MFS fund complex (having aggregate net
assets at December 31, 1997, of approximately $29 billion) except Mr.
Bailey, who served as Trustee of 69 funds within the MFS fund complex
(having aggregate net assets at December 31, 1997, of approximately $48
billion).
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>
$ 556 $ 83 $139 $195 $278
784 118 196 274 392
1,012 152 253 354 506
1,240 186 310 434 620
1,468 220 367 514 734
1,696 254 424 594 848
</TABLE>
- ---------------
(4) Other funds in the MFS fund complex provide similar retirement benefits to
the Trustees.
As of February 28, 1998, all Trustees and officers as a group owned less than 1%
of the Fund's shares outstanding on that date.
As of February 28, 1998, Merrill Lynch, Pierce, Fenner and Smith Inc., for the
sole benefit of its customers, 4800 Deer Lake
12
<PAGE> 80
Drive, Jacksonville, Florida, was the record owner of approximately 6.35%,
6.53%, and 12.79%, respectively, of the outstanding Class A, Class B and Class C
shares of the Fund. As of February 28, 1998, the MFS 401(k) Plan and the MFS
Defined Contribution Plan, Massachusetts Financial Services, 500 Boylston
Street, Boston, Massachusetts was the record owner of approximately 5.07% and
94.93%, respectively, of Class I shares of the Fund.
The Declaration of Trust provides that the Trust will indemnify its Trustees and
officers against liabilities and expenses incurred in connection with litigation
in which they may be involved because of their offices with the Trust, unless as
to 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.) Financial Services
Holdings, Inc., which in turn, is an indirect wholly owned subsidiary of 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, 1997, MFS received management fees
under the Advisory Agreement of $2,485,005, equivalent, on an annualized basis,
to 0.75% 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.
The Fund pays all of its expenses (other than those assumed by MFS or MFD),
including: advisory and administrative services fees; 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, 1997, 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, 1998, and will
continue in effect thereafter only if such continuance is specifically approved
at least annually by the Board of Trustees or by vote of a majority of the
Fund's shares (as defined in "Investment Restrictions") and, in either case, by
a majority of the Trustees who are not parties to the Advisory Agreement or
interested persons of any such party. The Advisory Agreement terminates
automatically if it is assigned and may be terminated without penalty by vote of
a majority of the Fund's shares (as defined in "Investment Restrictions"), or by
either party on not more than 60 days' nor less than 30 days' written notice.
The Advisory Agreement also provides that neither the Adviser nor its personnel
shall be liable for any error of judgment or mistake of law or for any loss
arising out of any investment or for any act or omission in the execution and
13
<PAGE> 81
management of the Fund, except for willful misfeasance, bad faith or gross
negligence in the performance of its or their duties or by reason of reckless
disregard of its or their obligations and duties under the Advisory Agreement.
ADMINISTRATOR
MFS provides the Fund with certain financial, legal, compliance, shareholder
communications and other administrative services pursuant to a Master
Administrative Services Agreement dated March 1, 1997, as amended. Under this
Agreement, the Fund pays MFS an administrative fee of up to 0.015% per annum of
the Fund's average daily net assets. This fee reimburses MFS for a portion of
the costs it incurs to provide such services. For the period March 1, 1997 to
November 30, 1997, MFS received fees under the Master Administrative Services
Agreement of $35,858.
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.
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 Trust. 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 0.1125%. In addition, the Shareholder
Servicing Agent will be reimbursed by the Fund for certain expenses incurred by
the Shareholder Servicing Agent on behalf of the Fund. State Street Bank and
Trust Company, the dividend and distribution disbursing agent of the Fund, has
contracted with the Shareholder Servicing Agent to perform certain dividend
disbursing agent functions for the Fund.
DISTRIBUTOR
MFD, a wholly owned subsidiary of MFS, serves as distributor for the continuous
offering of shares of the Fund pursuant to a Distribution Agreement as amended
and restated as of April 21, 1993 (the "Distribution Agreement"), with the
Trust. Prior to January 1, 1995, MFS Financial Services, Inc. ("FSI"), another
wholly owned subsidiary of MFS, was the Fund's distributor. Where 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 commissions 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
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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, 1997, MFD received sales
charges of $38,215 and dealers received sales charges of $210,843 (as concession
on gross sales charges of $252,784) for selling Class A shares of the Fund; the
Fund received $17,976,018 representing the aggregate net asset value. 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 years ended November 30, 1997, 1996 and 1995, the CDSC
imposed on redemption of the Fund's Class A shares was $0, $9,358 and $768,
respectively. During the Fund's fiscal years ended November 30, 1997, 1996 and
1995, the CDSC imposed on redemption of the Fund's Class B shares was $286,497,
$212,515 and $266,769, respectively. During the Fund's fiscal year ended
November 30, 1997 and the period April 1, 1996 through November 30, 1996, the
CDSC imposed on the redemption of Class C shares was $5,531 and $609,
respectively.
The Distribution Agreement will remain in effect until August 1, 1998, and will
continue in effect thereafter only if such continuance is specifically approved
at least annually by the Board of Trustees or by vote of a majority of the
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 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
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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 $54,160 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, 1997, 1996 and 1995, the Fund paid no
brokerage commissions.
In certain instances there may be securities which are suitable for the Fund's
portfolio as well as for that of one or more of the other clients of the Adviser
or any subsidiary of the Adviser. Investment decisions for the Fund and for such
other clients are made with a view to achieving their respective investment
objectives. It may develop that a particular security is bought or sold for only
one client even though it might be held by, or bought or sold for, other
clients. Likewise, a particular security may be bought for one or more clients
when one or more other clients are selling that same security. Some simultaneous
transactions are inevitable when several clients receive investment advice from
the same investment adviser, particularly when the same security is suitable for
the investment objectives of more than one client. When two or more clients are
simultaneously engaged in the purchase or sale of the same security, the
securities are allocated among clients in a manner believed 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 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
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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.
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
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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
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
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<PAGE> 86
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, the following:
- - Traditional Individual Retirement Accounts (IRAs) (for individuals who desire
to make limited contributions to a tax deferred retirement program and, if
eligible, to receive a federal income tax deduction for amounts contributed);
- - Roth Individual Retirement Accounts (Roth IRAs) (for individuals who desire to
make limited contributions to a tax-favored retirement program);
- - Simplified Employee Pension (SEP-IRA) Plans;
- - Retirement Plans Qualified under Section 401(k) of the Internal Revenue Code
of 1986 (the "Code"), as amended;
- - 403(b) Plans (deferred compensation arrangements for employees of public
school systems and certain non-profit organizations); and
- - Certain 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 gross income, the amount of Fund distributions, and the
composition of the Fund's portfolio assets. Because the Fund intends to
distribute all of its net investment income and net realized capital gains to
shareholders in accordance with the timing requirements imposed by the Code, it
is not expected that the Fund will be required to pay any federal income or
excise taxes, although the Fund's foreign-source income may be subject to
foreign withholding taxes. If the Fund should fail to qualify as a "regulated
investment company" in any year, the Fund would incur a regular corporate
federal income tax upon its taxable income and Fund distributions would
generally be taxable as ordinary dividend income to the shareholders.
Shareholders of the Fund normally will have to pay federal income taxes and any
state or local taxes on the dividends and
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<PAGE> 87
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 the net long-term
capital gains over net short-term capital losses), whether paid in cash or
reinvested in additional shares, are taxable to shareholders as long-term
capital gains for federal income tax purposes without regard to the length of
time the shareholders have held their shares. Such capital gains will generally
be taxable to shareholders as if the shareholders had directly realized gains
from the same sources from which they were realized by the Fund. Any Fund
dividend that is declared in October, November or December of any calendar year,
that is payable to shareholders of record in such a month, and that is paid the
following January will be treated as if received by the shareholders on December
31 of the year in which the dividend is declared. The Fund will notify
shareholders regarding the federal tax status of its distributions after the end
of each calendar year.
Any Fund distribution 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; a
long-term capital gain realized by an individual, estate or trust may be
eligible for reduced tax rates if the shares were held for more than 18 months.
However, any loss realized upon a disposition of shares in the Fund held for six
months or less will be treated as a long-term capital loss to the extent of any
distributions of net capital gain made with respect to those shares. Any loss
realized upon a disposition of shares may also be disallowed under rules
relating to wash sales. Gain may be increased (or loss reduced) upon a
redemption of Class A shares of the Fund within 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 those securities.
In order to distribute this income and avoid a tax on the Fund, the Fund may be
required to liquidate portfolio securities that it might otherwise have
continued to hold, potentially resulting in additional taxable gain or loss to
the Fund. An investment in residual interests of a CMO that has elected to be
treated as a real estate mortgage investment conduit, or "REMIC," can create
complex tax problems, especially if the Fund has state or local governments or
other tax exempt organizations as shareholders.
The Fund's transactions in options, Futures Contracts, Forward Contracts and
swaps and related transactions will be subject to special tax rules that may
affect the amount, timing and character of Fund income and distributions to
shareholders. For example, certain positions held by the Fund on the last
business day of each taxable year will be marked to market (i.e., treated as if
closed out) on that day, and any gain or loss associated with the positions will
be treated as 60% long-term and 40% short-term capital gain or loss. Certain
positions held by the Fund that substantially diminish its risk of loss with
respect to other positions in its portfolio may constitute "straddles," and may
be subject to special tax rules that would cause deferral of Fund losses,
adjustments in the holding periods of Fund securities, and conversion of
short-term into long-term capital losses. Certain tax elections exist for
straddles that may alter the effects of these rules. The Fund will limit its
activities in options, Futures Contracts, Forward Contracts, and swaps and
related transactions to the extent necessary to meet the requirements of
Subchapter M of the Code.
Special tax considerations apply with respect to foreign investments of the
Fund. Foreign exchange gains and losses realized by the Fund will generally be
treated as ordinary income and losses. Use of foreign currencies for non-hedging
purposes and investment by the Fund in certain "passive foreign investment
companies" may be limited in order to avoid a tax on the Fund. The Fund may
elect to mark to market any investments in "passive foreign investment
companies" on the last day of each year. This election may cause the Fund to
recognize income prior to the receipt of cash payments with respect to those
investments; in order to distribute this income and avoid a tax on the Fund, the
Fund may be required to liquidate portfolio securities that it might otherwise
have continued to hold.
Investment income received by the Fund from foreign securities may be subject to
foreign income taxes withheld at the source. The 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. 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
20
<PAGE> 88
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 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 the rate of 30%. The Fund intends
to withhold U.S. federal income tax at the rate of 30% (or any lower rate
permitted under an applicable treaty) on any taxable dividends and other
payments to Non-U.S. Persons that are subject to such withholding. Any amounts
overwithheld may be recovered by such persons by filing a claim for refund with
the U.S. Internal Revenue Service within the time period appropriate to such
claims. Distributions received from the Fund by Non-U.S. Persons may also be
subject to tax under the laws of their own jurisdictions. The Fund is also
required in certain circumstances to apply backup withholding at a rate of 31%
on taxable dividends and redemption proceeds paid to any shareholder (including
a Non-U.S. Person) who does not furnish to the Fund certain information and
certifications or who is otherwise subject to backup withholding. Backup
withholding will not, however, be applied to payments that have been subject to
30% withholding.
Distributions of the Fund that are derived from interest on obligations of the
U.S. Government and certain of its agencies and instrumentalities (but generally
not from capital gains realized upon the disposition of such obligations) may be
exempt from state and local taxes. The Fund intends to advise shareholders of
the extent, if any, to which its distributions consist of such interest.
Shareholders are urged to consult their tax advisers regarding the possible
exclusion of such portion of their dividends for state and local income tax
purposes as well as regarding the tax consequences of an investment in the Fund.
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,
Martin Luther King, Jr., Day, Presidents' Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day and Christmas Day.) This
determination is made once each day as of the close of regular trading on the
Exchange by deducting the amount of the liabilities attributable to the class
from the value of the assets attributable to the class and dividing the
difference by the number of shares of the class outstanding.
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 stock market, 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 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
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<PAGE> 89
distributor, or its agent, the Shareholder Servicing Agent, prior to the close
of that business day.
PERFORMANCE INFORMATION
TOTAL RATE OF RETURN: The Fund will calculate its total rate of return for each
class of shares for certain periods by determining the average annual compounded
rates of return over those periods that would cause an investment of $1,000
(made with all distributions reinvested and reflecting the CDSC or the maximum
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% for Class A shares) and/or (iii)
total rates of return which represent aggregate performance over a period or
year-by-year performance, and which may or may not reflect the effect of the
maximum or other sales charge or CDSC.
The Fund offers multiple classes of shares which were initially offered for sale
to, and purchased by, the public on different dates (the class "inception
date"). The calculation of total rate of return for a class of shares which has
a later class inception date than another class of shares of the Fund is based
both on (i) the performance of the Fund's newer class from its inception date
and (ii) the performance of the Fund's oldest class from its inception date up
to the class inception date of the newer class.
As discussed in the Prospectus, the sales charges, expenses and expense ratios,
and therefore the performance, of the Fund's classes of shares differ. In
calculating total rate of return for a newer class of shares in accordance with
certain formulas required by the SEC, the performance will be adjusted to take
into account the fact that the newer class is subject to a different sales
charge than the oldest class (e.g., if the newer class is Class A shares, the
total rate of return quoted will reflect the deduction of the initial sales
charge applicable to Class A shares; if the newer class is Class B shares, the
total rate of return quoted will reflect the deduction of the CDSC applicable to
Class B shares). However, the performance will not be adjusted to take into
account the fact that the newer class of shares bears different class specific
expenses than the oldest shares (e.g., Rule 12b-1 fees). Therefore, the total
rate of return quoted for a newer class of shares will differ from the return
that would 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, 1988 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."
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 annual-
22
<PAGE> 90
ize 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.
-- 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.
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<PAGE> 91
-- 1993 -- MFS(R) World Growth Fund is the first global emerging markets fund
to offer the expertise of two sub-advisers.
-- 1993 -- MFS becomes money manager of MFS(R) Union Standard(R) Equity Fund,
the first fund to invest in companies deemed to be union-friendly by an
Advisory Board of senior labor officials, senior managers of companies with
significant labor contracts, academics and other national labor leaders or
experts.
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, 1997, 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 $576,874 $135,002 $441,872
Class B Shares $886,576 $682,614 $203,962
Class C Shares $125,067 $ 15,030 $110,037
</TABLE>
GENERAL: The Distribution Plan will remain in effect until August 1, 1998, and
will continue in effect thereafter only if such continuance is specifically
approved at least annually by vote of both the Trustees and a majority of the
Trustees who are not "interested persons" or financially interested parties 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 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
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<PAGE> 92
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.
To the extent any Series' shareholder owns a controlling percentage of the
Series' shares, such shareholder may affect the outcome of such matters to a
greater extent than other Series 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, 1997; the Statement of Operations for the year ended November 30,
1997; the Statement of Changes in Net Assets for each of the two years in the
period ended November 30, 1997 and November 30, 1996; the Notes to the Financial
Statements and the Reports of Independent Auditors, each of which is included in
the Annual Report to Shareholders of the Fund, 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.
25
<PAGE> 93
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, 1988........................................... $ 8,916 $ 104 $ 923 $ 9,943
December 31, 1989........................................... 9,189 107 1,371 10,667
December 31, 1990........................................... 9,630 625 2,321 12,576
December 31, 1991........................................... 10,136 898 3,230 14,264
December 31, 1992........................................... 9,229 818 4,409 14,456
December 31, 1993........................................... 9,895 914 6,305 17,114
December 31, 1994........................................... 8,756 1,361 5,873 15,990
December 31, 1995........................................... 8,844 1,375 8,247 18,466
December 31, 1996........................................... 9,069 1,435 8,958 19,462
December 31, 1997........................................... 8,699 1,376 9,445 19,520
</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 as of November 30, 1997.
<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............................ -5.00% 5.25% 7.31% 4.80% 3.69%
Class A shares without sales charge......................... -0.29% 6.29% 7.84%
Class B shares with CDSC.................................... -4.96% 5.27%(1) 7.46%(1)
Class B shares without CDSC................................. -1.08% 5.55%(1) 7.46%(1) 4.30%
Class C shares with CDSC.................................... -2.07% 5.62%(2) 7.50%(2)
Class C shares without CDSC................................. -1.10% 5.62%(2) 7.50%(2) 4.29%
Class I shares.............................................. -0.12%(3) 6.33%(3) 7.86%(3) 5.30%
</TABLE>
(1) Class B share performance includes the performance of the Fund's Class A
shares for periods prior to the inception of Class B shares on September 7,
1993. Sales charges, expenses and expense ratios, and therefore performance,
for Class A and Class B shares differ. Class B share performance has been
adjusted to reflect that Class B shares generally are subject to CDSC
(unless the performance quotation does not give effect to the CDSC) whereas
Class A shares generally are subject to an initial sales charge. Class B
share performance has not, however, been adjusted to reflect differences in
operating expenses (e.g., Rule 12b-1 fees), which generally are lower for
Class A shares.
(2) Class C share performance includes the performance of the Fund's Class A
shares for periods prior to the inception of Class C shares on January 3,
1994. Sales charges, expenses and expense ratios, and therefore performance,
for Class A and Class C shares differ. Class C share performance has been
adjusted to reflect that Class C shares generally are subject to a CDSC
(unless the performance quotation does not give effect to the CDSC) whereas
Class A shares generally are subject to an initial sales charge. Class C
share performance has not, however, been adjusted to reflect differences in
operating expenses (e.g., Rule 12b-1 fees), which generally are lower for
Class A shares.
(3) Class I share performance includes the performance of the Fund's Class A
shares for the periods prior to the inception of Class I shares on January
1, 1997. Sales charges, expenses and expense ratios, and therefore,
performance for Class I and A shares differ. Class I share performance has
been adjusted to reflect that Class I shares are not subject to an initial
sales charge, whereas Class A shares generally are subject to an initial
sales charge. Class I share performance has not, however, been adjusted to
reflect differences in operating expenses (e.g., Rule 12b-1 fees), which
generally are lower for Class I shares.
A-1
<PAGE> 94
INVESTMENT ADVISER
Massachusetts Financial Services Company
500 Boylston Street, Boston, MA 02116
617-954-5000
DISTRIBUTOR
MFS Fund Distributors, Inc.
500 Boylston Street, Boston, MA 02116
(617)954-5000
CUSTODIAN AND DIVIDEND DISBURSING AGENT
State Street Bank and Trust Company
225 Franklin Street, Boston, MA 02110
SHAREHOLDER SERVICING AGENT
MFS Service Center, Inc.
500 Boylston Street, Boston, MA 02116
Toll free: (800) 225-2606
Mailing Address:
P.O. Box 2281, Boston, MA 02107-9906
INDEPENDENT AUDITORS
Ernst & Young LLP
200 Clarendon Street
Boston, MA 02116
[MFS LOGO] MWG-13-4/98/.5M 20/220/320
MFS(R)
WORLD
GOVERNMENTS FUND
500 BOYLSTON STREET
BOSTON, MA 02116
<PAGE> 95
[MASSACHUSETTS
CAPITAL
OPPORTUNITIES
LOGO AND DATE]
PROSPECTUS
CLASS A SHARES OF BENEFICIAL INTEREST
CLASS B SHARES OF BENEFICIAL INTEREST
CLASS C SHARES OF BENEFICIAL INTEREST
- -------------------------------------------------------------
This Prospectus pertains to MFS Capital Opportunities 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.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR
ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
INVESTORS SHOULD READ THIS PROSPECTUS AND RETAIN IT FOR
FUTURE REFERENCE.
