<PAGE> 1
As filed with the Securities and Exchange Commission on December 29, 1995
1933 Act File No. 2-54607
1940 Act File No. 811-2594
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------------
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
POST-EFFECTIVE AMENDMENT NO. 28
AND REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
AMENDMENT NO. 24
MFS SERIES TRUST IV
(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 March 1, 1995 pursuant to paragraph (a)(i)
/ / 75 days after filing pursuant to paragraph (a)(ii)
/ / on /date/ pursuant to paragraph (a)(ii) of rule 485.
If appropriate, check the following box:
/ / this post-effective amendment designates a new effective date for a
previously filed post-effective amendment
Pursuant to Rule 24f-2, the Registrant has registered an indefinite number of
its shares of Beneficial Interest (without par value), under the Securities Act
of 1933. The Registrant filed a Rule 24f-2 Notice with respect to its fiscal
year ended August 31, 1995 on October 30, 1995.
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF SECURITIES NUMBER OF SHARES OFFERING PRICE AGGREGATE OFFERING AMOUNT OF
BEING REGISTERED BEING REGISTERED PER SHARE PRICE REGISTRATION FEE
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Shares of Beneficial interest 58,684,132 $9.91 $290,000 $100
(without par value)
</TABLE>
Registrant elects to calculate the maximum aggregate offering price pursuant to
Rule 24(e)-2. 2,780,178,002 shares were redeemed during the fiscal year ended
August 31, 1995. 2,721,523,133 shares were used for reductions pursuant to
paragraph (c) of Rule 24(f)-2 during the current fiscal year. 58,654,869 shares
is the amount of redeemed shares used for reduction in this Amendment. Pursuant
to Rule 457(d) under the Securities Act of 1933, the maximum public offering
price of $9.91 per share on December 15, 1995 is the price used as the basis for
calculating the registration fee. While no fee is required for the 58,654,869
shares, the Registrant has elected to register, for $100, an additional $290,000
of shares (29,263 shares at $9.91 per share).
<PAGE> 2
MFS SERIES TRUST IV
MFS MONEY MARKET FUND
MFS GOVERNMENT MONEY MARKET FUND
MFS MUNICIPAL BOND FUND
MFS OTC FUND
CROSS REFERENCE SHEET
(Pursuant to Rule 404 showing location in Prospectus and/or Statement of
Additional Information of the responses to the Items in Parts A and B of Form
N-1A)
<TABLE>
<CAPTION>
STATEMENT OF
ITEM NUMBER ADDITIONAL
FORM N-1A, PART A PROSPECTUS CAPTION INFORMATION CAPTION
- ----------------- ------------------ -------------------
<S> <C> <C>
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) The Fund; Investment Objective *
and Policies
(b), (c) Investment Objective and *
Policies
5 (a) The Fund; Management of the *
Fund - Investment Adviser
(b) Front Cover Page; Management *
of the Fund - Investment Adviser;
Back Cover Page
</TABLE>
<PAGE> 3
<TABLE>
<CAPTION>
STATEMENT OF
ITEM NUMBER ADDITIONAL
FORM N-1A, PART A PROSPECTUS CAPTION INFORMATION CAPTION
- ----------------- ------------------ -------------------
<S> <C> <C>
(c), (d) Management of the Fund - *
Investment Adviser
(e) Management of the Fund - *
Shareholder Servicing Agent;
Back Cover Page
(f) Expense Summary; Condensed *
Financial Information
(g) Information Concerning Shares *
of the Fund - Purchases
5A (a), (b), (c) ** **
6 (a) Information Concerning Shares *
of the Fund - Description of
Shares, Voting Rights and
Liabilities; Information Concerning
Shares of the Fund - Redemptions
and Repurchases; Information
Concerning Shares of the Fund -
Purchases; Information Concerning
Shares of the Fund - Exchanges
(b), (c), (d) * *
(e) Shareholder Services *
(f) Information Concerning Shares *
of the Fund - Distributions;
Shareholder Services - Distribution
Options
(g) Information Concerning Shares *
of the Fund - Tax Status;
Information Concerning Shares of
the Fund - Distributions
7 (a) Front Cover Page; Management *
of the Fund - Distributor; Back
Cover Page
</TABLE>
<PAGE> 4
<TABLE>
<CAPTION>
STATEMENT OF
ITEM NUMBER ADDITIONAL
FORM N-1A, PART A PROSPECTUS CAPTION INFORMATION CAPTION
- ----------------- ------------------ -------------------
<S> <C> <C>
(b) Information Concerning Shares *
of the Fund - Purchases; Information
Concerning Shares of the Fund -
Net Asset Value
(c) Information Concerning Shares *
of the Fund - Purchases; Information
Concerning Shares of the Fund -
Exchanges; Shareholder Services
(d) Front Cover Page; Information *
Concerning Shares of the Fund -
Purchases; Shareholder Services
(e) Information Concerning Shares *
of the Fund - Distribution Plans;
Expense Summary; Information
Concerning Shares of the Fund -
Purchases
(f) Information Concerning Shares *
of the Fund - Distribution Plans
8 (a) Information Concerning Shares *
of the Fund - Redemptions and
Repurchases; Information
Concerning Shares of the Fund -
Purchases
(b), (c), (d) Information Concerning Shares *
of the Fund - Redemptions
and Repurchases
9 * *
</TABLE>
<PAGE> 5
<TABLE>
<CAPTION>
STATEMENT OF
ITEM NUMBER ADDITIONAL
FORM N-1A, PART A PROSPECTUS CAPTION INFORMATION CAPTION
- ----------------- ------------------ -------------------
<S> <C> <C>
10 (a), (b) * Front Cover Page
11 * Front Cover Page
12 * Definitions
13 (a), (b), (c) * Investment Objective, Policies and
Restrictions
(d) * *
14 (a), (b), * Management of the Fund - Trustees
and Officers
(c) * Management of the Fund - Trustees
and Officers; Appendix A
15 (a) * *
(b), (c) * Management of the Fund - Trustees
and Officers
16 (a) Management of the Fund - Management of the Fund -
Investment Adviser Investment Adviser; Management
of the Fund - Trustees and Officers
(b) Management of the Fund - Management of the Fund -
Investment Adviser Investment Adviser
(c) * *
(d) * Management of the Fund -
Investment Adviser
(e) * Portfolio Transactions and
Brokerage Commissions
(f) Information Concerning Shares Distribution Plans
of the Fund - Distribution
Plans
(g) * *
</TABLE>
<PAGE> 6
<TABLE>
<CAPTION>
STATEMENT OF
ITEM NUMBER ADDITIONAL
FORM N-1A, PART A PROSPECTUS CAPTION INFORMATION CAPTION
- ----------------- ------------------ -------------------
<S> <C> <C>
(h) * Management of the Fund -
Custodian; Independent
Auditors and Financial
Statements; Back Cover Page
(i) * Management of the Fund -
Shareholder Servicing Agent
17 (a), (b), (c), * Portfolio Transactions and
(d), (e) Brokerage Commissions
18 (a) Information Concerning Shares Description of Shares, Voting
of the Fund - Description of Rights and Liabilities
Shares, Voting Rights and Liabilities
(b) * *
19 (a) Information Concerning Shares Shareholder Services
of the Fund - Purchases;
Shareholder Services
(b) Information Concerning Shares Management of the Fund -
of the Fund - Net Asset Value; Distributor; Determination
Information Concerning Shares of Net Asset Value and
of the Fund - Purchases Performance - Net Asset Value
(c) * *
20 * Tax Status
21 (a), (b) * Management of the Fund -
Distributor; Distribution Plans
(c) * *
22 (a) * *
(b) * Determination of Net Asset
Value and Performance
23 * Independent Auditors and
Financial Statements
</TABLE>
- ------------------------
* Not Applicable
** Contained in Annual Report
<PAGE> 7
MFS(R) MONEY MARKET FUND PROSPECTUS
MFS(R) GOVERNMENT MONEY MARKET FUND January 1, 1996
(Members of the MFS Family of Funds(R)) Shares of Beneficial Interest
<TABLE>
- ----------------------------------------------------------------------------------------------
<CAPTION>
PAGE
----
<S> <C> <C>
1. Expense Summary.................................................................... 2
2. The Funds.......................................................................... 2
3. Condensed Financial Information.................................................... 3
4. Investment Objective and Policies.................................................. 4
5. Management of the Funds............................................................ 5
6. Information Concerning Shares of the Funds......................................... 6
Purchases.......................................................................... 6
Exchanges.......................................................................... 7
Redemptions........................................................................ 8
Determination of Net Asset Value................................................... 10
Distributions...................................................................... 10
Tax Status......................................................................... 10
Description of Shares, Voting Rights and Liabilities............................... 11
Performance Information............................................................ 11
7. Shareholder Services............................................................... 11
Appendix A......................................................................... A-1
</TABLE>
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
MFS(R) MONEY MARKET FUND
MFS(R) GOVERNMENT MONEY MARKET FUND
500 Boylston Street, Boston, Massachusetts 02116 (617) 954-5000
This Prospectus pertains to the MFS Money Market Fund and the MFS Government
Money Market Fund (collectively referred to as either the "Money Market Funds"
or the "Funds"), each a series of MFS Series Trust IV (the "Trust"). The Trust
presently consists of four series of shares, each of which represents a separate
diversified portfolio with separate investment policies. The investment
objective of each of the Money Market Funds is to seek as high a level of
current income as is considered consistent with the preservation of capital and
liquidity. The MFS Money Market Fund seeks to achieve its investment objective
by investing primarily in short-term money market instruments, including U.S.
Government securities and repurchase agreements collateralized by such
securities, obligations of the larger banks, prime commercial paper and high
quality corporate obligations. The MFS Government Money Market Fund seeks to
achieve its investment objective by investing only in short-term securities
issued or guaranteed by the U.S. Treasury or agencies or instrumentalities of
the U.S. Government and repurchase agreements collateralized by such securities.
See "Investment Objective and Policies." The minimum initial investment in a
Fund is generally $1,000 per account (see "Purchases").
INVESTMENTS IN THE FUNDS ARE NEITHER INSURED NOR GUARANTEED BY THE U.S.
GOVERNMENT AND THERE IS NO ASSURANCE THAT THE FUNDS WILL BE ABLE TO MAINTAIN A
STABLE NET ASSET VALUE OF $1.00 PER SHARE.
The investment adviser and distributor for each Fund is 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.
This Prospectus sets forth concisely the information concerning the Funds that a
prospective investor ought to know before investing. The Funds have filed with
the Securities and Exchange Commission (the "SEC") a Statement of Additional
Information (the "SAI"), dated January 1, 1996, as amended or supplemented from
time to time, which contains more detailed information about each of the Funds.
The SAI is incorporated into this Prospectus by reference. See page 12 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).
INVESTORS SHOULD READ THIS PROSPECTUS AND RETAIN IT FOR FUTURE REFERENCE.
<PAGE> 8
1. EXPENSE SUMMARY
SHAREHOLDER TRANSACTION EXPENSES FOR EACH FUND:
Maximum Sales Load Imposed on Purchases of Shares.................None
Maximum Contingent Deferred Sales Charge..................See Below(1)
<TABLE>
ANNUAL OPERATING EXPENSES OF THE FUNDS (AS A PERCENTAGE OF AVERAGE NET ASSETS):
<CAPTION>
MFS MONEY MFS GOVERNMENT
MARKET FUND MONEY MARKET FUND
----------- -----------------
<S> <C> <C>
Management Fees................................................ 0.48% 0.50%
Other Expenses................................................. 0.28% 0.34%
--- ---
Total Operating Expenses....................................... 0.76% 0.84%
<FN>
- ---------------
(1) A contingent deferred sales charge ("CDSC") of 1% will be imposed with
respect to the redemption of Fund shares in the event that (i) the shares
redeemed were exchanged from another fund in the MFS Family of Funds which
carried a CDSC which carried over to the Fund shares redeemed, and (ii) the
CDSC period had not expired at the time of the redemption of Fund shares
(see "Exchanges" and "Redemptions" below).
</TABLE>
<TABLE>
EXAMPLE OF EXPENSES
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C> <C>
An investor would pay the following dollar
amounts of expenses on a hypothetical $1,000 MFS MONEY MARKET
investment in a Fund, assuming (1) a 5% FUND $8 $24 $42 $ 94
annual return and (2) redemption at the end MFS GOVERNMENT
of each of the time periods indicated: MONEY MARKET FUND $9 $27 $47 $101
The purpose of the expense table provided above is to assist investors in
understanding the various costs and expenses that a shareholder in a Fund will
bear directly or indirectly. A more complete description of management fees of
the Funds is set forth in -- "Management of the Funds -- Investment Adviser."
THE "EXAMPLE" SET FORTH ABOVE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST
OR FUTURE EXPENSES OF A FUND; ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE
SHOWN.
</TABLE>
2. THE FUNDS
The Funds are diversified series of the Trust, an open-end management investment
company which was organized as a business trust under the laws of The
Commonwealth of Massachusetts in 1975. The Trust presently consists of four
series of shares, each of which represents a portfolio with separate investment
policies. Shares of the Funds are continuously sold to the public and the Funds
use the proceeds to buy money market instruments for the Fund for which such
shares were sold. The Trust's Board of Trustees provides broad supervision over
the affairs of the Trust. A majority of the Trustees of the Trust are not
affiliated with the Adviser. The Adviser is responsible for the management of
each Fund's assets and the officers of the Trust are responsible for the
operations of each Fund. The Adviser manages each Fund from day to day in
accordance with the investment objective and the investment policies of that
Fund. The selection of investments and the way they are managed depend on the
conditions and trends in the economy and the financial marketplaces. Each Fund
also offers to buy back (redeem) its shares from its shareholders at any time at
net asset value.
2
<PAGE> 9
<TABLE>
3. CONDENSED FINANCIAL INFORMATION
The following information has been audited since the inception of the Funds and should be read in conjunction with the financial
statements included in the Funds' Annual Report to Shareholders which are incorporated by reference into the SAI in reliance upon
the report of the Funds' independent auditors, as experts in accounting and auditing. Each Fund's current independent auditors are
Deloitte & Touche LLP.
FINANCIAL HIGHLIGHTS
MFS GOVERNMENT MONEY MARKET FUND
<CAPTION>
YEAR ENDED AUGUST 31, YEAR ENDED OCTOBER 31,
--------------------- ----------------------------------------------------
1995 1994* 1993 1992 1991 1990 1989
---------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Per share data (for a share outstanding
throughout each period):
Net asset value -- beginning of period...... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
-------- -------- -------- -------- -------- -------- --------
Income from investment operations --
Net investment income.................... $ 0.05 $ 0.02 $ 0.02 $ 0.03 $ 0.06 $ 0.07 $ 0.08
-------- -------- -------- -------- -------- -------- --------
Less distributions declared to
shareholders from net investment
income.................................. $ (0.05) $ (0.02) $ (0.02) $ (0.03) $ (0.06) $ (0.07) $ (0.08)
-------- -------- -------- -------- -------- -------- --------
Net asset value -- end of period............ $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
======== ======== ======== ======== ======== ======== ========
Total return................................ 4.92% 2.64%+ 2.33% 3.27% 5.68% 7.55% 8.61%
-------- -------- -------- -------- -------- -------- --------
Ratios (to average net assets)/Supplemental
data:
Expenses................................. 0.84% 1.05%+ 0.99% 0.87% 0.83% 0.80% 0.85%
-------- -------- -------- -------- -------- -------- --------
Net investment income.................... 4.82% 2.64%+ 2.20% 3.28% 5.53% 7.34% 8.29%
-------- -------- -------- -------- -------- -------- --------
Net assets at end of period (000 omitted)... $ 38,440 $ 38,347 $ 35,576 $ 47,629 $ 50,655 $ 53,701 $ 51,619
-------- -------- -------- -------- -------- -------- --------
<CAPTION>
1988 1987 1986 1985
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Per share data (for a share outstanding
throughout each period):
Net asset value -- beginning of period...... $ 1.00 $ 1.00 $ 1.00 $ 1.00
-------- -------- -------- --------
Income from investment operations --
Net investment income.................... $ 0.06 $ 0.05 $ 0.06 $ 0.07
-------- -------- -------- --------
Less distributions declared to
shareholders from net investment
income.................................. $ (0.06) $ (0.05) $ (0.06) $ (0.07)
-------- -------- -------- --------
Net asset value -- end of period............ $ 1.00 $ 1.00 $ 1.00 $ 1.00
======== ======== ======== ========
Total return................................ 6.47% 5.73% 6.33% 7.63%
-------- -------- -------- --------
Ratios (to average net assets)/Supplemental
data:
Expenses................................. 0.74% 0.59% 0.66% 0.72%
-------- -------- -------- --------
Net investment income.................... 6.29% 5.63% 6.07% 7.39%
-------- -------- -------- --------
Net assets at end of period (000 omitted)... $ 50,343 $ 59,875 $ 63,331 $ 45,894
-------- -------- -------- --------
</TABLE>
<TABLE>
FINANCIAL HIGHLIGHTS
MFS MONEY MARKET FUND
<CAPTION>
YEAR ENDED AUGUST 31, YEAR ENDED OCTOBER 31,
--------------------- ----------------------------------------------------
1995 1994* 1993 1992 1991 1990 1989
---------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Per share data (for a share outstanding
throughout each period):
Net asset value -- beginning of period...... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
-------- -------- -------- -------- -------- -------- --------
Income from investment operations --
Net investment income.................... $ 0.05 $ 0.02 $ 0.02 $ 0.03 $ 0.06 $ 0.07 $ 0.08
-------- -------- -------- -------- -------- -------- --------
Less distributions declared to
shareholders from net investment
income.................................. $ (0.05) $ (0.02) $ (0.02) $ (0.03) $ (0.06) $ (0.07) $ (0.08)
-------- -------- -------- -------- -------- -------- --------
Net asset value -- end of period............ $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
======== ======== ======== ======== ======== ======== ========
Total return................................ 5.04% 2.91%+ 2.39% 3.35% 6.07% 7.99% 8.84%
-------- -------- -------- -------- -------- -------- --------
Ratios (to average net assets)/Supplemental
data:
Expenses................................. 0.76% 0.78%+ 0.83% 0.87% 0.82% 0.76% 0.83%
-------- -------- -------- -------- -------- -------- --------
Net investment income.................... 4.92% 2.95%+ 2.39% 3.36% 5.94% 7.60% 8.45%
-------- -------- -------- -------- -------- -------- --------
Net assets at end of period (000 omitted)... $410,798 $435,780 $350,316 $448,825 $541,945 $677,164 $676,382
-------- -------- -------- -------- -------- -------- --------
<CAPTION>
1988 1987 1986 1985
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Per share data (for a share outstanding
throughout each period):
Net asset value -- beginning of period...... $ 1.00 $ 1.00 $ 1.00 $ 1.00
-------- -------- -------- --------
Income from investment operations --
Net investment income.................... $ 0.07 $ 0.06 $ 0.06 $ 0.08
-------- -------- -------- --------
Less distributions declared to
shareholders from net investment
income.................................. $ (0.07) $ (0.06) $ (0.06) $ (0.08)
-------- -------- -------- --------
Net asset value -- end of period............ $ 1.00 $ 1.00 $ 1.00 $ 1.00
======== ======== ======== ========
Total return................................ 7.12% 6.06% 6.80% 8.19%
-------- -------- -------- --------
Ratios (to average net assets)/Supplemental
data:
Expenses................................. 0.83% 0.82% 0.78% 0.73%
-------- -------- -------- --------
Net investment income.................... 6.72% 5.77% 6.53% 7.86%
-------- -------- -------- --------
Net assets at end of period (000 omitted)... $664,895 $716,528 $623,568 $657,000
-------- -------- -------- --------
<FN>
- ---------------
* For the ten months ended August 31, 1994.
+ Annualized.
</TABLE>
3
<PAGE> 10
4. INVESTMENT OBJECTIVE AND POLICIES
INVESTMENT OBJECTIVE -- The investment objective of each Fund is to seek as high
a level of current income as is considered consistent with the preservation of
capital and liquidity. The investment objective of a Fund will not be changed
without first obtaining shareholder approval from the shareholders of that Fund.
Any investment involves risk and there can be no assurance that either Fund will
achieve its investment objective.
INVESTMENT POLICIES -- The MFS Money Market Fund seeks to achieve its investment
objective by investing primarily (i.e., at least 80% of its assets under normal
circumstances) in the following instruments:
(i) obligations issued or guaranteed as to interest and principal by the
U.S. Government or any agency or instrumentality thereof (including
repurchase agreements collateralized by such securities);
(ii) obligations of banks (including certificates of deposit and
bankers' acceptances) which at the date of investment have capital, surplus,
and undivided profits (as of the date of their most recently published
financial statements) in excess of $100,000,000; and obligations of other
banks or savings and loan associations if such obligations are insured by
the Federal Deposit Insurance Corporation, provided that not more than 10%
of the total assets of the MFS Money Market Fund will be invested in such
insured obligations;
(iii) commercial paper which at the date of investment is rated A-1 by
Standard & Poor's Ratings Group ("S&P"), Fitch Investors Service, Inc.
("Fitch") or P-1 by Moody's Investors Service, Inc. ("Moody's"), or, if not
rated, is issued or guaranteed as to payment of principal and interest by
companies which at the date of investment have an outstanding debt issue
rated AA or better by S&P or Fitch or Aa or better by Moody's; and
(iv) short-term (maturing in 13 months or less) corporate obligations
which at the date of investment are rated AA or better by S&P or Fitch or Aa
or better by Moody's.
The MFS Money Market Fund may also invest up to 20% of its assets in debt
instruments not specifically described in (i) through (iv) above, provided that
such instruments are deemed by the Trustees of the Trust to be of comparable
high quality and liquidity. The MFS Money Market Fund may invest its assets in
the securities of foreign issuers and in the securities of foreign branches of
U.S. banks such as negotiable certificates of deposit (Eurodollars). Since the
portfolio of the MFS Money Market Fund may contain such securities, an
investment therein may involve a greater degree of risk than an investment in
the MFS Government Money Market Fund or in a fund which invests only in debt
obligations of U.S. domestic issuers, due to the possibility that there may be
less publicly available information concerning foreign issuers, more volatile
markets, less securities regulation, less favorable tax provisions, war or
expropriation.
In addition, the MFS Money Market Fund may invest up to 75% of its assets in all
finance companies as a group, all banks and bank holding companies as a group
and all utility companies as a group when in the opinion of management yield
differentials and money market conditions suggest such investments are advisable
and when cash is available for such investments and instruments are available
for purchase which fulfill the Fund's objective in terms of quality and
marketability.
The MFS Government Money Market Fund seeks to achieve its investment objective
by investing only in securities issued or guaranteed as to principal and
interest by the U.S. Treasury or agencies or instrumentalities of the U.S.
Government (including repurchase agreements collateralized by such securities).
------------------------
For a description of the instruments discussed above and the risks associated
with investments in repurchase agreements, see Appendix A to this Prospectus.
For a description of the ratings discussed above see Appendix A to the SAI.
All the assets of both the MFS Money Market Fund and the MFS Government Money
Market Fund will be invested in obligations which mature in 13 months or less
and substantially all of these investments will be held to maturity; however,
securities collateralizing repurchase agreements may have maturities in excess
of 13 months. Both the MFS Money Market Fund and the MFS Government Money Market
Fund will, to the extent feasible, make portfolio investments primarily in
anticipation of or in
4
<PAGE> 11
response to changing economic and money market conditions and trends. Currently,
the dollar weighted average maturity of the investments of either Fund may not
exceed 90 days.
The SAI includes a discussion of specific investment restrictions which govern
the investment policies of each Fund. The specific investment restrictions
listed in the SAI may be changed without shareholder approval unless indicated
otherwise. See "Investment Objective, Policies and Restrictions -- Investment
Restrictions" in the SAI. The Trust's investment limitations, policies and
rating standards are adhered to at the time of purchase or utilization of assets
subject to compliance with the Investment Company Act of 1940, as amended, and
rules adopted thereunder (the "1940 Act"); a subsequent change in circumstances
will not be considered to result in a violation of policy.