<PAGE> 96
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, 1998, 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 39 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 at
http://www.sec.gov that contains the SAI, materials that are incorporated by
reference into this Prospectus and the SAI, and other information regarding the
Fund. This Prospectus is available on the Adviser's Internet World Wide Web site
at http://www.mfs.com.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
1. Expense Summary......................................... 3
2. Condensed Financial Information......................... 4
3. The Fund................................................ 9
4. Investment Objective and Policies....................... 9
5. Certain Securities and Investment Techniques............ 10
6. Additional Risk Factors................................. 16
7. Management of the Fund.................................. 19
8. Information Concerning Shares of the Fund............... 20
Purchases............................................ 20
Exchanges............................................ 27
Redemptions and Repurchases.......................... 29
Distribution Plan.................................... 32
Distributions........................................ 34
Tax Status........................................... 34
Net Asset Value...................................... 35
Description of Shares, Voting Rights and
Liabilities....................................... 35
Performance Information.............................. 36
9. Shareholder Services.................................... 37
APPENDIX A............................................... A-1
APPENDIX B............................................... B-1
</TABLE>
2
<PAGE> 97
1. EXPENSE SUMMARY
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
SHAREHOLDER TRANSACTION EXPENSES: ------- ------- -------
<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)................ 0.29% 0.29% 0.29%
----- ------ ------
Total Operating Expenses......... 1.29% 2.04% 2.04%
</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."
3
<PAGE> 98
EXAMPLE OF EXPENSES
An investor would pay the following dollar amounts of expenses on a $1,000
investment in the Fund assuming (a) a 5% annual return and (b) redemption at the
end of each of the time periods indicated (unless otherwise indicated):
<TABLE>
<CAPTION>
PERIOD CLASS A CLASS B CLASS C
------ ------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
(1) (1)
1 year........................ $ 70 $ 61 $ 21 $ 31 $ 21
3 years....................... 96 94 64 64 64
5 years....................... 124 130 110 110 110
10 years....................... 204 217(2) 217(2) 237 237
</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. 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.
4
<PAGE> 99
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
YEAR ENDED NOVEMBER 30,
---------------------------------------------------------
1997 1996 1995 1994 1993 1992
------- ------- ------- ------- ------- -------
CLASS A
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
PER SHARE DATA (FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD):
Net asset value - beginning of
period........................... $ 13.34 $ 12.39 $ 9.44 $ 10.82 $ 10.17 $ 8.73
------- ------- ------- ------- ------- -------
Income from investment
operations# -
Net investment income (loss)... $ 0.07 $ 0.05 $ 0.01 $ (0.01) $ 0.02 $ --
Net realized and unrealized
gain on investments and
foreign currency
transactions................. 2.97 2.04 3.64 0.26 1.96 2.03
------- ------- ------- ------- ------- -------
Total from investment
operations............... $ 3.04 $ 2.09 $ 3.65 $ 0.25 $ 1.98 $ 2.03
------- ------- ------- ------- ------- -------
Less distributions declared to
shareholders -
From net investment income....... $ (0.03) $ -- $ -- $ (0.03) $ -- $ (0.07)
From net realized gain on
investments and foreign
currency transactions.......... (1.12) (1.14) (0.70) (1.60) (1.33) (0.52)
------- ------- ------- ------- ------- -------
Total distributions declared to
shareholders................. $ (1.15) $ (1.14) $ (0.70) $ (1.63) $ (1.33) $ (0.59)
------- ------- ------- ------- ------- -------
Net asset value - end of period.... $ 15.23 $ 13.34 $ 12.39 $ 9.44 $ 10.82 $ 10.17
======= ======= ======= ======= ======= =======
Total return++..................... 24.96% 18.50% 41.67% 1.92% 22.10% 24.60%
RATIOS (TO AVERAGE NET ASSETS)/SUPPLEMENTAL DATA:
Expenses##....................... 1.29% 1.32% 1.35% 1.37% 1.42% 1.53%
Net investment income (loss)..... 0.49% 0.43% 0.06% (0.05)% 0.09% --
PORTFOLIO TURNOVER................. 144% 112% 109% 91% 95% 111%
NET ASSETS AT END OF PERIOD (000
OMITTED)......................... $609,189 $427,478 $227,555 $141,790 $132,207 $112,958
AVERAGE COMMISSION RATE###......... $0.0317 $0.0304 $ -- $ -- $ -- $ --
</TABLE>
#Per share data for the periods subsequent to November 30, 1993, are based on
average shares outstanding.
##For fiscal years ending after September 1, 1995, the Fund's expenses are
calculated without reduction for fees paid indirectly.
###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.
If the charge had been included, the results would have been lower.
5
<PAGE> 100
FINANCIAL HIGHLIGHTS -- CONTINUED
<TABLE>
<CAPTION>
YEAR SIX MONTHS
ENDED ENDED YEAR ENDED MAY 31,
NOVEMBER 30, NOVEMBER 30, ---------------------------
1991 1990 1990 1989 1988
------------ ------------ ------- ------- -------
CLASS A
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE DATA (FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD):
Net asset value - beginning of
period............................. $ 7.46 $ 8.99 $ 10.52 $ 8.70 $ 9.60
------- ------- ------- ------- -------
Income from investment operations -
Net investment income.............. $ 0.14 $ 0.09 $ 0.33 $ 0.21 $ 0.10
Net realized and unrealized gain
(loss) on investments and foreign
currency transactions............ 1.21 (1.38) 0.17 2.17 (0.86)
------- ------- ------- ------- -------
Total from investment
operations................. $ 1.35 $ (1.29) $ 0.50 $ 2.38 $ (0.76)
------- ------- ------- ------- -------
Less distributions declared to
shareholders -
From net investment income......... $ (0.08) $ (0.11) $ (0.34) $ (0.17) $ (0.03)
From net realized gain on
investments and foreign currency
transactions..................... -- (0.05) (1.69) (0.39) (0.11)
From paid-in capital............... -- (0.08) -- -- --
------- ------- ------- ------- -------
Total distributions declared
to shareholders............ $ (0.08) $ (0.24) $ (2.03) $ (0.56) $ (0.14)
------- ------- ------- ------- -------
Net asset value - end of period...... $8.73 $7.46 $8.99 $10.52 $8.70
======= ======= ======= ======= =======
Total return++....................... 18.26% (29.48)%+ 5.13% 28.47% (7.63)%
RATIOS (TO AVERAGE NET ASSETS)/SUPPLEMENTAL DATA:
Expenses........................... 1.50% 1.51%+ 1.26% 1.41% 1.33%
Net investment income.............. 1.65% 2.30%+ 3.38% 2.29% 1.12%
PORTFOLIO TURNOVER................... 132% 36% 88% 80% 99%
NET ASSETS AT END OF PERIOD (000
OMITTED)........................... $104,600 $100,398 $125,191 $133,219 $116,218
</TABLE>
+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.
6
<PAGE> 101
FINANCIAL HIGHLIGHTS -- CONTINUED
<TABLE>
<CAPTION>
YEAR ENDED NOVEMBER 30,
----------------------------------------------
1997 1996 1995 1994 1993*
------- ------- ------ ------ --------
CLASS B
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE DATA (FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD):
Net asset value - beginning of period........ $ 13.01 $ 12.15 $ 9.34 $10.79 $ 10.61
------- ------- ------ ------ --------
Income from investment operations# -
Net investment loss........................ $ (0.04) $ (0.04) $(0.08) $(0.09) $ (0.01)
Net realized and unrealized gain on
investments and foreign currency
transactions............................. 2.89 2.00 3.59 0.27 0.19
------- ------- ------ ------ --------
Total from investment operations..... $ 2.85 $ 1.96 $ 3.51 $ 0.18 $ 0.18
------- ------- ------ ------ --------
Less distributions declared to shareholders -
From net realized gain on investments and
foreign currency transactions............ $ (1.09) $ (1.10) $(0.70) $(1.60) $ --
In excess of net investment income......... -- -- -- (0.03) --
------- ------- ------ ------ --------
Total distributions declared to
shareholders....................... $ (1.09) $ (1.10) $(0.70) $(1.63) $ --
------- ------- ------ ------ --------
Net asset value - end of period.............. $ 14.77 $ 13.01 $12.15 $ 9.34 $ 10.79
======= ======= ====== ====== ========
Total return................................. 24.03% 17.50% 40.53% 1.15% 1.70%++
RATIOS (TO AVERAGE NET ASSETS)/SUPPLEMENTAL
DATA:
Expenses##................................. 2.04% 2.16% 2.17% 2.25% 2.46%+
Net investment loss........................ (0.28)% (0.33)% (0.77)% (0.96)% (1.37)%+
PORTFOLIO TURNOVER........................... 144% 112% 109% 91% 95%
AVERAGE COMMISSION RATE###................... $0.0317 $0.0304 $ -- $ -- $ --
NET ASSETS AT END OF PERIOD (000 OMITTED).... $411,640 $244,247 $46,068 $17,189 $ 1,097
</TABLE>
*For the period from the inception of Class B, September 7, 1993, through
November 30, 1993.
+Annualized.
++Not annualized.
#Per share data for the periods subsequent to November 30, 1993, are based on
average shares outstanding.
##For fiscal years ending after September 1, 1995, the Fund's expenses are
calculated without reduction for fees paid indirectly.
###Average commission rate is calculated for funds with fiscal years beginning
on or after September 1, 1995.
7
<PAGE> 102
FINANCIAL HIGHLIGHTS -- CONTINUED
<TABLE>
<CAPTION>
YEAR ENDED PERIOD ENDED
NOVEMBER 30, NOVEMBER 30,
1997 1996**
----------------- -------------------
CLASS C
- --------------------------------------------------------------------------------------------
<S> <C> <C>
PER SHARE DATA (FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD):
Net asset value -- beginning of period.............. $ 13.03 $ 12.00
------- -------
Income from investment operations# -
Net investment loss............................... $ (0.04) $ (0.01)
Net realized and unrealized gain on investments
and foreign currency transactions............... 2.88 1.04
------- -------
Total from investment operations............ $ 2.84 $ 1.03
------- -------
Less distributions declared to shareholders -
From net investment income........................ $ (0.01) $ --
From net realized gain on investments and foreign
currency transactions........................... (1.12) --
------- -------
Total distributions declared to shareholders.... $ (1.13) $ --
------- -------
Net asset value - end of period..................... $ 14.74 $ 13.03
======= =======
Total return........................................ 24.02% 7.95%++
RATIOS (TO AVERAGE NET ASSETS)/SUPPLEMENTAL DATA:
Expenses##........................................ 2.04% 2.11%+
Net investment loss............................... (0.28)% (0.17)%+
PORTFOLIO TURNOVER.................................. 144% 112%
AVERAGE COMMISSION RATE............................. $0.0317 $0.0304
NET ASSETS AT END OF PERIOD (000) OMITTED).......... $66,148 $31,919
</TABLE>
+Annualized.
++Not annualized.
**For the period from the inception of Class C shares, April 1, 1996, through
November 30, 1996.
#Per share data are based on average shares outstanding.
##The Fund's expenses are calculated without reduction for fees paid
indirectly.
8
<PAGE> 103
3. 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.
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 which may be rated below the four highest grades of Moody's
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Investors Service, Inc. ("Moody's") (Aaa, Aa, A or Baa) or Standard & Poor's
Ratings Services ("S&P"), Fitch IBCA ("Fitch") or Duff & Phelps Credit Rating
Co. ("Duff & Phelps") (AAA, AA, A, BBB) 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. CERTAIN SECURITIES AND INVESTMENT TECHNIQUES
Consistent with the Fund's investment objective and policies, the Fund may
engage in the following securities transactions and investment techniques, many
of which are described more fully in the SAI. See "Investment Objective,
Policies and Restrictions" in the SAI.
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 of the liquidity
determinations, focusing on factors such as valuation, liquidity and
availability of information. Investing in Rule 144A securities could have the
effect of decreasing the level of liquidity in the Fund to the extent that
qualified institutional buyers become for a time uninterested in purchasing Rule
144A securities held in the Fund's portfolio. Subject to the Fund's 15%
limitation on investments in illiquid investments, the Fund may also invest in
restricted securities that may not be sold under Rule 144A, which presents
certain risks. As a result, the Fund 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 25% (and 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,
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governmental administration or economic or monetary policy (in the United States
or abroad) or circumstances in dealings between nations. Costs may be incurred
in connection with conversions between various currencies. Special
considerations may also include more limited information about foreign issuers,
higher brokerage costs, different accounting standards and thinner trading
markets. Foreign securities markets may also be less liquid, more volatile and
less subject to government supervision than in the United States. Investments in
foreign countries could be affected by other factors including expropriation,
confiscatory taxation and potential difficulties in enforcing contractual
obligations and could be subject to extended settlement periods. The Fund may
hold foreign currency received in connection with investments in foreign
securities when, in the judgment of the Adviser, it would be beneficial to
convert such currency into U.S. dollars at a later date, based on anticipated
changes in the relevant exchange rate. The Fund may also hold foreign currency
in anticipation of purchasing foreign securities.
EMERGING MARKET SECURITIES: The Fund may invest in securities of issuers whose
principal activities are located in emerging market countries. Emerging market
countries include any country determined by the Adviser to have an emerging
market economy, taking into account a number of factors, including whether the
country has a low- to middle-income economy according to the International Bank
for Reconstruction and Development, the country's foreign currency debt rating,
its political and economic stability and the development of its financial and
capital markets. The Adviser determines whether an issuer's principal activities
are located in an emerging market country by considering such factors as its
country of organization, the principal trading market for its securities and the
source of its revenues and location of its assets. The issuer's principal
activities generally are deemed to be located in a particular country if: (a)
the security is issued or guaranteed by the government of that country or any of
its agencies, authorities or instrumentalities; (b) the issuer is organized
under the laws of, and maintains a principal office in, that country; (c) the
issuer has its principal securities trading market in that country; (d) the
issuer derives 50% or more of its total revenues from goods sold or services
performed in that country; or (e) the issuer has 50% or more of its assets in
that country.
BRADY BONDS: The Fund may invest in Brady Bonds, which are securities created
through the exchange of existing commercial bank loans to public and private
entities in certain emerging markets for new bonds in connection with debt
restructurings under a debt restructuring plan introduced by former U.S.
Secretary of the Treasury, Nicholas F. Brady (the "Brady Plan"). Brady Plan debt
restructurings have been implemented to date in Argentina, Brazil, Bulgaria,
Costa Rica, Croatia, Dominican Republic, Ecuador, Jordan, Mexico, Morocco,
Nigeria, Panama, Peru, The Philippines, Poland, Slovenia, Uruguay and Venezuela.
Brady Bonds have been issued only recently, and for that reason do not have a
long payment history. Brady Bonds may be collateralized or uncollateralized, are
issued in various currencies (but primarily the U.S. dollar) and are actively
traded in over-the-counter secondary markets. U.S. dollar-denominated,
collateralized Brady Bonds, which may be fixed-rate bonds or floating-rate
bonds, are generally collateralized in full as to principal by U.S. Treasury
zero coupon bonds having the same maturity as the bonds. Brady Bonds are often
viewed as having three or four valuation components: the collateralized
repayment of
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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 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
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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. While awaiting delivery of securities
purchased on such bases, the Fund will segregate liquid assets sufficient to
cover its commitments. Although the Fund does not intend to make such purchases
for speculative purposes, purchases of securities on such bases may involve more
risk than other types of purchases.
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 changes in the
value of one or more specified underlying instruments. Indexed securities may be
positively or negatively indexed (i.e., their principal value or interest rates
may increase or decrease if the underlying instrument appreciates), and may have
return characteristics similar to direct investments in the underlying
instrument or to one or more options on the underlying instrument. Indexed
securities may be more volatile than the underlying instrument itself, and could
involve the loss of all or a portion of the principal amount of, or interest on,
the investment.
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. However, the writing of an option constitutes only a
partial hedge, up to the amount of the premium, less any transaction cost. In
contrast, 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
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Fund in connection with such transactions is limited to the amount of the
premium and related transaction costs associated with the option, although the
Fund may be required to forfeit such amounts in the event that the prices of
securities underlying the options do not move in the direction or to the extent
anticipated.
The Fund may also enter into options on the yield "spread," or yield
differential, between two securities, a transaction referred to as a "yield
curve" option, for hedging and non-hedging (an effort to increase current
income) purposes. In contrast to other types of options, a yield curve option is
based on the difference between the yields of designated securities rather than
the actual prices of the individual securities, and is settled through cash
payments. Accordingly, a yield curve option is profitable to the holder if this
differential widens (in the case of a call) or narrows (in the case of a put),
regardless of whether the yields of the underlying securities increase or
decrease. Yield curve options written by the Fund will be covered as described
in the 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
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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.
OPTIONS ON FUTURES CONTRACTS: The Fund may purchase and write options on Futures
Contracts ("Options on Futures Contracts") in order to protect against declines
in the values of portfolio securities or against increases in the cost of
securities to be acquired. Purchases of Options on Futures Contracts may present
less risk in hedging the Fund's portfolio than the purchase or sale of the
underlying Futures Contracts since the potential loss is limited to the amount
of the premium plus related transaction costs, although it may be necessary to
exercise the option to realize any profit, which results in the establishment of
a futures position. The writing of Options on Futures Contracts, however, does
not present less risk than the trading of Futures Contracts and will constitute
only a partial hedge, up to the amount of the premium received. In addition, if
an option is exercised, the Fund may suffer a loss on the transaction. The Fund
may also purchase and write Options on Futures Contracts for non-hedging
purposes to the extent permitted by applicable law.
FORWARD CONTRACTS: The Fund may enter into forward foreign currency exchange
contracts for the purchase or sale of a fixed quantity of a foreign currency at
a future date ("Forward Contracts"). The Fund may enter into Forward Contracts
for hedging purposes as well as for non-hedging purposes (i.e., speculative
purposes). By entering into transactions in Forward Contracts, for hedging
purposes, the Fund may be required to forego the benefits of advantageous
changes in exchange rates and, in the case of Forward Contracts entered into for
non-hedging purposes, the Fund may sustain losses which will reduce its gross
income. Such transactions, therefore, could be considered speculative. Forward
Contracts are traded over-the-counter and not on organized commodities or
securities exchanges. As a result, Forward Contracts operate in a manner
distinct from exchange-traded instruments, and their use involves certain risks
beyond those associated with transactions in Futures Contracts or options traded
on exchanges. The Fund may choose to, or be required to, receive delivery of the
foreign currencies underlying Forward Contracts it has entered into. Under
certain
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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 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, Fitch or Duff & Phelps and comparable unrated securities.
These securities, while normally exhibiting adequate protection parameters, have
speculative characteristics and changes in economic conditions or other
circumstances are more likely to lead to a weakened capacity to make principal
and interest payments than in the case of higher grade fixed income securities.
The Fund may also invest in securities rated Ba or lower by Moody's or BB or
lower by S&P, Fitch or Duff & Phelps and comparable unrated securities (commonly
known as "junk bonds") to the extent described above. No minimum rating standard
is required by the Fund. These securities are considered speculative and, while
generally providing greater income than investments in higher rated securities,
will involve greater risk of principal and income (including the possibility of
default or bankruptcy of the issuers of such securities) and may involve greater
volatility of price (especially during periods of economic uncertainty or
change) than securities in the higher rating categories. However, since yields
vary over time, no specific level of income can ever be assured. These lower
rated high yielding fixed income securities generally tend to reflect economic
changes and short-term corporate and industry developments to a greater extent
than higher rated securities which react primarily to fluctuations in the
general level of interest rates. These lower rated fixed income securities are
also affected by changes in interest rates, the market's perception of their
credit quality, and the outlook for economic growth. In the past, economic
downturns or an increase in interest rates have, under certain circumstances,
caused a higher incidence of default by the issuers of these securities and may
do so in the future, especially in the case of highly leveraged issuers. During
certain periods, the higher yields on the Fund's lower rated high yielding fixed
income securities are paid primarily because of the increased risk of loss of
principal and income, arising from such factors as the heightened possibility of
default or bankruptcy of the issuers of such securities. Due to the fixed income
payments of these securities, the Fund may continue to earn the same level of
interest income while its net asset value declines due to portfolio losses,
which could result in an increase in the Fund's yield despite the actual loss of
principal. Changes in the value of securities subsequent to their acquisition
will not affect cash income or yield to maturity to the Fund but will be
reflected in the net asset value of shares of the Fund. The market for these
lower rated fixed income securities may be less liquid than the market for
investment grade fixed
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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
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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 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, 1997, 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.
------------------------
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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. Except with respect to the Fund's policy on borrowing and investing
in illiquid securities, 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 Senior 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,
1997, MFS received management fees of $6,851,160.
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 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.), a subsidiary of Sun
Life Assurance Company of Canada ("Sun Life"), in connection with the sale of
various fixed/variable annuity contracts. MFS and its wholly owned subsidiary,
MFS Institutional Advisors, Inc., provide investment advice to substantial
private clients.
MFS is America's oldest mutual fund organization. MFS and its predecessor
organizations have a history of money management dating from 1924 and the
founding of the first mutual fund in the United States, Massachusetts Investors
Trust. Net assets under the management of the MFS organization were
approximately $77.6 billion on behalf of approximately 2.9 million investor
accounts as of February 28, 1998. MFS is a subsidiary of Sun Life of Canada
(U.S.) Financial Services Holdings, Inc., which in turn is an indirect wholly
owned subsidiary of Sun Life. The Directors of MFS are John W. Ballen, Jeffrey
L. Shames, Donald A. Stewart, John D. McNeil and Arnold D. Scott. Mr. Ballen is
an Executive Vice President of MFS, Mr. Shames is the Chairman, Chief Executive
Officer and President of MFS 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
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<PAGE> 114
headquarters office here in 1973. The executive officers of MFS report to the
Chairman of Sun Life.
Mr. Shames, the Chairman, Chief Executive Officer, President and a Director of
MFS, is a Trustee of the Trust. Leslie J. Nanberg, Stephen C. Bryant, W. Thomas
London, Stephen E. Cavan, James O. Yost, James R. Bordewick, Jr., Ellen Moynihan
and Mark E. Bradley, all of whom are officers of MFS, are also officers of the
Trust.
In certain instances there may be securities which are suitable for the Fund's
portfolio as well as for portfolios of other clients of MFS. Some simultaneous
transactions are inevitable when several clients receive investment advice from
MFS, particularly when the same security is suitable for more than one client.
While in some cases this arrangement could have a detrimental effect on the
price or availability of the security as far as the Fund is concerned, in other
cases, however, it may produce increased investment opportunities for the Fund.
ADMINISTRATOR -- MFS provides the Fund with certain financial, legal,
compliance, shareholder communications and other administrative services
pursuant to a Master Administrative Services Agreement dated March 1, 1997, as
amended. Under this Agreement, the Fund pays MFS an administrative fee of up to
0.015% per annum of the Fund's average daily net assets. This fee reimburses MFS
for a portion of the costs it incurs to provide such services.
DISTRIBUTOR -- MFD, a wholly owned subsidiary of MFS, is the distributor of
shares of the Fund and also serves as distributor for each of the other MFS
Funds.
SHAREHOLDER SERVICING AGENT -- MFS Service Center, Inc. (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. As used in this prospectus and any
appendices hereto, the term "dealer" includes any broker, dealer, bank
(including bank trust departments), registered investment adviser, financial
planner and any other financial institutions having a selling agreement or other
similar agreement with MFD. Dealers may also charge their customers fees
relating to 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> 115
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 five circumstances, Class A shares are offered at net asset value
without an initial sales charge, but subject to a CDSC equal to 1% of the lesser
of the value of the shares redeemed (exclusive of reinvested dividend and
capital gain distributions) or the total cost of such shares, in the event of a
share redemption within 12 months following the purchase:
(i) on investments of $1 million or more in Class A shares;
(ii) on investments in Class A shares by certain retirement plans subject to
the Employee Retirement Income Security Act of 1974, as amended ("ERISA"),
if, prior to July 1, 1996: (a) the plan had established an account with
the Shareholder Servicing Agent and (b) the sponsoring organization had
demonstrated to the satisfaction of MFD that either (i) the employer had
at least 25 employees or (ii) the aggregate purchases by the retirement
plan of Class A shares of the MFS Funds would be in an 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
21
<PAGE> 116
an account with the Shareholder Servicing Agent on or after July 1, 1996;
and (c) the aggregate purchases by the retirement plan of Class A shares
of the MFS Funds will be in an aggregate amount of at least $500,000
within a reasonable period of time, as determined by MFD in its sole
discretion;
(iv) on investments in Class A shares by certain retirement plans subject to
ERISA, if: (a) the plan establishes an account with the Shareholder
Servicing Agent on or after July 1, 1996 and (b) the plan has, at the time
of purchase, a market value of $500,000 or more invested in shares of any
class or classes of the MFS Funds. THE RETIREMENT PLAN WILL QUALIFY UNDER
THIS CATEGORY ONLY IF THE PLAN OR ITS SPONSORING ORGANIZATION INFORMS THE
SHAREHOLDER SERVICING AGENT PRIOR TO THE 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; AND
(v) on investments in Class A shares by certain retirement plans subject to
ERISA, as amended, if: (a) the plan establishes an account with the
Shareholder Servicing Agent on or after July 1, 1997; (b) such plan's
records are maintained on a pooled basis by the Shareholder Servicing Agent;
and (c) the sponsoring organization demonstrates to the satisfaction of MFD
that, at the time of purchase, the employer has at least 200 eligible
employees and the plan has aggregate assets of at least $2,000,000.
In the case of such purchases, MFD will pay commissions to dealers on new
investments in Class A shares made through such dealers, as follows:
<TABLE>
<CAPTION>
COMMISSION PAID
BY MFD TO DEALERS CUMULATIVE PURCHASE AMOUNT
----------------- --------------------------
<S> <C>
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, 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
22
<PAGE> 117
under Section 401(a) or 403(b) of the Internal Revenue Code of 1986, as amended
(the "Code"), and subject to ERISA, where:
(i) the retirement plan and/or sponsoring organization does not subscribe to
the MFS Participant Recordkeeping System; and
(ii) the retirement plan and/or sponsoring organization demonstrates to the
satisfaction of, and certifies to, the Shareholder Servicing Agent that the
retirement plan has, at the time of certification or will have pursuant to
a purchase order placed with the certification, a market value of $500,000
or more invested in shares of any class or classes of the MFS Funds and
aggregate assets of at least $10 million;
provided, however, that the CDSC will not be waived (i.e., it will be imposed)
(a) with respect to plans which establish an account with the Shareholder
Servicing Agent on or after November 1, 1997, in the event that the Plan makes a
complete redemption of all of its shares in the MFS Funds, or (b) with respect
to plans which established an account with the Shareholder Servicing Agent prior
to November 1, 1997, in the event that there is a change in law or regulations
which results in a material adverse change to the tax advantaged nature of the
plan, or in the event that the plan and/or sponsoring organization: (i) becomes
insolvent or bankrupt; (ii) is terminated under ERISA or is liquidated or
dissolved; or (iii) is acquired by, merged into, or consolidated with, any other
entity.
CLASS B SHARES: Class B shares are offered at net asset value without an initial
sales charge but subject to a CDSC upon redemption as follows:
<TABLE>
<CAPTION>
YEAR OF CONTINGENT
REDEMPTION DEFERRED SALES
AFTER PURCHASE CHARGE
-------------- --------------
<S> <C>
First...................... 4%
Second..................... 4%
Third...................... 3%
Fourth..................... 3%
Fifth...................... 2%
Sixth...................... 1%
Seventh and following...... 0%
</TABLE>
The CDSC imposed is assessed against the lesser of the value of the shares
redeemed (exclusive of reinvested dividends and capital gain distributions) or
the total cost of such shares. No CDSC is assessed against shares acquired
through the automatic reinvestment of dividends or capital gain distributions.
See "Redemptions and Repurchases -- Contingent Deferred Sales Charge" for
further discussion of the CDSC.
Except as described below, MFD will pay commissions to dealers of 3.75% of the
purchase price of Class B shares purchased through dealers. MFD will also
advance to dealers the first year service fee payable under the Fund's
Distribution Plan (see "Distribution Plan" below) at a rate equal to 0.25% of
the purchase price of such shares. Therefore, the total amount paid to a dealer
upon the sale of Class B shares is 4% of the purchase price of the shares
(commission rate of 3.75% plus a service fee equal to 0.25% of the purchase
price).
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<PAGE> 118
Class B shares purchased by a retirement plan whose sponsoring organization
subscribes to the MFS Participant Recordkeeping System and which has established
its account with the Shareholder Servicing Agent on or after July 1, 1996, will
be subject to the CDSC described above, only under limited circumstances, as
explained below under "Waivers of CDSC." With respect to such purchases, MFD
pays an amount to dealers equal to 3.00% of the amount purchased through such
dealers (rather than the 4.00% payment described above), which is comprised of a
commission of 2.75% plus the advancement of the first year service fee equal to
0.25% of the purchase price payable under the Fund's Distribution Plan. As
discussed above, such retirement plans are eligible to purchase Class A shares
of the Fund at net asset value without an initial sales charge but subject to a
1% CDSC if the plan has, at the time of purchase, a market value of $500,000 or
more invested in shares of any class or classes of the MFS Funds. IN THIS EVENT,
THE PLAN OR ITS SPONSORING ORGANIZATION SHOULD INFORM THE SHAREHOLDER SERVICING
AGENT THAT THE PLAN IS ELIGIBLE TO PURCHASE CLASS A SHARES UNDER THIS CATEGORY;
THE SHAREHOLDER SERVICING AGENT HAS NO OBLIGATION INDEPENDENTLY TO DETERMINE
WHETHER SUCH A PLAN QUALIFIES UNDER THIS CATEGORY FOR THE PURCHASE OF CLASS A
SHARES.
WAIVERS OF CDSC. In certain circumstances, the CDSC imposed upon redemption of
Class B shares is waived. These circumstances are described in Appendix A to
this Prospectus. In addition to these circumstances, the CDSC imposed upon the
redemption of Class B shares is waived with respect to shares held by a
retirement plan whose sponsoring organization subscribes to the MFS Participant
Recordkeeping System and which has established an account with the Shareholder
Servicing Agent on or after July 1, 1996; provided, however, that the CDSC will
not be waived (i.e., it will be imposed) in the event that there is a change in
law or regulations which results in a material adverse change to the tax
advantaged nature of the plan, or in the event that the plan and/or sponsoring
organization: (i) becomes insolvent or bankrupt; (ii) is terminated under ERISA
or is liquidated or dissolved; or (iii) is acquired by, merged into, or
consolidated with, any other entity.
CONVERSION OF CLASS B SHARES. Class B shares of the Fund that remain outstanding
for approximately eight years will convert to Class A shares of the 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
24
<PAGE> 119
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. 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 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.
25
<PAGE> 120
SUBSEQUENT INVESTMENT BY TELEPHONE: Each shareholder may purchase additional
shares of any MFS Fund by telephoning the Shareholder Servicing Agent toll-free
at (800) 225-2606. The minimum purchase amount is $50 and the maximum purchase
amount is $100,000. Shareholders wishing to avail themselves of this telephone
purchase privilege must so elect on their Account Application and designate
thereon a bank and account number from which purchases will be made. If a
telephone purchase request is received by the Shareholder Servicing Agent on any
business day prior to the close of regular trading on the Exchange (generally,
4:00 p.m., Eastern time), the purchase will occur at the closing net asset value
of the shares purchased on that day. The Shareholder Servicing Agent may be
liable for any losses resulting from unauthorized telephone transactions if it
does not follow reasonable procedures designed to verify the identity of the
caller. The Shareholder Servicing Agent will request personal or other
information from the caller, and will normally also record calls. Shareholders
should verify the accuracy of confirmation statements immediately after their
receipt.
RIGHT TO REJECT PURCHASE ORDERS/MARKET TIMING. Purchases and exchanges should be
made for investment purposes only. The Fund and MFD each reserves the right to
reject or restrict any specific purchase or exchange request. In the event that
the Fund or MFD rejects an exchange request, neither the redemption nor the
purchase side of the exchange will be processed.
The Fund is not designed for professional market timing organizations or other
entities using programmed or frequent exchanges. The Fund defines a "market
timer" as an individual, or organization acting on behalf of one or more
individuals, if (i) the individual or organization makes three or more exchange
requests out of the Fund per calendar year and (ii) any one of such exchange
requests represents shares equal in value to 1/2 of 1% or more of the Fund's net
assets at the time of the request. Accounts under common ownership or control,
including accounts administered by market timers, will be aggregated for
purposes of this definition.
As noted above, the Fund and MFD each reserves the right to reject or restrict
any specific purchase and exchange request and, in addition, may impose specific
limitations with respect to market timers, including delaying for up to seven
days the purchase side of an exchange request by market timers or specifically
rejecting or otherwise restricting purchase 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 Family
of 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
26
<PAGE> 121
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 or
arrange for the sale of shares of the Fund. Such concessions provided by MFD may
include financial assistance to dealers in connection with preapproved
conferences or seminars, sales or training programs for invited registered
representatives and other employees, payment for travel expenses, including
lodging, incurred by registered representatives and other employees for such
seminars or training programs, seminars for the public, advertising and sales
campaigns regarding one or more MFS Funds, and/or other dealer-sponsored events.
From time to time, MFD may make expense reimbursements for special training of a
dealer's registered representatives and other employees in group meetings or to
help pay the expenses of sales contests. Other concessions may be offered to the
extent not prohibited by state laws or any self-regulatory agency, such as the
NASD.
SPECIAL INVESTMENT PROGRAMS. For shareholders who elect to participate in
certain investment programs (e.g., the Automatic Investment Plan) or other
shareholder services, MFD or its affiliates may either (i) give a gift of
nominal value, such as a hand-held calculator or (ii) make a nominal charitable
contribution on their behalf.
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
27
<PAGE> 122
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
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
28
<PAGE> 123
Exchange (generally, 4:00 p.m., Eastern time), the exchange will occur on that
day if all the requirements set forth above have been complied with at that time
and subject to the Fund's right to reject purchase orders. No more than five
exchanges may be made in any one Exchange Request by telephone. Additional
information concerning this exchange privilege and prospectuses for any of the
other MFS Funds may be obtained from dealers or the Shareholder Servicing Agent.
For federal and (generally) state income tax purposes, an exchange is treated as
a sale of the shares exchanged and, therefore, an exchange could result in a
gain or loss to the shareholder making the exchange. Exchanges by telephone are
automatically available to most non-retirement plan accounts and certain
retirement plan accounts. For further information regarding exchanges by
telephone, see "Redemptions by Telephone." The exchange privilege (or any aspect
of it) may be changed or discontinued and is subject to certain limitations,
including certain restrictions on purchases by market timers.
REDEMPTIONS AND REPURCHASES
A shareholder may withdraw all or any portion of the value of his account on any
date on which the Fund is open for business by redeeming shares at their net
asset value (a redemption) or by selling such shares to the Fund through a
dealer (a repurchase). Certain redemptions and repurchases are, however, subject
to a CDSC. See "Contingent Deferred Sales Charge" below. Because the net asset
value of shares of the account fluctuates, redemptions or repurchases, which are
taxable transactions, are likely to result in gains or losses to the
shareholder. When a shareholder withdraws an amount from his account, the
shareholder is deemed to have tendered for redemption a sufficient number of
full and fractional shares in his account to cover the amount withdrawn. The
proceeds of a redemption or repurchase will normally be available within seven
days, except for shares purchased or received in exchange for shares purchased
by check (including certified checks or cashier's checks). Payment of redemption
proceeds may be delayed for up to 15 days from the purchase date in an effort to
assure that such check has cleared. See "Tax Status."
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
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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 C and Class B shares purchased on or after January 1, 1993 will be
aggregated on a calendar month basis -- all transactions made during a calendar
month, regardless of when during the month they have occurred, will age one year
at the close of business on the last day of such month in the following calendar
year and each subsequent year. For Class B and Class C 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,
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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.
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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."
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
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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 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
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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
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any federal income or excise taxes, although the Fund's foreign source income
may be subject to foreign withholding taxes.
Shareholders of the Fund normally will have to pay federal income taxes, and any
state or local taxes, on the dividends and capital gain distributions they
receive from the Fund, whether paid in cash or reinvested in additional shares.
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
be sent a statement setting forth the federal income tax status of all dividends
and distributions for that year, including the portion taxable as ordinary
income, the portion taxable as long-term capital gain (as well as the rate
category or categories under which such gain is taxable), the portion, if any,
representing a return of capital (which is generally free of current taxes but
which results in a basis reduction), and the amount, if any, of federal income
tax withheld.
Fund distributions will reduce the Fund's net asset value per share.
Shareholders who buy shares 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 at the rate of 30% (or any
lower rate permitted under an applicable treaty) 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. 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 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
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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.
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, and purchased by, the public on
different dates (the class "inception date"). The calculation of total rate of
return for a class of shares which has a later class inception date than another
class of shares of the Fund is based both on (i) the performance of the Fund's
newer class from its inception date and (ii) the performance of the Fund's
oldest class from
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its inception date up to the class inception date of the newer class. See the
SAI for further information on the calculation of total rate of return for share
classes with different class inception dates.
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, 1997, please see the Fund's Annual Report. A copy of the Annual
Report may be obtained without charge by contacting the Shareholder Servicing
Agent (see back cover for address and phone number). In addition to information
provided in shareholder reports, the Fund may, in its discretion, from time to
time, make a list of all or a portion of its holdings available to investors
upon request.
9. SHAREHOLDER SERVICES
Shareholders with questions concerning the shareholder services described below
or concerning other aspects of the Fund should contact the Shareholder Servicing
Agent (see back cover for address and phone number).
ACCOUNT AND CONFIRMATION STATEMENTS -- Each shareholder will receive
confirmation statements showing the transaction activity in his account. At the
end of each calendar year, each shareholder will receive income tax information
regarding 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; and
-- 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
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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 $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.
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AUTOMATIC EXCHANGE PLAN: Shareholders having account balances of at least
$5,000 in any MFS Fund may participate in the Automatic Exchange Plan. The
Automatic Exchange Plan provides for automatic exchanges of funds from the
shareholder's account in an MFS Fund for investment in the same class of shares
of other MFS Funds selected by the shareholder. Under the Automatic Exchange
Plan, exchanges of at least $50 each may be made to up to 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.
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, 1998, 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.
39
<PAGE> 134
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). As used in the Prospectus and any appendices thereto, the
term "dealer" includes any broker, dealer, bank (including bank trust
departments), registered investment adviser, financial planner and any other
financial institutions having a selling agreement or other similar agreement
with MFD.
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;
- 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")
A-1
<PAGE> 135
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;
- 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.
A-2
<PAGE> 136
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.
7. LOAN REPAYMENTS
- Shares acquired pursuant to repayments by retirement plan participants
of loans from 401(a) or ESP Plans with respect to which such Plan or
its sponsoring organization subscribes to the MFS FUNDamental 401(k)
Program or the MFS Recordkeeper Plus Program (but not the MFS
Recordkeeper Program).