5. MANAGEMENT OF THE FUNDS
INVESTMENT ADVISER -- MFS manages each Fund pursuant to an Investment Advisory
Agreement dated August 1, 1993 (the "Advisory Agreement"). The Adviser provides
each Fund with overall investment advisory and administrative services, as well
as general office facilities. Geoffrey L. Kurinsky, a Senior Vice President of
the Adviser, has been each Fund's portfolio manager since 1992 and has been
employed by the Adviser since 1987. Subject to such policies as the Trustees may
determine, the Adviser makes investment decisions for each Fund. For these
services and facilities, the Adviser receives a management fee computed and paid
monthly at an annual rate equal to 0.5% of the first $300 million of the average
aggregate daily net assets of the MFS Government Money Market Fund and the MFS
Money Market Fund; 0.45% of the next $400 million of such assets; 0.4% of the
next $300 million of such assets; and 0.35% of such assets in excess of $1
billion. For the Trust's fiscal year ended August 31, 1995, MFS received fees
under the Advisory Agreement of $2,224,748 and $193,160 from the MFS Money
Market Fund and MFS Government Money Market Fund, respectively, the total of
which is equivalent, on an annualized basis, to 0.48% and 0.50%, respectively,
of the Fund's average daily net assets.
MFS also serves as investment adviser to 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 Special Value Trust, MFS Institutional
Trust, MFS Union Standard Trust, MFS Variable Insurance Trust, MFS/Sun Life
Series Trust, Sun Growth Variable Annuity Fund, Inc. and seven variable
accounts, each of which is a registered investment company established by Sun
Life Assurance Company of Canada (U.S.) ("Sun Life of Canada (U.S.)")in
connection with the sale of various fixed/variable annuity contracts. MFS and
its wholly owned subsidiary, MFS Asset Management, Inc., provide investment
advice to substantial private clients.
MFS is America's oldest mutual fund organization. MFS and its predecessor
organizations have a history of money management dating from 1924 and the
founding of the first mutual fund in the United States, Massachusetts Investors
Trust. Net assets under the management of the MFS organization were
approximately $41.5 billion on behalf of approximately 1.8 million investor
accounts as of November 30, 1995. As of such date, the MFS organization managed
approximately $20.4 billion of assets in fixed income securities and
approximately $17.3 billion of assets in equity securities. MFS is a wholly
owned subsidiary of Sun Life of Canada (U.S.), which in turn is a wholly owned
subsidiary of Sun Life Assurance Company of Canada ("Sun Life"). The Directors
of MFS are A. Keith Brodkin, Jeffrey L. Shames, Arnold D. Scott, John D. McNeil
and John R. Gardner. Mr. Brodkin is the Chairman, Mr. Shames is the President
and Mr. Scott is the Secretary and a Senior Executive Vice President of MFS.
Messrs. McNeil and Gardner are the Chairman and the President, respectively, of
Sun Life. Sun Life, a mutual life insurance company, is one of the largest
international life insurance companies and has been operating in the United
States since 1895, establishing a headquarters office here in 1973. The
executive officers of MFS report to the Chairman of Sun Life.
A. Keith Brodkin, the Chairman and a Director of MFS, is the Chairman, President
and a Trustee of the Trust. W. Thomas London, Stephen E. Cavan, James O. Yost,
James R. Bordewick, Jr., Robert A. Dennis and Geoffrey L. Kurinsky, all of whom
are officers of MFS, are officers of the Trust.
MFS has established a strategic alliance with Foreign & Colonial Management Ltd.
("Foreign & Colonial"). Foreign & Colonial is a subsidiary of two of the world's
oldest financial services institutions, the London-based Foreign & Colonial
Investment Trust
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PLC, which pioneered the idea of investment management in 1868, and HYPO-BANK
(Bayerische Hypotheken-und Weschsel-Bank AG), the oldest publicly listed bank in
Germany, founded in 1835. As part of this alliance, the portfolio managers and
investment analysts of MFS and Foreign & Colonial will share their views on a
variety of investment related issues, such as the economy, securities markets,
portfolio securities and their issuers, investment recommendations, strategies
and techniques, risk analysis, trading strategies and other portfolio management
matters. MFS will have access to the extensive international equity investment
expertise of Foreign & Colonial and Foreign & Colonial will have access to the
extensive U.S. equity investment expertise of MFS. One or more MFS investment
analysts are expected to work for an extended period with Foreign & Colonial's
portfolio managers and investment analysts at their offices in London. In
return, one or more Foreign & Colonial employees are expected to work in a
similar manner at MFS' Boston offices.
In certain instances there may be securities which are suitable for the Fund's
portfolio as well as for portfolios of other clients of MFS or clients of
Foreign & Colonial. Some simultaneous transactions are inevitable when several
clients receive investment advice from MFS and Foreign & Colonial, particularly
when the same security is suitable for more than one client. While in some cases
this arrangement could have a detrimental effect on the price or availability of
the security as far as the Fund is concerned, in other cases, it may produce
increased investment opportunities for the Fund.
DISTRIBUTOR -- MFD, a wholly owned subsidiary of MFS, is the distributor of the
shares of each Fund and also serves as distributor for each of the other MFS
Funds.
SHAREHOLDER SERVICING AGENT -- MFS Service Center, Inc. ("Shareholder Servicing
Agent"), a wholly owned subsidiary of MFS, performs transfer agency, certain
dividend disbursing agency and other services for the Funds.
6. INFORMATION CONCERNING SHARES OF THE FUNDS
PURCHASES
Shares of each Fund may be purchased without a sales charge at net asset value.
It is anticipated that the net asset value of $1.00 per share will remain
constant and the Trust will employ specific investment policies and procedures
to accomplish this result, although no assurance can be given that it will be
able to do so on a continuing basis (see "Net Income and Distributions"). Except
as described below, the minimum initial investment in either Fund is $1,000 per
account and the minimum additional investment is $50 per account. While there is
no sales charge, brokers may charge for their services in connection with a
purchase of shares.
Accounts being established for monthly automatic investments and under payroll
savings programs and tax-deferred retirement programs (other than Individual
Retirement Accounts ("IRAs")) involving the submission of investments by means
of group remittal statements are subject to a $50 minimum on initial and
additional investments per account. The minimum initial investment for IRAs is
$250 per account and the minimum additional investment is $50 per account. There
are also other limited exceptions to these minimums for certain tax-deferred
programs. The minimum initial investment per account for participation in the
Automatic Transfer Plan is $5,000. Any minimums may be changed at any time at
the discretion of the Trust.
Each Fund intends to be as fully invested at all times as is reasonably
practicable in order to maximize the yield on its respective assets. The money
markets in which each Fund will purchase and sell portfolio securities normally
require immediate settlement of transactions in federal funds. Accordingly, in
order to make investments which will immediately generate income, each Fund must
have federal funds available to it (i.e., monies credited to its custodian bank
by a Federal Reserve Bank). Therefore, a non-federal funds investment will
remain idle for two business days after it is received by the Shareholder
Servicing Agent. Information on how to procure a "Federal Reserve Draft" is
available at any national bank or any state bank which is a member of the
Federal Reserve System. (Checks drawn on the U.S. Treasury are not federal
funds.)
All investments in each Fund are credited to the shareholder's account in the
form of full and fractional shares of that Fund at the rate of one share for
each dollar invested. The Trust does not issue share certificates for either
Fund, but the Shareholder
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Servicing Agent maintains an account for each shareholder and mails to each
shareholder a confirmation of purchases or sales in his account.
Purchases and exchanges should be made for investment purposes only. The Fund
and MFD each reserve the right to reject any specific purchase order or to
restrict purchases by a particular purchaser (or group of related purchasers).
The Fund or MFD may reject or restrict any purchases by a particular purchaser
or group, for example, when such purchase is contrary to the best interests of
the Fund's other shareholders or otherwise would disrupt the management of the
Fund.
MFD may enter into an agreement with shareholders who intend to make exchanges
among certain classes of certain MFS Funds (as determined by MFD) which follow a
timing pattern, and with individuals or entities acting on such shareholders'
behalf (collectively, "market timers"), setting forth the terms, procedures and
restrictions with respect to such exchanges. In the absence of such an
agreement, it is the policy of the Fund and MFD to reject or restrict purchases
by market timers if (i) more than two exchange purchases are effected in a timed
account in the same calendar quarter or (ii) a purchase would result in shares
being held in timed accounts by market timers representing more than (x) one
percent of the Fund's net assets or (y) specified dollar amounts in the case of
certain MFS Funds which may include the Fund and which may change from time to
time. The Fund and MFD each reserve the right to request market timers to redeem
their shares at net asset value, less any applicable CDSC, if either of these
restrictions is violated.
OPENING AN ACCOUNT:
BY MAIL
Payment may be made by check or other negotiable bank draft payable to the order
of MFS Service Center, Inc., and mailed with the Account Application Form to the
Shareholder Servicing Agent:
MFS Service Center, Inc.
P.O. Box 2281
Boston, Massachusetts 02107-9906.
The Fund to be purchased should be designated on the Account Application Form.
BY WIRE
Payment may be wired in federal funds to the Custodian of the Trust as follows:
State Street Bank and Trust Company, Boston, MA, Attn: Mutual Funds Division,
For the Account of: [Shareholder's name], Re: MFS Money Market Fund (4423-744-4)
or MFS Government Money Market Fund (4423-710-5) and Wire Number: [assigned by
telephone]. Information on how to wire federal funds is available at any
national bank or any state bank which is a member of the Federal Reserve System.
A SHAREHOLDER CHOOSING THIS METHOD FOR AN INVESTMENT SHOULD FIRST TELEPHONE THE
SHAREHOLDER SERVICING AGENT TOLL-FREE AT (800) 225-2606 TO ADVISE OF HIS
INTENDED ACTION AND THE FUND TO BE PURCHASED, AND TO OBTAIN A WIRE ORDER NUMBER.
EXCHANGES
Shares of either Fund which are acquired through direct purchase for which
payment has been received by the Trust (i.e., an established account) may be
exchanged at net asset value for shares of the other Fund without the imposition
of a sales charge. Shares of either Fund may be exchanged for Class A shares of
any of the other MFS Funds at net asset value plus their normal sales charge (if
available for sale). However, this charge will not apply to: (i) shares
exchanged from either Fund acquired by an exchange from any other MFS Fund; (ii)
shares exchanged from either Fund acquired by automatic investment of dividends
from any other MFS Fund paid after June 1, 1992; or (iii) shares exchanged from
either Fund where the shares being exchanged would have, at the time of
purchase, been eligible for purchase at net asset value without the imposition
of a sales charge had the shareholder made a direct investment in the MFS Fund
into which the exchange is being made. In addition, shares of the Money Market
Fund may be exchanged for Class C shares of any of the other MFS Funds at net
asset value (if available for sale). In the event that shares of either Fund are
acquired through an exchange from shares of any other MFS Fund bearing 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
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<PAGE> 14
shares. 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 shares having an aggregate value of at least $1,000
($50 in the case of retirement plan participants whose sponsoring organizations
subscribe to the MFS FUNDamental 401(k) Plan or another similar 401(k)
recordkeeping system made available by the Shareholder Servicing Agent) or all
the shares in the account. If an Exchange Request is received by the Shareholder
Servicing Agent in writing or by telephone on any business day prior to the
close of regular trading on the New York Stock Exchange (the "Exchange"), the
exchange will usually occur that day if all the requirements set forth above
have been complied with at that time. No more than five exchanges may be made in
any one Exchange Request by telephone. Exchanges by telephone are automatically
available to most non-retirement plan accounts and certain retirement plan
accounts. For further information regarding exchanges by telephone see
"Redemptions By Telephone." The exchange privilege (or any aspect of it) may be
changed or discontinued and is subject to certain limitations, including certain
restrictions on purchases by market timers. Special procedures, privileges and
restrictions with respect to exchanges may apply to market timers who enter into
an agreement with MFD, as set forth in such agreement (see "Purchases").
REDEMPTIONS
A shareholder in either Fund may withdraw all or any portion of the amount in
his account on any date on which the Trust is open for business by redeeming
shares at their net asset value, normally $1.00 per share. The redemption
proceeds will be reduced by any applicable CDSC. For the convenience of
shareholders and to enable them to continue earning daily dividends for as long
as possible, the Trust has arranged for several different procedures for
redemption. The proceeds of a redemption will normally be available within one
business day or, in any event, within seven days (except, in certain cases,
redemptions of shares purchased by check -- see below).
Shares of either Fund which are purchased directly (i.e., are not exchanged from
any other MFS Fund) will not bear a CDSC upon redemption. However, as noted
above under "Exchanges," in the event that shares of either Fund are acquired
through an exchange from shares of any other MFS Fund bearing 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. The maximum CDSC
applicable to shares of other MFS Funds which are eligible for exchange into
either Fund is 1%, and this CDSC expires after shares have been held for
approximately one year. Any applicable CDSC 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. For further information on
the CDSC, see the "Redemption and Repurchases" section of the prospectus of the
MFS Fund from which the exchange is made.
A. BY CHECK -- State Street Bank and Trust Company (the "Bank") will provide
each shareholder, upon request, with forms of checks drawn on the Bank. Checks
may be payable in any amount not less than $500. Shareholders wishing to avail
themselves of this redemption by check privilege must so elect on their Account
Application Form and must execute signature cards (for additional information,
see the reverse side of the signature card) with signature guaranteed in the
manner set forth under the caption "Signature Guarantee" below. Additional
documentation will be required from corporations, partnerships, fiduciaries or
other institutional investors. All checks must be signed by the shareholder(s)
of record exactly as the account is registered before the Bank will honor them.
The shareholders of joint accounts may authorize each shareholder to redeem by
check. Shareholders who purchase shares by check (including certified checks or
cashiers checks) may write checks against those shares only after they have been
on the Fund's books for 15 days. When such a check is presented to the Bank for
payment, a sufficient number of full and fractional shares will be redeemed to
cover the amount of the check, any applicable CDSC and the amount of any income
tax required to be withheld. If the amount of the check, plus any applicable
CDSC and the amount of any income tax required to be withheld is greater than
the value of the shares held in the shareholders' account, the check will be
returned unpaid, and the shareholder may be subject to extra charges. The check
may not draw on month-to-date dividends which have been declared but not
distributed. To avoid dishonor of checks due to fluctuations in the value of
each account, shareholders are advised against closing accounts by means of a
check. Checks should not be used to close a Fund account because when the
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<PAGE> 15
check is written, the shareholder will not know the exact total value of the
account on the day the check clears. There is presently no charge to the
shareholder for the maintenance of this special checking account or for the
clearance of any checks, but the Trust reserves the right to impose such charges
or to modify or terminate the redemption by check privilege at any time.
B. BY MAIL -- Each shareholder has the right to redeem all or any portion of
the shares in his account by mailing or delivering to the Shareholder Servicing
Agent (see back cover for address) a stock power, together with a written
request for redemption, or a letter of instructions, all in "good order" for
transfer. "Good order" generally means that a stock power, written request for
redemption, or letter of instruction 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" below. In
addition, in some cases, "good order" may require the furnishing of additional
documents.
C. 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 Form, designate thereon a commercial
bank and account number to receive the proceeds of such redemption, and sign the
Account Application Form with the signature(s) guaranteed in the manner set
forth below under the caption "Signature Guarantee" below. The proceeds of such
a redemption are mailed by check to the designated account, without charge. As a
special service, investors may arrange to have proceeds in excess of $1,000
wired in federal funds to the designated account. 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. During times of drastic economic or market changes, a shareholder
may experience delays in reaching the above telephone number. This redemption
privilege (or any aspect of it) may be changed or discontinued without notice to
shareholders. The Shareholder Servicing Agent will not be responsible for any
losses resulting from unauthorized telephone transactions if it follows
reasonable procedures designed to verify the identity of the caller. The
Shareholder Servicing Agent will request personal or other information from the
caller, and will normally also record calls. Shareholders should verify the
accuracy of confirmation statements immediately after their receipt.
D. GENERAL -- 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. 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 insure
that such check has cleared.
Due to the relatively high cost of maintaining small accounts, each Fund
reserves the right to redeem shares in any account for their then-current value
(which will be promptly paid to the shareholder) if at any time the total
investment in such account drops below $500 because of redemptions, except in
the case of accounts established for monthly automatic investments and certain
payroll savings programs and tax-deferred retirement plans, for which the
minimum investment requirement is either $250 or $50. 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.
The right of redemption can be suspended and the payment of the redemption
proceeds deferred during any period in which the Exchange is closed or trading
on the Exchange is restricted or to the extent otherwise permitted by the 1940
Act if an emergency exists.
The Shareholder Servicing Agent may make certain de minimis exceptions to the
requirements for redemption.
SIGNATURE GUARANTEE: In order to protect shareholders against fraud, the Trust
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.
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<PAGE> 16
DETERMINATION OF NET ASSET VALUE
Securities are valued at amortized cost, which the Trustees have determined in
good faith constitutes fair value for the purposes of complying with the 1940
Act. This valuation method will continue to be used until such time as the
Trustees determine that it does not constitute fair value for such purposes.
Since the Net Income, as defined in the SAI, of each Fund is declared as a
dividend each time the Net Income of that Fund is determined, the net asset
value per share of that Fund (i.e., the value of the net assets of that Fund
divided by the number of shares of that Fund outstanding) remains at $1.00 per
share immediately after each such determination and dividend declaration. Any
increase in the value of a shareholder's investment in either Fund, representing
the reinvestment of dividend income, is reflected by an increase in the number
of shares of that Fund in his account.
It is expected that each Fund will have a positive Net Income at the time of
each determination thereof. If for any reason the Net Income of either Fund
determined at any time is a negative amount, that Fund will first offset the
negative amount with respect to each shareholder account in that Fund from the
dividends declared during the month with respect to such account. Then, to the
extent necessary, such Fund will reduce the number of its outstanding shares by
treating each of its shareholders as having contributed to its capital that
number of full and fractional shares in the account of such shareholder which
represents his proportion of such excess. Each shareholder of that Fund will be
deemed to have agreed to such contribution in these circumstances by his
investment in that Fund. This procedure will permit the net asset value per
share of each Fund to be maintained at a constant $1.00 per share.
DISTRIBUTIONS
The Net Income of each Fund is determined each day during which the Exchange is
open for trading. This determination is made once during each such day as of the
close of regular trading. All the Net Income of each Fund so determined is
declared in shares of the respective Fund at the time of such determination.
Shares purchased become entitled to dividends declared as of the first day
following the date of investment. Dividends are generally distributed on the
last business day of each month in the form of additional shares of the
respective Fund at the rate of one share (and fraction thereof) for each one
dollar (and fraction thereof) of dividend income attributable to that Fund, or,
at the election of the shareholder, in cash; except that if a shareholder
redeems the entire amount in his account with that Fund at any time during the
month, all dividends declared on that series during the month through the date
of redemption will be paid to him at the same time as the proceeds from the
redemption of his shares. 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.
TAX STATUS
Each 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 each Fund would
otherwise be required to pay, each 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"), and to make distributions to its shareholders
in accordance with the timing requirements set out in the Code. It is not
expected that the Funds will be required to pay any federal income or excise
taxes, although foreign source income earned by the MFS Money Market Fund may be
subject to foreign withholding taxes.
Shareholders of each 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 in additional shares. The Funds
expect that none of their distributions will be eligible for the
dividends-received deduction for corporations. Shareholders should consult with
their tax advisers regarding the possible exemption from state and local taxes
of distributions of a 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).
Shortly after the end of each calendar year, each Fund shareholder will receive
a statement setting forth the federal income tax status of all of the Fund's
dividends and distributions for that calendar year, including the portion
taxable as ordinary income, the portion, if any, taxable as long-term capital
gain, the portion representing
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<PAGE> 17
interest on U.S. Government obligations, the portion, if any, representing a
return of capital (which is free of current taxes but results in a basis
reduction), and the amount, if any, of federal income tax withheld.
Each Fund intends to withhold U.S. federal income tax at the rate of 30% on
dividends and other payments that are subject to such withholding and that are
made to persons who are neither citizens nor residents of the U.S., regardless
of whether a lower rate may be permitted under an applicable treaty. Each Fund
is also required in certain circumstances to apply backup withholding at a rate
of 31% on taxable dividends paid to any shareholder (including a shareholder who
is neither a citizen nor a resident of the U.S.) who does not furnish to the
Fund certain information and certifications or who is otherwise subject to
backup withholding. However, backup withholding will not be applied to payments
that have been subject to 30% withholding. Prospective shareholders should read
the Account Application for additional information regarding backup withholding
of federal income tax and should consult their own tax advisers as to the tax
consequences of an investment in a Fund.
DESCRIPTION OF SHARES, VOTING RIGHTS AND LIABILITIES
Each Fund has only one class of shares, entitled Shares of Beneficial Interest
(without par value). The Trust presently has four series of shares and has
reserved the right to create and issue additional series of shares. Each share
of a series represents an equal proportionate interest in that series with each
other share of that series. The shares of each series participate equally in the
earnings, dividends and assets of the particular series. Shares have no
pre-emptive or conversion rights. Shares when issued are fully paid and
non-assessable. Shareholders are entitled to one vote for each share held.
Shares of each series vote separately to approve investment advisory agreements
or changes in investment objective or restrictions, but shares of all series
vote together in the election or selection of Trustees and accountants.
Shareholders of each series would be entitled to share pro rata in the net
assets of their respective portfolio available for distribution to shareholders
upon liquidation of the Trust or that series.
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, each Fund may advertise its yield and effective yield. Both
yield and effective yield are based on historical earnings and are not intended
to indicate future performance. The yield of a Fund refers to the income
generated by an investment in that series over a seven-day period (which period
will be stated in the advertisement). This income is then annualized; that is,
the amount of income generated by the investment during that week is assumed to
be generated each week over a 52-week period and is shown as a percentage of the
investment. The effective yield is calculated similarly but, when annualized,
the income earned by an investment in a Fund is assumed to be reinvested. The
effective yield will be slightly higher than the yield because of the
compounding effect of this assumed reinvestment.
The yield of each Fund will vary based on the type, quality, and maturities of
the securities held in the portfolio of the particular series, fluctuations in
short-term interest rates and changes in the Trust's expenses. For a discussion
of the manner in which each Fund will calculate its yield, see the SAI. In
addition to information provided in shareholder reports, the Fund may, in its
discretion, from time to time, make a list of all or a portion of its holdings
available to investors upon request.
7. SHAREHOLDER SERVICES
Shareholders with questions concerning the shareholder services described below
or concerning other aspects of the Funds, should contact the Shareholder
Servicing Agent (see back cover for address and phone number). The Shareholder
Servicing Agent, which is a wholly owned subsidiary of the Adviser, performs
transfer agency, certain dividend disbursing agency and other services for the
Trust.
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ACCOUNT AND CONFIRMATION STATEMENTS -- Each shareholder will receive a
confirmation statement showing the activity in his account. At the end of each
calendar year, each shareholder will receive income tax information regarding
distributions made by the Fund for that year and the amount, if any, of federal
income tax withheld.
DISTRIBUTION OPTIONS -- The following options are available to all accounts
(except Systematic Withdrawal Plan accounts described below) and may be changed
as often as desired by notifying the Shareholder Servicing Agent:
-- Dividends reinvested in additional shares (this option will be
assigned if no other option is specified); or
-- Dividends in cash.
Dividends in amounts less than $10 will automatically be reinvested in
additional shares of the applicable Fund. If a shareholder has elected to
receive dividends in cash and the postal or other delivery service is unable to
deliver checks to the shareholder's address of record, such shareholder's
distribution option will automatically be converted to having all dividends
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 in order to be effective for that dividend. No interest will accrue on
amounts represented by uncashed distribution or redemption checks.
INVESTMENT OR WITHDRAWAL PROGRAMS -- For the convenience of shareholders, the
Funds make available the following programs designed to enable shareholders to
add to their investment in an account with the Funds 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 share purchases) and may be
changed or discontinued at any time by a shareholder or the Fund.
DISTRIBUTION INVESTMENT PROGRAM: Dividend distributions made by either Fund
may be automatically invested in shares of one of the other MFS Funds, if shares
of the particular 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 must be at least $100, except in certain limited circumstances.
DOLLAR COST AVERAGING PROGRAMS
AUTOMATIC INVESTMENT PLAN: Cash investments of $50 or more may be made
through a shareholder's checking account biweekly, monthly or quarterly.