II. WAIVERS OF CLASS A SALES CHARGES
In addition to the waivers set forth in Section I above, in the following
circumstances the initial sales charge imposed on purchases of Class A
shares and the CDSC imposed on certain redemptions of Class A shares are
waived:
1. WRAP ACCOUNT AND FUND "SUPERMARKET" INVESTMENTS
- Shares acquired by investments through certain dealers (including
registered investment advisers and financial planners) which have
established certain operational arrangements with MFD which include a
requirement that such shares be sold for the sole benefit of clients
participating in a "wrap" account, mutual fund "supermarket" account or
a similar program under which such clients pay a fee to such dealer.
2. INVESTMENT BY INSURANCE COMPANY SEPARATE ACCOUNTS
- Shares acquired by insurance company separate accounts.
3. RETIREMENT PLANS
ADMINISTRATIVE SERVICES ARRANGEMENTS
- Shares acquired by retirement plans or trust accounts whose third party
administrators or dealers have entered into an administrative services
agreement with MFD or one of its affiliates to perform certain
administrative services, subject to certain operational and minimum
size requirements specified from time to time by MFD or one or more of
its affiliates.
A-3
<PAGE> 137
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.
4. PURCHASES OF AT LEAST $5 MILLION (CDSC WAIVER ONLY)
- Shares acquired of Eligible Funds (as defined below) if the
shareholder's investment equals or exceeds $5 million in one or more
Eligible Funds (the "Initial Purchase") (this waiver applies to the
shares acquired from the Initial Purchase and all shares of Eligible
Funds subsequently acquired by the shareholder); provided that the
dealer through which the Initial Purchase is made enters into an
agreement with MFD to accept delayed payment of commissions with
respect to the Initial Purchase and all subsequent investments by the
shareholder in the Eligible Funds subject to such requirements as may
be established from time to time by MFD (for a schedule of the amount
of commissions paid by MFD to the dealer on such investments, see
"Purchases -- Class A Shares -- Purchases Subject to a CDSC" in the
Prospectus). The Eligible Funds are all funds included in the MFS
Family of Funds, except for Massachusetts Investors Trust,
Massachusetts Investors Growth Stock Fund, MFS Municipal Bond Fund, MFS
Municipal Limited Maturity Fund, MFS Money Market Fund, MFS Government
Money Market Fund and MFS Cash Reserve Fund.
A-4
<PAGE> 138
5. BANK TRUST DEPARTMENTS AND LAW FIRMS
- Shares acquired by certain bank trust departments or law firms acting
as trustee or manager for trust accounts which have entered into an
administrative services agreement with MFD and are acquiring such
shares for the benefit of their trust account clients.
III. WAIVERS OF CLASS B AND CLASS C SALES CHARGES
In addition to the waivers set forth in Section I above, in the following
circumstances the CDSC imposed on redemptions of Class B and Class C
shares is waived:
1. SYSTEMATIC WITHDRAWAL PLAN
- Systematic Withdrawal Plan redemptions with respect to up to 10% per
year (or 15% per year, in the case of accounts registered as IRAs where
the redemption is made pursuant to Section 72(t) of the Internal
Revenue Code of 1986, as amended) of the account value at the time of
establishment.
2. DEATH OF OWNER
- 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
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-5
<PAGE> 139
APPENDIX B
DESCRIPTION OF BOND RATINGS
The ratings of Moody's, S&P, Fitch and Duff & Phelps 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.
B-1
<PAGE> 140
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: An obligation rated AAA has the highest rating assigned by S&P. The
obligor's capacity to meet its financial commitment on the obligation is
EXTREMELY STRONG.
AA: An obligation rated AA differs from the highest rated obligations only in
small degree. The obligor's capacity to meet its financial commitment to the
obligation is VERY STRONG.
A: An obligation rated A is somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than obligations in higher
rated categories. However, the obligor's capacity to meet its financial
commitment on the obligation is still STRONG.
BBB: An obligation rated BBB exhibits ADEQUATE protection parameters. However,
adverse economic conditions or changing circumstances are more likely to lead to
a weakened capacity of the obligor to meet its financial commitment on the
obligation.
Obligations rated BB, B, CCC, CC, and C are regarded as having significant
speculative characteristics. BB indicates the least degree of speculation and C
the highest. While such obligations will likely have some quality and protective
characteristics, these may be outweighed by large uncertainties or major
exposures to adverse conditions.
BB: An obligation rated BB is LESS VULNERABLE to nonpayment than other
speculative issues. However, it faces major ongoing uncertainties or exposure to
adverse business, financial, or economic conditions which could lead to the
obligor's inadequate capacity to meet its financial commitment on the
obligation.
B: An obligation rated B is MORE VULNERABLE to nonpayment than obligations rated
BB, but the obligor currently has the capacity to meet its financial commitment
on the obligation. Adverse business, financial, or economic conditions will
likely impair the obligor's capacity or willingness to meet its financial
commitment on the obligation.
CCC: An obligation rated CCC is CURRENTLY VULNERABLE to nonpayment, and is
dependent upon favorable business, financial, and economic conditions for the
obligor to meet its financial commitment on the obligation. In the event of
adverse business, financial, or economic conditions the obligor is not likely to
have the capacity to meet its financial commitment on the obligation.
CC: An obligation rated CC is CURRENTLY HIGHLY VULNERABLE to nonpayment.
C: The C rating may be used to cover a situation where a bankruptcy petition has
been filed or similar action has been taken, but payments on this obligation are
being continued.
B-2
<PAGE> 141
D: An obligation rated D is in payment default. The D rating category is used
when payments on an obligation are not made on the date due even if the
applicable grace has not expired, unless Standard & Poor's believes that such
payments will be made during such grace period. The D rating also will be used
upon the filing of a bankruptcy petition or the taking of a similar action if
payments on an obligation are jeopardized.
PLUS(+) OR MINUS (-) The ratings from AA to CCC may be modified by the addition
of a plus or minus sign to show relative standing within the major rating
categories.
r: This symbol is attached to the ratings of instruments with significant
noncredit risks, it highlights risks to principal or volatility of expected
returns which are not addressed in the credit rating. Examples include:
obligations linked or indexed to equities, currencies, or commodities;
obligations exposed to sever prepayment risk -- such as interest-only or
principal-only mortgage securities; and obligations with unusually risky
interest terms, such as inverse floaters.
FITCH IBCA
AAA: Highest credit quality. AAA ratings denote the lowest expectation of credit
risk. They are assigned only in case of exceptionally strong capacity for timely
payment of financial commitments. This capacity is highly unlikely to be
adversely affected by foreseeable events.
AA: Very high credit quality. AA ratings denote a very low expectation of credit
risk. They indicate very strong capacity for timely payment of financial
commitments. This capacity is not significantly vulnerable to foreseeable
events.
A: High credit quality. A ratings denote a low expectation of credit risk. The
capacity for timely payment of financial commitments is considered strong. This
capacity may, nevertheless, be more vulnerable to changes in circumstances or in
economic conditions than is the case for higher ratings.
BBB: Good credit quality. BBB ratings indicate that there is currently a low
expectation of credit risk. The capacity for timely payment of financial
commitments is considered adequate, but adverse changes in circumstances and in
economic conditions are more likely to impair this capacity. This is the lowest
investment-grade category.
Speculative Grade
BB: Speculative. BB ratings indicate that there is a possibility of credit risk
developing, particularly as the result of adverse economic change over time;
however, business or financial alternatives may be available to allow financial
commitments to be met. Securities rated in this category are not investment
grade.
B: Highly speculative. B ratings indicate that significant credit risk is
present, but a limited margin of safety remains. Financial commitments are
currently being met; however, capacity for continued payment is contingent upon
a sustained, favorable business and economic environment.
B-3
<PAGE> 142
CCC, CC, C: High default risk. Default is a real possibility. Capacity for
meeting financial commitments is solely reliant upon sustained, favorable
business or economic developments. A CC rating indicates that default of some
kind appears probable. C ratings signal imminent default.
DDD, DD, D: Default. Securities are not meeting current obligations and are
extremely speculative. DDD designates the highest potential for recovery of
amounts outstanding on any securities involved. For U.S. corporates, for
example, DD indicates expected recovery of 50% -- 90% of such outstandings, and
D the lowest recovery potential, i.e. below 50%.
DUFF & PHELPS CREDIT RATING CO.
AAA: Highest credit quality. The risk factors are negligible, being only
slightly more than for risk-free U.S. Treasury debt.
AA+, AA, AA-: High credit quality: Protection factors are strong. Risk is modest
but may vary slightly from time to time because of economic conditions.
A+, A, A-: Protection factors are average but adequate. However, risk factors
are more variable and greater in periods of economic stress.
BBB+, BBB, BBB-: Below average protection factors but still considered
sufficient for prudent investment. Considerable variability in risk during
economic cycles.
BB+, BB, BB-: Below investment grade but deemed likely to meet obligations when
due. Present or prospective financial protection factors fluctuate according to
industry conditions or company fortunes. Overall quality may move up or down
frequently within this category.
B+, B, B-: Below investment grade and possessing risk that obligations will not
be met when due. Financial protection factors will fluctuate widely according to
economic cycles, industry conditions and/or company fortunes. Potential exists
for frequent changes in the rating within this category or into a higher or
lower rating grade.
CCC: Well below investment-grade securities. Considerable uncertainty exists as
to timely payment of principal, interest or preferred dividends. Protection
factors are narrow and risk can be substantial with unfavorable
economic/industry conditions, and/or with unfavorable company developments.
DD: Defaulted debt-obligations. Issuer failed to meet scheduled principal and/or
interest payments.
DP: Preferred stock with dividend arrearages.
B-4
<PAGE> 143
THE MFS FAMILY OF FUNDS(R)
AMERICA'S OLDEST MUTUAL FUND GROUP
The members of the MFS Family of Funds are grouped below according to the types
of securities in their portfolios. For free prospectuses containing more
complete information, including the exchange privilege and all charges and
expenses, please contact your financial adviser or call MFS at 1-800-225-2606
any business day from 8 a.m. to 8 p.m. Eastern time. This material should be
read carefully before investing or sending money.
STOCK WORLD
- ----------------------------------- -----------------------------------
Massachusetts Investors Trust MFS(R)/Foreign & Colonial Emerging
Massachusetts Investors Growth Markets Equity Fund
Stock Fund MFS(R) International Growth Fund(4)
MFS(R) Emerging Growth Fund MFS(R) International Growth and
MFS(R) Equity Income Fund Income Fund(5)
MFS(R) Growth Opportunities Fund MFS(R) Research International Fund
MFS(R) Large Cap Growth Fund(1) MFS(R) World Asset Allocation
MFS(R) Managed Sectors Fund Fund(SM)
MFS(R) Mid Cap Growth Fund(2) MFS(R) World Equity Fund
MFS(R) New Discovery Fund MFS(R) World Governments Fund
MFS(R) Research Fund MFS(R) World Growth Fund
MFS(R) Research Growth and Income MFS(R) World Total Return Fund
Fund
MFS(R) Strategic Growth Fund
MFS(R) Union Standard(R) Equity Fund NATIONAL TAX-FREE BOND
MFS(R) Capital Opportunities -----------------------------------
Fund(3) MFS(R) Municipal Bond Fund
MFS(R) Municipal High Income Fund
STOCK AND BOND MFS(R) Municipal Income Fund
- -----------------------------------
MFS(R) Total Return Fund STATE TAX-FREE BOND
MFS(R) Utilities Fund -----------------------------------
Alabama, Arkansas, California,
BOND Florida, Georgia, Maryland,
- ----------------------------------- Massachussets, Mississippi, New
MFS(R) Bond Fund York, North Carolina, Pennsylvania,
MFS(R) Government Mortgage Fund South Carolina, Tennessee,
MFS(R) Government Securities Fund Virginia, West Virginia
MFS(R) High Income Fund
MFS(R) Intermediate Income Fund MONEY MARKET
MFS(R) Strategic Income Fund -----------------------------------
MFS(R) Cash Reserve Fund
LIMITED MATURITY BOND MFS(R) Government Money Market Fund
- ----------------------------------- MFS(R) Money Market Fund
MFS(R) Government Limited Maturity
Fund (1) Formerly MFS(R) Capital Growth
MFS(R) Limited Maturity Fund Fund.
MFS(R) Municipal Limited Maturity Fund
(2) Formerly MFS(R) OTC Fund.
(3) Formerly MFS(R) Value Fund.
(4) Formerly MFS(R) /Foreign &
Colonial International Growth
Fund.
(5) Formerly MFS(R) /Foreign &
Colonial International Growth
and Income Fund.
<PAGE> 144
Investment Adviser
Massachussetts 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
500 Boylston Street
Boston, MA 02116
Toll-free: (800) 225-2606
Mailing Address
P.O. Box 2281
Boston, MA 02107-9906
Independent Auditors
Deloitte & Touche LLP
125 Summer Street
Boston, MA 02110
<PAGE> 145
MFS CAPITAL OPPORTUNITIES FUND
SUPPLEMENT TO THE APRIL 1, 1998 PROSPECTUS AND STATEMENT OF
ADDITIONAL INFORMATION
THE FOLLOWING INFORMATION SHOULD BE READ IN CONJUNCTION WITH THE FUND'S
PROSPECTUS AND STATEMENT OF ADDITIONAL INFORMATION ("SAI"), DATED APRIL 1, 1998,
AND CONTAINS A DESCRIPTION OF CLASS I SHARES.
CLASS I SHARES ARE AVAILABLE FOR PURCHASE ONLY BY CERTAIN INVESTORS AS
DESCRIBED UNDER THE CAPTION "ELIGIBLE PURCHASERS" BELOW.
EXPENSE SUMMARY
<TABLE>
SHAREHOLDER TRANSACTION EXPENSES: CLASS I
<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) 0.29%
----
Total Operating Expenses 1.04%
</TABLE>
(1) The Fund has an expense offset arrangement which reduces the Fund's
custodian fee based upon the amount of cash maintained by the Fund with its
custodian and dividend disbursing agent, and may enter into other such
arrangements and directed brokerage arrangements (which would also have the
effect of reducing the Fund's expenses). Any such fee reductions are not
reflected under "Other Expenses."
EXAMPLE OF EXPENSES
An investor would pay the following dollar amounts of expenses on a $1,000
investment in Class I shares of the Fund, assuming (a) a 5% annual return and
(b) redemption at the end of each of the time periods indicated:
<TABLE>
<CAPTION>
PERIOD CLASS I
------ -------
<S> <C>
1 year........................................ $ 11
----
3 years....................................... 33
----
5 years....................................... 57
----
10 years...................................... 127
----
</TABLE>
The purpose of the expense table above is to assist investors in
understanding the various costs and expenses that a shareholder of the Fund will
bear directly or indirectly. 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.
-1-
<PAGE> 146
CONDENSED FINANCIAL INFORMATION
The following information should be read in conjunction with the financial
statements included in the Fund's Annual Report to Shareholders which are
incorporated by reference into the 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.
<TABLE>
<CAPTION>
PERIOD ENDED
NOVEMBER 30, 1997*
CLASS I
<S> <C>
Per share data (for a share outstanding throughout the period):
Net asset value - beginning of period $ 12.22
------------
Income from investment operations# -
Net investment income $ 0.08
------------
Net realized and unrealized gain on investments and foreign currency transactions 2.96
------------
Total from investment operations $ 3.04
------------
Net asset value - end of period $ 15.26
------------
Total return 24.88%++
------------
Ratios (to average net assets)/Supplemental data:
Expenses## 1.01%+
------------
Net investment income 0.65%+
------------
Portfolio turnover 144%
------------
Average commission rate $ 0.0317
------------
Net assets at end of period (000 omitted) $ 30,517
</TABLE>
- ------------
+ Annualized.
++ Not annualized.
* For the period from the inception of Class I shares, January 3, 1997,
through November 30, 1997.
# Per share data are based on average shares outstanding.
## The Fund's expenses are calculated without reduction for fees paid
indirectly.
ELIGIBLE PURCHASERS
Class I shares are available for purchase only by the following purchasers
("Eligible Purchasers"):
(i) certain retirement plans established for the benefit of employees of
Massachusetts Financial Services Company ("MFS"), the Fund's investment
adviser, and employees of MFS' affiliates;
(ii) any fund distributed by MFS Fund Distributors, Inc. ("MFD"), the Fund's
distributor, if the fund seeks to achieve its investment objective by
investing primarily in shares of the Fund and other funds distributed by
MFD;
(iii) any retirement plan, endowment or foundation which (a) purchases shares
directly through MFD (rather than through a third party broker or dealer
or other financial intermediary); (b) has, at the time of purchase of
Class I shares, aggregate assets of at least $100 million; and (c)
invests at least $10 million in Class I shares of the Fund either alone
or in combination with investments in Class I shares of other MFS funds
distributed by MFD (additional investments may be made in any amount);
provided that MFD may accept purchases from smaller plans, endowments or
foundations or in smaller amounts if it believes, in its sole discretion,
that such entity's aggregate assets will equal or exceed $100 million, or
that such entity will make additional investments which will cause its
total investment to equal or exceed $10 million, within a reasonable
period of time; and
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<PAGE> 147
(iv) bank trust departments or law firms acting as trustee or manager for
trust accounts which initially invest, on behalf of their trust clients,
at least $100,000 in Class I shares of the Fund (additional investments
may be made in any amount); provided that MFD may accept smaller initial
purchases if it believes, in its sole discretion, that the bank trust
department or law firm will make additional investments, on behalf of its
trust clients, which will cause its total investment to equal or exceed
$100,000 within a reasonable period of time.
In no event will the Fund, MFS, MFD or any of their affiliates pay any sales
commissions or compensation to any third party in connection with the sale of
Class I shares; the payment of any such sales commission or compensation would,
under the Fund's policies, disqualify the purchaser as an eligible investor of
Class I shares.
SHARE CLASSES OFFERED BY THE FUND
Four classes of shares of the Fund currently are offered for sale: Class A
shares, Class B shares, Class C shares and Class I shares. Class I shares are
available for purchase only by Eligible Purchasers, as defined above, and are
described in this Supplement. Class A shares, Class B shares and Class C shares
are described in the Fund's Prospectus and are available for purchase by the
general public.
Class A shares are offered at net asset value plus an initial sales charge
up to a maximum of 5.75% of the offering price (or a contingent deferred sales
charge (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 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 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, 1998
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[MFS LOGO]
<TABLE>
<S> <C>
MFS(R) CAPITAL OPPORTUNITIES FUND STATEMENT OF
ADDITIONAL INFORMATION
(A member of the MFS Family of Funds(R)) April 1, 1998
</TABLE>
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<TABLE>
<CAPTION>
PAGE
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<S> <C>
1. Definitions............................................. 2
2. Investment Objective, Policies and Restrictions......... 2
3. Management of the Fund.................................. 12
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................................... 19
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 CAPITAL OPPORTUNITIES 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, 1998. This SAI should be read in conjunction with the Prospectus, a
copy of which may be obtained without charge by contacting the Shareholder
Servicing Agent (see last page for address and phone number).
THIS SAI IS NOT A PROSPECTUS AND IS AUTHORIZED FOR DISTRIBUTION TO PROSPECTIVE
INVESTORS ONLY IF PRECEDED OR ACCOMPANIED BY A CURRENT PROSPECTUS.
<PAGE> 149
1. DEFINITIONS
<TABLE>
<S> <C>
"Fund" -- MFS Capital Opportunities
Fund, a series of MFS
Series Trust VII (the
"Trust"), a Massachusetts
business trust. The Fund
was known as MFS Value
Fund until its name was
changed on March 30, 1998.