Required forms are available from the Shareholder Servicing Agent or investment
dealers.
AUTOMATIC EXCHANGE PLAN: Shareholders having account balances of at least
$5,000 in any MFS Fund, may exchange their shares for the same class of shares
of other MFS Funds under the Automatic Exchange Plan. The Automatic Exchange
Plan provides for automatic monthly or quarterly exchanges of funds from the
shareholder's account in an MFS Fund for investment in the same class of shares
of other MFS Funds selected by the shareholder. Under the Automatic Exchange
Plan, exchanges of at least $50 each may be made to up to four different funds.
A shareholder should consider the differences in 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
FROM EITHER OF THE MONEY MARKET FUNDS 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.
------------------------------
TAX-DEFERRED RETIREMENT PLANS -- Shares of either Fund may be purchased by all
types of tax-deferred retirement plans, including IRAs; SEP-IRAs; 401(k) plans;
403(b) plans and other qualified pension and profit-sharing plans. Investors
should consult with their tax advisers before establishing any of the
tax-deferred retirement plans described above.
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------------------------
The Fund's SAI, dated January 1, 1996, contains more detailed information about
the Funds, including information related to (i) the Funds' investment
objectives, policies and restrictions, (ii) Trustees, officers and investment
adviser, (iii) portfolio transactions, (iv) the Funds' shares, including rights
and liabilities of shareholders, (v) the method used to calculate the yield and
effective yield of each Fund, and (vi) various services and privileges provided
by the Funds for the benefit of their shareholders.
13
<PAGE> 20
APPENDIX A
DESCRIPTION OF CERTAIN FUND INVESTMENTS:
U.S. GOVERNMENT OBLIGATIONS -- are issued by the U.S. Treasury and include
bills, certificates of indebtedness, notes and bonds. Agencies and
instrumentalities of the U.S. Government are established under the authority of
an act of Congress and include, but are not limited to, the Government National
Mortgage Association ("GNMA"), the Tennessee Valley Authority, the Bank for
Cooperatives, the Farmers Home Administration, Federal Home Loan Banks ("FHLB"),
Federal Intermediate Credit Banks, Federal Land Banks, and the Federal National
Mortgage Association ("FNMA").
REPURCHASE AGREEMENTS -- may be entered into by each Fund in order to earn
additional income on available cash or as a temporary defensive measure. Under a
repurchase agreement, the Fund acquires securities subject to the seller's
agreement to repurchase at a specified time and price. If the seller becomes
subject to a proceeding under the bankruptcy laws or its assets are otherwise
subject to a stay order, the Fund's right to liquidate the securities may be
restricted (during which time the value of the securities could decline). As
discussed in the SAI, the Trust has adopted certain procedures intended to
minimize any risk.
CERTIFICATES OF DEPOSIT -- are certificates issued against funds deposited in a
bank (including eligible foreign branches of U.S. banks), are for a definite
period of time, earn a specified rate of return, and are normally negotiable.
BANKERS' ACCEPTANCES -- are short-term credit instruments used to finance the
import, export, transfer or storage of goods. They are termed "accepted" when a
bank guarantees their payment at maturity.
COMMERCIAL PAPER -- refers to promissory notes issued by corporations in order
to finance their short-term credit needs.
CORPORATE OBLIGATIONS -- include bonds and notes issued by corporations in order
to finance long-term credit needs. The MFS Money Market Fund will invest only in
corporate obligations which have a maturity when purchased of 13 months or less.
A-1
<PAGE> 21
<TABLE>
<S> <C>
[LOGO]
Investment Adviser
Massachusetts Financial Services Company
500 Boylston Street
Boston, MA 02116 MFS[R] MONEY MARKET FUND
(617) 954-5000 MFS[R] GOVERNMENT MONEY MARKET FUND
Distributor Prospectus
MFS Fund Distributors, Inc. January 1, 1996
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]
MFS[R] MONEY MARKET FUND
MFS[R] GOVERNMENT MONEY
MARKET FUND
500 Boylston Street
Boston, MA 02116
MCM-1 1/96 114M 10/22/310
</TABLE>
<PAGE> 22
<TABLE>
<S> <C>
LOGO
MFS(R) MONEY MARKET FUND STATEMENT OF
MFS(R) GOVERNMENT MONEY ADDITIONAL INFORMATION
MARKET FUND
(Members of the MFS Family of Funds(R))
January 1, 1996
</TABLE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Page
-----
<C> <S> <C>
1. Definitions........................................................................... 2
2. Investment Objective, Policies and Restrictions....................................... 2
3. Management of the Funds............................................................... 3
Trustees............................................................................ 3
Officers............................................................................ 4
Investment Adviser.................................................................. 5
Distributor......................................................................... 5
Custodian........................................................................... 6
Shareholder Servicing Agent......................................................... 6
4. Portfolio Transactions and Brokerage Commissions...................................... 6
5. Shareholder Services.................................................................. 6
Investment and Withdrawal Programs.................................................. 6
Exchange Privilege.................................................................. 8
Tax-Deferred Retirement Plans....................................................... 8
6. Tax Status............................................................................ 8
7. Description of Shares, Voting Rights and Liabilities.................................. 9
8. Net Income and Distributions.......................................................... 10
9. Performance Information............................................................... 10
10. Independent Auditors and Financial Statements......................................... 12
Appendix A (Commercial Paper and Bond Ratings)........................................ 13
Appendix B (Trustee Compensation)..................................................... 14
</TABLE>
MFS MONEY MARKET FUND
MFS GOVERNMENT MONEY MARKET FUND
Series of MFS Series Trust IV
500 Boylston Street, Boston, Massachusetts 02116
(617) 954-5000
This Statement of Additional Information (the "SAI") sets forth information
which may be of interest to investors but which is not necessarily included in
the Funds' Prospectus, dated January 1, 1996. 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> 23
1. DEFINITIONS
<TABLE>
<S> <C> <C>
"Trust" -- MFS Series Trust IV, a
Massachusetts business
trust. The Trust was known
as Massachusetts Cash
Management Trust prior to
August 27, 1993.
"Money Market Funds" -- The MFS Money Market Fund
or "Funds" and the MFS Government
Money Market Fund, both of
which are diversified
series of the Trust.
"MFS" or the "Adviser" -- Massachusetts Financial
Services Company, a
Delaware corporation.
"Prospectus" -- The Prospectus of the
Funds, dated January 1,
1996, as amended or
supplemented from time to
time.
</TABLE>
2. INVESTMENT OBJECTIVE, POLICIES AND RESTRICTIONS
INVESTMENT OBJECTIVE. The investment objective of each Money Market Fund is to
seek as high a level of current income as is considered consistent with the
preservation of capital and liquidity. The investment objective of a Fund will
not be changed without first obtaining shareholder approval from the
shareholders of that Fund. Any investment involves risk and there can be no
assurance that either Money Market Fund will achieve its investment objective.
INVESTMENT POLICIES. The investment policies of the Funds are described in the
Prospectus. In addition, certain of the Funds' investment policies are described
in greater detail below.
REPURCHASE AGREEMENTS: Each Fund may enter into repurchase agreements with
sellers who are member firms (or a subsidiary 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 a Fund
purchases and holds through its agent are U.S. Government securities, the values
of which are equal to or greater than the repurchase price agreed to be paid by
the seller. The repurchase price may be higher than the purchase price, the
difference being income to the Fund, or the purchase and repurchase prices may
be the same, with interest at a standard rate due to the Fund together with the
repurchase price on repurchase. In either case, the income to the Fund is
unrelated to the interest rate on the U.S. Government securities.
The repurchase agreement provides that in the event the seller fails to pay the
price agreed upon on the agreed upon delivery date or upon demand, as the case
may be, the applicable 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 series'
exercise of its right to liquidate the securities may be delayed and result in
certain losses and costs to the Fund. The Trust has adopted and follows
procedures which are intended to minimize the risks of repurchase agreements.
For example, a Fund only enters into repurchase agreements after the Adviser has
determined that the seller is creditworthy, and the Adviser monitors the
seller's creditworthiness on an ongoing basis. Moreover, under such agreements,
the value of the securities (which are marked to market every business day) is
required to be greater than the repurchase price, and the Fund has the right to
make margin calls at any time if the value of the securities falls below the
agreed upon margin.
INVESTMENT RESTRICTIONS. The Trust has adopted the following investment
restrictions which apply to each of the Funds and which cannot be changed with
respect to either Fund without the approval of the holders of a majority of the
shares of that Fund (which, as used in this SAI, means the lesser of (i) more
than 50% of the outstanding shares of that Fund, or (ii) 67% or more of the
outstanding shares of that Fund present at a meeting if holders of more than 50%
of the outstanding shares of that Fund are represented at such meeting in person
or by proxy):
Neither Fund may:
(1) Borrow money or pledge, mortgage or hypothecate its assets, except as a
temporary measure in an amount not to exceed one-third of its total assets
(taken at current value) to facilitate redemptions (a loan limitation in
excess of 5% is generally associated with a leveraged fund, but, since neither
Fund anticipates paying interest on borrowed money at rates comparable to its
yield, neither Fund has any intention of attempting to increase its net income
by means of borrowing. Each Fund will borrow money only to accommodate
requests for the repurchase of its shares while effecting an orderly
liquidation of portfolio securities); and except that either Fund may enter
into repurchase agreements (see description above);
(2) Underwrite securities except insofar as the Trust may technically be
deemed an underwriter under the Securities Act of 1933 in selling a portfolio
security;
(3) Purchase voting securities of any issuer or purchase the securities of
any issuer if, as a result thereof, more than 25% of that Fund's total assets
(taken at current value) would be concentrated in any one industry; provided,
however, that (a) there is no limitation in respect to investments in
obligations issued or guaranteed by the U.S. Government or its agencies or
instrumentalities, and (b) each Fund may invest up to 75% of its assets in all
finance companies as a group, all banks and bank holding companies as a group
and all utility companies as a group when in the opinion of management yield
differentials and money market conditions suggest and when cash is available
for such investment and instruments are available for purchase which fulfill
the Fund's objective in terms of quality and marketability;
(4) Purchase or retain real estate (including limited partnership interests
but excluding securities of companies which deal in real estate or interests
therein), mineral leases, commodities or commodity contracts;
2
<PAGE> 24
(5) Make loans to other persons except by the purchase of obligations in
which that Fund is authorized to invest and by entering into repurchase
agreements (see description above); not more than 10% of the total assets of
either Fund (taken at current value) will be subject to repurchase agreements
maturing in more than seven days;
(6) Purchase the securities of any issuer if such purchase, at the time
thereof, would cause more than 5% of that Fund's total assets (taken at
current value) to be invested in the securities of such issuer, other than
securities issued or guaranteed by the U.S. Government or its agencies or
instrumentalities;
(7) Purchase securities of any issuer (other than securities issued or
guaranteed by the U.S. Government or its agencies or instrumentalities) if
such purchase at the time thereof would cause that Fund to hold more than 10%
of any class of securities of such issuer; for this purpose all debt
obligations of an issuer maturing in less than one year shall be deemed a
single class;
(8) Invest in companies for the purpose of exercising control or management;
(9) Purchase securities issued by any registered investment company except
by purchase in the open market where no commission or profit to a sponsor or
dealer results from such purchase other than the customary broker's
commission, or except when such purchase, though not made in the open market,
is part of a plan of merger or consolidation; provided, however, that neither
Fund will purchase the securities of any registered investment company if such
purchase at the time thereof would cause more than 10% of the total assets of
that Fund (taken at current value) to be invested in the securities of such
issuers; and provided, further, that neither Fund will purchase securities
issued by any open-end investment company;
(10) Invest more than 5% of its total assets (taken at current value) in
companies which, including predecessors, have a record of less than three
years' continuous operation;
(11) Purchase or retain securities of any issuer any of whose officers,
directors, or security-holders is a Trustee or officer of the Trust, or is an
officer or Director of the Adviser, if or so long as one or more of such
persons owns beneficially more than 1/2 of 1% of any class of securities,
taken at market value, of such issuer, and such persons owning more than 1/2
of 1% of such securities together own beneficially more than 5% of any class
of securities, taken at market value;
(12) Purchase securities on margin except that either Fund may obtain such
credits as may be necessary for the clearance of purchases and sales of
securities;
(13) Make short sales of securities;
(14) Write or purchase any put or call option; or
(15) Invest in securities which are restricted as to disposition under
federal securities laws, or securities with other legal or contractual
restrictions on resale, except for repurchase agreements.
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 FUNDS
The Board of Trustees provides broad supervision over the affairs of the Trust.
The Adviser is responsible for the investment management of each Fund, and the
officers of the Trust are responsible for its operations. The Trustees and
officers of the Trust are listed below, together with their principal
occupations during the past five years. (Their titles may have varied during
that period.)
TRUSTEES
A. KEITH BRODKIN,* Chairman and President
Massachusetts Financial Services Company, Chairman and Director
RICHARD B. BAILEY*
Private Investor; Massachusetts Financial Services Company, former Chairman
(prior to September 30, 1991); Cambridge Bancorp, Director; Cambridge Trust
Company, Director
PETER G. HARWOOD
Private Investor
Address: 211 Lindsay Pond Road, Concord, Massachusetts
J. ATWOOD IVES
Eastern Enterprises (diversified holding company), Chairman and Chief Executive
Officer (since December 1991); General Cinema Corporation, Vice Chairman and
Chief Financial Officer (prior to December 1991); The Neiman Marcus Group,
Inc., Vice Chairman and Chief Financial Officer (prior to February 1992)
Address: 9 Riverside Road, Weston, Massachusetts
LAWRENCE T. PERERA
Hemenway & Barnes (attorneys), Partner
Address: 60 State Street, Boston, Massachusetts
WILLIAM J. POORVU
Harvard University Graduate School of Business Administration, Adjunct
Professor; CBL & Associates Properties, Inc. (a real estate investment trust),
Director; The Baupost Fund (a registered investment company), Vice Chairman
(since November 1993), Chairman and Trustee (prior to November 1993)
Address: Harvard Business School, Soldiers Field Road, Cambridge, Massachusetts
CHARLES W. SCHMIDT
Private Investor; OHM Corporation, Director; The Boston Company, Director;
Boston Safe Deposit and Trust Company, Director; Mohawk Paper Company,
Director
Address: 30 Colpitts Road, Weston, Massachusetts
ARNOLD D. SCOTT*
Massachusetts Financial Services Company, Senior Executive Vice President,
Secretary and Director
JEFFREY L. SHAMES*
Massachusetts Financial Services Company, President and Director
3
<PAGE> 25
ELAINE R. SMITH
Independent Consultant; Brigham and Women's Hospital, Executive Vice President
and Chief Operating Officer (prior to September 1992)
Address: Weston, Massachusetts
DAVID B. STONE
North American Management Corp. (investment adviser), Chairman and Director;
Eastern Enterprises, Director
Address: 10 Post Office Square, Suite 300, Boston, Massachusetts
OFFICERS
W. THOMAS LONDON,* Treasurer
Massachusetts Financial Services Company, Senior Vice President
STEPHEN E. CAVAN,* Secretary and Clerk
Massachusetts Financial Services Company, Senior Vice President, General Counsel
and Assistant Secretary
JAMES R. BORDEWICK, JR.,* Assistant Secretary
Massachusetts Financial Services Company, Vice President and Associate General
Counsel
ROBERT A. DENNIS,* Vice President
Massachusetts Financial Services Company, Senior Vice President
GEOFFREY L. KURINSKY,* Vice President
Massachusetts Financial Services Company, Senior Vice President
JAMES O. YOST,* Assistant Treasurer
Massachusetts Financial Services Company, Vice President
- ---------------
*"Interested persons" (as defined in the Investment Company Act of 1940, as
amended (the "1940 Act")) of the Adviser, whose address is 500 Boylston Street,
Boston, Massachusetts 02116.
Each Trustee and officer holds comparable positions with certain MFS affiliates
or with certain other funds of which MFS or a subsidiary of MFS is the
investment adviser or distributor. Mr. Brodkin, the Chairman of MFS Fund
Distributors, Inc. ("MFD"), Messrs. Shames and Scott, Directors of MFD, and Mr.
Cavan, the Secretary of MFD, hold similar positions with certain other MFS
affiliates. Mr. Bailey is a Director of Sun Life Assurance Company of Canada
(U.S.) ("Sun Life of Canada (U.S.)"), the corporate parent of MFS.
Each Fund pays compensation of non-interested Trustees and Mr. Bailey (who
currently receive a fee of $1,370 and $130 per year plus $80 and $10 per meeting
and $60 and $10 per committee meeting attended, from the MFS Money Market Fund
and the MFS Government Money Market Fund, respectively, 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 5 years of
service, he would be entitled to annual payments during his lifetime of up to
50% of such Trustee's average annual compensation (based on the three years
prior to his retirement) depending on his length of service. A Trustee may also
retire prior to age 73 and receive reduced payments if he has completed at least
5 years of service. Under the plan, a Trustee (or his beneficiaries) will also
receive benefits for a period of time in the event the Trustee is disabled or
dies. These benefits will also be based on the Trustee's average annual
compensation and length of service. There is no retirement plan provided by the
Trust for Messrs. Brodkin, Scott and Shames. The Trust will accrue its allocable
share of compensation expenses each year to cover current years service and
amortize past service costs.
Set forth in Appendix B hereto is certain information concerning the cash
compensation paid to the Trustees and benefits accrued and estimated benefits
payable, under the retirement plan.
As of November 30, 1995, all Trustees and officers as a group owned less than 1%
of the shares of the MFS Money Market Fund (not including 7,077,596 shares
representing approximately 1.80% of the outstanding shares of the MFS Money
Market Fund owned of record by an employee benefit plan of MFS of which Mr.
Brodkin is a Trustee) and owned 4.6% of the shares of the MFS Government Money
Market Fund (not including 5,992,358 shares representing approximately 15.54% of
the outstanding shares of the MFS Government Money Market Fund owned of record
by an employee benefit plan of MFS of which Mr. Brodkin is a Trustee).
As of November 30, 1995, Nationwide Life Insurance Company, c/o IPO CO 51, P.O.
Box 18209, Columbus, OH 43218-0245, was the record holder of approximately
16.48% of the outstanding shares of the MFS Money Market Fund, which it held for
the benefit of its policy holders. As of November 30, 1995, National City Bank,
c/o Faith Schnell, P.O. Box 94777, Cleveland, OH 44101-4777, was the record
owner of approximately 5.99% of the outstanding shares of the MFS Money Market
Fund. As of November 30, 1995, National City Bank, P.O. Box 94777, Cleveland, OH
44101-4777, was the record owner of approximately 9.08% of the outstanding
shares of the MFS Money Market Fund. As of November 30, 1995, Church Development
Fund, Inc., 905 South Euclid Street, Fullerton, CA 92632-2808, was the record
owner of approximately 6.46% of the outstanding shares of the MFS Money Market
Fund. As of November 30, 1995, MFS Defined Contribution Plan, c/o Massachusetts
Financial Services Company, 500 Boylston Street, Boston, MA 02116-3740, was the
record owner of approximately 5.69% of the outstanding shares of MFS Government
Money Market Fund. As of November 30, 1995, Ultima Partners, 1131 Shadow Hill
Way, Beverly Hills, CA 90210-2231, was the record owner of approximately 11.41%
of the outstanding shares of the MFS Government Money Market Fund.
The Trust's Declaration of Trust provides that it will indemnify its Trustees
and officers against liabilities and expenses incurred in connection with
litigation in which they may be involved because of their offices with the
Trust, unless, as to liabilities to the Trust or its shareholders, it is finally
adjudicated that they engaged in willful misfeasance, bad faith, gross
negligence or reckless disregard of the duties involved in their offices, or
with respect to any matter, unless it is adjudicated that they did not act in
good faith in the reasonable belief that their actions were in the best interest
of the Trust. In the case of settlement, such indemnification will not be
provided unless it has been determined by a court or other body approving the
settlement or other disposition or by a reasonable determination based upon a
review of readily available facts by vote of a majority of disinterested
Trustees or in a written opinion of independent counsel, that such officers or
Trustees have not engaged in willful misfeasance, bad faith, gross negligence or
reckless disregard of their duties.
4
<PAGE> 26
INVESTMENT ADVISER
MFS and its predecessor organizations have a history of money management dating
from 1924. MFS is a wholly owned subsidiary of Sun Life of Canada (U.S.), which
in turn is a wholly owned subsidiary of Sun Life Assurance Company of Canada
("Sun Life"). The Prospectus contains information with respect to the management
of the Adviser and other investment companies for which MFS serves as investment
adviser.
The Adviser manages each Fund pursuant to an Amended and Restated Investment
Advisory Agreement dated August 1, 1993 (the "Advisory Agreement"). The Adviser
provides each Fund with overall investment advisory and administrative services,
as well as general office facilities. Subject to such policies as the Trustees
may determine, the Adviser makes investment decisions for each Fund. For these
services and facilities, the Adviser receives a management fee computed and paid
monthly at the annual rate of 0.5% of the first $300 million of the average
aggregate net assets of the MFS Money Market Fund and the MFS Government Money
Market Fund; 0.45% of the next $400 million of such assets; 0.4% of the next
$300 million of such assets; and 0.35% of such assets in excess of $1 billion.
For the year ended October 31, 1993, the ten months ended August 31, 1994 and
the year ended August 31, 1995, MFS received management fees under the Funds'
Advisory Agreement of $1,807,419, $1,621,026 and $2,224,748 respectively, from
the MFS Money Market Fund, and $200,112, $160,327 and $193,160, respectively,
from the MFS Government Money Market Fund. The Trust's advisory fee is allocated
between the MFS Money Market Fund and the MFS Government Money Market Fund in
the ratio each fund's average daily net assets bears to the aggregate average
daily net assets of the Trust.
In order to comply with the expense limitations of certain state securities
commissions, the Adviser will reduce its management fee or otherwise reimburse
each Fund for any expenses, exclusive of interest, taxes and brokerage
commissions, incurred by each Fund in any fiscal year to the extent such
expenses exceed the most restrictive of such state expense limitations. The
Adviser will make appropriate adjustments to such reimbursements in response to
any amendment or rescission of the various state requirements. Any such
adjustment would not become effective until the beginning of each Fund's next
fiscal year following the date of such amendments or the date on which such
requirements become no longer applicable.
Each Fund pays all of its expenses (other than those assumed by MFS) including:
Trustees fees discussed above; governmental fees; interest charges; taxes;
membership dues in the Investment Company Institute allocable to the Trust; fees
and expenses of independent auditors, of legal counsel, and of any transfer
agent, registrar or dividend disbursing agent of the Trust; expenses of
repurchasing and redeeming shares; expenses of preparing, printing and mailing
prospectuses, shareholder reports, notices, proxy statements and reports to
governmental officers and commissions; expenses connected with the execution,
recording and settlement of portfolio security transactions; insurance premiums;
fees and expenses of State Street Bank and Trust Company, each Fund's Custodian,
for all services to each Fund, including safekeeping of funds and securities and
maintaining required books and accounts; expenses of calculating the net asset
value of shares of each Fund; expenses of shareholder meetings; and expenses
relating to the issuance, registration and qualification of shares of each Fund.
Such expenses are allocated between the MFS Money Market Fund and the MFS
Government Money Market Fund in a manner believed to be fair and equitable to
each. For a list of the Trust's expenses, including the compensation paid to
Trustees who are not officers of MFS, during the Trust's fiscal year ended
August 31, 1995, see the financial statements included in the Funds' Annual
Report to Shareholders which is incorporated by reference into this SAI.
The Adviser pays the compensation of the Trust's officers and of the Trustees
who are officers of the Adviser. 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 Trust's investments, effecting
its portfolio transactions, and, in general, administering its affairs.
The Advisory Agreement will remain in effect until August 1, 1996, 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 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 a Fund's
outstanding voting securities or by either party on not more than 60 days' nor
less than 30 days' written notice. The Advisory Agreement further provides that
the Adviser 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.
DISTRIBUTOR
MFD, a wholly owned subsidiary of MFS, serves as distributor for the continuous
offering of shares of each 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.
The Distribution Agreement will remain in effect until August 1, 1996, and will
continue in effect thereafter only of 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
5
<PAGE> 27
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.