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 "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, 1998,
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. The Fund
would also receive a fee from the borrower or compensation based on investment
of cash collateral, less a fee paid to the borrower, if the collateral is in the
form of cash. The Fund would not, however, have the right to vote any securities
having voting rights during the existence of the loan, but 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
amount agreed upon on the agreed upon delivery date or upon demand, as the case
may be, the Fund will have the right to liquidate the securities. If at the time
the Fund is contractually entitled to exercise its right to liquidate the
securities, the seller is subject to a proceeding under the bankruptcy laws or
its assets are otherwise subject to a stay order, the Fund's exercise of its
right to liquidate the securities may be delayed and result in certain losses
and costs to the Fund. The Fund has adopted and follows procedures which are
intended to minimize the risks of repurchase agreements. For example, the Fund
only enters into repurchase agreements after the Adviser has determined that the
seller is creditworthy, and the Adviser monitors that seller's creditworthiness
on an ongoing basis. Moreover, under such agreements, the value of the
securities (which are marked to market every business day) is required to be
greater than the repurchase price, and the Fund has the right to make margin
calls at any time if the value of the securities falls below the agreed upon
collateral.
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
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<PAGE> 150
purchase. Loans that are fully secured offer the Fund more protection than an
unsecured loan in the event of non-payment of scheduled interest or principal.
However, there is no assurance that the liquidation of collateral from a secured
loan would satisfy the corporate borrower's obligation, or that the collateral
can be liquidated.
These loans are made generally to finance internal growth, mergers,
acquisitions, stock repurchases, leveraged buy-outs and other corporate
activities. Such loans are typically made by a syndicate of lending
institutions, represented by an agent lending institution which has negotiated
and structured the loan and is responsible for collecting interest, principal
and other amounts due on its own behalf and on behalf of the others in the
syndicate, and for enforcing its and their other rights against the borrower.
Alternatively, such loans may be structured as a novation, pursuant to which the
Fund would assume all of the rights of the lending institution in a loan, or as
an assignment, pursuant to which the Fund would purchase an assignment of a
portion of a lender's interest in a loan either directly from the lender or
through an intermediary. The Fund may also purchase trade or other claims
against companies, which generally represent money owed by the company to a
supplier of goods or services. These claims may also be purchased at a time when
the company is in default.
Certain of the loans acquired by the Fund may involve revolving credit
facilities or other standby financing commitments which obligate the Fund to pay
additional cash on a certain date or on demand. These commitments may have the
effect of requiring the Fund to increase its investment in a company at a time
when the Fund might not otherwise decide to do so (including at a time when the
company's financial condition makes it unlikely that such amounts will be
repaid). To the extent that the Fund is committed to advance additional funds,
it will at all times segregate 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
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<PAGE> 151
it necessary to sell the "when-issued" or "forward delivery" securities before
delivery, it may incur a loss because of market fluctuations since the time the
commitment to purchase such securities was made.
FOREIGN SECURITIES: As discussed in the Prospectus, investing in foreign
securities generally 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"), by Fitch IBCA ("Fitch") or Duff &
Phelps Credit Rating Co. ("Duff & Phelps") and comparable unrated securities.
These securities, while normally exhibiting adequate protection parameters, have
speculative characteristics and changes in economic conditions or other
circumstances are more likely to lead to a weakened capacity to make principal
and interest payments than in the case of higher grade fixed income securities.
The Fund may also invest in fixed income securities rated Ba or lower by Moody's
or BB or lower by S&P, Fitch or Duff & Phelps and comparable unrated securities
(commonly known as "junk bonds") 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 C 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
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<PAGE> 152
supplement such ratings with the Adviser's own independent and ongoing review of
credit quality. To the extent the Fund invests in these lower rated securities,
the achievement of its investment 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.
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
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 segregated by the Fund) 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 liquid assets representing the difference are segregated by
the Fund. A put option written by the Fund is covered if the Fund segregates
liquid assets with a value equal to the exercise price, or else holds a put on
the same security and in the same principal amount as the put written where the
exercise price of the put held (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 liquid assets representing the difference are segregated by the Fund.
Put and call options written by the Fund may also be covered in such other
manner as may be in accordance with the requirements of the exchange on which,
or the 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 between the Fund's purchase price of the security and the exercise
price, less related transaction costs. If the options are not exercised and the
price of the underlying security declines, the
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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 INDEXES: The Fund may write (sell) covered call and put options
on stock indexes 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 indexes 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 segregated by the Fund) 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 liquid assets representing the difference is segregated
by the Fund. The Fund may cover put options on stock indexes by segregating
liquid assets with a value equal to the exercise price, 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
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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 liquid assets
representing the difference is segregated by the Fund. Put and call options on
stock indexes 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 indexes 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 indexes 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 indexes 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 indexes 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
segregates liquid assets sufficient to cover the Fund's net liability under the
two options. Therefore, the Fund's liability for such a covered option is
generally limited to the difference between the amount of the Fund's liability
under the option written by the Fund less the value of the option held by the
Fund. Yield curve options may also be covered in such other manner as may be in
accordance with the requirements of the 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 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
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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 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
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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 liquid assets
representing the difference is segregated by the Fund. The Fund may cover the
writing of put Options on Futures Contracts (a) through sales of the underlying
Futures Contract, (b) through segregation of liquid assets in an amount equal to
the value of the security or index underlying the Futures Contract, or (c)
through the holding of a put on the same Futures Contract and in the same
principal amount as the put written where the exercise price of the put held (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 liquid assets representing
the difference is segregated by the Fund. Put and Call Options on Futures
Contracts written by the Fund may also be covered in such other manner as may be
in accordance with the 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 which require 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 assets
will be marked to market on a daily basis. While these contracts are not
presently regulated by the Commodity Futures Trading Commission ("CFTC"), the
CFTC may in the future assert authority to regulate Forward Contracts. In such
event, the Fund's ability to utilize Forward Contracts in the manner set forth
above may be restricted.
RISK FACTORS: IMPERFECT CORRELATION OF HEDGING INSTRUMENTS WITH THE FUND'S
PORTFOLIO -- The Fund's ability effectively to hedge all or a portion of its
portfolio through transactions in options, Futures Contracts, and Forward
Contracts will depend on the degree to which price movements in the underlying
index or instrument correlate with price movements in the relevant portion of
the Fund's portfolio. Because the securities in the Fund's portfolio will most
likely not be the same as those securities underlying a stock index, the
correlation between movements in the portfolio and in the securities underlying
the index will not be perfect. The trading of Futures Contracts and options
entails the additional risk of imperfect correlation between movements in the
futures or option price and the price of the underlying index or obligation. The
anticipated spread between the prices may be distorted due to the differences in
the nature of the markets, such as differences in margin requirements, the
liquidity of such markets and the participation of speculators in such markets.
In this regard, trading by speculators in options and Futures Contracts
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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 indexes 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.
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
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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, Options on Futures Contracts and Options on
Foreign Currencies traded on a CFTC-regulated exchange only (i) for bona fide
hedging purposes (as defined in CFTC regulations), or (ii) for non-bona fide
hedging purposes, provided that the aggregate initial margin and premiums
required to establish such non-bona fide hedging positions does not exceed 5% of
the liquidation value of the Fund's assets, after taking into account unrealized
profits and unrealized losses on any such contracts the fund has entered into,
and excluding, in computing such 5%, the in-the-money amount with respect to an
option that is in-the-money at the time of purchase.
------------------------
The policies described above are not fundamental and may be changed without
shareholder approval, as may be the Fund's investment objective.
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 variation margin in connection
therewith are not considered a pledge of assets;
(3) underwrite securities issued by other persons except insofar as the Fund
may technically be deemed an underwriter under the Securities Act of 1933 in
selling a portfolio security;
(4) concentrate its investments in any particular industry, but if it is
deemed appropriate for the achievement of its investment objective, up to 25%
of its assets, at market value at the time of each investment, may be invested
in securities of issuers in any one industry;
11
<PAGE> 159
(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. The Fund will not invest 25% or more of the market
value of its total assets in securities of issuers in any one industry.
Except with respect to Investment Restriction (1) and the Fund's non-fundamental
policy on investing in illiquid securities, these investment restrictions are
adhered to at the time of purchase or utilization of assets; a subsequent change
in circumstances will not be considered to result in a violation of policy.
3. MANAGEMENT OF THE FUND
The Board of Trustees provides broad supervision over the affairs of the Fund.
The Adviser is responsible for the 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.)
12
<PAGE> 160
TRUSTEES
RICHARD B. BAILEY* (born 9/14/26)
Private investor; Massachusetts Financial Services Company, former Chairman and
Director (prior to September 30, 1991); Cambridge Bancorp, Director; Cambridge
Trust Company, Director
PETER G. HARWOOD (born 4/3/26)
Private investor
Address: 211 Lindsay Pond Road, Concord, Massachusetts
J. ATWOOD IVES (born 5/1/36)
Eastern Enterprises (diversified services company), Chairman and Chief Executive
Officer
Address: 9 Riverside Road, Weston, Massachusetts
LAWRENCE T. PERERA (born 6/23/35)
Hemenway & Barnes (attorneys), Partner
Address: 60 State Street, Boston, Massachusetts
WILLIAM J. POORVU (born 4/10/35)
Harvard University Graduate School of Business Administration, Adjunct
Professor; CBL & Associates Properties, Inc. (a real estate investment trust),
Director; The Baupost Fund (a registered investment company), Vice Chairman
(since November 1993), Chairman and Trustee (prior to November 1993)
Address: Harvard Business School, Soldiers Field Road, Cambridge, Massachusetts
CHARLES W. SCHMIDT (born 3/18/28)
Private investor; OHM Corporation, Director; Mohawk Paper Company, Director
Address: 30 Colpitts Road, Weston, Massachusetts
ARNOLD D. SCOTT* (born 12/16/42)
Massachusetts Financial Services Company, Senior Executive Vice President and
Secretary
JEFFREY L. SHAMES* (born 6/2/55)
Massachusetts Financial Services Company, Chairman, Chief Executive Officer and
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, Trustee
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
MARK E. BRADLEY,* Assistant Treasurer (born 11/23/59)
Massachusetts Financial Services Company, Vice President (since March 1997);
Putnam Investments, Vice President (from September 1994 until March 1997);
Ernst & Young, Senior Tax Manager (until September 1994)
ELLEN MOYNIHAN,* Assistant Treasurer (born 11/13/57)
Massachusetts Financial Services Company, Vice President (since September 1996);
Deloitte & Touche LLP, Senior Manager (until September 1996)
- ---------------
*"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. Messrs. Shames and Scott, Directors of MFD,
and Mr. Cavan, the Secretary of MFD, hold similar positions with certain other
MFS affiliates. Mr. Bailey is a director of Sun Life Assurance Company of Canada
(U.S.), a subsidiary of Sun Life Assurance Company of Canada ("Sun Life").
The Fund pays the compensation of non-interested Trustees and Mr. Bailey (who
currently receive a fee of $3,250 per year plus $165 per meeting and $130 per
committee meeting attended, together with such 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. 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 $3,983 $ 664 8 $283,647
Peter G. Harwood 4,153 491 5 121,105
J. Atwood Ives 3,983 693 17 108,720
Lawrence T. Perera 4,383 1,129 25 127,055
William J. Poorvu 4,153 1,213 25 121,105
Charles W. Schmidt 4,153 1,187 18 121,105
Arnold D. Scott 0 0 N/A 0
Jeffrey L. Shames 0 0 N/A 0
Elaine R. Smith 4,383 712 27 132,035
David B. Stone 4,353 999 11 127,055
</TABLE>
- ---------------
(1) For fiscal year ended November 30, 1997.
(2) Based on normal retirement age of 73. See the table below for estimated
annual benefits payable upon retirement by the Fund to a Trustee based on
his or her estimated credited years of service.
(3) For calendar year 1997. All Trustees receiving compensation served as
Trustees of 27 funds within the MFS fund complex (having aggregate net
assets at December 31, 1997, of approximately $29 billion) except Mr.
Bailey, who served as Trustee of 69 funds within the MFS fund complex
(having aggregate net assets at December 31, 1997, of approximately $48
billion).
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<PAGE> 161
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>
$3,585 $538 $ 896 $1,255 $1,792
3,832 575 958 1,341 1,916
4,079 612 1,020 1,428 2,040
4,327 649 1,082 1,514 2,163
4,574 686 1,143 1,601 2,287
4,821 723 1,205 1,687 2,411
</TABLE>
- ---------------
(4) Other funds in the MFS fund complex provide similar retirement benefits to
the Trustees.
As of February 28, 1998, all Trustees and officers as a group owned less than 1%
of the outstanding shares of the Fund, not including 1,156,683.589 shares (which
represent approximately 1.34% of the outstanding shares of the Fund) owned of
record by certain employee benefit plans of MFS for which Messrs. Scott and
Shames are Trustees.
As of February 28, 1998, Merrill Lynch, Pierce, Fenner and Smith Inc., for the
sole benefit of its customers, 4800 Deer Lake Drive, Jacksonville, Florida owned
12.40% and 42.31% of the outstanding Class B and Class C shares of the Fund,
respectively.
As of February 28, 1998, 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, Michigan,
were the owners of approximately 51.87%, 12.77% and 35.29% 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.) Financial Services
Holdings, Inc., which in turn, is an indirect wholly owned subsidiary of 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, 1997, 1996 and 1995, MFS received
management fees under the Advisory Agreement of $6,851,160, $3,552,972 and
$1,526,502, respectively.
The Fund pays all of its expenses (other than those assumed by MFS or MFD),
including: advisory and administrative services fees; 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, 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, 1997, see
"Statement of Operations" in the Annual Report to shareholders. Payment by the
Fund of brokerage commissions for brokerage and research services of value to
the Adviser in serving its clients is discussed under the caption "Portfolio
Transactions and Brokerage Commissions."
MFS pays the compensation of the Trust's officers and of any Trustee who is an
officer of MFS. The Adviser also furnishes at its own expense all necessary
administrative services, including office space, equipment, clerical personnel,
investment advisory facilities, and all executive and supervisory personnel
necessary for managing the Fund's investments, effecting the Fund's portfolio
transactions and, in general, administering the Fund's affairs.
The Advisory Agreement will remain in effect until August 1, 1998, and will
continue in effect thereafter only if such continuance is specifically approved
at least annually by the Board of Trustees or by vote of a majority of the
Fund's outstanding 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
14
<PAGE> 162
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 financial, legal, compliance, shareholder
communications and other administrative services pursuant to a Master
Administrative Services Agreement dated March 1, 1997, as amended. Under this
Agreement, the Fund pays MFS an administrative fee of up to 0.015% per annum of
the Fund's average daily net assets. This fee reimburses MFS for a portion of
the costs it incurs to provide such services. For the period March 1, 1997 to
November 30, 1997, MFS received fees under the Administrative Services Agreement
of $109,492.
CUSTODIAN
State Street Bank and Trust Company (the "Custodian") is the custodian of the
Fund's assets. The Custodian's responsibilities include safekeeping and
controlling the Fund's cash and securities, handling the receipt and delivery of
securities, determining income and collecting interest and dividends on the
Fund's investments, maintaining books of original entry for portfolio and fund
accounting and other required books and accounts, and calculating the daily net
asset value of each class of shares of the Fund. The Custodian does not
determine the investment policies of the Fund or decide which securities the
Fund will buy or sell. The Fund may, however, invest in securities of the
Custodian and may deal with the Custodian as principal in securities
transactions. The Custodian also acts as the dividend disbursing agent of the
Fund.
SHAREHOLDER SERVICING AGENT
MFS Service Center, Inc. (the "Shareholder Servicing Agent"), a wholly owned
subsidiary of MFS, is the Fund's shareholder servicing agent, pursuant to a
Shareholder Servicing Agent Agreement, effective August 1, 1985 as amended (the
"Agency Agreement"), with the Trust. The Shareholder Servicing Agent's
responsibilities under the Agency Agreement include administering and performing
transfer agent functions and 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 0.1125%. In
addition, the Shareholder Servicing Agent will be reimbursed by the Fund for
certain expenses incurred by the Shareholder Servicing Agent on behalf of the
Fund. State Street Bank and Trust Company, the dividend and distribution
disbursing agent of the Fund, has contracted with the Shareholder Servicing
Agent to administer and perform certain dividend and distribution disbursing
agent functions for the Fund.
DISTRIBUTOR
MFD, a wholly owned subsidiary of MFS, serves as distributor for the continuous
offering of shares of the Fund pursuant to a Distribution Agreement, dated
January 1, 1995 (the "Distribution Agreement"). 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 "Shareholder Services Investment and Withdrawal
Programs" in this SAI). A group might qualify to obtain quantity sales charge
discounts (see "Shareholder Services Investment and Withdrawal Programs").
Class A shares of the Fund may be sold at their net asset value to certain
persons or in certain circumstances as described in the Prospectus. Such sales
are made without a sales charge to promote good will with employees and others
with whom MFS, MFD and/or the Fund have business relationships, and because the
sales effort, if any, involved in making such sales is negligible.
MFD allows discounts to dealers (which are alike for all dealers) from the
applicable public offering price of the Class A shares. Dealer allowances
expressed as a percentage of offering price for all offering prices are set
forth in the Prospectus (see "Purchases" in the Prospectus). The difference
between the total amount invested and the sum of (a) the net proceeds to the
Fund and (b) the dealer commission, is the commission paid to the distributor.
Because of rounding in the computation of offering price, the portion of the
sales charge paid to the distributor may vary and the total sales charge may be
more or less than the sales charge calculated using the sales charge expressed
as a percentage of the offering price or as a percentage of the net amount
invested as listed in the Prospectus. In the case of the maximum sales charge,
the dealer retains 5% and MFD retains approximately 3/4 of 1% of the public
offering price. In addition, MFD, on behalf of the Fund, will pay a commission
to dealers who initiate
15
<PAGE> 163
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, 1997, MFD received sales
charges of $351,940 and dealers received sales charges of $2,323,157 (as their
concession on gross sales charges of $2,675,097) for selling Class A shares of
the Fund; the Fund received $154,524,936 representing the aggregate net asset
value of such 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 years ended November 30, 1997, 1996, and 1995, the CDSC
imposed on redemption of Class A shares was $21,436, $139,302 and $336,
respectively.
During the Fund's fiscal years ended November 30, 1997, 1996, and 1995, the CDSC
imposed on redemption of Class B shares was $386,422, $13,250 and $59,989,
respectively.
During the Fund's fiscal year ended November 30, 1997 and the period April 1,
1996 through November 30, 1996, the CDSC imposed on the redemption of Class C
shares was $28,099 and $317, respectively.
The Distribution Agreement will remain in effect until August 1, 1998, and will
continue in effect thereafter only if such continuance is specifically approved
at least annually by the Board of Trustees or by vote of a majority of the
Trust's shares (as defined in "Investment Restrictions") and, in either case, by
a majority of the Trustees who are not parties to the Distribution Agreement or
interested persons of any such party. The Distribution Agreement terminates
automatically if it is assigned and may be terminated without penalty by either
party on not more than 60 days' nor less than 30 days' notice.
4. PORTFOLIO TRANSACTIONS AND BROKERAGE COMMISSIONS
Specific decisions to purchase or sell securities for the Fund are made by
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 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 and trends, portfolio strategy and the performance of accounts;
and effecting securities transactions and performing functions incidental
thereto such as clearance and settlement.
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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 $54,160 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, 1997, 1996 and 1995, the Fund
paid total brokerage commissions of $3,084,458, $1,705,286 and $679,727,
respectively, on total transactions (excluding transactions involving U.S.
Government securities, purchased options transactions, and short-term
obligations) of $1,829,690,143, $830,127,346 and $272,156,668, respectively. Not
all of the Fund's transactions are equity security transactions which involve
the payment of brokerage commissions.
During the fiscal year ended November 30, 1997, the Fund acquired and retained
securities issued by General Electric Capital Corp., a regular broker dealer of
the Fund, which securities had a value of $9,250,000.
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
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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 the Fund with
respect to the liquidation of shares. No charge is
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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.