CUSTODIAN
State Street Bank and Trust Company (the "Custodian") is the custodian of each
Fund's assets. The Custodian's responsibilities include safekeeping and
controlling the Funds' cash and securities, handling the receipt and delivery of
securities, determining income and collecting interest and dividends on the
Funds' investments, maintaining books of original entry for portfolio and fund
accounting and other required books and accounts, and calculating the daily net
income on shares of the Funds. The Custodian does not determine the investment
policies of the Funds or decide which securities the Funds will buy or sell. The
Funds 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 Trust.
SHAREHOLDER SERVICING AGENT
MFS Service Center, Inc. (the "Shareholder Servicing Agent" or the "Agent"), a
wholly owned subsidiary of MFS, is the Trust's shareholder servicing agent,
pursuant to a Shareholder Servicing Agreement, effective August 1, 1985, as
amended (the "Agency Agreement") with the Trust. The Agent's responsibilities
under the Agency Agreement include administering and performing transfer
functions and keeping records in connection with the issuance, transfer and
redemption of the shares of the Trust. For these services, the Agent will
receive a fee calculated as a percentage of the average daily net assets of each
Fund at an effective annual rate of 0.15%. In addition, the Agent will be
reimbursed by the Trust for certain expenses incurred by the Agent on behalf of
the Trust. State Street Bank and Trust Company, the dividend disbursing agent of
the Trust, has contracted with the Shareholder Servicing Agent to administer and
perform certain dividend and distribution disbursing functions for the Trust.
4. PORTFOLIO TRANSACTIONS AND
BROKERAGE COMMISSIONS
Specific decisions to purchase or sell securities for each Fund are made by the
Funds' portfolio manager who is an employee of the Adviser and who is appointed
and supervised by its senior officers. Changes in the Funds' investments are
reviewed by the Board of Trustees. The Funds' portfolio manager may serve other
clients of the Adviser or any subsidiary of the Adviser in a similar capacity.
The primary consideration in placing portfolio security transactions for each
series is "best execution," i.e., execution at the most favorable prices and in
the most effective manner possible. The Adviser at all times attempts to achieve
"best execution," and it has complete freedom as to the markets in and the
broker-dealers through which it seeks this result. It is expected that most
transactions will be with the issuer or with major dealers acting for their own
account and not as brokers. Subject to the requirement of seeking "best
execution," securities may be bought from or sold to broker-dealers who have
furnished research and investment services to the Adviser. Such research and
investment services are those which brokerage houses customarily provide to
institutional investors and include statistical and economic data and research
reports on particular companies and industries. In placing orders with such
broker-dealers the Adviser will, where possible, take into account the
comparative usefulness of such research and investment services. Such research
and investment services are useful to the Adviser even though their dollar value
may be indeterminable and their receipt or availability generally does not
reduce the Adviser's normal research activities or expenses. From time to time,
the Adviser may also direct certain portfolio transactions to broker-dealer
firms which, in turn, have agreed to pay a portion of the Funds' operating
expenses (e.g., fees charged by the Custodian of the Funds' assets).
Consistent with the foregoing primary consideration, the Rules of Fair Practice
of the National Association of Securities Dealers, Inc., and such other policies
as the Trustees may determine, the Adviser may consider sales of shares of the
Trust and of other investment company clients of MFS as a factor in the
selection of broker-dealers to execute the Trust's portfolio transactions.
In certain instances there may be securities which are suitable for one or both
of the Trust's portfolios 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 each 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 either Fund is concerned. In other cases, however, the Trust believes
that the ability of each Fund to participate in volume transactions will produce
better executions for that Fund.
5. SHAREHOLDER SERVICES
INVESTMENT AND WITHDRAWAL PROGRAMS: Each 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. The programs involve no extra charge to
shareholders other than a sales charge in the case of certain
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share purchases and may be changed or discontinued at any time by a shareholder
or the Fund.
DISTRIBUTION INVESTMENT PROGRAM: Distributions of dividends made by either Fund
may be automatically invested in shares of one of the other funds in the MFS
Family of Funds (the "MFS Funds"), if shares of the fund are available for sale.
Such investments will be subject to initial investment minimums, as well as
additional purchase minimums. Distributions invested in one of the other MFS
Funds will be invested at net asset value (exclusive of any sales charge).
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 monthly, quarterly or
semi-annual 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. Such payments are drawn from the proceeds of the
redemption of shares held in the shareholder's account. 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. To initiate this service, a shareholder
must own 5,000 or more shares of the Fund. The shareholder may deposit into the
account additional shares of the Fund, change the payee or change the dollar
amount of each payment. The Fund may terminate any SWP for an account if the
number of shares in 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 such plan may be terminated at any time
by either the shareholder or the Fund.
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 under the Automatic Exchange Plan. The Automatic Exchange Plan
provides for automatic monthly or quarterly exchanges of funds from the
shareholder's Fund account for investment in the same class of shares of other
MFS Funds selected by the shareholder. Under the Automatic Exchange Plan,
exchanges of at least $50 each may be made to up to four different funds
effective on the seventh day of each month or of 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 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 the Fund as long as the balance of the account is
sufficient to complete the exchanges. Additional payments made to a
shareholder's account will extend the period that exchanges will continue to be
made under the Automatic Exchange Plan. However, if additional payments are
added to an account subject to the Automatic Exchange Plan shortly before an
exchange is scheduled, such funds may not be available for exchanges until the
following month; therefore, care should be used to avoid inadvertently
terminating the Automatic Exchange Plan through exhaustion of the account
balance.
No transaction fee for exchanges will be charged in connection with the
Automatic Exchange Plan. However, exchanges of shares of the Funds 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 the 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, see "Exchange Privilege"
below.
INVEST BY MAIL OR WIRE: Additional investments of $50 or more may be made at any
time either by mailing a check payable to the Fund directly to the Shareholder
Servicing Agent or by wire, as described in the Funds' Prospectus under the
caption "Information Concerning Shares of the Funds -- Opening an Account: By
Wire." The shareholder's account number must be included with each investment.
REINSTATEMENT PRIVILEGE: Shareholders of the Funds who have redeemed their
shares (other than shares acquired through direct purchase or reinvested
dividends) and shareholders of the other MFS Funds who have redeemed their
shares have a one-time right to reinvest the redemption proceeds in 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 money market funds, the
shareholder has the right to exchange such 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 12 months of the initial purchase,
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such CDSC will be imposed upon redemption. Although redemptions and repurchases
of shares are taxable events, a reinvestment within such 90-day period in the
same fund may be considered a "wash sale" and may result in the inability to
recognize currently all or a portion of any loss realized on the original
redemption for federal income tax purposes. Please see your tax advisor for
further information.
EXCHANGE PRIVILEGE: Shares of either Fund which are acquired through direct
purchase for which payment has been received by the Fund (i.e., an established
account) may be exchanged at net asset value for shares of the other Fund.
However, shares of either Fund may be redeemed and shares of any of the other
MFS Funds acquired at net asset value plus their normal sales charge. Shares of
either Fund acquired by an exchange from any of the other MFS Funds or by
automatic reinvestment of Fund dividends paid after June 1, 1992, may be
exchanged for shares of any of such other MFS Funds (if available for sale).
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 shares having an aggregate value of at least $1,000 ($50
in the case of retirement plan participants whose sponsoring organizations
subscribe to the MFS FUNDamental 401(k) Plan or another similar 401(k)
recordkeeping system made available by the Shareholder Servicing Agent) or all
the shares in the account. If the Exchange Request is received by the
Shareholder Servicing Agent in writing or by telephone on any business day prior
to the close of regular trading on the Exchange, the exchange will usually occur
that day if all the requirements set forth above have been complied with at that
time. No more than five exchanges may be made in any one Exchange Request by
telephone. 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). Required forms are available from the Shareholder Servicing Agent
or investment dealers.
Additional information with respect to any of the MFS Funds, including a copy of
its current prospectus, may be obtained from investment dealers or the
Shareholder Servicing Agent. A shareholder should obtain and read the prospectus
of the other MFS Fund and consider the differences in objectives and policies
before making any exchange. Unitholders of the MFS Fixed Fund (a bank collective
investment fund) have the right to exchange their units (except units acquired
through direct purchases) for shares of either Fund, subject to the conditions,
if any, imposed upon such unitholders by the MFS Fixed Fund.
Any state income tax advantage for investment in shares of each portfolio of MFS
Municipal Series Trust and 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.
TAX-DEFERRED RETIREMENT PLANS -- Shares of either Fund may be purchased by all
types of tax-deferred retirement plans. MFD makes available through investment
dealers plans and/or custody agreements for the following:
Individual Retirement Accounts (IRAs) (for individuals and their nonemployed
spouses who desire to make limited contributions to a tax-deferred retirement
program and, if eligible, to receive a federal income tax deduction for
amounts contributed);
Simplified Employee Pension (SEP-IRA) Plans;
403(b) Plans (deferred compensation arrangements for employees of public
school systems and certain non-profit organizations); and
Certain other qualified pension and profit-sharing plans.
The plan documents provided by MFD designate The First National Bank of Boston
as 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 First National Bank of Boston or MFD, tax
consequences and redemption information, see the specific documents for that
plan. Plan documents other than those provided by MFD may be used to establish
any of the plans described above. Third party administrative services, available
for some corporate plans, may limit or delay the processing of transactions.
Investors should consult with their tax advisers before establishing any of the
tax-deferred retirement plans described above.
6. TAX STATUS
The Trust intends to qualify each Fund each year as a "regulated investment
company" under Subchapter M of the Internal Revenue Code of 1986, as amended,
(the "Code") by having each of them meet all applicable requirements of
Subchapter M, including requirements as to the nature of each Fund's gross
income, the amount of each Fund's distributions, and the composition and holding
period of each Fund's portfolio assets. Because each Fund intends to distribute
all of its net investment income and net realized capital gains to shareholders
in accordance with the timing requirements imposed by the Code, it is expected
that neither Fund will be required to pay any federal income or excise taxes,
although the MFS Money Market Fund's foreign source income may be subject to
foreign withholding taxes. If a Fund should fail to qualify as a "regulated
investment company" in any year, it would incur a regular corporate federal
income tax upon its taxable income and its distributions would generally be
taxable as ordinary dividend income to its shareholders.
Shareholders of each Fund normally will have to pay federal income taxes, and
any state or local taxes, on the dividends they receive from that Fund.
Dividends from ordinary income and any distributions from net short-term capital
gains are taxable to the
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Fund's shareholders as ordinary income for federal income tax purposes whether
the dividends are paid in cash or reinvested in additional shares. Because the
Funds expect to earn primarily interest income, it is expected that no Fund
dividends will qualify for the dividends received deduction for corporations.
Fund dividends declared in October, November or December and paid the following
January will be taxable to shareholders as if received on December 31 of the
year in which they are declared. The Fund will notify shareholders regarding the
federal tax status of its distributions after the end of each calendar year.
Special tax considerations apply with respect to foreign investments of the MFS
Money Market Fund. Foreign exchange gains and losses realized by that Fund will
generally be treated as ordinary income and losses. Investment income received
by the MFS Money Market Fund from foreign securities may be subject to foreign
income taxes withheld at the source; the Fund does not expect to be able to pass
through to shareholders foreign tax credits or deductions with respect to such
foreign taxes. The United States has entered into tax treaties with many foreign
countries that may entitle the MFS Money Market 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 impossible to determine the effective rate
of foreign tax in advance since the amount of the Fund's assets to be invested
within various countries is not known.
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 Funds intend
to withhold U.S. federal income tax at the rate of 30% on taxable dividends and
other payments to Non-U.S. Persons that are subject to such withholding,
regardless of whether a lower treaty rate may be permitted. 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. Each Fund is also required in certain circumstances to apply backup
withholding at a rate of 31% on taxable dividends paid to any shareholder who
does not furnish to the Fund certain information and certifications or who is
otherwise subject to backup withholding. Backup withholding will not, however,
be applied to payments that have been subject to 30% withholding. Distributions
received from a Fund by Non-U.S. Persons also may be subject to tax under the
laws of their own jurisdictions.
As long as a Fund qualifies as a regulated investment company under the Code, it
will not be required to pay Massachusetts income or excise taxes.
Distributions of each 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. Each Fund intends to advise shareholders of
the extent to which its distributions consist of such interest. Shareholders are
urged to consult their tax advisers regarding the possible exclusion of such
portion of their dividends for state and local income tax purposes as well as
regarding the tax consequences of an investment in the Fund.
7. DESCRIPTION OF SHARES, VOTING RIGHTS AND LIABILITIES
The Trust presently has four series of shares and has reserved the right to
create additional series of shares. Each share of a series represents an equal
proportionate interest in that series with each other share of that series. The
shares of each series participate equally in the earnings, dividends and assets
of the particular portfolio. Shares have no pre-emptive or conversion rights.
Shares when issued are fully paid and non-assessable. Shareholders are entitled
to one vote for each share held. Shares of each series vote separately to
approve investment advisory agreements or changes in investment objective or
restrictions, but shares of all series vote together in the election of Trustees
and the selection of accountants. Although Trustees are not elected annually by
the shareholders, shareholders have under certain circumstances the right to
remove one or more Trustees. Shareholders of each series would be entitled to
share pro rata in the net assets of their respective portfolio available for
distribution to shareholders upon liquidation of the Trust or that series.
The Trust may merge or consolidate with another organization or sell all or
substantially all its assets, if approved by the vote of the holders of
two-thirds of the outstanding shares of the Trust, except that if the Trustees
recommend such merger, consolidation or sale, the approval by vote of the
holders of a majority of the Trust's outstanding shares will be sufficient. The
Trust may be terminated upon liquidation and distribution of the assets of the
Trust, if approved by the vote of the holders of two-thirds of the outstanding
shares of the Trust. If not so terminated, the Trust will continue indefinitely.
The Trust is an entity of the type commonly known as a "Massachusetts business
trust." Under Massachusetts law, shareholders of such a trust may, under certain
circumstances, be held personally liable as partners for its obligations.
However, the Declaration of Trust contains an express disclaimer of shareholder
liability for acts or obligations of the Trust and provides for indemnification
and reimbursement of expenses out of the Trust property for any shareholder held
personally liable for the obligations of the Trust. The Declaration of Trust
also provides that the Trust shall maintain appropriate insurance (for example,
fidelity bonding and errors and omissions insurance) for the protection of the
Trust, its shareholders, Trustees, officers, employees and agents covering
possible tort and other liabilities. Thus, the risk of a shareholder incurring
financial loss on account of shareholder liability is limited to circumstances
in which both inadequate insurance existed and the Trust itself was unable to
meet its obligations.
The Declaration of Trust further provides that obligations of the Trust are not
binding upon the Trustees individually but only upon the property of the Trust
and that the Trustees will not be liable for any action or failure to act, but
nothing in the Declaration of Trust protects a Trustee against any liability to
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which he would otherwise be subject by reason of willful misfeasance, bad faith,
gross negligence, or reckless disregard of the duties involved in the conduct of
his office.
8. NET INCOME AND DISTRIBUTIONS
The Net Income of each Fund is determined each day during which the Exchange is
open for trading. (As of the date of this SAI, the Exchange is open for trading
every weekday except for the following holidays or the days on which they are
observed: New Year's Day, Presidents' Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day and Christmas Day.) This
determination is made once during each such day as of the close of regular
trading on the Exchange. All the Net Income, as defined below, of each Fund so
determined is declared in shares of the respective Fund as a dividend to
shareholders of record of that Fund at the time of such determination. Shares
purchased become entitled to dividends declared as of the first day following
the date of investment. Dividends are generally distributed on the last business
day of each month in the form of additional shares of the respective Fund at the
rate of one share (and fraction thereof) for each one dollar (and fraction
thereof) of dividend income attributable to that Fund, or, at the election of
the shareholder, in cash; except that if a shareholder redeems the entire amount
in his account with that Fund at any time during the month, all dividends
declared on that Fund during the month through the date of redemption will be
paid to him at the same time as the proceeds from the redemption of his shares.
For this purpose the Net Income of either Fund (from the time of the immediately
preceding determination thereof) shall consist of (i) all interest income
accrued on the portfolio assets of that Fund, (ii) less all actual and accrued
expenses of that Fund determined in accordance with generally accepted
accounting principles, and (iii) plus or minus net realized gains and losses and
net unrealized appreciation or depreciation on the assets of that Fund. Interest
income shall include discount earned (including both original issue and market
discount) on discount paper accrued ratably to the date of maturity. Securities
are valued at amortized cost, which the Trustees have determined in good faith
constitutes fair value for the purposes of complying with the 1940 Act. This
valuation method will continue to be used until such time as the Trustees
determine that it does not constitute fair value for such purposes. The Trust
will limit the portfolio investments of each Fund to those U.S.
dollar-denominated instruments which the Board of Trustees or its delegate
determines present minimal credit risks, and which are of high quality as
determined by the 1940 Act and the rules thereunder. The Trust has also agreed
to maintain a dollar weighted average maturity for each series of 90 days or
less and to invest only in securities maturing in 13 months or less. The Board
of Trustees has also established procedures designed to stabilize the net asset
value per share of each series, as computed for the purposes of sales and
redemptions, at $1.00 per share. If the Trustees determine that a deviation from
the $1.00 per share price may exist which may result in a material dilution or
other unfair result to investors or existing shareholders, they will take such
corrective action as they regard as necessary and appropriate, which action
could include the sale of instruments prior to maturity (to realize capital
gains or losses); shortening average portfolio maturity; withholding dividends;
or using market quotations for valuation purposes.
Since the Net Income of each Fund is declared as a dividend each time the Net
Income of that Fund is determined, the net asset value per share of that Fund
(i.e., the value of the net assets of that Fund divided by the number of shares
of that Fund outstanding) remains at $1.00 per share immediately after each such
determination and dividend declaration. Any increase in the value of a
shareholder's investment in either Fund, representing the reinvestment of
dividend income, is reflected by an increase in the number of shares of that
Fund in his account.
It is expected that each Fund will have a positive Net Income at the time of
each determination thereof. If for any reason the Net Income of either Fund
determined at any time is a negative amount, which could occur, for instance,
upon default by an issuer of a portfolio security, that Fund would first offset
the negative amount with respect to each shareholder account in that Fund from
the dividends declared during the month with respect to each such account. If
and to the extent that such negative amount exceeds such declared dividends at
the end of the month (or during the month in the case of an account liquidated
in its entirety), that Fund could reduce the number of its outstanding shares by
treating each shareholder of that Fund as having contributed to its capital that
number of full and fractional shares of that Fund in the account of such
shareholder which represents his proportion of such excess. Each shareholder of
that Fund will be deemed to have agreed to such contribution in these
circumstances by his investment in that Fund. This procedure would permit the
net asset value per share of each Fund to be maintained at a constant $1.00 per
share.
9. PERFORMANCE INFORMATION
YIELD INFORMATION. Each Fund will provide current annualized and effective
annualized yield quotations based on the daily dividends of the particular Fund.
These quotations may from time to time be used in advertisements, shareholder
reports or other communications to shareholders. However, these yield quotations
should not be considered as representative of the yield of either Fund in the
future since the yield of each Fund will vary based on the type, quality and
maturities of the securities held in the portfolio of the particular Fund,
fluctuations in short-term interest rates and changes in the Fund's expenses.
The current annualized yield of the MFS Money Market Fund for the seven-day
period ended August 31, 1995 (the end of the Trust's fiscal year) was 5.05% and
the effective annualized yield of the MFS Money Market Fund for such period was
5.17%. The current annualized yield of the MFS Government Money Market Fund for
that seven-day period was 5.07% and the effective annualized yield of the MFS
Government Money Market Fund for that period was 5.20%. Current yield and
account balance
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information may be obtained by calling 1-800-MFS-TALK (637-8255).
Any current yield quotation of either Fund which is used in such a manner as to
be subject to the provisions of Rule 482(d), under the Securities Act of 1933,
as amended, shall consist of an annualized historical yield, carried at least to
the nearest hundredth of one percent, based on a specific seven calendar day
period and shall be calculated by dividing the net change in the value of an
account having a balance of one share at the beginning of the period by the
value of the account at the beginning of the period and multiplying the quotient
by 365/7. For this purpose the net change in account value would reflect the
value of additional shares purchased with dividends declared on the original
share and dividends declared on both the original share and any such additional
shares, but would not reflect any realized gains or losses from the sale of
securities or any unrealized appreciation or depreciation on portfolio
securities. In addition, any effective yield quotation of either Fund so used
shall be calculated by compounding the current yield quotation for such period
by multiplying such quotation by 7/365, adding 1 to the product, raising the sum
to a power equal to 365/7, and subtracting 1 from the result.
GENERAL: 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, each 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.
Each Fund may also quote evaluations mentioned in independent radio or
television broadcasts.
From time to time each 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.
MFS FIRSTS: MFS has a long history of innovations.
-- 1924 -- Massachusetts Investors Trust is established as the first open-end
mutual fund in America.
-- 1924 -- Massachusetts Investors Trust is the first mutual fund to make
full public disclosure of its operations in shareholder reports.
-- 1932 -- One of the first internal research departments is established to
provide in-house analytical capability for an investment management firm.
-- 1933 -- Massachusetts Investors Trust is the first mutual fund to register
under the Securities Act of 1933 ("Truth in Securities Act" or "Fund
Disclosure Act").
-- 1936 -- Massachusetts Investors Trust is the first mutual fund to allow
shareholders to take capital gain distributions either in additional
shares or in cash.
-- 1976 -- MFS Municipal Bond Fund is among the first municipal bond funds
established.
-- 1979 -- Spectrum becomes the first combination fixed/variable annuity with
no initial sales charge.
-- 1981 -- MFS World Governments Fund is established as America's first
globally diversified fixed-income mutual fund.
-- 1984 -- MFS Municipal High Income Fund is the first open-end mutual fund
to seek high tax-free income from lower-rated municipal securities.
-- 1986 -- MFS Managed Sectors Fund becomes the first mutual fund to target
and shift investments among industry sectors for shareholders.
-- 1986 -- MFS Municipal Income Trust is the first closed-end, high-yield
municipal bond fund traded on the New York Stock Exchange.
-- 1987 -- MFS Multimarket Income Trust is the first closed-end, multimarket
high income fund listed on the New York Stock Exchange.
-- 1989 -- MFS 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 World Growth Fund is the first global emerging markets fund to
offer the expertise of two sub-advisers.
-- 1993 -- MFS becomes money manager of MFS Union Standard Trust, the first
Trust to invest solely 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.
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10. INDEPENDENT AUDITORS AND
FINANCIAL STATEMENTS
Deloitte & Touche LLP are the Funds' independent auditors, providing audit
services, tax return preparation, and assistance and consultation with respect
to the preparation of filings with the SEC.
The Portfolios of Investments at August 31, 1995, the Statements of Assets and
Liabilities at August 31, 1995, the Statements of Operations for the year ended
August 31, 1995, the Statements of Changes in Net Assets for the year ended
August 31, 1995, the ten months ended August 31, 1994 and the year ended October
31, 1993, the Notes to Financial Statements and the Independent Auditors'
Report, each of which is included in the Annual Report to shareholders of the
Funds, are incorporated by reference into this SAI and have been so incorporated
in reliance upon the report of Deloitte & Touche LLP, independent auditors, as
experts in accounting and auditing. A copy of the Annual Report accompanies this
SAI.
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<PAGE> 34
APPENDIX A
DESCRIPTION OF STANDARD & POOR'S RATINGS GROUP ("S&P"), FITCH INVESTORS SERVICE,
INC. ("FITCH") AND MOODY'S INVESTORS SERVICE, INC. ("MOODY'S") HIGHEST
COMMERCIAL PAPER AND BOND RATINGS:
A-1 AND P-1 COMMERCIAL PAPER RATINGS
The rating "A-1" is the highest commercial paper rating assigned by S&P and
Fitch, and issues so rated are regarded as having the greatest capacity for
timely payment. Issues in the "A" category are delineated with the numbers 1, 2
and 3 to indicate the relative degree of safety. The A-1 designation indicates
that the degree of safety regarding timely payment is strong. Those A-1 issues
determined to possess extremely strong safety characteristics will be denoted
with a plus (+) sign designation.
The rating P-1 is the highest commercial paper rating assigned by Moody's.
Issuers rated P-1 (or supporting institutions) have a superior ability for
repayment of senior short-term debt obligations. P-1 repayment ability will
often be evidenced by many of the following characteristics: (1) leading market
positions in well-established industries; (2) high rates of return on
funds employed; (3) conservative capitalization structure with moderate reliance
on debt and ample asset protection; (4) broad margins in earnings coverage of
fixed financial charges and high internal cash generation; (5) well-established
access to a range of financial markets and assured sources of alternate
liquidity.
AAA, AA AND AAA, AA BONDS RATINGS
Debt rated AA by S&P and Fitch are judged by S&P to be high-quality obligations,
and differ only in small degree from issues rated AAA. AAA is S&P and Fitch's
highest rating and indicates an extremely strong capacity to pay interest and
repay principal. Bonds rated Aa by Moody's are judged by Moody's 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 Aaa securities
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.
13
<PAGE> 35
APPENDIX B
<TABLE>
TRUSTEE COMPENSATION
MFS MONEY MARKET FUND
<CAPTION>
RETIREMENT BENEFIT TOTAL TRUSTEE
TRUSTEE FEES ACCRUED AS ESTIMATED FEES FROM
FROM PART OF FUND CREDITED YEARS FUND AND
TRUSTEE FUND(1) EXPENSE(1) OF SERVICE(2) FUND COMPLEX(3)
- ----------------------------------------------------- ------------ ------------------ -------------- ---------------
<S> <C> <C> <C> <C>
Richard B. Bailey.................................... $2,370 $ 621 8 $ 226,221
A. Keith Brodkin..................................... 0 0 N/A 0
Peter G. Harwood..................................... 2,490 283 5 105,812
J. Atwood Ives....................................... 2,350 629 17 106,482
Lawrence T. Perera................................... 2,230 1,663 23 96,592
William Poorvu....................................... 2,490 1,646 23 106,482
Charles W. Schmidt................................... 2,370 1,562 16 98,397
Arnold D. Scott...................................... 0 0 N/A 0
Jeffrey L. Shames.................................... 0 0 N/A 0
Elaine R. Smith...................................... 2,370 600 27 98,397
David B. Stone....................................... 2,490 1,111 12 104,007
<FN>
- ---------------
(1) For fiscal year ended August 31, 1995.
(2) Based on normal retirement age of 73.
(3) For calendar year 1994. All Trustees receiving compensation served as
Trustees of 20 funds within the MFS fund complex (having aggregate net
assets at December 31, 1994, of approximately $14 billion) except Mr.
Bailey, who served as Trustee of 56 funds within the MFS fund complex
(having aggregate net assets at December 31, 1994, of approximately $24
billion).
</TABLE>
<TABLE>
ESTIMATED ANNUAL BENEFITS PAYABLE BY FUND UPON RETIREMENT(4)
<CAPTION>
YEARS OF SERVICE
AVERAGE -------------------------------------------
TRUSTEE FEES 3 5 7 10 OR MORE
- ------------ ---- ---- ---- ----------
<S> <C> <C> <C> <C>
$2,010 $302 $503 $704 $1,005
2,155 323 539 754 1,078
2,300 345 575 805 1,150
2,445 367 611 856 1,223
2,590 389 648 907 1,295
2,735 410 684 957 1,368
<FN>
- ---------------
(4) Other funds in the MFS fund complex provide similar retirement benefits to
the Trustees.
</TABLE>
14
<PAGE> 36
APPENDIX B (CONT'D)
<TABLE>
TRUSTEE COMPENSATION
MFS GOVERNMENT MONEY MARKET FUND
<CAPTION>
RETIREMENT BENEFIT TOTAL TRUSTEE
TRUSTEE FEES ACCRUED AS ESTIMATED FEES FROM
FROM PART OF FUND CREDITED YEARS FUND AND
TRUSTEE FUND(1) EXPENSE(1) OF SERVICE(2) FUND COMPLEX(3)
- ----------------------------------------------------- ------------ ------------------ -------------- ---------------
<S> <C> <C> <C> <C>
Richard B. Bailey.................................... $260 $ 63 8 $ 226,221
A. Keith Brodkin..................................... 0 0 N/A 0
Peter G. Harwood..................................... 280 31 5 105,812
J. Atwood Ives....................................... 260 64 17 106,482
Lawrence T. Perera................................... 240 170 23 96,592
William Poorvu....................................... 280 169 23 106,482
Charles W. Schmidt................................... 260 158 16 98,397
Arnold D. Scott...................................... 0 0 N/A 0
Jeffrey L. Shames.................................... 0 0 N/A 0
Elaine R. Smith...................................... 260 61 27 98,397
David B. Stone....................................... 280 97 11 104,007
<FN>
- ---------------
(1) For fiscal year ended August 31, 1995.
(2) Based on normal retirement age of 73.
(3) For calendar year 1994. All Trustees receiving compensation served as
Trustees of 20 funds within the MFS fund complex (having aggregate net
assets at December 31, 1994, of approximately $14 billion) except Mr.
Bailey, who served as Trustee of 56 funds within the MFS fund complex
(having aggregate net assets at December 31, 1994, of approximately $24
billion.
</TABLE>
<TABLE>
ESTIMATED ANNUAL BENEFITS PAYABLE BY FUND UPON RETIREMENT(4)
<CAPTION>
YEARS OF SERVICE
AVERAGE -----------------------------------------
TRUSTEE FEES 3 5 7 10 OR MORE
- ------------ --- --- ---- ----------
<S> <C> <C> <C> <C>
$215 $32 $54 $ 75 $108
235 35 59 82 118
255 38 64 89 128
275 41 69 96 138
295 44 74 103 148
315 47 79 110 158
<FN>
- ---------------
(4) Other funds in the MFS fund complex provide similar retirement benefits to
the Trustees.
</TABLE>
15
<PAGE> 37
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
INDEPENDENT AUDITORS
Deloitte & Touche LLP
125 Summer Street, Boston, MA 02110
MFS(R) MONEY
MARKET FUND
MFS(R) GOVERNMENT
MONEY MARKET FUND
500 BOYLSTON STREET
BOSTON, MA 02116
[LOGO]
MCM-13 1/96 2.25M 10/22/310
<PAGE> 38
<PAGE>
[LOGO] MFS [SM] Annual Report for
THE FIRST NAME IN MUTUAL FUNDS Year Ended
August 31, 1995
MFS [R] MONEY MARKET FUND
MFS [R] GOVERNMENT MONEY MARKET FUND
[A Photo of a columned building.]
<PAGE>
MFS [R] MONEY MARKET FUND
MFS [R] GOVERNMENT MONEY MARKET FUND
TRUSTEES
A. Keith Brodkin* - Chairman and President
Richard B. Bailey* - Private Investor;
Former Chairman and Director (until 1991),
Massachusetts Financial Services Company
Peter G. Harwood - Private Investor
J. Atwood Ives - Chairman and Chief Executive
Officer, Eastern Enterprises
Lawrence T. Perera - Partner,
Hemenway & Barnes
William J. Poorvu - Adjunct Professor, Harvard
University Graduate School of Business Administration
Charles W. Schmidt - Private Investor
Arnold D. Scott* - Senior Executive Vice
President and Secretary, Massachusetts
Financial Services Company
Jeffrey L. Shames* - President, Massachusetts
Financial Services Company
Elaine R. Smith - Independent Consultant
David B. Stone - Chairman, North American
Management Corp. (Investment Adviser)
INVESTMENT ADVISER
Massachusetts Financial Services Company
500 Boylston Street
Boston, MA 02116-3741
DISTRIBUTOR
MFS Fund Distributors, Inc.
500 Boylston Street
Boston, MA 02116-3741
PORTFOLIO MANAGER
Geoffrey L. Kurinsky*
TREASURER
W. Thomas London*
ASSISTANT TREASURER
James O. Yost*
SECRETARY
Stephen E. Cavan*
ASSISTANT SECRETARY
James R. Bordewick, Jr.*
CUSTODIAN
State Street Bank and Trust Company
AUDITORS
Deloitte & Touche LLP
INVESTOR INFORMATION
For MFS stock and bond market outlooks, call
toll free: 1-800-637-4458 anytime
from a touch-tone telephone.
For information on MFS mutual funds, call
your financial adviser or, for an
information kit, call toll free: 1-800-637-2929
any business day from 9 a.m. to 5 p.m. Eastern time
(or leave a message anytime).
INVESTOR SERVICE
MFS Service Center, Inc.
P.O. Box 2281
Boston, MA 02107-9906
For general information, call toll free:
1-800-225-2606 any business day from
8 a.m. to 8 p.m. Eastern time.
For service to speech- or hearing-impaired, call
toll free: 1-800-637-6576 any business day from
9 a.m. to 5 p.m. Eastern time. (To use this
service, your phone must be equipped with a
Telecommunications Device for the Deaf.)
For share prices, account balances and
exchanges, call toll free: 1-800-MFS-TALK
(1-800-637-8255) anytime from a touch-tone telephone.
* Affiliated with the Investment Adviser
<PAGE>
LETTER TO SHAREHOLDERS
Dear Shareholders:
Short-term interest rates increased dramatically during the past year, despite
the last few months of lower rates. The annualized yield on an investment in MFS
MONEY MARKET FUND for the seven-day period ended August 31, 1995 increased from
3.7% to 5.2%. During this same period, the annualized yield on an investment in
MFS GOVERNMENT MONEY MARKET FUND rose from 3.4% to 5.2%.
Economic Environment
Moderate, but sustainable, growth appears to be the hallmark of the economic
expansion's fifth year. After slowing earlier in the summer, consumer spending
and homebuying were showing renewed strength by August 31, while businesses
continued to work off excess inventories and reduce factory output. Meanwhile,
overseas economies, particularly those of Germany and Japan, have not recovered
as expected, limiting U.S. export growth. However, the Federal Reserve Board's
consistent and, so far, successful efforts to fight inflation seem to be giving
consumers and businesses enough confidence to help maintain 2 1/2% to 3% real
(adjusted for inflation) growth in gross domestic product, at least through
1995.
Interest Rates
During the fiscal year ended August 31, 1995, the Federal Reserve voted to
continue to tighten monetary policy by raising the federal funds rate (the
interest rate charged by banks to other banks in need of overnight loans) two
more times. On November 15, 1994, it raised the federal funds rate 75 basis
points (0.75%). Then on February 1, 1995, an increase of 50 basis points (0.50%)
was put into effect. Most recently, however, the Federal Reserve lowered rates
25 basis points (0.25%) on July 6, 1995 (the first easing in nearly three years)
after the economy began to show signs of contracting. As a result, yields on
30-day U.S. Treasury bills rose from just over 4.2% at the end of August 1994 to
5.3% as of August 31, 1995, while yields on 30-day commercial paper increased
from 4.7% to their current level of 5.7% during the same period. With improving
inflation conditions and moderate economic growth, we believe short-term
interest rates may fall somewhat further over the next several months.
Portfolio Performance and Strategy
Because of the trend toward stable-to-lower short-term interest rates and in an
effort to provide a reasonable level of current income, we have lengthened
maturities in both portfolios. The average maturity of both Funds was 53 days as
of August 31, 1995 versus 27 and 28 days, respectively, for MFS MONEY MARKET
FUND and MFS GOVERNMENT MONEY MARKET FUND on August 31, 1994.
1
<PAGE>
LETTER TO SHAREHOLDERS - continued
The portfolio of MFS MONEY MARKET FUND continues to include only the
highest-quality corporate, bank and government securities in an effort to
provide investors with maximum security against credit risk (although money
market funds are neither insured nor guaranteed by the U.S. government, and
there can be no assurance that they will be able to maintain a stable net asset
value). On August 31, 1995, approximately 31% of this Fund's net assets was
invested in commercial paper, with the balance invested in securities issued or
guaranteed by the U.S. Treasury or agencies or instrumentalities of the U.S.
government because of the very narrow yield spreads between government agency
obligations and commercial paper. At the same time, the quality of MFS
GOVERNMENT MONEY MARKET FUND'S portfolio remains at the highest practical level
because its investments are limited to those securities issued or guaranteed by
the U.S. Treasury or agencies or instrumentalities of the U.S. government,
including repurchase agreements collateralized by such securities. This emphasis
on quality should allow the Fund to continue to help investors to obtain current
income and, at the same time, to preserve capital and liquidity.
We appreciate your support and welcome any questions or comments you may
have.
Respectfully,
/s/ A. Keith Brodkin /s/ Geoffrey L. Kurinsky
A. Keith Brodkin Geoffrey L. Kurinsky
Chairman and President Portfolio Manager
September 12, 1995
TAX FORM SUMMARY
In January 1996, shareholders will be mailed a Tax Form Summary reporting the
federal tax status of all distributions paid during the calendar year 1995.
PORTFOLIO MANAGER PROFILE
Geoffrey Kurinsky began his career at MFS in 1987 in the Fixed Income
Department. A graduate of the University of Massachusetts and Boston
University's Graduate School of Management, he was named Assistant Vice
President in 1988, Vice President in 1989 and Senior Vice President in 1993. He
has managed MFS Money Market Fund and MFS Government Money Market Fund since
1992.
2
<PAGE>
PORTFOLIOS OF INVESTMENTS - August 31, 1995
<TABLE>
<CAPTION>
MFS MONEY MARKET FUND
Commercial Paper - 31.0%
================================================================================
Principal Amount
Issuer (000 Omitted) Value
- --------------------------------------------------------------------------------
<S> <C> <C>
American Telephone & Telegraph Co., due 10/16/95 $14,400 $ 14,298,480
Coca-Cola Co., due 11/30/95 7,800 7,690,605
Duke Power Co., due 9/12/95 10,000 9,982,583
Ford Motor Credit Corp., due 9/01/95 2,700 2,700,000
General Electric Co., due 12/15/95 8,500 8,358,935
Hershey Foods Corp., due 10/06/95 8,743 8,694,974
Hewlett Packard Co., due 9/28/95 - 10/03/95 17,600 17,520,166
PepsiCo, Inc., due 9/14/95 - 10/03/95 15,157 15,104,868
Procter & Gamble Co., due 10/05/95 - 12/18/95 17,000 16,851,067
Transamerica Corp., due 9/06/95 8,000 7,993,645
Wal-Mart Stores, Inc., due 9/15/95 12,000 11,973,400
Warner-Lambert Co., due 12/29/95 6,000 5,889,925
- --------------------------------------------------------------------------------
Total Commercial Paper, at Amortized Cost $127,058,648
- --------------------------------------------------------------------------------
U.S. Government and Agency Obligations - 70.2%
================================================================================
Federal Farm Credit Bank, due 9/05/95 - 12/20/95 $19,600 $ 19,448,194
Federal Home Loan Bank, due 9/01/95 - 1/22/96 38,000 37,605,107
Federal Home Loan Mortgage Corp.,
due 9/08/95 - 2/09/96 132,263 131,043,756
Federal National Mortgage Assn.,
due 9/07/95 - 12/22/95 93,250 92,489,961
Tennessee Valley Authority, due 9/19/95 8,000 7,977,520
- --------------------------------------------------------------------------------
Total U.S. Government and Agency Obligations, at Amortized Cost $288,564,538
- --------------------------------------------------------------------------------
Total Investments, at Amortized Cost $415,623,186
Other Assets, Less Liabilities - (1.2)% (4,825,267)
================================================================================
Net Assets - 100.0% $410,797,919
- --------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
MFS GOVERNMENT MONEY MARKET FUND
U.S. Government and Agency Obligations - 97.4%
================================================================================
Principal Amount
Issuer (000 Omitted) Value
- --------------------------------------------------------------------------------
<S> <C> <C>
Federal Farm Credit Bank, due 9/22/95 - 12/18/95 $8,100 $ 8,016,961
Federal Home Loan Bank, due 9/01/95 - 2/05/96 5,500 5,436,813
Federal Home Loan Mortgage Corp.,
due 9/05/95 - 2/08/96 11,225 11,133,346
Federal National Mortgage Assn.,
due 9/07/95 - 12/28/95 10,000 9,948,656
Tennessee Valley Authority, due 10/03/95 2,900 2,885,539
- --------------------------------------------------------------------------------
Total Investments, at Amortized Cost $37,421,315
Other Assets, Less Liabilities - 2.6% 1,018,467
================================================================================
Net Assets - 100.0% $38,439,782
- --------------------------------------------------------------------------------
</TABLE>
See notes to financial statements
3
<PAGE>
FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Statements of Assets and Liabilities
================================================================================
MFS Money MFS Government
August 31, 1995 Market Fund Money Market Fund
- --------------------------------------------------------------------------------
<S> <C> <C>
Assets:
Investments, at amortized cost and value $415,623,186 $37,421,315
Cash 46,471 19,293
Receivable for Fund shares sold 948,218 1,090,756
Other assets 7,013 535
------------ -----------
Total assets $416,624,888 $38,531,899
------------ -----------
Liabilities:
Distributions payable $ 79,397 $ 9,168
Payable for Fund shares reacquired 5,527,089 24,329
Payable to affiliates -
Management fee 75 --
Shareholder servicing agent fee 1,734 167
Accrued expenses and other liabilities 218,674 58,453
------------ -----------
Total Liabilities $ 5,826,969 $ 92,117
------------ -----------
Net Assets (represented by paid-in capital) $410,797,919 $38,439,782
============ ===========
Shares of beneficial interest outstanding 410,797,919 38,439,782
============ ===========
Net Asset Value, offering price and
redemption price per share
(net assets/shares of beneficial
interest outstanding) $1.00 $1.00
===== =====
</TABLE>
See notes to financial statements
4
<PAGE>
FINANCIAL STATEMENTS - continued
<TABLE>
<CAPTION>
Statements of Operations
================================================================================
Year Ended
MFS Money Market Fund August 31, 1995
- --------------------------------------------------------------------------------
<S> <C>
Net investment income:
Interest income $ 26,215,863
------------
Expenses -
Management fee $ 2,224,748
Trustees' compensation 28,998
Shareholder servicing agent fee 691,600
Custodian fee 137,750
Postage 90,146
Printing 41,886
Auditing fees 7,244
Legal fees 1,643
Miscellaneous 285,973
------------
Total expenses $ 3,509,988
------------
Net investment income $ 22,705,875
============
</TABLE>
<TABLE>
<CAPTION>
Year Ended
MFS Government Money Market Fund August 31, 1995
- --------------------------------------------------------------------------------
<S> <C>
Net investment income:
Interest income $ 2,188,724
------------
Expenses -
Management fee $ 193,160
Trustees' compensation 3,641
Shareholder servicing agent fee 57,948
Auditing fees 23,018
Postage 4,674
Miscellaneous 43,689
------------
Total expenses $ 326,130
------------
Net investment income $ 1,862,594
============
</TABLE>
See notes to financial statements
5
<PAGE>
FINANCIAL STATEMENTS - continued
Statements of Changes in Net Assets
<TABLE>
<CAPTION>
====================================================================================================================================
Year Ended Ten Months Ended Year Ended
MFS Money Market Fund August 31, 1995 August 31, 1994 October 31, 1993
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Increase (decrease) in net assets:
From operations -
Net investment income, declared as
distributions to shareholders $ 22,705,875 $ 10,000,828 $ 8,857,063
--------------- --------------- ---------------
Fund share (principal) transactions
at net asset value of $1.00 per share -
Net proceeds from sale of shares $ 2,481,903,487 $ 1,171,346,513 $ 479,475,355
Net asset value of shares issued
to shareholders in reinvestment
of distributions 19,523,795 8,997,225 8,547,220
Cost of shares reacquired (2,526,408,894) (1,094,880,512) (586,530,807)
--------------- --------------- ---------------
Total increase (decrease) in
net assets $ (24,981,612) $ 85,463,226 $ (98,508,232)
Net assets:
At beginning of period 435,779,531 350,316,305 448,824,537
--------------- --------------- ---------------
At end of period $ 410,797,919 $ 435,779,531 $ 350,316,305
=============== =============== ===============
</TABLE>
<TABLE>
<CAPTION>
Year Ended Ten Months Ended Year Ended
MFS Government Money Market Fund August 31, 1995 August 31, 1994 October 31, 1993
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Increase (decrease) in net assets:
From operations -
Net investment income, declared as
distributions to shareholders $ 1,862,594 $ 894,377 $ 893,663
------------- ------------- -------------
Fund share (principal) transactions
at net asset value of $1.00 per share -
Net proceeds from sale of shares $ 130,386,802 $ 63,018,558 $ 36,011,225
Net asset value of shares issued
to shareholders in reinvestment
of distributions 1,692,388 815,492 817,778
Cost of shares reacquired (131,986,405) (61,062,849) (48,882,554)
------------- ------------- -------------
Total increase (decrease) in
net assets $ 92,785 $ 2,771,201 $ (12,053,551)
Net assets:
At beginning of period 38,346,997 35,575,796 47,629,347
------------- ------------- -------------
At end of period $ 38,439,782 $ 38,346,997 $ 35,575,796
=============== =============== ===============
</TABLE>
See notes to financial statements
6
<PAGE>
FINANCIAL STATEMENTS - continued
<TABLE>
<CAPTION>
Financial Highlights
====================================================================================================================================
Year Ended August 31, Year Ended October 31,
--------------------- --------------------------------------------------------
MFS Money Market Fund 1995 1994* 1993 1992 1991
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value -
beginning of period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
--------- --------- --------- --------- ---------
Income from investment operations -
Net investment income $ 0.05 $ 0.02 $ 0.02 $ 0.03 $ 0.06
--------- --------- --------- --------- ---------
Less distributions declared
to shareholders from net
investment income $ (0.05) $ (0.02) $ (0.02) $ (0.03) $ (0.06)
--------- --------- --------- --------- ---------
Net asset value - end of period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
========= ========= ========= --------- ---------
Total return 5.04% 2.91%+ 2.39% 3.35% 6.07%
Ratios (to average net assets)/Supplemental data:
Expenses 0.76% 0.78%+ 0.83% 0.87% 0.82%
Net investment income 4.92% 2.95%+ 2.39% 3.36% 5.94%
Net assets at end of period (000 omitted) $ 410,798 $ 435,780 $ 350,316 $ 448,825 $ 541,945
</TABLE>
<TABLE>
<CAPTION>
Year Ended October 31,
-------------------------------------------------------------------------------------
MFS Money Market Fund 1990 1989 1988 1987 1986 1985
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value -
beginning of period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
--------- --------- --------- --------- --------- ---------
Income from investment operations -
Net investment income $ 0.07 $ 0.08 $ 0.07 $ 0.06 $ 0.06 $ 0.08
--------- --------- --------- --------- --------- ---------
Less distributions declared
to shareholders from net
investment income $ (0.07) $ (0.08) $ (0.07) $ (0.06) $ (0.06) $ (0.08)
--------- --------- --------- --------- --------- ---------
Net asset value - end of period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
========= ========= ========= ========= --------- ---------
Total return 7.99% 8.84% 7.12% 6.06% 6.80% 8.19%
Ratios (to average net assets)/Supplemental data:
Expenses 0.76% 0.83% 0.83% 0.82% 0.78% 0.73%
Net investment income 7.60% 8.45% 6.72% 5.77% 6.53% 7.86%
Net assets at end of period (000 omitted) $ 677,164 $ 676,382 $ 664,895 $ 716,528 $ 623,568 $ 657,000
<FN>
* For the ten months ended August 31, 1994.
+ Annualized.