EXCHANGE PRIVILEGE -- Subject to the requirements set forth below, some or all
of the shares in an account for which payment
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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, the following:
- - Individual Retirement Accounts (IRAs) (for individuals who desire to make
limited contributions to a tax-deferred retirement program and, if eligible,
to receive a federal income tax deduction for amounts contributed);
- - Roth Individual Retirement Accounts (Roth IRAs) (for individuals who desire to
make limited contributions to a tax-favored retirement program);
- - Simplified Employee Pension (SEP-IRA) Plans;
- - Retirement Plans Qualified under Section 401(k) of the Internal Revenue Code
of 1986, as amended (the "Code");
- - 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 gross income, the amount of Fund distributions, and the
composition of the Fund's portfolio assets. Because the Fund intends to
distribute all of its net investment income and net realized capital gains to
shareholders in accordance with the timing requirements
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imposed by the Code, it is not expected that the Fund will be required to pay
any federal income or excise taxes, although the Fund's foreign-source income
may be subject to foreign withholding taxes. If the Fund should fail to qualify
as a "regulated investment company" in any year, the Fund would incur a regular
corporate federal income tax upon its taxable income and Fund distributions
would generally be taxable as ordinary dividend income to the shareholders.
Shareholders of the Fund normally will have to pay federal income taxes, and any
state or local taxes, on the dividends and capital gain distributions they
receive from the Fund. Dividends from ordinary income and any distributions from
net short-term capital gains are taxable to the Fund's shareholders as ordinary
income for federal income tax purposes, whether the distributions are paid in
cash or reinvested in additional shares. 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 reinvested in additional shares, are taxable to shareholders as
long-term capital gains for federal income tax purposes without regard to the
length of time shareholders have held their shares. Such capital gains will
generally be taxable to shareholders as if the shareholders had directly
realized gains from the same sources from which they were realized by the Fund.
Any Fund dividend 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; a
long-term capital gain realized by an individual, estate or trust may be
eligible for reduced tax rates if the shares were held for more than eighteen
months. However, any loss realized upon a disposition of shares in the Fund held
for six months or less will be treated as a long-term capital loss to the extent
of any distributions of net capital 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, payment-in-kind 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. Use of foreign currencies for non-hedging
purposes and investment by the Fund in certain "passive foreign investment
companies" may be limited in order to avoid a tax on the Fund. The Fund may
elect to mark to market any investments in "passive foreign investment
companies" on the last day of each year. This election may cause the Fund to
recognize income prior to the receipt of cash payments with respect to those
investments; in order to distribute this income and avoid a tax on the Fund, the
Fund may be required to liquidate portfolio securities that it might otherwise
have continued to hold.
Investment income received by the Fund from foreign securities may be subject to
foreign taxes withheld at the source; the Fund does not expect to be able to
pass through to shareholders foreign tax credits with respect to such foreign
taxes. The United States has entered into tax treaties with many foreign
countries that may entitle the Fund to a reduced rate of tax or an exemption
from tax on such income; the Fund intends to qualify for treaty reduced rates
where available. It is not possible, however, to determine the Fund's effective
rate of foreign tax in advance since
21
<PAGE> 169
the amount of the Fund's assets to be invested within various countries is not
known.
Dividends and certain other payments to persons who are not citizens or
residents of the United States or U.S. entities ("Non-U.S. Persons") are
generally subject to U.S. tax withholding at the rate of 30%. The Fund intends
to withhold U.S. federal income tax at the rate of 30% (or any lower rate
permitted under an applicable treaty) on taxable dividends and other payments
made to Non-U.S. Persons that are subject to such withholding. Any amounts
overwithheld may be recovered by such persons by filing a claim for refund with
the U.S. Internal Revenue Service within the time period appropriate to such
claims. Distributions received from the Fund by Non-U.S. Persons may also be
subject to tax under the laws of their own jurisdictions. The Fund is also
required in certain circumstances to apply backup withholding at the rate of 31%
on taxable dividends and redemption proceeds paid to any shareholder (including
a Non-U.S. Person) who does not furnish to the Fund certain information and
certifications or who is otherwise subject to backup withholding. Backup
withholding will not, however, be applied to payments that have been subject to
30% withholding.
As long as it qualifies as a regulated investment company under the Code, the
Fund will not be required to pay Massachusetts income or excise taxes.
7. DETERMINATION OF NET ASSET VALUE AND PERFORMANCE
NET ASSET VALUE: The net asset value per share of each class of the Fund is
determined each day during which the Exchange is open for trading. (As of the
date of this SAI, the Exchange is open for trading every weekday except for the
following holidays or the day on which they are observed: New Year's Day, Martin
Luther King, Jr., Day, Presidents' Day, Good Friday, Memorial Day, Independence
Day, Labor Day, Thanksgiving Day and Christmas Day.) This determination is made
once during each day as of the close of regular trading on the Exchange by
deducting the amount of the liabilities attributable to the class from the value
of the assets attributable to the class and dividing the difference by the
number of shares of the class outstanding.
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 stock market, 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.
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% for Class A shares), and/or (iii)
total rates of return which represent aggregate performance over a period or
year-by-year performance, and which may or may not reflect the effect of the
maximum or other sales charge or CDSC.
The Fund offers multiple classes of shares which were initially offered for sale
to, and purchased by, the public on different dates (the "class inception
date"). The calculation of the total rate of return for a class of shares which
has a later class inception date than another class of shares of the Fund is
based both on (i) the performance of the Fund's newer class from its inception
date
22
<PAGE> 170
and (ii) the performance of the Fund's oldest class from its inception date up
to the class inception date of the newer class.
As discussed in the Prospectus, the sales charges, expenses and expense ratios,
and therefore the performance, of the Fund's classes of shares differ. In
calculating total rate of return for a newer class of shares in accordance with
certain formulas required by the SEC, the performance will be adjusted to take
into account the fact that the newer class is subject to a different sales
charge than the oldest class (e.g., if the newer class is Class A shares, the
total rate of return quoted will reflect the deduction of the initial sales
charge applicable to Class A shares; if the newer class is Class B shares, the
total rate of return quoted will reflect the deduction of the CDSC applicable to
Class B shares). However, the performance will not be adjusted to take into
account the fact that the newer class of shares bears different class specific
expenses than the oldest 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, 1988 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
23
<PAGE> 171
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 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(R) Equity Fund,
the first fund to invest in companies deemed to be union-friendly by an
Advisory Board of Senior labor officials, senior managers of companies
with significant labor contracts, academics and other national labor
leaders or experts.
8. DISTRIBUTION PLAN
The Trustees have adopted a Distribution Plan for Class 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,
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<PAGE> 172
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, 1997, 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 $1,276,806 $ 181,376 $1,095,430
Class B Shares $3,278,283 $2,503,096 $ 775,187
Class C Shares $ 499,968 $ 16,733 $ 483,235
</TABLE>
GENERAL: The Distribution Plan will remain in effect until August 1, 1998, and
will continue in effect thereafter only if such continuance is specifically
approved at least annually by vote of both the Trustees and a majority of the
Trustees who are not "interested persons" or financially interested parties of
such Plan ("Distribution Plan Qualified Trustees"). The Distribution Plan also
requires that the Fund and MFD each shall provide the Trustees, and the Trustees
shall review, at least quarterly, a written report of the amounts expended (and
purposes therefor) under such Plan. The Distribution Plan may be terminated at
any time by vote of a majority of the Distribution Plan Qualified Trustees or by
vote of the holders of a majority of the respective class of the Fund's shares
(as defined in "Investment Restrictions"). All agreements relating to the
Distribution Plan entered into between the Fund or MFD and other organizations
must be approved by the Board of Trustees, including a majority of the
Distribution Plan Qualified Trustees. Agreements under the Distribution Plan
must be in writing, will be terminated automatically if assigned, and may 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
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<PAGE> 173
of Trust property for any shareholder held personally liable for the obligations
of the Trust. The Declaration of Trust also provides that the Trust shall
maintain appropriate insurance (for example, fidelity bonding and errors and
omissions insurance) for the protection of the Trust, its shareholders,
Trustees, officers, employees and agents covering possible tort and other
liabilities. Thus, the risk of a shareholder incurring financial loss on account
of shareholder liability is limited to circumstances in which both inadequate
insurance existed and the Trust itself was unable to meet its obligations.
The Declaration of Trust further provides that obligations of the Trust are not
binding upon the Trustees individually but only upon the property of the Trust
and that the Trustees will not be liable for any action or failure to act, but
nothing in the Declaration of Trust protects a Trustee against any liability to
which he would otherwise be subject by reason of his willful misfeasance, bad
faith, gross negligence, or reckless disregard of his duties involved in the
conduct of his office.
10. INDEPENDENT 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, 1997, the Statement of Assets and
Liabilities at November 30, 1997, the Statement of Operations for the year ended
November 30, 1997, the Statement of Changes in Net Assets for the years ended
November 30, 1997 and 1996, 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> 174
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, 1988........................................ $11,232 $ 484 $ 218 $11,934
December 31, 1989........................................ 11,170 2,752 678 14,600
December 31, 1990........................................ 9,489 2,519 864 12,872
December 31, 1991........................................ 10,996 3,828 1,131 15,955
December 31, 1992........................................ 11,307 6,356 1,162 18,825
December 31, 1993........................................ 12,129 8,267 3,195 23,591
December 31, 1994........................................ 10,958 9,162 2,886 23,006
December 31, 1995........................................ 14,371 12,679 6,132 33,182
December 31, 1996........................................ 15,317 14,729 8,668 38,714
December 31, 1997........................................ 17,297 17,889 13,784 48,970
</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 as of November 30, 1997.
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS
-----------------------------
1 YEAR 5 YEAR 10 YEAR
------ ------ -------
<S> <C> <C> <C>
Class A with sales charge................................... 17.81% 19.73% 17.94%
Class A without sales charge................................ 24.96% 21.15% 18.64%
Class B with CDSC........................................... 20.03% 20.13%(1) 18.23%(1)
Class B without CDSC........................................ 24.03% 20.32%(1) 18.23%(1)
Class C with CDSC........................................... 23.02% 20.39%(2) 18.26%(2)
Class C without CDSC........................................ 24.02% 20.39%(2) 18.26%(2)
Class I shares.............................................. 25.12%(3) 21.19%(3) 18.66%(3)
</TABLE>
(1) Class B share performance includes the performance of the Fund's Class A
shares for periods prior to the inception of Class B shares on September 7,
1993. Sales charges, expenses and expense ratios, and therefore performance,
for Class A and Class B shares differ. Class B share performance has been
adjusted to reflect that Class B shares generally are subject to a CDSC
(unless the performance quotation does not give effect to the CDSC) whereas
Class A shares generally are subject to an initial sales charge. Class B
share performance has not, however, been adjusted to reflect differences in
operating expenses (e.g., Rule 12b-1 fees), which generally are lower for
Class A shares.
(2) Class C share performance includes the performance of the Fund's Class A
shares for periods prior to the inception of Class C shares on 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> 175
(3) Class I share performance includes the performance of the Fund's Class A
shares for the periods prior to the inception of Class I shares on January
1, 1997. Sales charges, expenses and expense ratios, and therefore,
performance for Class I and A shares differ. Class I share performance has
been adjusted to reflect that Class I shares are not subject to an initial
sales charge, whereas Class A shares generally are subject to an initial
sales charge. Class I share performance has not, however, been adjusted to
reflect differences in operating expenses (e.g., Rule 12b-1 fees), which
generally are lower for Class I shares.
A-2
<PAGE> 176
INVESTMENT ADVISER
Massachusetts Financial Services Company
500 Boylston Street, Boston, MA 02116
(617) 954-5000
DISTRIBUTOR
MFS Fund Distributors, Inc.
500 Boylston Street, Boston, MA 02116
(617) 954-5000
CUSTODIAN AND DIVIDEND DISBURSING AGENT
State Street Bank and Trust Company
225 Franklin Street, Boston, MA 02110
SHAREHOLDER SERVICING AGENT
MFS Service Center, Inc.
500 Boylston Street, Boston, MA 02116
Toll free: 800-225-2606
Mailing Address
P.O. Box 2281, Boston, MA 02107-9906
INDEPENDENT AUDITORS
Deloitte & Touche LLP
125 Summer Street, Boston, MA 02110
LOGO MCO-13-4/98/.5M 23/223/323
MFS(R)
CAPITAL OPPORTUNITIES FUND
500 Boylston Street
Boston, MA 02116
<PAGE> 177
PART C
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS
MFS WORLD GOVERNMENTS FUND
(a) FINANCIAL STATEMENTS INCLUDED IN PART A:
For the five years in the period ended December 31,
1992, for the period from January 1, 1993 to
November 30, 1993 and for the four years ended
November 30, 1997:
Financial Highlights
FINANCIAL STATEMENTS INCLUDED IN PART B:
At November 30, 1997:
Portfolio of Investments*
Statement of Assets and Liabilities*
For the year ended November 30, 1997:
Statement of Operations*
For the two years in the period ended November 30,
1997: Statement of Changes in Net Assets*
MFS CAPITAL OPPORTUNITIES FUND
(a) FINANCIAL STATEMENTS INCLUDED IN PART A:
For the ten years ended November 30, 1997:
Financial Highlights
FINANCIAL STATEMENTS INCLUDED IN PART B:
At November 30, 1997:
Portfolio of Investments*
Statement of Assets and Liabilities*
For the year ended November 30, 1997:
Statement of Operations*
For the two years in the period ended November 30,
1997: Statement of Changes in Net Assets*
- ----------------------
* Incorporated herein by reference to MFS World Governments Fund's Annual
Report to Shareholders dated November 30, 1997 filed with the SEC on January
29, 1998.
** Incorporated herein by reference to MFS Capital Opportunities Fund's Annual
Report to Shareholders, dated November 30, 1997, filed with the SEC on
February 6, 1998.
(b) EXHIBITS:
1 (a) Declaration of Trust Amended and Restated,
January 18, 1995. (4)
<PAGE> 178
(b) Amendment to the Declaration of Trust, dated
March 13, 1996. (6)
(c) Amendment to Declaration of Trust, dated June
20, 1996. (8)
(d) Amendment to Declaration of Trust, dated
December 19, 1996. (12)
(e) Form of Amendment to Declaration of Trust to
change the name of a series; filed herewith.
2 By-Laws as Amended and Restated, January 6,
1995. (4)
3 Not Applicable.
4 Form of Share Certificate representing
ownership of the Registrant's Classes of
Shares. (7)
5 (a) Investment Advisory Agreement dated May
20, 1982, by and between the Registrant and
Massachusetts Financial Services Company. (5)
(b) Investment Advisory Agreement for MFS Value
Fund, dated September 1, 1993. (5)
6 (a) Distribution Agreement dated January 1, 1995.
(4)
(b) Dealer Agreement between MFS Fund
Distributors, Inc. ("MFD") and a dealer, and
the Mutual Fund Agreement between MFD and a
bank or NASD affiliate, as amended on April
11, 1997. (13)
7 Retirement Plan for Non-Interested Person
Trustees, dated January 1, 1991. (5)
8 (a) Custodian Contract between Registrant
and State Street Bank and Trust Company,
dated June 28, 1988. (5)
(b) Amendment to Custodian Contract between
Registrant and State Street Bank and Trust
Company, dated October 1, 1989. (5)
(c) Amendment to Custodian Contract between
Registrant and State Street Bank and Trust
Company dated June 28, 1988. (5)
<PAGE> 179
(d) Amendment to Custodian Contract between
Registrant and State Street Bank and Trust
Company dated September 17, 1991. (5)
9 (a) Shareholder Servicing Agent Agreement
between Registrant and Massachusetts
Financial Service Center, dated August 1,
1985. (5)
(b) Amendment to Shareholder Servicing Agent
Agreement dated January 1, 1998; filed
herewith.
(c) Exchange Privilege Agreement dated September
1, 1993, as amended and restated through and
including July 30, 1997; filed herewith.
(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) Third Amendment dated February 14, 1997 to
Loan Agreement dated February 21, 1995 By
and Among the Banks named therein and The
First National Bank of Boston. (14)
(f) Dividend Disbursing Agency Agreement dated
February 1, 1986. (2)
(g) Master Administrative Services Agreement
dated March 1, 1997, as amended. (15)
10 Opinion and Consent of Counsel, dated March
18, 1998; filed herewith.
11 (a) Consent of Ernst & Young LLP - MFS World
Governments Fund; filed herewith.
(b) Consent of Deloitte & Touche LLP - MFS
Capital Opportunities Fund; filed herewith.
12 Not Applicable.
13 Investment Representation Letter dated
February 18, 1991. (5)
14 (a) Forms for Individual Retirement Account
Disclosure Statement as currently in effect.(1)
(b) Forms for MFS 403(b) Custodial Account
Agreement as currently in effect. (1)
<PAGE> 180
(c) Forms for MFS Prototype Paired Defined
Contribution Plans and Trust Agreement as
currently in effect. (1)
(d) Forms for Roth Individual Retirement Account
Disclosure Statement and Trust Agreement. (16)
15 (a) Master Distribution Plan pursuant to
12b-1 under the Investment Company Act of
1940, effective January 1, 1997. (11)
(b) Exhibits as revised February 18, 1998, to
Master Distribution Plan pursuant to Rule
12b-1 under the Investment Company Act of
1940, to replace those exhibits to the
Master Distribution Plan contained in
Exhibit 15(a) above. (15)
16 Schedule for Computation of Performance
Quotations - Aggregate and Average Annual
Total Rate of Return, Distribution Rate and
Yield Calculations. (4)
17 Financial Data Schedules for each class of
MFS World Governments Fund and MFS Special
Opportunities Fund; filed herewith.
18 Plan pursuant to Rule 18f-3(d) under the
Investment Company Act of 1940. (7)
Power-of Attorney dated September 21, 1994.(5)
Power of Attorney dated February 19, 1998;
filed herewith.
- -----------------------------
(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 Registrant's Post-Effective Amendment No. 19
filed with the SEC via EDGAR on March 30, 1995.
(5) Incorporated by reference to Registrant's Post-Effective Amendment No. 20
filed with the SEC via EDGAR on December 31, 1995.
(6) Incorporated by reference to Registrant's Post-Effective Amendment No. 21
filed with the SEC via EDGAR on March 29, 1996.
(7) Incorporated by reference to MFS Series Trust I (File Nos. 33-7638 and
811-4777) Post-Effective Amendment No. 25 filed with the SEC via EDGAR on
August 27, 1996.
(8) Incorporated by reference to Registrant's Post-Effective Amendment No. 22
filed with the SEC via EDGAR on August 28, 1996.
<PAGE> 181
(9) 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.
(10) Incorporated by reference to Massachusetts Investors Growth Stock Fund
(File Nos. 2-14677 and 811-859) Post-Effective Amendment No. 64 filed with
the SEC via EDGAR on October 29, 1997.
(11) 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.
(12) Incorporated by reference to Registrant's Post-Effective Amendment No. 23
filed with the SEC via EDGAR on March 27, 1997.
(13) Incorporated by reference to MFS Series Trust III (File Nos. (File Nos.
2-60491 and 811-2794) Post-Effective Amendment No. 24 filed with the SEC
via EDGAR on May 29, 1997.
(14) Incorporated by reference to MFS Series Trust I (File Nos. 33-7638 and
811-4777) Post-Effective Amendment No. 28 filed with the SEC via EDGAR on
June 26, 1997.
(15) Incorporated by reference to Massachusetts Investors Growth Stock Fund
(File Nos. 2-14677 and 811-859) Post-Effective Amendment No. 65 filed with
the SEC via EDGAR on March 30, 1998.
(16) Incorporated by reference to MFS Series Trust VIII (File Nos. 33-37972 and
811-5262) Post-Effective Amendment No. 14 filed with the SEC via EDGAR on
February 26, 1998.