</FN>
</TABLE>
See notes to financial statements
7
<PAGE>
FINANCIAL STATEMENTS - continued
<TABLE>
<CAPTION>
Financial Highlights - continued
- ------------------------------------------------------------------------------------------------------------------------------------
Year Ended August 31, Year Ended October 31,
--------------------- -----------------------------------
MFS Government Money Market Fund 1995 1994* 1993 1992 1991
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value -
beginning of period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
-------- -------- -------- -------- --------
Income from investment operations -
Net investment income $ 0.05 $ 0.02 $ 0.02 $ 0.03 $ 0.06
-------- -------- -------- -------- --------
Less distributions declared
to shareholders from net
investment income $ (0.05) $ (0.02) $ (0.02) $ (0.03) $ (0.06)
-------- -------- -------- -------- --------
Net asset value - end of period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
======== ======== ======== ======== ========
Total return 4.92% 2.64%+ 2.33% 3.27% 5.68%
Ratios (to average net assets)/Supplemental data:
Expenses 0.84% 1.05%+ 0.99% 0.87% 0.83%
Net investment income 4.82% 2.64%+ 2.20% 3.28% 5.53%
Net assets at end of period (000 omitted) $ 38,440 $ 38,347 $ 35,576 $ 47,629 $ 50,655
</TABLE>
<TABLE>
<CAPTION>
Year Ended October 31,
-----------------------------------------------------------------------------------
MFS Government Money Market Fund 1990 1989 1988 1987 1986 1985
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value -
beginning of period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
-------- -------- -------- -------- -------- --------
Income from investment operations -
Net investment income $ 0.07 $ 0.08 $ 0.06 $ 0.05 $ 0.06 $ 0.07
-------- -------- -------- -------- -------- --------
Less distributions declared
to shareholders from net
investment income $ (0.07) $ (0.08) $ (0.06) $ (0.05) $ (0.06) $ (0.07)
-------- -------- -------- -------- -------- --------
Net asset value - end of period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
======== ======== ======== ======== ======== ========
Total return 7.55% 8.61% 6.47% 5.73% 6.33% 7.63%
Ratios (to average net assets)/Supplemental data:
Expenses 0.80% 0.85% 0.74% 0.59% 0.66% 0.72%
Net investment income 7.34% 8.29% 6.29% 5.63% 6.07% 7.39%
Net assets at end of period (000 omitted) $ 53,701 $ 51,619 $ 50,343 $ 59,875 $ 63,331 $ 45,894
<FN>
* For the ten months ended August 31, 1994.
+ Annualized.
</FN>
</TABLE>
See notes to financial statements
8
<PAGE>
NOTES TO FINANCIAL STATEMENTS
(1) Business and Organization
MFS Money Market Fund and MFS Government Money Market Fund are each a separate,
diversified series of MFS Series Trust IV (the Trust). The Trust is organized as
a Massachusetts business trust and is registered under the Investment Company
Act of 1940, as amended, as an open-end management investment company.
(2) Significant Accounting Policies
Investment Valuations - Money market instruments are valued at amortized cost,
which the Trustees have determined in good faith constitutes fair value. The
Trust's use of amortized cost is subject to the Trust's compliance with certain
conditions as specified under Rule 2a-7 of the Investment Company Act of 1940.
Repurchase Agreements - The Trust may enter into repurchase agreements with
institutions that the Trust's investment adviser has determined are
creditworthy. Each repurchase agreement is recorded at cost. The Trust requires
that the securities purchased in a repurchase transaction be transferred to the
custodian in a manner sufficient to enable the Trust to obtain those securities
in the event of a default under the repurchase agreement. The Trust monitors, on
a daily basis, the value of the securities transferred to ensure that the value,
including accrued interest, of the securities under each repurchase agreement is
greater than amounts owed to the Trust under each such repurchase agreement.
Investment Transactions and Income - Investment transactions are recorded on the
trade date. Interest income is recorded on the accrual basis. All premium and
original issue discount are amortized or accreted for financial statement and
tax reporting purposes as required by federal income tax regulations.
Tax Matters and Distributions - The Trust's policy is to comply with the
provisions of the Internal Revenue Code (the Code) applicable to regulated
investment companies and to distribute to shareholders all of its net income.
Accordingly, no provision for federal income or excise tax is provided.
Distributions to shareholders are recorded on the ex-dividend date.
(3) Transactions with Affiliates
Investment Adviser - The Funds each have a separate investment advisory
agreement with Massachusetts Financial Services Company (MFS) to provide overall
investment advisory and administrative services and general office facilities.
The management fee is computed daily and paid monthly at an annual rate of
0.48% and 0.50% of average daily net assets for the MFS Money Market Fund and
the MFS Government Money Market Fund, respectively.
9
<PAGE>
NOTES TO FINANCIAL STATEMENTS - continued
The Trust pays no compensation directly to its Trustees who are officers of the
investment adviser, or to officers of the Trust, all of whom receive
remuneration for their services to the Trust from MFS. Certain of the officers
and Trustees of the Trust are officers or directors of MFS, MFS Fund
Distributors, Inc. (MFD) and MFS Service Center, Inc. (MFSC). The Trust has an
unfunded defined benefit plan for all of its independent Trustees and Mr.
Bailey. Included in Trustees' compensation for the MFS Money Market Fund and the
MFS Government Money Market Fund is a net periodic pension expense of $9,898 and
$2,099, respectively, for the year ended August 31, 1995.
Shareholder Servicing Agent - MFSC, a wholly owned subsidiary of MFS, earns a
fee for its services as shareholder servicing agent. The fee is calculated as a
percentage of the average daily net assets of each Fund at an effective annual
rate of 0.15%.
(4) Portfolio Securities
Purchases and sales of money market investments, exclusive of securities subject
to repurchase agreements for MFS Money Market Fund, aggregated $4,610,280,786
and $4,672,541,608, respectively.
Purchases and sales of money market investments, exclusive of securities subject
to repurchase agreements for MFS Government Money Market Fund, were $574,391,657
and $577,610,709, respectively.
(5) Shares of Beneficial Interest
The Trust's Declaration of Trust permits the Trustees to issue an unlimited
number of full and fractional shares of beneficial interest (without par value)
of each Fund.
(6) Line of Credit
The Trust entered into an agreement which enables it to participate with other
funds managed by MFS in an unsecured line of credit with a bank which permits
borrowings up to $350 million, collectively. Borrowings may be made to
temporarily finance the repurchase of Trust shares. Interest is charged to each
fund, based on its borrowings, at a rate equal to the bank's base rate. In
addition, a commitment fee, based on the average daily unused portion of the
line of credit, is allocated among the participating funds at the end of each
quarter. The commitment fees allocated to the MFS Money Market Fund and the
MFS Government Money Market Fund were $7,073 and $505 respectively, for the year
ended August 31, 1995.
10
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Trustees of MFS Series Trust IV and the Shareholders of MFS Money Market
Fund and MFS Government Money Market Fund:
We have audited the accompanying statements of assets and liabilities, including
the portfolios of investments, of MFS Money Market Fund and MFS Government Money
Market Fund as of August 31, 1995, the related statements of operations for the
year then ended and the ten months ended August 31, 1994, the statements of
changes in net assets for the year ended August 31, 1995, the ten months ended
August 31, 1994 and the year ended October 31, 1993, and the financial
highlights for each of the years in the ten-year period ended August 31, 1995.
These financial statements and financial highlights are the responsibility of
the Trust's management. Our responsibility is to express an opinion on these
financial statements and financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of the securities owned at
August 31, 1995 by correspondence with the custodian. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of MFS Money Market
Fund and MFS Government Money Market Fund at August 31, 1995, the results of
their operations, the changes in their net assets, and their financial
highlights for the respective stated periods in conformity with generally
accepted accounting principles.
DELOITTE & TOUCHE LLP
Boston, Massachusetts
October 6, 1995
--------------------------------------------------------
This report is prepared for the general information of shareholders. It is
authorized for distribution to prospective investors only when preceded or
accompanied by a current prospectus.
<PAGE>
MFS INVESTMENT OPPORTUNITIES
MUTUAL FUNDS
The MFS Family of Funds, shown on the facing page, falls into the eight general
categories below. All offer full-time professional management, a diversified
portfolio, and a wide array of shareholder services.
STOCK FUNDS seek growth of capital rather than income through investments in
stocks.
STOCK AND BOND FUNDS seek current income and growth of capital through
investments in both stocks and bonds.
BOND FUNDS seek current income through investments in debt securities.
WORLD FUNDS seek stock, balanced, and bond fund objectives through investments
in U.S. and foreign stocks and bonds.
LIMITED-MATURITY FUNDS seek current income and preservation of capital through
investments in debt securities with remaining maturities of five years or less.
National tax-free bond funds seek current income exempt from federal income tax
through investments in debt securities issued by states and municipalities.1
STATE TAX-FREE BOND FUNDS seek current income exempt from federal and state
income taxes through investments in debt securities issued by a single state and
its municipalities.[1]
MONEY MARKET FUNDS seek preservation of capital and current income through
investments in short-term debt securities.[2]
To determine which MFS fund may be appropriate for you, please contact your
financial adviser, who can help you relate these investment opportunities to
your financial goals. If you prefer, you may call MFS Investor Information for
literature[3] on MFS products and services: 1-800-637-2929, from 9 a.m. to 5
p.m. Eastern time any business day (leave a message anytime).
[1] A small portion of the income may be subject to federal, state and/or
alternative minimum tax.
[2] Investments in money market funds are not issued or guaranteed by the U.S.
government and there is no assurance that the fund will be able to maintain a
stable net asset value.
[3] Including a prospectus containing more complete information including
charges and expenses. Read the prospectus carefully before investing.
12
<PAGE>
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 1-800-637-2929
any business day from 9 a.m. to 5 p.m. Eastern time (or, leave a message any
time). This material should be read carefully before investing or sending money.
STOCK
================================================================================
Massachusetts Investors Trust
- --------------------------------------------------------------------------------
Massachusetts Investors Growth Stock Fund
- --------------------------------------------------------------------------------
MFS [R] Capital Growth Fund
- --------------------------------------------------------------------------------
MFS [R] Emerging Growth Fund
- --------------------------------------------------------------------------------
MFS [R] Gold & Natural Resources Fund
- --------------------------------------------------------------------------------
MFS [R] Growth Opportunities Fund
- --------------------------------------------------------------------------------
MFS [R] Managed Sectors Fund
- --------------------------------------------------------------------------------
MFS [R] OTC Fund
- --------------------------------------------------------------------------------
MFS [R] Research Fund
- --------------------------------------------------------------------------------
MFS [R] Value Fund
STOCK AND BOND
================================================================================
MFS [R] Total Return 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
(formerly MFS [R] Income & Opportunity Fund)
- --------------------------------------------------------------------------------
LIMITED MATURITY BOND
================================================================================
MFS [R] Government Limited Maturity Fund
- --------------------------------------------------------------------------------
MFS [R] Limited Maturity Fund
- --------------------------------------------------------------------------------
MFS [R] Municipal Limited Maturity Fund
- --------------------------------------------------------------------------------
WORLD
================================================================================
MFS [R] World Asset Allocation Fund
- --------------------------------------------------------------------------------
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
(closed to new investors)
- --------------------------------------------------------------------------------
MFS [R] Municipal Income Fund
- --------------------------------------------------------------------------------
STATE TAX-FREE BOND
================================================================================
Alabama, Arkansas, California, Florida,
Georgia, Louisiana, Maryland, Massachusetts, Mississippi, New York,
North Carolina, Pennsylvania,
South Carolina, Tennessee, Texas, Virginia, Washington, West Virginia
- --------------------------------------------------------------------------------
MONEY MARKET
================================================================================
MFS [R] Cash Reserve Fund
- --------------------------------------------------------------------------------
MFS [R] Government Money Market Fund
- --------------------------------------------------------------------------------
MFS [R] Money Market Fund
- --------------------------------------------------------------------------------
<PAGE>
MFS [R] MONEY Bulk Rate
MARKET FUND U.S. Postage
P A I D
MFS [R] Permit #55638
GOVERNMENT Boston, MA
MONEY MARKET
FUND
500 Boylston Street
Boston, MA 02116
[LOGO]
MCM-2-10/95 39M 10/31/22
<PAGE> 39
<TABLE>
<S> <C>
MFS(R) MUNICIPAL PROSPECTUS
BOND FUND January 1, 1996
(A member of the MFS Family of Funds(R)) Class A Shares of Beneficial Interest
Class B Shares of Beneficial Interest
</TABLE>
<TABLE>
- ----------------------------------------------------------------------------------------------
<CAPTION>
PAGE
------
<S> <C>
1. Expense Summary..................................................................... 2
2. The Fund............................................................................ 3
3. Condensed Financial Information..................................................... 4
4. Investment Objective and Policies................................................... 5
5. Management of the Fund.............................................................. 9
6. Information Concerning Shares of the Fund........................................... 10
Purchases....................................................................... 10
Exchanges....................................................................... 13
Redemptions and Repurchases..................................................... 14
Class B Distribution Plan....................................................... 17
Distributions................................................................... 18
Tax Status...................................................................... 18
Net Asset Value................................................................. 19
Description of Shares, Voting Rights and Liabilities............................ 19
Performance Information......................................................... 19
7. Shareholder Services................................................................ 20
Appendix A............................................................................. A-1
Appendix B............................................................................. B-1
Appendix C............................................................................. C-1
</TABLE>
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
MFS MUNICIPAL BOND FUND
500 Boylston Street, Boston, Massachusetts 02116 (617) 954-5000
This Prospectus pertains to the MFS Municipal Bond Fund (the "Fund"), a
diversified series of MFS Series Trust IV (the "Trust"), an open-end investment
company presently consisting of four series. The investment objective of the
Fund is to provide as high a level of current income exempt from federal income
taxes as is considered consistent with prudent investing while seeking
protection of shareholders' capital (see "Investment Objective and Policies").
The minimum initial investment generally is $1,000 per account (see
"Purchases").
The Fund's investment adviser and distributor are Massachusetts Financial
Services Company ("MFS") and MFS Fund Distributors, Inc. ("MFD"), respectively,
both of which are located at 500 Boylston Street, Boston, Massachusetts 02116.
INVESTMENT PRODUCTS ARE NOT INSURED BY THE FDIC OR ANY OTHER GOVERNMENT AGENCY,
AND ARE NOT DEPOSITS OR OTHER OBLIGATIONS OF, OR GUARANTEED BY, ANY FINANCIAL
INSTITUTION. SHARES OF MUTUAL FUNDS ARE SUBJECT TO INVESTMENT RISK, INCLUDING
POSSIBLE LOSS OF THE PRINCIPAL AMOUNT INVESTED, AND WILL FLUCTUATE IN VALUE. YOU
MAY RECEIVE MORE OR LESS THAN YOU PAID WHEN YOU REDEEM YOUR SHARES.
This Prospectus sets forth concisely the information concerning the Fund that a
prospective investor ought to know before investing. The Fund has filed with the
Securities and Exchange Commission (the "SEC") a Statement of Additional
Information (the "SAI"), dated January 1, 1996, as amended or supplemented from
time to time, which contains more detailed information about the Fund. The SAI
is incorporated into this Prospectus by reference. See page 22 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).
INVESTORS SHOULD READ THIS PROSPECTUS AND RETAIN IT FOR FUTURE REFERENCE.
<PAGE> 40
1. EXPENSE SUMMARY
<TABLE>
<CAPTION>
SHAREHOLDER TRANSACTION EXPENSES: CLASS A CLASS B
--------- -------
<S> <C> <C>
Maximum Initial Sales Charge Imposed on Purchases of Fund Shares
(as a percentage of offering price).............................. 4.75% 0.00%
Maximum Contingent Deferred Sales Charge (as a percentage of
original purchase price or redemption proceeds, as applicable)... See Below(1) 4.00%
ANNUAL OPERATING EXPENSES OF THE FUND (AS A PERCENTAGE OF AVERAGE NET ASSETS):
Management Fees.................................................... 0.42% 0.42%
Rule 12b-1 Fees.................................................... 0.00% 0.88%(2)
Other Expenses..................................................... 0.19% 0.30%
---- ----
Total Operating Expenses........................................... 0.61% 1.60%
<FN>
- ---------------
(1) Purchases of $1 million or more are not subject to an initial sales charge;
however, a contingent deferred sales charge (a "CDSC") of 1% will be imposed
on such purchases in the event of certain redemption transactions within 12
months following such purchases (see "Information Concerning Shares of the
Fund -- Purchases" below).
(2) The Fund has adopted a Distribution Plan for its Class B shares in
accordance with Rule 12b-1 under the Investment Company Act of 1940, as
amended (the "1940 Act"), which provides that it will pay
distribution/service fees aggregating up to (but not necessarily all of)
1.00% per annum of the average daily net assets attributable to the Class B
shares (see "Distribution Plan"). Except in the case of the 0.25% per annum
Class B service fee paid by the Fund in connection with the sale of Class B
shares, payment of the Class B service fee is not being imposed. Payment of
the service fee will commence on such date as the Trustees of the Trust may
determine (see "Class B Distribution Plan" below). Distribution expenses
paid under this Plan, together with any CDSC payable upon redemption of
Class B 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.
</TABLE>
EXAMPLE OF EXPENSES
An investor would pay the following dollar amounts of expenses on a $1,000
investment in the Fund, assuming (a) a 5% annual return and (b) redemption at
the end of each of the time periods indicated (unless otherwise noted):
<TABLE>
<CAPTION>
PERIOD CLASS A CLASS B
------------------------------------------------------- ------- ----------------
(1)
<S> <C> <C> <C>
1 year................................................ $ 53 $ 56 $ 16
3 years............................................... 66 80 50
5 years............................................... 80 107 87
10 years............................................... 120 163(2) 163(2)
<FN>
- ---------------
(1) Assumes no redemption.
(2) Class B shares convert to Class A shares approximately eight years after
purchase; therefore, years nine and ten reflect Class A expenses.
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 Fund
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.
</TABLE>
2
<PAGE> 41
2. THE FUND
The Fund is a diversified series of the Trust, an open-end management investment
company which was organized as a business trust under the laws of The
Commonwealth of Massachusetts in 1975. The Trust presently consists of four
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 uses the proceeds to buy securities (primarily municipal bonds and other
instruments the interest on which is exempt from federal income tax) for its
portfolio. Two classes of shares of the Fund currently are offered to the
general public. Class A shares are offered at net asset value plus an initial
sales charge (or a CDSC in the case of certain purchases of $1 million or more).
Class B shares are offered at net asset value without an initial sales charge
but subject to a CDSC and a Distribution Plan providing for a distribution fee
and a service fee. Class B shares will convert to Class A shares approximately
eight years after purchase.
The Trust's Board of Trustees provides broad supervision over the affairs of the
Fund. The Adviser is responsible for the management of the Fund's assets and the
officers of the Trust are responsible for the Fund's operations. The Adviser
manages the portfolio from day to day in accordance with the Fund's investment
objective and policies. The selection of investments and the way they are
managed depend on the conditions and trends in the economy and the financial
marketplaces. The Fund also offers to buy back (redeem) its shares from its
shareholders at any time at net asset value, less any applicable CDSC.
3
<PAGE> 42
3. CONDENSED FINANCIAL INFORMATION
The following information has been audited for at least the latest five fiscal
years of the Fund and should be read in conjunction with the financial
statements included in the Fund's Annual Report to shareholders which are
incorporated by reference into the SAI in reliance upon the report of the Fund's
independent auditors, as experts in accounting and auditing. The Fund's current
independent auditors are Deloitte & Touche LLP.
<TABLE>
FINANCIAL HIGHLIGHTS
CLASS A AND CLASS B SHARES
<CAPTION> TEN
YEAR MONTHS
ENDED ENDED YEAR ENDED OCTOBER 31,
AUG.31, AUG.31, -----------------------------------------------------------------------
1995 1994 1993 1992 1991 1990 1989 1988 1987 1986
-------- ------- ------ ------ ------ ------ ------ ------ ------- ------
CLASS A
--------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Per share data (for a share
outstanding throughout each
period):
Net asset value -- beginning of
period............................. $10.68 $ 11.64 $10.73 $10.80 $10.11 $10.53 $10.57 $ 9.71 $ 11.00 $10.02
------ ------- ------ ------- ------ ------ ------ ------ ------- ------
Income from investment
operations++ --
Net investment income............ $ 0.60 $ 0.51 $ 0.61 $ 0.66 $ 0.68 $ 0.68 $ 0.72 $ 0.73 $ 0.72 $ 0.78
------ ------- ------ ------ ------ ------ ------ ------ ------- ------
Net realized and unrealized gain
(loss) on investments........... 0.15 (0.77) 1.14 0.09 0.69 (0.13) 0.04 0.86 (0.90) 1.27
------ ------- ------ ------ ------ ------ ------ ------ ------- ------
Total from investment operations.... $ 0.75 $ (0.26) $ 1.75 $ 0.75 $ 1.37 $ 0.55 $ 0.76 $ 1.59 $ (0.18) $ 2.05
------ ------- ------ ------ ------ ------ ------ ------ ------- ------
Less distributions declared to
shareholders --
From net investment income......... $(0.60) $ (0.47) $(0.66) $(0.66) $(0.68) $(0.69) $(0.72) $(0.73) $ (0.72) $(0.78)
------ ------- ------ ------ ------ ------ ------ ------ ------- ------
In excess of net investment
income........................... -- (0.04) (0.03) -- -- -- -- -- -- --
From net realized gain on
investments...................... -- (0.16) (0.15) (0.16) -- (0.27) (0.08) -- (0.39) (0.29)
In excess of net realized gain on
investments...................... -- (0.03) -- -- -- -- -- -- -- --
From paid-in capital............... -- -- -- -- -- (0.01) -- -- -- --
------ ------- ------ ------ ------ ------ ------ ------ ------- ------
Total distributions declared
to shareholders.................. $(0.60) $ (0.70) $(0.84) $(0.82) $(0.68) $(0.97) $(0.80) $(0.73) $ (1.11) $(1.07)
------ ------- ------ ------ ------ ------ ------ ------ ------- ------
Net asset value -- end of period.... $10.83 $ 10.68 $11.64 $10.73 $10.80 $10.11 $10.53 $10.57 $ 9.71 $11.00
====== ======= ====== ====== ====== ====== ====== ====== ======= ======
Total return#....................... 7.31% (2.33)% 16.97% 7.35% 13.85% 5.42% 7.54% 16.95% (1.98)% 21.79%
------ ------- ------ ------ ------ ------ ------ ------ ------- ------
Ratios (to average net assets)/
Supplemental data:
Expenses......................... 0.61% 0.59%+ 0.59% 0.57% 0.59% 0.60% 0.64% 0.65% 0.61% 0.64%
------ ------- ------ ------ ------ ------ ------ ------ ------- ------
Net investment income............ 5.70% 5.49%+ 5.63% 6.12% 6.47% 6.69% 6.87% 7.16% 6.96% 7.45%
------ ------- ------ ------ ------ ------ ------ ------ ------- ------
Portfolio turnover.................. 90% 74% 56% 87% 98% 160% 199% 190% 218% 164%
------ ------- ------ ------ ------ ------ ------ ------ ------- ------
Net assets at end of period (000,000
omitted)........................... $1,949 $ 2,031 $2,195 $1,878 $1,715 $1,409 $1,259 $1,003 $ 903 $ 844
------ ------- ------ ------ ------ ------ ------ ------ ------- ------
<CAPTION>
TEN
YEAR MONTHS YEAR
ENDED ENDED ENDED
AUG.31, AUG.31, OCT.31,
1985 1995 1994 1993**
------ ------- ------- -------
CLASS B
-------
<S> <C> <C> <C> <C>
Per share data (for a share
outstanding throughout each
period):
Net asset value -- beginning of
period............................. $ 9.12 $10.67 $ 11.63 $11.68
------ ------ ------- ------
Income from investment
operations++ --
Net investment income............ $ 0.82 $ 0.49 $ 0.40 $ 0.07
------ ------ ------- ------
Net realized and unrealized gain
(loss) on investments........... 0.89 0.16 (0.77) (0.05)
------ ------ ------- ------
Total from investment operations.... $ 1.71 $ 0.65 $ (0.37) $ 0.02
------ ------ ------- ------
Less distributions declared to
shareholders --
From net investment income......... $(0.81) $(0.49) $ (0.40) $(0.07)***
------ ------ ------- ------
In excess of net investment
income........................... -- -- -- --
From net realized gain on
investments...................... -- -- (0.16) --
In excess of net realized gain on
investments...................... -- -- (0.03) --
From paid-in capital............... -- -- -- --
------ ------ ------- ------
Total distributions declared
to shareholders.................. $(0.81) $(0.49) $ (0.59) $(0.07)
------ ------ ------- ------
Net asset value -- end of period.... $10.02 $10.83 $ 10.67 $11.63
====== ====== ======= ======
Total return#....................... 19.64% 6.35% (3.25)% 1.49% +
------ ------ ------- ------
Ratios (to average net assets)/
Supplemental data:
Expenses......................... 0.69% 1.60% 1.72%+ 1.70% +
------ ------ ------- ------
Net investment income............ 8.50% 4.68% 4.41%+ 3.85% +
------ ------ ------- ------
Portfolio turnover.................. 225% 90% 74% 56%
------ ------ ------- ------
Net assets at end of period (000,000
omitted)........................... $ 469 $ 56 $ 45 $ 10
------ ------ ------- ------
<FN>
- ---------------
** For the period from the date of issue of Class B shares, September 7, 1993 to October 31, 1993.
*** Includes a per share distribution in excess of net investment income of $0.002.
+ Annualized.