ITEM 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT.
Not Applicable.
ITEM 26. NUMBER OF HOLDERS OF SECURITIES
FOR MFS WORLD GOVERNMENTS FUND
<TABLE>
<CAPTION>
(1) (2)
TITLE OF CLASS NUMBER OF RECORD HOLDERS
<S> <C>
Class A Shares of Beneficial Interest 13,354
(without par value) (as at February 28, 1998)
Class B Shares of Beneficial Interest 5,904
(without par value) (as at February 28, 1998)
Class C Shares of Beneficial Interest 558
(without par value) (as at February 28, 1998)
Class I Shares of Beneficial Interest 4
(without par value) (as at February 28, 1998)
</TABLE>
FOR MFS CAPITAL OPPORTUNITIES FUND
<TABLE>
<CAPTION>
(1) (2)
TITLE OF CLASS NUMBER OF RECORD HOLDERS
<S> <C>
Class A Shares of Beneficial Interest 43,928
(without par value) (as at February 28, 1998)
</TABLE>
<PAGE> 182
<TABLE>
<S> <C>
Class B Shares of Beneficial Interest 36,084
(without par value) (as at February 28, 1998)
Class C Shares of Beneficial Interest 3,211
(without par value) (as at February 28, 1998)
Class I Shares of Beneficial Interest 6
(without par value) (as at February 28, 1998)
</TABLE>
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 Registrant and its officers
are also insured under the fidelity bond required by Rule 17g-1 under the
Investment Company Act of 1940.
ITEM 28. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER
MFS serves as investment adviser to the following open-end
Funds comprising the MFS Family of Funds (except the Vertex Funds mentioned
below): Massachusetts Investors Trust, Massachusetts Investors Growth Stock
Fund, MFS Growth Opportunities Fund, MFS Government Securities Fund, MFS
Government Limited Maturity Fund, MFS Series Trust I (which has thirteen series:
MFS Managed Sectors Fund, MFS Cash Reserve Fund, MFS World Asset Allocation
Fund, MFS Strategic Growth Fund, MFS Research Growth and Income Fund, MFS Core
Growth Fund, MFS Equity Income Fund, MFS Special Opportunities Fund, MFS
Convertible Securities Fund, MFS Blue Chip Fund, MFS New Discovery Fund, MFS
Science and Technology Fund and MFS Research International Fund), MFS Series
Trust II (which has three series: MFS Emerging Growth Fund, MFS Large Cap Growth
Fund and MFS Intermediate Income Fund), MFS Series Trust III (which has two
series: MFS High Income Fund and MFS Municipal High Income Fund), MFS Series
Trust IV (which has four series: MFS Money Market Fund, MFS Government Money
Market Fund, MFS Municipal Bond Fund and MFS Mid Cap Growth Fund), MFS Series
Trust V (which has six series: MFS Total Return Fund, MFS Research Fund, MFS
International Opportunities Fund, MFS International Strategic Growth Fund, MFS
International Value Fund and MFS Asia Pacific Fund), MFS Series Trust VI (which
has three series: MFS World Total Return Fund, MFS Utilities Fund and MFS World
Equity Fund), MFS Series Trust VII (which has two series: MFS World Governments
Fund and MFS Value Fund), MFS Series Trust VIII (which has two series: MFS
Strategic Income Fund and MFS World Growth Fund), MFS Series Trust IX (which has
three series: MFS Bond Fund, MFS Limited Maturity Fund and MFS Municipal Limited
Maturity Fund), MFS
<PAGE> 183
Series Trust X (which has eight series: MFS Government Mortgage Fund,
MFS/Foreign & Colonial Emerging Markets Equity Fund, MFS International Growth
Fund, MFS International Growth and Income Fund, MFS Real Estate Investment Fund,
MFS Strategic Value Fund, MFS Small Cap Value Fund and MFS Emerging Markets Debt
Fund), MFS Series Trust XI (which has six series: MFS Union Standard Equity
Fund, Vertex All Cap Fund, Vertex Research All Cap Fund, Vertex Growth Fund,
Vertex Discovery Fund and Vertex Contrarian Fund (the Vertex Funds are expected
to be declared effective April 28, 1998)), and MFS Municipal Series Trust (which
has 16 series: MFS Alabama Municipal Bond Fund, MFS Arkansas Municipal Bond
Fund, MFS California Municipal Bond Fund, MFS Florida Municipal Bond Fund, MFS
Georgia Municipal Bond Fund, MFS Maryland Municipal Bond Fund, MFS Massachusetts
Municipal Bond Fund, MFS Mississippi Municipal Bond Fund, MFS New York Municipal
Bond Fund, MFS North Carolina Municipal Bond Fund, MFS Pennsylvania Municipal
Bond Fund, MFS South Carolina Municipal Bond Fund, MFS Tennessee Municipal Bond
Fund, MFS Virginia Municipal Bond Fund, MFS West Virginia Municipal Bond Fund
and MFS Municipal Income Fund) (the "MFS Funds"). The principal business address
of each of the MFS Funds is 500 Boylston Street, Boston, Massachusetts 02116.
MFS also serves as investment adviser of the following
open-end Funds: MFS Institutional Trust ("MFSIT") (which has seven series) and
MFS Variable Insurance Trust ("MVI") (which has twelve series). The principal
business address of each of the aforementioned funds is 500 Boylston Street,
Boston, Massachusetts 02116.
In addition, MFS serves as investment adviser to the following
closed-end funds: MFS Municipal Income Trust, MFS Multimarket Income Trust, MFS
Government Markets Income Trust, MFS Intermediate Income Trust, MFS Charter
Income Trust and MFS Special Value Trust (the "MFS Closed-End Funds"). The
principal business address of each of the MFS Closed-End Funds is 500 Boylston
Street, Boston, Massachusetts 02116.
Lastly, MFS serves as investment adviser to MFS/Sun Life
Series Trust ("MFS/SL") (which has 26 series), Money Market Variable Account,
High Yield Variable Account, Capital Appreciation Variable Account, Government
Securities Variable Account, World Governments Variable Account, Total Return
Variable Account and Managed Sectors Variable Account (collectively, the
"Accounts"). The principal business address of MFS/SL is 500 Boylston Street,
Boston, Massachusetts 02116. The principal business address of each of the
aforementioned Accounts is One Sun Life Executive Park, Wellesley Hills,
Massachusetts 02181.
Vertex Investment Management, Inc., a Delaware corporation and
a wholly owned subsidiary of MFS, whose principal business address is 500
Boylston Street, Boston, Massachusetts 02116 ("Vertex"), serves as investment
adviser to Vertex All Cap Fund, Vertex Research All Cap Fund, Vertex Growth
Fund, Vertex Discovery Fund and Vertex Contrarian Fund, each a series of MFS
Series Trust XI. The principal business address of the aforementioned Funds is
500 Boylston Street, Boston, Massachusetts 02116.
<PAGE> 184
MFS International Ltd. ("MIL"), a limited liability company
organized under the laws of Bermuda and a subsidiary of MFS, whose principal
business address is Cedar House, 41 Cedar Avenue, Hamilton HM12 Bermuda, serves
as investment adviser to and distributor for MFS American Funds (which has six
portfolios: MFS American Funds-U.S. Equity Fund, MFS American Funds-U.S.
Emerging Growth Fund, MFS American Funds-U.S. High Yield Bond Fund, MFS American
Funds - U.S. Dollar Reserve Fund, MFS American Funds-Charter Income Fund and MFS
American Funds-U.S. Research Fund) (the "MIL Funds"). The MIL Funds are
organized in Luxembourg and qualify as an undertaking for collective investments
in transferable securities (UCITS). The principal business address of the MIL
Funds is 47, Boulevard Royal, L-2449 Luxembourg.
MIL also serves as investment adviser to and distributor for
MFS Meridian U.S. Government Bond Fund, MFS Meridian Charter Income Fund, MFS
Meridian Global Governments Fund, MFS Meridian U.S. Emerging Growth Fund, MFS
Meridian Global Equity Fund, MFS Meridian Limited Maturity Fund, MFS Meridian
World Growth Fund, MFS Meridian Money Market Fund, MFS Meridian World Total
Return Fund, MFS Meridian U.S. Equity Fund, MFS Meridian Research Fund, MFS
Meridian U.S. High Yield Fund and MFS Meridian 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 Institutional Advisors (Australia) Ltd.
("MFSI-Australia"), a private limited company organized under the Corporations
Law of New South Wales, Australia whose current address is Level 37, Governor
Phillip Tower, One Farrer Place, Sydney, N5W2000, Australia, is involved
primarily in investment management and distribution of Australian superannuation
unit trusts and acts as an investment adviser to institutional accounts.
MFS Holdings Australia Pty Ltd. ("MFS Holdings Australia"), a
private limited company organized pursuant to the Corporations Law of New South
Wales, Australia whose current address is Level 37, Governor Phillip Tower, One
Farrer Place, Sydney, NSW2000 Australia, and whose function is to serve
primarily as a holding company.
MFS Fund Distributors, Inc. ("MFD"), a wholly owned subsidiary
of MFS, serves as distributor for the MFS Funds, MVI and MFSIT.
MFS Service Center, Inc. ("MFSC"), a wholly owned subsidiary
of MFS, serves as shareholder servicing agent to the MFS Funds, the MFS
Closed-End Funds, MFSIT and MVI.
<PAGE> 185
MFS Institutional Advisors, Inc. ("MFSI"), a wholly owned
subsidiary of MFS, provides investment advice to substantial private clients.
MFS Retirement Services, Inc. ("RSI"), a wholly owned
subsidiary of MFS, markets MFS products to retirement plans and provides
administrative and record keeping services for retirement plans.
MFS
The Directors of MFS are Jeffrey L. Shames, Arnold D. Scott,
John W. Ballen, Donald A. Stewart and John D. McNeil. Mr. Shames is the
Chairman, Chief Executive Officer and President, Mr. Scott is a Senior Executive
Vice President and Secretary, William W. Scott, Jr., Patricia A. Zlotin, John W.
Ballen, Thomas J. Cashman, Jr., Joseph W. Dello Russo and Kevin R. Parke are
Executive Vice Presidents, Stephen E. Cavan is a Senior Vice President, General
Counsel and an Assistant Secretary, Robert T. Burns is a Senior Vice President,
Associate General Counsel and an Assistant Secretary of MFS, and Thomas B.
Hastings is a Vice President and Treasurer of MFS.
MASSACHUSETTS INVESTORS TRUST
MASSACHUSETTS INVESTORS GROWTH STOCK FUND
MFS GROWTH OPPORTUNITIES FUND
MFS GOVERNMENT SECURITIES FUND
MFS SERIES TRUST I
MFS SERIES TRUST V
MFS SERIES TRUST VI
MFS SERIES TRUST X
MFS GOVERNMENT LIMITED MATURITY FUND
Stephen E. Cavan is the Secretary, W. Thomas London is the
Treasurer, James O. Yost, Ellen M. Moynihan and Mark E. Bradley, Vice Presidents
of MFS, are the Assistant Treasurers, James R. Bordewick, Jr., Senior Vice
President and Associate General Counsel of MFS, is the Assistant Secretary.
MFS SERIES TRUST II
Leslie J. Nanberg, Senior Vice President of MFS, is a Vice
President, Stephen E. Cavan is the Secretary, W. Thomas London is the Treasurer,
James O. Yost, Ellen M. Moynihan and Mark E. Bradley are the Assistant
Treasurers, and James R. Bordewick, Jr. is the Assistant Secretary.
MFS GOVERNMENT MARKETS INCOME TRUST
MFS INTERMEDIATE INCOME TRUST
Leslie J. Nanberg, Senior Vice President of MFS, is a Vice
President, Stephen E. Cavan is the Secretary, W. Thomas London is the Treasurer,
James O. Yost, Ellen M. Moynihan and Mark E. Bradley are the Assistant
Treasurers, and James R. Bordewick, Jr. is the Assistant Secretary.
<PAGE> 186
MFS SERIES TRUST III
James T. Swanson, Robert J. Manning and Joan S. Batchelder,
Senior Vice Presidents of MFS, and Bernard Scozzafava, Vice President of MFS,
are Vice Presidents, Sheila Burns-Magnan, Assistant Vice President of MFS, and
Daniel E. McManus, Vice President of MFS, are Assistant Vice Presidents, Stephen
E. Cavan is the Secretary, W. Thomas London is the Treasurer, James O. Yost,
Ellen M. Moynihan and Mark E. Bradley are the Assistant Treasurers, and James R.
Bordewick, Jr. is the Assistant Secretary.
MFS SERIES TRUST IV
MFS SERIES TRUST IX
Robert A. Dennis and Geoffrey L. Kurinsky, Senior Vice
Presidents of MFS, are Vice Presidents, Stephen E. Cavan is the Secretary, W.
Thomas London is the Treasurer, James O. Yost, Ellen M. Moynihan and Mark E.
Bradley are the Assistant Treasurers and James R. Bordewick, Jr. is the
Assistant Secretary.
MFS SERIES TRUST VII
Leslie J. Nanberg and Stephen C. Bryant, Senior Vice
Presidents of MFS, are Vice Presidents, Stephen E. Cavan is the Secretary, W.
Thomas London is the Treasurer, James O. Yost, Ellen M. Moynihan and Mark E.
Bradley are the Assistant Treasurers and James R. Bordewick, Jr. is the
Assistant Secretary.
MFS SERIES TRUST VIII
Jeffrey L. Shames, Leslie J. Nanberg and James T. Swanson and
John D. Laupheimer, Jr., a Senior Vice President of MFS, are Vice Presidents,
Stephen E. Cavan is the Secretary, W. Thomas London is the Treasurer, James O.
Yost, Ellen M. Moynihan and Mark E. Bradley are the Assistant Treasurers and
James R. Bordewick, Jr. is the Assistant Secretary.
MFS MUNICIPAL SERIES TRUST
Robert A. Dennis is Vice President, David B. Smith and
Geoffrey L. Schechter, Vice Presidents of MFS, are Vice Presidents, Daniel E.
McManus, Vice President of MFS, is an Assistant Vice President, Stephen E. Cavan
is the Secretary, W. Thomas London is the Treasurer, James O. Yost, Ellen M.
Moynihan and Mark E. Bradley are the Assistant Treasurers and James R.
Bordewick, Jr. is the Assistant Secretary.
<PAGE> 187
MFS VARIABLE INSURANCE TRUST
MFS SERIES TRUST XI
MFS INSTITUTIONAL TRUST
Stephen E. Cavan is the Secretary, W. Thomas London is the
Treasurer, James O. Yost, Ellen M. Moynihan and Mark E. Bradley are the
Assistant Treasurers and James R. Bordewick, Jr. is the Assistant Secretary.
MFS MUNICIPAL INCOME TRUST
Robert J. Manning is Vice President, Stephen E. Cavan is the
Secretary, W. Thomas London is the Treasurer, James O. Yost, Ellen M. Moynihan
and Mark E. Bradley are the Assistant Treasurers and James R. Bordewick, Jr. is
the Assistant Secretary.
MFS MULTIMARKET INCOME TRUST
MFS CHARTER INCOME TRUST
Leslie J. Nanberg and James T. Swanson are Vice Presidents,
Stephen E. Cavan is the Secretary, W. Thomas London is the Treasurer, James O.
Yost, Ellen M. Moynihan and Mark E. Bradley are the Assistant Treasurers and
James R. Bordewick, Jr. is the Assistant Secretary.
MFS SPECIAL VALUE TRUST
Robert J. Manning is Vice President, Stephen E. Cavan is the
Secretary, W. Thomas London is the Treasurer, James O. Yost, Ellen M. Moynihan
and Mark E. Bradley are the Assistant Treasurers and James R. Bordewick, Jr. is
the Assistant Secretary.
MFS/SUN LIFE SERIES TRUST
John D. McNeil, Chairman and Director of Sun Life Assurance
Company of Canada, is the Chairman, Stephen E. Cavan is the Secretary, W. Thomas
London is the Treasurer, James O. Yost, Ellen M. Moynihan and Mark E. Bradley
are the Assistant Treasurers and James R. Bordewick, Jr. is the Assistant
Secretary.
MONEY MARKET VARIABLE ACCOUNT
HIGH YIELD VARIABLE ACCOUNT
CAPITAL APPRECIATION VARIABLE ACCOUNT
GOVERNMENT SECURITIES VARIABLE ACCOUNT
TOTAL RETURN VARIABLE ACCOUNT
WORLD GOVERNMENTS VARIABLE ACCOUNT
MANAGED SECTORS VARIABLE ACCOUNT
John D. McNeil is the Chairman, Stephen E. Cavan is the
Secretary, and James R. Bordewick, Jr. is the Assistant Secretary.
<PAGE> 188
VERTEX
Jeffrey L. Shames and Arnold D. Scott are the Directors,
Jeffrey L. Shames is the President, Kevin R. Parke and John W. Ballen are
Executive Vice Presidents, John F. Brennan, Jr., and John D. Laupheimer are
Senior Vice Presidents, Brian E. Stack is a Vice President, Joseph W. Dello
Russo is the Treasurer, Thomas B. Hastings is the Assistant Treasurer, Stephen
E. Cavan is the Secretary and Robert T. Burns is the Assistant Secretary.
MIL
Arnold D. Scott, Jeffrey L. Shames and Thomas J. Cashman, Jr.
are Directors, Stephen E. Cavan is a Director, Senior Vice President and the
Clerk, Robert T. Burns is an Assistant Clerk, Joseph W. Dello Russo, Executive
Vice President and Chief Financial Officer of MFS, is the Treasurer and Thomas
B. Hastings is the Assistant Treasurer.
MIL-UK
Thomas J. Cashman, Jr. is President and a Director, Arnold D.
Scott and Jeffrey L. Shames are Directors, Stephen E. Cavan is a Director and
the Secretary, Joseph W. Dello Russo is the Treasurer, Thomas B. Hastings is the
Assistant Treasurer and Robert T. Burns is the Assistant Secretary.
MFSI - AUSTRALIA
Thomas J. Cashman, Jr. is President and a Director, Graham E.
Lenzer, John A. Gee and David Adiseshan are Directors, Stephen E. Cavan is the
Secretary, Joseph W. Dello Russo is the Treasurer, Thomas B. Hastings is the
Assistant Treasurer, and Robert T. Burns is the Assistant Secretary.
MFS HOLDINGS - AUSTRALIA
Jeffrey L. Shames is the President and a Director, Arnold D.
Scott, Thomas J. Cashman, Jr., and Graham E. Lenzer are Directors, Stephen E.
Cavan is the Secretary, Joseph W. Dello Russo is the Treasurer, Thomas B.
Hastings is the Assistant Treasurer, and Robert T. Burns is the Assistant
Secretary.
MIL FUNDS
Richard B. Bailey, John A. Brindle, Richard W. S. Baker,
Arnold D. Scott, Jeffrey L. Shames and William F. Waters are Directors, Stephen
E. Cavan is the Secretary, W. Thomas London is the Treasurer, James O. Yost,
Ellen M. Moynihan and Mark E. Bradley are the Assistant Treasurers and James R.
Bordewick, Jr. is the Assistant Secretary.
<PAGE> 189
MFS MERIDIAN FUNDS
Richard B. Bailey, John A. Brindle, Richard W. S. Baker,
Arnold D. Scott, Jeffrey L. Shames and William F. Waters are Directors, Stephen
E. Cavan is the Secretary, W. Thomas London is the Treasurer, James R.
Bordewick, Jr. is the Assistant Secretary and James O. Yost, Ellen M. Moynihan
and Mark E. Bradley are the Assistant Treasurers.
MFD
Arnold D. Scott and Jeffrey L. Shames are Directors, William
W. Scott, Jr., an Executive Vice President of MFS, is the President, Stephen E.
Cavan is the Secretary, Robert T. Burns is the Assistant Secretary, Joseph W.