++ Per share data for the periods subsequent to October 31, 1993 is based on average shares outstanding.
# Total returns for Class A shares do not include the applicable sales charge. If the charge had been included,
the results would have been lower.
</TABLE>
4
<PAGE> 43
4. INVESTMENT OBJECTIVE AND POLICIES
INVESTMENT OBJECTIVE -- The Fund's investment objective is to provide as high a
level of current income exempt from federal income taxes as is considered
consistent with prudent investing and protection of shareholders' capital. Any
investment involves risk and there can be no assurance that the Fund will
achieve its investment objective. The investment objective and policies may,
unless otherwise specifically stated, be changed without shareholder approval.
INVESTMENT POLICIES -- The Fund's policy under normal conditions is to invest
substantially all (i.e., at least 80%) of the Fund's assets in debt securities
issued by or on behalf of states, territories and possessions of the United
States and the District of Columbia and their political subdivisions, agencies
or instrumentalities, the interest on which is exempt from federal income tax
("Municipal Bonds" or "tax-exempt securities"). As a temporary defensive measure
during times of adverse market conditions, up to 50% of the Fund's assets may be
invested in short-term investments described in paragraphs 3 and 4 below.
The Fund's total assets will be invested in:
(1) Tax-exempt securities which are rated AAA, AA or A by Standard &
Poor's Ratings Group ("S&P") or by Fitch Investors Service, Inc.
("Fitch"), or are rated Aaa, Aa or A by Moody's Investors Service, Inc.
("Moody's");
(2) Notes of issuers having an issue of outstanding Municipal Bonds
rated AAA, AA or A by S&P or by Fitch or Aaa, Aa or A by Moody's or which
are guaranteed by the U.S. Government;
(3) Obligations issued or guaranteed by the U.S. Government or its
agencies or instrumentalities;
(4) Commercial paper, obligations of banks (including certificates of
deposit, bankers' acceptances and repurchase agreements) with $1 billion
of assets, and cash;
(5) Tax-exempt securities which are not rated but which, in the
opinion of the Adviser, are of at least comparable quality to the three
highest grades of S&P, Fitch or Moody's; however, not more than 10% of
the Fund's total assets will be invested in such securities;
(6) Tax-exempt securities which are rated BBB by S&P or Fitch or are
rated Baa by Moody's (and comparable unrated securities); however, not
more than 20% of the Fund's total assets will be invested in such
securities.
Interest income from the short-term investments described in paragraphs 3 and 4
above will be taxable to shareholders as ordinary income. The Fund may purchase
Municipal Bonds the interest on which may be subject to an alternative minimum
tax (see "Tax Status"), but for purposes of this Prospectus, such interest is
nonetheless considered to be tax-exempt. For a comparison of yields on Municipal
Bonds and taxable securities, see the Taxable Equivalent Yield Table in Appendix
A to this Prospectus. For a general discussion of Municipal Bonds and
descriptions of short-term investments permitted as investments and the ratings
of S&P, Fitch and Moody's for Municipal Bonds, see Appendix B to this Prospectus
and Appendix A to the Statement of Additional Information, respectively.
Although higher quality tax-exempt securities may produce lower yields, they are
generally more marketable.
As noted above, the Fund may invest in tax-exempt securities rated Baa by
Moody's or BBB by S&P or Fitch (and comparable unrated securities). These
securities, while normally exhibiting adequate protection parameters, have
speculative characteristics and changes in economic conditions or other
circumstances are more likely to lead to a weakened capacity to make principal
and interest payments than in the case of higher grade tax-exempt securities. If
a security purchased by the Fund is subsequently downgraded to below BBB by S&P
or Fitch or Baa by Moody's or comparable standards for unrated securities, the
security will be sold only if the Adviser believes it is advantageous to do so.
The net asset value of the shares of an open-end investment company such as the
Fund, which invests primarily in fixed income tax-exempt securities, changes as
the general levels of interest rates fluctuate. When interest rates decline, the
value of the Fund shares can be expected to rise. Conversely, when interest
rates rise, the value of the Fund shares can be expected to decline.
5
<PAGE> 44
From time to time, proposals have been introduced before Congress for the
purpose of restricting or eliminating the federal income tax exemption for
interest on Municipal Bonds. For the effect of current federal tax law on this
exemption, see the "Tax Status" section of this Prospectus.
ZERO COUPON BONDS: Municipal Bonds in which the Fund may invest also include
zero coupon bonds. Zero coupon bonds are debt obligations which are issued at a
significant discount from face value and do not require the periodic payment of
interest. The discount approximates the total amount of interest the bonds will
accrue and compound over the period until maturity at a rate of interest
reflecting the market rate of the security at the time of issuance. Zero coupon
bonds benefit the issuer by mitigating its need for cash to meet debt service,
but also require a higher rate of return to attract investors who are willing to
defer receipt of such cash. Such investments may experience greater volatility
in market value due to changes in interest rates than debt obligations which
make regular payments of interest. The Fund will accrue income on such
investments for tax and accounting purposes, as required, which is distributable
to shareholders and which, because no cash is received at the time of accrual,
may require the liquidation of other portfolio securities to satisfy the Fund's
distribution obligations.
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, as amended (the "1933 Act"),
("restricted securities") but can be offered and sold to "qualified
institutional buyers" under Rule 144A under the 1933 Act ("Rule 144A
Securities"). The Trust's Board of Trustees determines, based upon a continuing
review of the trading markets for the specific Rule 144A Security, whether such
a security is liquid and thus not subject to the Fund's limitation on investing
not more than 15% of its net assets in illiquid investments. The Board of
Trustees has adopted guidelines and delegated to the Adviser the daily function
of determining and monitoring liquidity of Rule 144A Securities. The Board,
however, retains oversight and is ultimately responsible for the determinations.
The Board will carefully monitor the Fund's investments in Rule 144A Securities,
focusing on such important factors, among others, as valuation, liquidity and
availability of information. This investment practice could have the effect of
decreasing the level of liquidity in the Fund to the extent that qualified
institutional buyers become for a time uninterested in purchasing Rule 144A
Securities held in the Fund's portfolio. Subject to the Fund's 15% limitation on
investments in illiquid investments, the Fund may also invest in restricted
securities that may not be sold under Rule 144A, which presents certain risks.
As a result, the Fund might not be able to sell these securities when the
Adviser wishes to do so, or might have to sell them at less than fair value. In
addition, market quotations are less readily available. Therefore, the judgment
of the Adviser may at times play a greater role in valuing these securities than
in the case of unrestricted securities.
"WHEN-ISSUED" SECURITIES: Some tax-exempt securities may be purchased 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 them
until the contractual settlement date. In order to invest its assets
immediately, while awaiting delivery of securities purchased on such bases, the
Fund will normally invest in cash, short-term money market instruments or high
quality debt securities. For additional information concerning the use, risks
and costs of "when-issued" and "forward delivery" securities, see the Fund's
Statement of Additional Information.
INVERSE FLOATING RATE OBLIGATIONS: The Fund may invest in so-called "inverse
floating rate obligations" or "residual interest" bonds, or other obligations or
certificates structured to have similar features. Such obligations generally
have floating or variable interest rates that move in the opposite direction of
short-term interest rates and generally increase or decrease in value in
response to changes in short-term interest rates at a rate which is a multiple
(typically two) of the rate at which fixed-rate long-
6
<PAGE> 45
term tax-exempt securities increase or decrease in response to such changes. As
a result, such obligations have the effect of providing investment leverage and
may be more volatile than fixed-rate long-term tax-exempt obligations.
OPTIONS: The Fund may write (sell) "covered" put and call options on fixed
income securities. Call options written by the Fund give the holder the right to
buy the underlying securities from the Fund at a fixed exercise price up to a
stated expiration date or, in the case of certain options, on such date. Put
options written by the Fund give the holder the right to sell the underlying
securities to the Fund during the term of the option at a fixed exercise price
up to a stated expiration date or, in the case of certain options, on such date.
Call options are "covered" by the Fund, for example, when it owns the underlying
securities, and put options are "covered" by the Fund, for example, when it has
established a segregated account of cash, short-term money market instruments or
high quality debt securities which can be liquidated promptly to satisfy any
obligation of the Fund to purchase the underlying securities. The Fund may also
write straddles (combinations of puts and calls on the same underlying
security). The writing of straddles generates additional premium income but may
present greater risk.
The Fund will receive a premium from writing a put or call option, which
increases the Fund's gross income in the event the option expires unexercised or
is closed out at a profit. The amount of the premium will reflect, among other
things, the relationship of the exercise price to the market price and
volatility of the underlying security, the remaining term of the option, supply
and demand and interest rates. By writing a call option, the Fund limits its
opportunity to profit from any increase in the market value of the underlying
security above the exercise price of the option. By writing a put option, the
Fund assumes the risk that it may be required to purchase the underlying
security for an exercise price higher than its then-current market value,
resulting in a potential capital loss unless the security subsequently
appreciates in value.
The Fund may terminate an option that it has written prior to its expiration by
entering into a closing purchase transaction in which it purchases an option
having the same terms as the option written. It is possible, however, that
illiquidity in the options markets may make it difficult from time to time for
the Fund to close out its written option positions.
The Fund may also purchase put or call options in anticipation of changes in
interest rates which may adversely affect the value of its portfolio or the
prices of securities that the Fund wants to purchase at a later date. The
premium paid for a put or call option plus any transaction costs will reduce the
benefit, if any, realized by the Fund upon exercise of the option, and, unless
the price of the underlying security changes sufficiently, the option may expire
without value to the Fund.
In addition, the Fund may purchase warrants on fixed income securities. A
warrant on a fixed income security is a long-dated call option conveying to the
holder of the warrant the right, but not the obligation, to purchase a fixed
income security of a specific description from the issuer on a certain date or
dates (the exercise date) at a fixed exercise price.
The Fund intends to write and purchase options on securities primarily for
hedging purposes and also in an effort to increase current income. Options on
securities, including warrants, that are written or purchased by the Fund will
be traded on U.S. securities exchanges and over-the-counter.
FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS: The Fund may purchase and
sell futures contracts on fixed income securities or indices of such securities,
including Municipal Bond indices and any other indices of fixed income
securities which may become available for trading ("Futures Contracts"). The
Fund may also purchase and write options on such Futures Contracts ("Options on
Futures Contracts"). These instruments will be used to hedge against anticipated
future changes in interest rates which otherwise might either adversely affect
the value of the Fund's portfolio securities or adversely affect the price of
securities which the Fund intends to purchase at a later date. These instruments
may also be used for non-hedging, subject to applicable law. For example, the
Fund may sell Futures Contracts on an index of securities in order to profit
from any anticipated decline in the value of the securities comprising the
underlying index. Should interest rates move in an unexpected manner, however,
the Fund may not achieve the anticipated benefits of the hedging transactions
and may realize a loss.
In order to assure that the Fund will not be deemed to be a "commodity pool" for
purposes of the Commodity Exchange Act, regulations of the Commodity Futures
Trading Commission (the "CFTC") require that the Fund enter into transactions in
Futures Contracts and Options on Futures Contracts only (i) for bona fide
hedging purposes (as defined in CFTC regulations), or (ii) for
7
<PAGE> 46
non-hedging purposes, provided that the aggregate initial margin and premiums on
such non-hedging positions does not exceed 5% of the liquidation value of the
Fund's assets. In addition, the Fund must comply with the requirements of
various state securities laws in connection with such transactions.
The Fund has adopted the additional restriction that it will not enter into a
Futures Contract if, immediately thereafter, the value of securities and other
obligations underlying all such Futures Contracts would exceed 50% of the value
of the Fund's total assets. Moreover, the Fund will not purchase put and call
options on securities or on Futures Contracts, if, as a result, more than 5% of
its total assets would be invested in such options.
Futures Contracts and Options on Futures Contracts that are entered into by the
Fund will be traded on U.S. commodities exchanges.
RISK FACTORS: Although the Fund will enter into transactions in Futures
Contracts and Options on Futures Contracts for hedging purposes, and will enter
into certain option transactions for hedging purposes, such transactions
nevertheless involve risks. For example, a lack of correlation between the
instrument underlying an option or Futures Contract and the assets being hedged,
or unexpected adverse price movements, could render the Fund's hedging strategy
unsuccessful and could result in losses. The Fund also may enter into
transactions in options for non-hedging purposes, 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.
Also, 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 a loss. The markets
for such instruments may be extremely volatile from time to time, as discussed
in the SAI, which could increase the risks incurred by the Fund in making such
transactions. The SAI contains a further description of options, Futures
Contracts and Options on Futures Contracts, and a discussion of the risks
related to transactions therein.
Transactions in options may be entered into on U.S. exchanges regulated by the
SEC and in the over-the-counter market, while Futures Contracts and Options on
Futures Contracts may be entered into on U.S. commodities exchanges regulated by
the CFTC. Over-the-counter transactions involve certain risks which may not be
present in exchange-traded transactions.
Gains recognized from options and futures transactions engaged in by the Fund
are taxable income to shareholders upon distribution.
PORTFOLIO TRADING: The Fund intends to engage in buying and selling securities,
as well as holding securities to maturity. In buying and selling portfolio
securities, the Fund seeks to take advantage of market developments, yield
disparities and variations in the creditworthiness of issuers. For a description
of the strategies which may be used by the Fund in buying and selling portfolio
securities, see the SAI.
The primary consideration in placing portfolio security transactions is
execution at the most favorable price. Consistent with the foregoing primary
consideration, the Rules of Fair Practice of the National Association of
Securities Dealers, Inc. (the "NASD") and such other policies as the Trustees
may determine, the Adviser may consider sales of shares of the Fund and of the
other investment company clients of MFD, the Fund's distributor, as a factor in
the selection of broker-dealers to execute the portfolio transactions of the
Fund. From time to time, the Adviser may direct certain portfolio transactions
to broker dealer firms which, in turn, have agreed to pay a portion of the
Fund's operating expenses (e.g., fees charged by the custodian of the Fund's
assets). For a further discussion of portfolio transactions and brokerage
commissions, see the SAI.
----------------------------------
The SAI includes a discussion of other investment policies and a listing of
specific investment restrictions which govern the Fund's investment policies.
The specific investment restrictions listed in the SAI may be changed without
shareholder approval unless indicated otherwise (see "Investment Restrictions"
in the SAI). The Fund's investment limitations, policies and rating standards
are adhered to at the time of purchase or utilization of assets; a subsequent
change in circumstances will not be considered to result in a violation of
policy.
8
<PAGE> 47
5. MANAGEMENT OF THE FUND
<TABLE>
INVESTMENT ADVISER -- The Adviser manages the Fund pursuant to an Investment
Advisory Agreement dated September 1, 1993 (the "Advisory Agreement"). The
Adviser provides the Fund with overall investment advisory and administrative
services, as well as general office facilities. Robert A. Dennis, a Senior Vice
President of the Adviser, has been the Fund's portfolio manager since 1984 and
has been employed by the Adviser since 1980. Subject to such policies as the
Trustees may determine, the Adviser makes investment decisions for the Fund. For
these services and facilities, the Adviser receives a management fee computed
and paid monthly on the basis of a formula based upon a percentage of the Fund's
average daily net assets plus a percentage of its gross income (i.e., income
other than gains from the sale of securities) in each case on an annualized
basis for the Fund's then-current fiscal year. The applicable percentages are
reduced as assets and income reach the following levels:
<CAPTION>
ANNUAL RATE OF MANAGEMENT FEE ANNUAL RATE OF MANAGEMENT FEE
BASED ON AVERAGE DAILY NET ASSETS BASED ON GROSS INCOME
-------------------------------------------------------- --------------------------------------------------------
<S> <C>
.220% of the first $200 million 4.12% of the first $16 million
.187% of average daily net assets in excess of $200
million 3.51% of gross income in excess of $16 million
.168% of average daily net assets in excess of $2
billion 3.16% of gross income in excess of $160 million
</TABLE>
For the Fund's fiscal year ended August 31, 1995, MFS received management fees
under the Fund's investment advisory agreement of $8,210,290 equivalent on an
annualized basis to 0.42% of the Fund's average daily net assets.
MFS also serves as investment adviser to each of the other funds in the MFS
Family of Funds (the "MFS Funds"), to MFS Municipal Income Trust, MFS Government
Markets Income Trust, MFS Multimarket Income Trust, MFS Intermediate Income
Trust, MFS Charter Income Trust, MFS Special Value Trust, MFS Institutional
Trust, MFS Union Standard Trust, MFS Variable Insurance Trust, Sun Growth
Variable Annuity Fund, Inc., 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.) ("Sun Life of Canada (U.S.)") in
connection with the sale of various fixed/variable annuity contracts. MFS and
its wholly owned subsidiary, MFS Asset Management, Inc., provide investment
advice to substantial private clients.
MFS is America's oldest mutual fund organization. MFS and its predecessor
organizations have a history of money management dating from 1924 and the
founding of the first mutual fund in the United States, Massachusetts Investors
Trust. Net assets under the management of the MFS organization were
approximately $41.5 billion on behalf of approximately 1.8 million accounts as
of November 30, 1995. As of such date, the MFS organization managed
approximately $6.7 billion of assets in municipal obligations and approximately
$20.4 billion of assets in fixed income funds and fixed income portfolios. MFS
is a wholly owned subsidiary of Sun Life of Canada (U.S.) which in turn is a
wholly owned subsidiary of Sun Life Assurance Company of Canada ("Sun Life").
The Directors of MFS are A. Keith Brodkin, Jeffrey L. Shames, Arnold D. Scott,
John D. McNeil and John R. Gardner. Mr. Brodkin is the Chairman, Mr. Shames is
the President and Mr. Scott is the Secretary and a Senior Executive Vice
President of MFS. Messrs. McNeil and Gardner are the Chairman and the President,
respectively, of Sun Life. Sun Life, a mutual life insurance company, is one of
the largest international life insurance companies and has been operating in the
United States since 1895, establishing a headquarters office here in 1973. The
executive officers of MFS report to the Chairman of Sun Life.
A. Keith Brodkin, the Chairman and a Director of MFS, is the Chairman, President
and a Trustee of the Trust. James R. Bordewick, Jr., Stephen E. Cavan, Robert A.
Dennis, Geoffrey L. Kurinsky, W. Thomas London, and James O. Yost, all of whom
are officers of MFS, are officers of the Trust.
MFS has established a strategic alliance with Foreign & Colonial Management Ltd.
("Foreign & Colonial"). Foreign & Colonial is a subsidiary of two of the world's
oldest financial services institutions, the London-based Foreign Colonial
Investment Trust PLC, which pioneered the idea of investment management in 1868,
and HYPO-BANK (Bayerische Hypotheken-und Weschsel-Bank AG), the oldest publicly
listed bank in Germany, founded in 1835. As part of this alliance, the portfolio
managers and investment analysts of MFS and Foreign & Colonial will share their
views on a variety of investment related issues, such as the economy, securities
markets, portfolio securities and their issuers, investment recommendations,
strategies and techniques, risk analysis, trading strategies and other portfolio
management matters. MFS will have access to the extensive international equity
investment
9
<PAGE> 48
expertise of Foreign & Colonial, and Foreign & Colonial will have access to the
extensive U.S. equity investment expertise of MFS. One or more MFS investment
analysts are expected to work for an extended period with Foreign & Colonial's
portfolio managers and investment analysts at their offices in London. In
return, one or more Foreign & Colonial employees are expected to work in a
similar manner at MFS' Boston offices.
In certain instances there may be securities which are suitable for the Fund's
portfolios as well as for portfolios of other clients of MFS or clients of
Foreign & Colonial. Some simultaneous transactions are inevitable when several
clients receive investment advice from MFS and Foreign & Colonial, particularly
when the same security is suitable for more then 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.
DISTRIBUTOR -- MFD, a wholly owned subsidiary of the Adviser, is the distributor
of shares of the Fund and also serves as distributor for each of the other MFS
Funds.
SHAREHOLDER SERVICING AGENT -- MFS Service Center, Inc. ("Shareholder Servicing
Agent"), a wholly owned subsidiary of MFS, performs transfer agency, certain
dividend disbursing agency and certain other services for the Fund.
6. INFORMATION CONCERNING SHARES OF THE FUND
PURCHASES
Shares of the Fund may be purchased at the public offering price through any
dealer and other financial institutions ("dealers") having a selling agreement
with MFD. Dealers may also charge their customers fees relating to investment in
the Fund.
The Fund offers two classes of shares (Class A and Class B shares) which bear
sales charges 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.
<TABLE>
PURCHASES SUBJECT TO INITIAL SALES CHARGE. Class A shares are offered at net
asset value plus an initial sales charge as follows:
- -----------------------------------------------------------------------------------------------------------------
<CAPTION>
DEALER
SALES CHARGE* AS PERCENTAGE OF: 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**
- -----------------------------------------------------------------------------------------------------------------
<FN>
*Because of rounding in the calculation of offering price, actual sales charges
may be more or less than those calculated using the percentages above.
**A CDSC will apply to such purchases, as discussed below.
</TABLE>
MFD allows discounts to dealers (which are alike for all dealers) from the
applicable public offering price as shown in the above table. In the case of the
maximum sales charge, the dealer retains 4% and MFD retains approximately 3/4 of
1% of the public offering price. The sales charge may vary depending on the
number of shares of the Fund as well as certain other MFS Funds owned or being
purchased, the existence of an agreement to purchase additional shares during a
13-month period (or 36-month period for purchases of $1 million or more) or
other special purchase programs. A description of the Right of Accumulation,
Letter of Intent and Group Purchase privileges by which the sales charge may be
reduced is set forth in the SAI.
PURCHASES SUBJECT TO A CDSC (but not subject to an initial sales charge). In the
following two circumstances, Class A shares are also 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
10
<PAGE> 49
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; and
(ii) on investments in Class A shares by certain retirement plans subject to the
Employee Retirement Income Security Act of 1974, as amended, if the
sponsoring organization demonstrates to the satisfaction of MFD that either
(a) the employer has at least 25 employees or (b) the aggregate purchases
by the retirement plan of Class A shares of the MFS Funds will be in an
amount of at least $250,000 within a reasonable period of time, as
determined by MFD in its sole discretion.
In the case of such purchases, MFD will pay a commission to dealers as follows:
1% on sales up to $5 million, plus 0.25% on the amount in excess of $5 million.
Purchases of $1 million or more for each shareholder account will be aggregated
over a 12-month period (commencing from the date of the first such purchase) for
purposes of determining the level of commissions to be paid during the period
with respect to such account. In addition, with respect to sales to retirement
plans under the second circumstance described above, MFD may pay a commission,
on sales in excess of $5 million to certain retirement plans, of 1% to certain
dealers which, at MFD's invitation, enter into an agreement with MFD in which
the dealer agrees to return any commission paid to it on the sale (or on a pro
rata portion thereof) if the shareholder redeems his or her shares within a
period of time after purchase as specified by MFD.
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.
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.
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 Class B Distribution Plan (see "Class
B 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).
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.
11
<PAGE> 50
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 Distribution Plan applicable to
Class B shares. See "Distribution Plans" below. However, for purposes of
conversion to Class A shares, all shares in a shareholder's account that were
purchased through the reinvestment of dividends and distributions paid in
respect of Class B shares (and which have not converted to Class A shares as
provided in the following sentence) will be held in a separate sub-account. Each
time any Class B shares in the shareholder's account (other than those in the
sub-account) convert to Class A shares, a portion of the Class B shares then in
the sub-account will also convert to Class A shares. The portion will be
determined by the ratio that the shareholder's Class B shares not acquired
through reinvestment of dividends and distributions that are converting to Class
A shares bear to the shareholder's total Class B shares not acquired through
reinvestment. The conversion of Class B shares to Class A shares is subject to
the continuing availability of a ruling from the Internal Revenue Service or an
opinion of counsel that such conversion will not constitute a taxable event for
federal tax purposes. There can be no assurance that such ruling or opinion will
be available, and the conversion of Class B shares to Class A shares will not
occur if such ruling or opinion is not available. In such event, Class B shares
would continue to be subject to higher expenses than Class A shares for an
indefinite period.