Dello Russo is the Treasurer, and Thomas B. Hastings is the Assistant Treasurer.
MFSC
Arnold D. Scott and Jeffrey L. Shames are Directors, Joseph A.
Recomendes, a Senior Vice President and Chief Information Officer of MFS, is
Vice Chairman and a Director, Janet A. Clifford is the President, Joseph W.
Dello Russo is the Treasurer, Thomas B. Hastings is the Assistant Treasurer,
Stephen E. Cavan is the Secretary, and Robert T. Burns is the Assistant
Secretary.
MFSI
Jeffrey L. Shames, and Arnold D. Scott are Directors, Thomas
J. Cashman, Jr., is the President and a Director, Leslie J. Nanberg is a Senior
Vice President, a Managing Director and a Director, Kevin R. Parke is the
Executive Vice President and a Managing Director, George F. Bennett, Jr., John
A. Gee, Brianne Grady, Joseph A. Kosciuszek and Joseph J. Trainor are Senior
Vice Presidents and Managing Directors, Joseph W. Dello Russo is the Treasurer,
Thomas B. Hastings is the Assistant Treasurer and Robert T. Burns is the
Secretary.
RSI
Arnold D. Scott is the Chairman and a Director, Martin E.
Beaulieu is the President, William W. Scott, Jr. is a Director, Joseph W. Dello
Russo is the Treasurer, Thomas B. Hastings is the Assistant Treasurer, Stephen
E. Cavan is the Secretary and Robert T. Burns is the Assistant Secretary.
In addition, the following persons, Directors or officers of
MFS, have the affiliations indicated:
Donald A. Stewart President and a Director, Sun Life
Assurance Company of Canada, Sun Life
Centre, 150 King Street West, Toronto,
Ontario, Canada (Mr. Stewart is also an
officer and/or Director of various
subsidiaries and affiliates of Sun Life)
<PAGE> 190
John D. McNeil Chairman, Sun Life Assurance Company of
Canada, Sun Life Centre, 150 King Street
West, Toronto, Ontario, Canada (Mr.
McNeil is also an officer and/or
Director of various subsidiaries and
affiliates of Sun Life)
Joseph W. Dello Russo Director of Mutual Fund Operations, The
Boston Company, Exchange Place, Boston,
Massachusetts (until August, 1994)
ITEM 29. DISTRIBUTORS
(a) Reference is hereby made to Item 28 above.
(b) Reference is hereby made to Item 28 above; the principal
business address of each of these persons is 500 Boylston Street, Boston,
Massachusetts 02116.
(c) Not applicable.
ITEM 30. LOCATION OF ACCOUNTS AND RECORDS
The accounts and records of the Registrant are located, in
whole or in part, at the office of the Registrant and the following locations:
NAME ADDRESS
Massachusetts Financial Services 500 Boylston Street
Company (investment adviser) Boston, 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.
<PAGE> 191
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.
(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> 192
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 19th day of March, 1998.
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 19, 1998.
SIGNATURE TITLE
STEPHEN E. CAVAN* Principal Executive Officer
- ----------------------------
Stephen E. Cavan
W. THOMAS LONDON* Treasurer (Principal Financial Officer
- ---------------------------- and Principal Accounting Officer)
W. Thomas London
RICHARD B. BAILEY* Trustee
- ----------------------------
Richard B. Bailey
PETER G. HARWOOD* Trustee
- ----------------------------
Peter G. Harwood
J. ATWOOD IVES* Trustee
- ----------------------------
J. Atwood Ives
<PAGE> 193
LAWRENCE T. PERERA* Trustee
- ----------------------------
Lawrence T. Perera
WILLIAM J. POORVU* Trustee
- ----------------------------
William J. Poorvu
CHARLES W. SCHMIDT* Trustee
- ----------------------------
Charles W. Schmidt
ARNOLD D. SCOTT* Trustee
- ----------------------------
Arnold D. Scott
JEFFREY L. SHAMES* Trustee
- ----------------------------
Jeffrey L. Shames
ELAINE R. SMITH* Trustee
- ----------------------------
Elaine R. Smith
DAVID B. STONE* Trustee
- ----------------------------
David B. Stone
*By: JAMES R. BORDEWICK, JR.
Name: James R. Bordewick, Jr.
as Attorney-in-fact
Executed by James R. Bordewick, Jr. on
behalf of those indicated pursuant to
(i) a Power of Attorney, dated September
21, 1994, incorporated by reference to
Registrant's Post-Effective Amendment
No. 19 filed with the SEC via EDGAR on
March 30, 1995, and (ii) Power of
Attorney dated February 19, 1998, filed
herewith.
<PAGE> 194
POWER OF ATTORNEY
MFS Series Trust VII
The undersigned officer of MFS Series Trust VII (the "Registrant")
hereby severally constitutes and appoints Jeffrey L. Shames, Arnold D. Scott, W.
Thomas London, and James R. Bordewick, Jr., and each of them singly, as true and
lawful attorneys, with full power to them and each of them to sign for the
undersigned, in the name of, and in the capacity indicated below, any
Registration Statement and any and all amendments thereto and to file the same
with all exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission for the purpose of registering the Registrant
as a management investment company under the Investment Company Act of 1940
and/or the shares issued by the Registrant under the Securities Act of 1933
granting unto my said attorneys, and each of them, acting alone, full power and
authority to do and perform each and every act and thing requisite or necessary
or desirable to be done in the premises, as fully to all intents and purposes as
he or she might or could do in person, hereby ratifying and confirming all that
said attorneys or any of them may lawfully do or cause to be done by virtue
thereof.
In WITNESS WHEREOF, the undersigned has hereunto set his hand on this
19th day of February, 1998.
Signature Title
STEPHEN E. CAVAN Principal Executive Officer
---------------------
Stephen E. Cavan
<PAGE> 195
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION OF EXHIBIT PAGE NO.
- ----------- ---------------------- --------
<S> <C> <C>
1 (e) Form of Amendment to Declaration of Trust to change the
name of a series.
9 (b) Amendment to Shareholder Servicing Agent Agreement dated
January 1, 1998.
(c) Exchange Privilege Agreement dated September
1, 1993, as amended and restated through and
including July 30, 1997.
10 Opinion and Consent of Counsel, dated March 18, 1998.
11 (a) Consent of Ernst & Young LLP - MFS World Governments Fund;
filed herewith.
(b) Consent of Deloitte & Touche LLP - MFS Capital
Opportunities Fund.
17 Financial Data Schedules for each class of MFS World
Governments Fund and MFS Special Opportunities Fund.
Power of Attorney dated February 19, 1998.
</TABLE>
<PAGE> 1
EXHIBIT NO. 99.1(e)
FORM OF
MFS SERIES TRUST VII
CERTIFICATION OF AMENDMENT
TO THE DECLARATION OF TRUST
REDESIGNATION OF SERIES
The undersigned, being a majority of the Trustees of MFS Series Trust
VII (the "Trust"), a Massachusetts 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 6.9 of the Declaration, do hereby redesignate an
existing series of Shares (as defined in the Declaration) as follows:
1. The series designated as MFS Value Fund shall be redesignated
as MFS Capital Opportunities Fund.
Pursuant to Section 6.9(e) of the Declaration, this redesignation of
series of Shares shall be effective upon the execution of a majority of the
Trustees of the Trust.
<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 ____ day of ________, 1998.
_______________________ ________________________
Richard B. Bailey Charles W. Schmidt
63 Atlantic Avenue 63 Claypit Hill Road
Boston, MA 02110 Wayland, MA 01778
_______________________ ________________________
Peter G. Harwood Arnold D. Scott
211 Lindsay Pond Road 20 Rowes Wharf
Concord, MA 01742 Boston, MA 02110
_______________________ ________________________
J. Atwood Ives Jeffrey L. Shames
17 West Cedar Street 38 Lake Avenue
Boston, MA 02108 Newton, MA 02159
_______________________ ________________________
Lawrence T. Perera Elaine R. Smith
18 Marlborough Street 75 Scotch Pine Road
Boston, MA 02116 Weston, MA 02193
_______________________ ________________________
William J. Poorvu David B. Stone
975 Memorial Drive 282 Beacon Street
Cambridge, MA 02138 Boston, MA 02116
<PAGE> 1
EXHIBIT NO. 99.9(b)
MFS SERIES TRUST VII
500 BOYLSTON - BOSTON - MASSACHUSETTS 02116-3741
(617) - 954-5000
January 1, 1998
MFS Service Center, Inc.
500 Boylston Street
Boston, MA 02116
Dear Sir/Madam:
This will confirm our understanding that Exhibit B to the Shareholder
Servicing Agent Agreement between us, dated August 1, 1985, as amended, is
hereby amended, effective immediately, to read in its entirety as set forth on
Attachment 1 hereto.
Please indicate your acceptance of the foregoing by signing below.
Sincerely,
MFS Series Trust 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, 1998
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 0.1125% of the average daily net assets of the Fund.
<PAGE> 1
EXHIBIT NO. 99.9(c)
EXCHANGE PRIVILEGE AGREEMENT
AGREEMENT, dated as of July 30, 1997, by and among each of the trusts (on
behalf of each of their series from time to time) listed below (collectively,
the "Funds") and MFS Fund Distributors, Inc. ("MFD").
WITNESSETH THAT:
WHEREAS, pursuant to the terms of a distribution agreement by and between
each Fund and MFD, MFD has the exclusive right to arrange for the sale of shares
of each class of each Fund at the net asset value used in determining the public
offering price on which orders for shares were based, subject to the exceptions
therein set forth or referred to; and
WHEREAS, the Funds have differing investment objectives as set out in
their prospectuses and consider it appropriate to make available to existing and
future shareholders of the Funds the opportunity to implement changes to their
investments through the acquisition, without sales charge or reinitiating the
time period used in calculating the amount of contingent deferred sales charge
assessable upon redemption, of the shares of any one or more of the Funds by use
of the proceeds of redemption of shares of any other Fund (if available for sale
and if the purchaser is eligible to purchase such shares) (herein referred to in
various grammatical forms of the word "exchange"), subject to reasonable
conditions designed to limit expense and administrative inconvenience or imposed
in the best interest of the other shareholders of any of the Funds;
NOW, THEREFORE, the parties hereto agree as follows:
1. During the term of this Agreement, shares of each Fund may, subject to
the policies and restrictions set forth in the Funds' then current prospectuses,
be exchanged for shares of any one or more other Funds at net asset value;
provided that the shares being acquired are then available for sale and the
purchaser is then eligible to purchase such shares. Front-end sales loads,
deferred sales loads, administrative fees, redemption fees and Rule 12b-1 fees
(as such terms are defined or used in Rule 11a-3 under the Investment Company
Act of 1940 (the "1940 Act")), shall be imposed, suspended or tolled,
reinstated, and continued, as applicable, with respect to such exchanges in
accordance with Rule 11a-3 under the 1940 Act and the policies described in the
Funds' then current prospectuses.
-1-
<PAGE> 2
2. MFD shall serve as the agent of the Funds in effecting share exchanges.
In accordance with the provisions of Section 1 above, MFD may charge the
shareholder a reasonable amount for its services in effecting the exchange. MFD
shall report daily to the Funds concerning all exchanges made pursuant to this
Agreement. MFD will not seek reimbursement from the Funds for any expenses
incurred by it in connection with any such purchases.
3. Each of the Funds may, by written notice to each of the other Funds and
MFD, terminate its exchange offer provided by this Agreement and require MFD and
the other Funds to terminate the exchange offer in respect of the shares of the
Fund so giving notice. MFD may by written notice to any Fund terminate its
services in effecting such exchanges on behalf of such Fund. The exchange offers
with respect to shares of a Fund made by MFD to the shareholders of the other
Funds pursuant to this Agreement shall in any event be terminated effective upon
the termination of the services of MFD as distributor of the shares of such
Fund.
4. Nothing in this Agreement shall modify or reduce the obligations of a
Fund or MFD contained in the distribution agreement, if any, between MFD and
such Fund as the same may from time to time be modified or amended.
5. To the extent that a Fund's current prospectus contains provisions that
are inconsistent with the terms of this Agreement, the terms of the prospectus
shall be controlling.
6. This Agreement supersedes all prior or contemporaneous agreements
between the parties hereto relating to the subject matter hereof.
7. The terms of this Agreement shall become effective as of the date first
above written.
8. A copy of the Declaration of Trust of each Fund is on file with the
Secretary of State of The Commonwealth of Massachusetts. MFD acknowledges that
the obligations of or arising out of this instrument are not binding upon any of
the Funds' trustees, officers, employees, agents or shareholders individually,
but are binding solely upon the assets and property of the Fund. If this
instrument is executed by a Fund on behalf of one or more series of the Fund,
MFD further acknowledges that the assets and liabilities of each series of the
Fund are separate and distinct and that the obligations of or arising out of
this instrument are binding solely upon the assets or property of the series on
whose behalf the Fund has executed this instrument. If a Fund has executed this
instrument on behalf of more than one series of the Fund, MFD also agrees that
the obligations of each series hereunder shall be several and
-2-
<PAGE> 3
not joint, in accordance with its proportionate interest hereunder, and MFD
agrees not to proceed against any series for the obligations of another series.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date first above written and caused their seals to be affixed by their
representatives thereunto duly authorized.
MFS SERIES TRUST I MFS SERIES TRUST IX
MFS SERIES TRUST II MFS SERIES TRUST X
MFS SERIES TRUST III MFS MUNICIPAL SERIES TRUST
MFS SERIES TRUST IV MFS GROWTH OPPORTUNITIES FUND
MFS SERIES TRUST V MFS GOVERNMENT SECURITIES FUND
MFS SERIES TRUST VI MASSACHUSETTS INVESTORS GROWTH STOCK
FUND
MFS SERIES TRUST VII MFS GOVERNMENT LIMITED MATURITY FUND
MFS SERIES TRUST VIII MASSACHUSETTS INVESTORS TRUST
MFS UNION STANDARD TRUST
By: A. KEITH BRODKIN
-----------------------
A. Keith Brodkin
Chairman
MFS FUND DISTRIBUTORS, INC.
By: WILLIAM W. SCOTT, JR.
----------------------------
William W. Scott, Jr.,
President
-3-
<PAGE> 1
EXHIBIT NO. 99.10
MASSACHUSETTS FINANCIAL SERVICES COMPANY
500 BOYLSTON STREET BOSTON MASSACHUSETTS 02116-3741
617 954 5182/FACSIMILE 627 954 7760 [email protected]
James R. Bordewick, Jr.
Senior Vice President and
Associate General Counsel
March 18, 1998
MFS Series Trust VII
500 Boylston Street
Boston, MA 02116
Gentlemen:
I am a Senior Vice President and Associate General Counsel of
Massachusetts Financial Services Company, which serves as investment adviser to
MFS Series Trust VII (the "Trust"), and the Assistant Secretary of the Trust. I
am admitted to practice law in The Commonwealth of Massachusetts. The Trust was
created under a written Declaration of Trust dated August 22, 1980, and executed
and delivered in Boston, Massachusetts, as amended and restated January 18, 1995
(the "Declaration of Trust"), as amended. The beneficial interest thereunder is
represented by transferable shares without par value. The Trustees have the
powers set forth in the Declaration of Trust, subject to the terms, provisions
and conditions therein provided.
I am of the opinion that the legal requirements have been complied with
in the creation of the Trust, and that said Declaration of Trust is legal and
valid.
Under Article VI, Section 6.4 of the Declaration of Trust, the Trustees
are empowered, in their discretion, from time to time to issue shares of the
Trust for such amount and type of consideration, at such time or times and on
such terms as the Trustees may deem best. Under Article VI, Section 6.1, it is
provided that the number of shares of beneficial interest authorized to be
issued under the Declaration of Trust is unlimited.
<PAGE> 2
MFS Series Trust VII
Page 2
March 18, 1998
By vote adopted on January 18, 1995, the Trustees of the Trust
determined to sell to the public the authorized but unissued shares of
beneficial interest of the Trust for cash at a price which will net the Trust
(before taxes) not less than the net asset value thereof, as defined in the
Trust's By-Laws, determined next after the sale is made or at some later time
after such sale (the "Shares").
The Trust has registered an indefinite number of shares of beneficial
interest under the Securities Act of 1933 (the "Shares").
I am of the opinion that all necessary Trust action precedent to the
issue of all the authorized but unissued Shares of the Trust has been duly
taken, and that all the Shares were legally and validly issued, and when sold,
will be fully paid and non-assessable, assuming the receipt by the Trust of the
cash consideration therefor in accordance with the terms of the January 18,
1995, vote of the Trustees described above, except as described below. I express
no opinion as to compliance with the Securities Act of 1933, the Investment
Company Act of 1940, or applicable state "Blue Sky" or securities laws in
connection with the sale of the Shares.
The Trust is an entity of the type commonly known as a "Massachusetts
business trust." Under Massachusetts law, shareholders could, under certain
circumstances, be held personally liable for the obligations of the Trust.
However, the Declaration of Trust disclaims shareholder liability for acts or
obligations of the Trust and requires that notice of such disclaimer be given in
each agreement, obligation, or instrument entered into or executed by the Trust
or the Trustees. The Declaration of Trust provides for indemnification out of
the Trust property for all loss and expense of any shareholder held personally
liable for the obligations of the Trust. Thus, the risk of a shareholder
incurring financial loss on account of shareholder liability is limited to
circumstances in which the Trust itself would be unable to meet its obligations.
I consent to your filing this opinion with the Securities and Exchange
Commission.
Very truly yours,
JAMES R. BORDEWICK, JR.
James R. Bordewick, Jr.
JRB/bjn
<PAGE> 1
EXHIBIT NO. 99.11
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the reference made to our firm under the captions "Condensed
Financial Information" in the Prospectus and "Independent Auditors and Financial
Statements" in the Statement of Additional Information and to the
incorporation by reference in this Post-Effective Amendment No. 26 to
Registration Statement No. 2-68918 on Form N-1A of our report dated January 9,
1998, on the financial statements and financial highlights of MFS World
Governments Fund, a series of MFS Series Trust VII, included in the 1997 Annual
Report to Shareholders.
/s/ Ernst & Young LLP
---------------------
Ernst & Young LLP
Boston, Massachusetts
March 26, 1998
<PAGE> 1
EXHIBIT NO. 99.11(b)
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in this Post-Effective
Amendment No. 26 to Registration Statement No. 2-68918 of MFS Series Trust VII
of our report dated January 9, 1998 appearing in the annual report to
shareholders for the year ended November 30, 1997 of MFS Capital Opportunities
Fund (formerly 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 Auditors and Financial Statements" in the Statement
of Additional Information, both of which are part of such Registration
Statement.
DELOITTE & TOUCHE LLP
- ---------------------
Deloitte & Touche LLP
Boston, Massachusetts
March 26, 1998
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<INTEREST-INCOME> 8652527
<OTHER-INCOME> (376343)
<EXPENSES-NET> (14491704)
<NET-INVESTMENT-INCOME> 1578558
<REALIZED-GAINS-CURRENT> 114638154
<APPREC-INCREASE-CURRENT> 88884455
<NET-CHANGE-FROM-OPS> 205101167
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<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> (21106896)
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<NUMBER-OF-SHARES-SOLD> 11370630
<NUMBER-OF-SHARES-REDEEMED> (3749784)
<SHARES-REINVESTED> 1482412
<NET-CHANGE-IN-ASSETS> 413849861
<ACCUMULATED-NII-PRIOR> 511690
<ACCUMULATED-GAINS-PRIOR> 61880975
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<GROSS-EXPENSE> 14534900
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<PER-SHARE-NII> (0.04)
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