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.
RIGHT TO REJECT PURCHASE ORDERS/MARKET TIMING. Purchases and exchanges should be
made for investment purposes only. The Fund and MFD each reserve the right to
reject any specific purchase order or to restrict purchases by a particular
purchaser (or group of related purchasers). The Fund or MFD may reject or
restrict any purchases by a particular purchaser or group, for example, when
such purchase is contrary to the best interests of the Fund's other shareholders
or otherwise would disrupt the management of the Fund.
MFD may enter into an agreement with shareholders who intend to make exchanges
among certain classes of shares of certain MFS Funds (as determined by MFD)
which follow a timing pattern, and with individuals or entities acting on such
shareholders' behalf (collectively, "market timers"), setting forth the terms,
procedures and restrictions with respect to such exchanges. In the absence of
such an agreement, it is the policy of the Fund and MFD to reject or restrict
purchases by market timers if (i) more than two exchange purchases are effected
in a timed account in the same calendar quarter or (ii) a purchase would result
in shares being held in timed accounts by market timers representing more than
(x) one percent of the Fund's net assets or (y) specified dollar amounts in the
case of certain MFS Funds which may include the Fund and which may change from
time to time. The Fund and MFD each reserve the right to request market timers
to redeem their shares at net asset value, less any applicable CDSC, if either
of these restrictions is violated.
DEALER CONCESSIONS. Dealers may receive different compensation with respect to
sales of Class A and Class B shares. In addition, from time to time, MFD may pay
dealers 100% of the applicable sales charge on sales of Class A shares of
certain specified MFS Funds sold by such dealer during a specified sales period.
In addition, MFD or its affiliates may, from time to time, pay dealers an
additional commission equal to 0.50% of the net asset value of all of the Class
B shares of certain specified MFS Funds sold by such dealer during a specified
sales period. In addition, from time to time, MFD, at its expense, may provide
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<PAGE> 51
additional commissions, compensation or promotional incentives ("concessions")
to dealers which sell shares of the Fund. Such concessions provided by MFD may
include financial assistance to dealers in connection with preapproved
conferences or seminars, sales or training programs for invited registered
representatives, payment for travel expenses, including lodging, incurred by
registered representatives for such seminars or training programs, seminars for
the public, advertising and sales campaigns regarding one or more MFS Funds,
and/or other dealer-sponsored events. From time to time, MFD may make expense
reimbursements for special training of a dealer's registered representatives in
group meetings or to help pay the expenses of sales contests. Other concessions
may be offered to the extent not prohibited by state laws or any self-regulatory
agency, such as the NASD.
SPECIAL INVESTMENT PROGRAMS. For shareholders who elect to participate in
certain investment programs (e.g., the Automatic Investment Plan) or other
shareholder services, MFD or its affiliates may either (i) give a gift of
nominal value, such as a hand-held calculator or (ii) make a nominal charitable
contribution on their behalf.
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).
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
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<PAGE> 52
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: 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 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. A
shareholder should read the prospectus of the other MFS Fund and consider the
differences in objectives, policies and restrictions before making any exchange.
For federal and (generally) state income tax purposes, and exchange is treated
as a sale of the shares exchanged and, therefore, an exchange could result in a
gain or loss to the shareholder making the exchange. Exchanges by telephone are
automatically available to most non-retirement plan accounts and certain
retirement plan accounts. For further information regarding exchanges by
telephone, see "Redemptions by Telephone." The exchange privilege (or any aspect
of it) may be changed or discontinued and is subject to certain limitations,
including certain restrictions on purchases by market timers. Special
procedures, privileges and restrictions with respect to exchanges may apply to
market timers who enter into an agreement with MFD, as set forth in such
agreement. See "Purchases -- General -- Right to Reject Purchase Orders/Market
Timing."
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.
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
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<PAGE> 53
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. See "Tax Status" below.
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.
REDEMPTION BY CHECK: Only Class A shares may be redeemed by check. A
shareholder owning Class A shares of the Fund may elect to have a special
account with State Street Bank and Trust Company (the "Bank") for the purpose of
redeeming Class A shares from his or her account by check. The Bank will provide
each Class A shareholder, upon request, with forms of checks drawn on the Bank.
Only shareholders having accounts in which no share certificates have been
issued will be permitted to redeem shares by check. Checks may be made payable
in any amount not less than $500. Shareholders wishing to avail themselves of
this redemption by check privilege should so request on their Account
Application, must execute signature cards (for additional information, see the
Account Application) with signature guaranteed in the manner set forth under the
caption "Signature Guarantee" below, and must return any Class A share
certificates issued to them. Additional documentation will be required from
corporations, partnerships, fiduciaries or other such institutional investors.
All checks must be signed by the shareholder(s) of record exactly as the account
is registered before the Bank will honor them. The shareholders of joint
accounts may authorize each shareholder to redeem by check. The check may not
draw on monthly dividends which have been declared but not distributed.
SHAREHOLDERS WHO PURCHASE CLASS A SHARES BY CHECK (INCLUDING CERTIFIED CHECKS OR
CASHIERS' CHECKS) MAY WRITE CHECKS AGAINST THOSE SHARES ONLY AFTER THEY HAVE
BEEN ON THE FUND'S BOOKS FOR 15 DAYS. WHEN SUCH A CHECK IS PRESENTED TO THE BANK
FOR PAYMENT, A SUFFICIENT NUMBER OF FULL AND FRACTIONAL SHARES WILL BE REDEEMED
TO COVER THE AMOUNT OF THE CHECK, ANY APPLICABLE CDSC AND THE AMOUNT OF ANY
INCOME TAX REQUIRED TO BE WITHHELD. IF THE AMOUNT OF THE CHECK, PLUS ANY
APPLICABLE CDSC AND THE AMOUNT OF ANY INCOME TAX REQUIRED TO BE WITHHELD IS
GREATER THAN THE VALUE OF CLASS A SHARES HELD IN THE SHAREHOLDERS' ACCOUNT, THE
CHECK WILL BE RETURNED UNPAID, AND THE SHAREHOLDER MAY BE SUBJECT TO EXTRA
CHARGES. TO AVOID DISHONOR OF CHECKS DUE TO FLUCTUATIONS IN ACCOUNT VALUE,
SHAREHOLDERS ARE ADVISED AGAINST REDEEMING ALL OR MOST OF THEIR ACCOUNT BY
CHECK. CHECKS SHOULD NOT BE USED TO CLOSE A FUND ACCOUNT BECAUSE WHEN THE CHECK
IS WRITTEN, THE SHAREHOLDER WILL NOT KNOW THE EXACT TOTAL VALUE OF THE ACCOUNT
ON THE DAY THE CHECK CLEARS. There is presently no charge to the shareholder for
the maintenance of this special account or for the clearance of any checks, but
the Fund and the Bank reserve the right to impose such charges or to modify or
terminate the redemption by check privilege at any time.
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<PAGE> 54
CONTINGENT DEFERRED SALES CHARGE: Investments in Class A or Class B shares
("Direct Purchases") will be subject to a CDSC for a period of 12 months (in the
case of purchases of $1 million or more of Class A shares or purchases by
certain retirement plans of Class A shares) or six years (in the case of
purchases of Class B shares). Purchases of Class A shares made during a calendar
month, regardless of when during the month the investment occurred, will age one
month on the last day of the month and each subsequent month. Class B shares
purchased on or after January 1, 1993 will be aggregated on a calendar month
basis -- all transactions made during a calendar month, regardless of when
during the month they have occurred, will age one year at the close of business
on the last day of such month in the following calendar year and each subsequent
year. For Class B shares of the Fund purchased prior to January 1, 1993,
transactions will be aggregated on a calendar year basis -- all transactions
made during a calendar year, regardless of when during the year they have
occurred, will age one year at the close of business on December 31 of that year
and each subsequent year.
At the time of a redemption, the amount by which the value of a shareholder's
account for a particular class of shares represented by Direct Purchases exceeds
the sum of the six calendar year aggregations (12 months in the case of
purchases of $1 million or more of Class A shares or purchases by certain
retirement plans of Class A shares) of Direct Purchases may be redeemed without
charge ("Free Amount"). Moreover, no CDSC is ever assessed on additional shares
acquired through the automatic reinvestment of dividends or capital gain
distributions ("Reinvested Shares"). Therefore, at the time of redemption of a
particular class, (i) any Free Amount is not subject to the CDSC, and (ii) the
amount of 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 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. Subject to compliance with applicable regulations, the
Fund has reserved the right to pay the redemption or repurchase price of shares
of the Fund, either totally or partially, by a distribution in-kind of
securities (instead of cash) from the Fund's portfolio. The securities
distributed in such a distribution would be valued at the same amount as that
assigned to them in calculating the net asset value for the shares being sold.
If a shareholder received a distribution in-kind, the 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." Shareholders will be notified that the
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<PAGE> 55
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.
CLASS B DISTRIBUTION PLAN
The Trustees have adopted a Distribution Plan for Class B shares pursuant to
Section 12(b) of the 1940 Act and Rule 12b-1 thereunder (the "Distribution
Plan"), after having concluded that there is a reasonable likelihood that the
Distribution Plan would benefit the Fund and its Class B shareholders.
In certain circumstances, the fees described below may not yet been imposed or
are being waived. These circumstances are described below under the heading
"Current Level of Distribution and Service Fees."
SERVICE FEE. 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 Class B
shares annually in order that MFD may pay expenses on behalf of the Fund
relating to the servicing of Class B shares. The service fee is used by MFD to
compensate dealers which enter into a sales agreement with MFD in consideration
for all personal services and/or account maintenance services rendered by the
dealer with respect to Class B shares owned by investors for whom such dealer is
the dealer or holder of record. MFD may from time to time reduce the amount of
the service fees paid for shares sold prior to a certain date. Service fees may
be reduced for a dealer that is the holder or dealer of record for an investor
who owns shares of the Fund having an aggregate net asset value at or above a
certain dollar level. Dealers may from time to time be required to meet certain
criteria in order to receive service fees. MFD or its affiliates are entitled to
retain all service fees payable under the Distribution Plan for which there is
no dealer of record or for which qualification standards have not been met as
partial consideration for personal services and/or account maintenance services
performed by MFD or its affiliates to shareholder accounts.
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.
DISTRIBUTION FEE. The Distribution Plan provides that the Fund may pay MFD a
distribution fee equal, on an annual basis, to 0.75% of the Fund's average daily
net assets attributable to the Class B shares as partial consideration for
distribution services performed and expenses incurred in the performance of
MFD's obligations under its distribution agreement with the Fund (including the
3.75% commission it pays to dealers upon purchase of Class B shares, as
described under "Purchases -- Class B Shares" above). See "Management of the
Fund -- Distributor" in the SAI. While the amount of compensation received by
MFD in the form of distribution fees during any year may be more or less than
the expense incurred by MFD under its distribution agreement with the Fund, the
Fund is not liable to MFD for any losses MFD may incur in performing services
under its distribution agreement with the Fund.
OTHER FEATURES. Fees payable under the Distribution Plan are charged to, and
therefore reduce, income allocated to the Class B shares.
CURRENT LEVEL OF DISTRIBUTION AND SERVICE FEES. The Fund's Class B distribution
and service fees for its current fiscal year are 0.88% per annum of the average
net assets. Except in the case of the 0.25% per annum Class B service fee paid
by the Fund in connection with the sale of Class B shares, payment of the Class
B service fee is not being imposed. Payment of the service fee will commence on
such date as the Trustees of the Trust may determine.
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<PAGE> 56
DISTRIBUTIONS
The Fund intends to declare daily and pay to its shareholders substantially all
of its net investment income as dividends on a monthly basis. Dividends are
generally distributed on the first business day of the following month. In
addition, 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
shares because expenses attributable to Class B shares will generally be higher.
TAX STATUS
The Fund is treated as an entity separate from the other series of the Trust for
federal income tax purposes. In order to minimize the taxes the Fund would
otherwise be required to pay, the Fund intends to qualify each year as a
"regulated investment company" under Subchapter M of the Internal Revenue Code
of 1986 as amended, (the "Code"), and to make distributions to its shareholders
in accordance with the timing requirements imposed by the Code. It is not
expected that the Fund will be required to pay any federal income or excise
taxes.
The Fund expects that the dividends paid to shareholders from interest on
Municipal Obligations will be exempt from federal income tax because it intends
to satisfy certain requirements of the Code. One such requirement is that at the
close of each quarter of its taxable year, at least 50% of the value of the
Fund's total assets consists of obligations whose interest is exempt from
federal income tax. Certain distributions of exempt-interest dividends may be a
tax preference item for purposes of the federal alternative minimum tax.
Distributions of income from capital gains, from investments in taxable
securities, and from certain other transactions (including options and futures
transactions) will be taxable to shareholders, whether paid in cash or
additional shares. Also, Fund distributions may be subject to state and local
income taxes, depending on the nature of the distribution and the residence of
the shareholder. Residents of certain states may be subject to an intangibles
tax or a personal property tax on all or a portion of the value of their shares.
Investors should consult their tax advisers in this regard.
Interest on indebtedness incurred by shareholders to purchase or carry shares of
the Fund will not be deductible for federal income tax purposes. Exempt interest
dividends are taken into account in calculating the amount of social security
and railroad retirement benefits that may be subject to federal income tax. All
exempt interest dividends may increase a corporate shareholder's alternative
minimum tax liability. Entities or persons who are "substantial users" (or
persons related to "substantial users") of facilities financed by certain
private activity bonds should consult their tax advisers before purchasing
shares of the Fund.
Shortly after the end of each calendar year, each shareholder will be sent a
statement setting forth the federal income tax status of all of the Fund's
dividends and distributions for that year, including the portion, if any,
taxable as ordinary income, the portion, if any, taxable as long-term capital
gain, the portion, if any, representing a return of capital (which is free of
current taxes but results in a basis reduction), the portion exempt from federal
income taxes as "exempt-interest dividends", the portion, if any, that is a tax
preference item under the federal alternative minimum tax, 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 of net
capital gains or net short-term capital gains may thus pay the full price for
the shares and then effectively receive a portion of the purchase price back as
a taxable distribution.
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<PAGE> 57
The Fund intends to withhold U.S. federal income tax at a rate of 30% on taxable
dividends and certain other payments that are subject to such withholding and
that are made to persons who are neither citizens nor residents of the U.S.,
regardless of whether a lower rate may be permitted under an applicable treaty.
The Fund is also required in certain circumstances to apply backup withholding
at a rate of 31% on taxable dividends and redemption proceeds paid to any
shareholder (including a shareholder who is neither a citizen nor a resident of
the U.S.) who does not furnish to the Fund certain information and
certifications or who is otherwise subject to backup withholding. However,
backup withholding will not be applied to payments which have been subject to
30% withholding. Prospective shareholders should read the Account Application
for information regarding backup withholding of federal income tax and should
consult their own tax advisers as to the tax consequences of an investment in
the Fund.
NET ASSET VALUE
The net asset value per share of each class of the Fund is determined each day
during which the Exchange is open for trading. This determination is made once
during each such day as of the close of regular trading on the Exchange by
deducting the amount of the liabilities attributable to the class from the value
of the Fund's assets attributable to the class and dividing the difference by
the number of shares of the class outstanding. Assets in the Fund's portfolio
are valued on the basis of valuations furnished by a pricing service or at their
fair value as determined by the Board of Trustees, as described in the SAI. The
net asset value of each class of shares is effective for orders received in
"good order" by the dealer prior to its calculation and received by MFD prior to
the close of that business day.
DESCRIPTION OF SHARES, VOTING RIGHTS AND LIABILITIES
The Fund, one of four series of the Trust, has two classes of shares, entitled
Class A and Class B Shares of Beneficial Interest (without par value). The Trust
has reserved the right to create and issue additional classes and series of
shares, in which case each class of shares of a series would participate equally
in the earnings, dividends and assets of the particular class of shares of that
particular series. Shareholders are entitled to one vote for each share held and
shares of each series would be entitled to vote separately to approve investment
advisory agreements or changes in investment restrictions, but shares of all
series would be entitled to vote together in the election of Trustees and
selection of accountants. Additionally, each class of shares of a series will
vote separately on any material increases in the fees under its Distribution
Plan or on any other matter that affects solely that class of shares, but will
otherwise vote together with all other classes of shares of the series on all
other matters. The Trust does not intend to hold annual shareholders 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
particular class. Shares have no pre-emptive or conversion rights (except as set
forth above in "Purchases -- Conversions 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 assignments and in certain other limited
circumstances.
The Trust is an entity of the type commonly known as a "Massachusetts business
trust." Under Massachusetts law, shareholders of such a trust may, under certain
circumstances, be held personally liable as partners for its obligations.
However, the risk of a shareholder incurring financial loss on account of
shareholder liability is limited to circumstances in which both inadequate
insurance (e.g., fidelity bonding and errors and omissions insurance) existed
and the Trust itself was unable to meet its obligations.
PERFORMANCE INFORMATION
From time to time, the Fund will provide yield, current distribution rate,
tax-equivalent yield and total rate of return quotations for each class of
shares and may also quote fund rankings in the relevant fund category from
various sources, such as the Lipper Analytical Services, Inc. and Wiesenberger
Investment Companies Service. Yield and tax-equivalent yield quotations are
based on
19
<PAGE> 58
the annualized net investment income per share of a class of the Fund over a
30-day period stated as a percent of the maximum public offering price on the
last day of that period. Yield calculations for Class B shares assume no CDSC is
paid. The current distribution rate for each class is generally based upon the
total amount of dividends per share paid by the Fund to shareholders of that
class during the past twelve months and is computed by dividing the amount of
such dividends by the maximum public offering price of that class at the end of
such period. Current distribution rate calculations for Class B shares assume no
CDSC is paid. The current distribution rate differs from the yield calculation
because it may include distributions to shareholders from sources other than
dividends and interest, such as premium income from option writing, short-term
capital gains, and return of invested capital, and is calculated over a
different period of time. Total rate of return quotations reflect the average
annual percentage change over stated periods in the value of an investment in a
class of shares of the Fund made at the maximum public offering price of the
shares of that class with all distributions reinvested and which, if quoted for
periods of six years or less, will give effect to the imposition of the CDSC
assessed upon redemptions of the Fund's Class B shares. Such total rate of
return quotations may be accompanied by quotations which do not reflect the
reduction in value of the initial investment due to the sales charge or the
deduction of a CDSC, and which will thus be higher. All performance quotations
are based on historical performance and are not intended to indicate future
performance. Yield and tax-equivalent yield reflect only net portfolio income as
of a stated time and current distribution rate reflects only the rate of
distributions paid by the Fund over a stated period of time, while total rate of
return reflects all components of investment return over a stated period of
time. The Fund's quotations may from time to time be used in advertisements,
shareholder reports or other communications to shareholders. For a discussion of
the manner in which the Fund will calculate its yield, current distribution
rate, tax-equivalent yield and total rate of return, see the SAI. For further
information about the Fund's performance for the fiscal year ended August 31,
1995, please see the Fund's Annual Report. A copy of the annual report may be
obtained without charge by contacting the Shareholder Servicing Agent (see back
cover for address and phone number). In addition to information provided in
shareholder reports, the Fund may, in its discretion, from time to time, make a
list of all or a portion of its holdings available to investors upon request.
7. SHAREHOLDER SERVICES
Shareholders with questions concerning the shareholder services described below
or concerning other aspects of the Fund should contact the Shareholder Servicing
Agent (see back cover for address and phone number).
ACCOUNT AND CONFIRMATION STATEMENTS -- Each shareholder will receive
confirmation statements showing the transaction activity in his account.
Cancelled checks, if any, will be sent to shareholders monthly. At the end of
each calendar year, each shareholder will receive information regarding the tax
status of reportable dividends and distributions for that year (see "Tax
Status").
DISTRIBUTION OPTIONS -- The following options are available to all accounts
(except Systematic Withdrawal Plan accounts) and may be changed as often as
desired by notifying the Shareholder Servicing Agent:
-- Dividends and capital gain distributions reinvested in additional
shares. This option will be assigned if no other option is
specified;
-- Dividends in cash; capital gain distributions reinvested in
additional shares;
-- Dividends and capital gain distributions in cash.
Reinvestments (net of any tax withholding) will be made in additional full and
fractional shares of the same class of shares at the net asset value in effect
at the close of business on the record date. Dividends and capital gains
distributions in amounts less than $10 will automatically be reinvested in
additional shares of the Fund. If a shareholder has elected to receive dividends
and/or capital gain distributions in cash and the postal or other delivery
service is unable to deliver checks to shareholder's address of record, such
shareholder's distribution option will automatically be converted to having all
dividends and other distributions reinvested in additional shares. Any request
to change a distribution option must be received by the Shareholder Servicing
Agent by the record date for a dividend or distribution in order to be effective
for that dividend or distribution. No interest will accrue on amounts
represented by uncashed distribution or redemption checks.
20
<PAGE> 59
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 either 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 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 and Class B 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 dividends 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 in shares of the same class of another
MFS Fund, if shares of such Fund are available for sale (without a sales charge
and not subject to any applicable CDSC).
SYSTEMATIC WITHDRAWAL PLAN: A shareholder may direct the Shareholder
Servicing Agent to send to him (or any one he designates) regular periodic
payments based upon the value of his account. Each payment under a Systematic
Withdrawal Plan (a "SWP") must be at least $100, except in certain limited
circumstances. The aggregate withdrawals of Class B shares in any year pursuant
to a SWP will not be subject to a CDSC and are generally limited to 10% of the
value of the account at the time of the establishment of the SWP. The CDSC will
not be waived in the case of SWP redemptions of Class A shares which are subject
to a CDSC.
DOLLAR COST AVERAGING PROGRAMS --
AUTOMATIC INVESTMENT PLAN: Cash investments of $50 or more may be made
through a shareholder's checking account twice monthly, monthly or quarterly.
Required forms are available from the Shareholder Servicing Agent or investment
dealers.
AUTOMATIC EXCHANGE PLAN: Shareholders having account balances of at least
$5,000 in any MFS Fund may exchange their shares for the same class of shares of
the other MFS Funds under the Automatic Exchange Plan. The Automatic Exchange
Plan provides for automatic monthly or quarterly exchanges of funds from the
shareholder's account in an MFS Fund for investment in the same class of shares
of other MFS Funds selected by the shareholder. Under the Automatic Exchange
Plan, exchanges of at least $50 each may be made to up to four different funds.
A shareholder should consider the objectives and policies of a fund and review
its prospectus before electing to exchange money into such fund through the
Automatic Exchange Plan. No transaction fee is imposed in connection with
exchange transactions under the Automatic Exchange Plan. However, exchanges of
shares of MFS Money Market Fund, MFS Government Money Market Fund or Class A
shares of MFS Cash Reserve Fund will be subject to any applicable sales charge.
For federal and (generally) state income tax purposes, an exchange is treated as
a sale of the shares exchanged and, therefore, could result in a capital gain or
loss to the shareholder making the exchange. See the Statement of Additional
Information for further information concerning the Automatic Exchange Plan.
Investors should consult their tax advisers for information regarding the
potential capital gain and loss consequences of transactions under the Automatic
Exchange Plan.
Because a dollar cost averaging program involves periodic purchases of shares
regardless of fluctuating share offering prices, a shareholder should consider
his financial ability to continue his purchases through periods of low price
levels. Maintaining a dollar
21
<PAGE> 60
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.
----------------------------------
The Fund's SAI, dated January 1, 1996, contains more detailed information about
the Fund, including, but not limited to, information related to (i) the Fund's
investment objective, policies and restrictions, (ii) the Trustees, officers and
investment adviser, (iii) portfolio trading, (iv) the method used to calculate
yield, tax-equivalent yield and total rate of return quotations of the Fund, (v)
the Distribution Plan and (vi) various services and privileges provided by the
Fund for the benefit of its shareholders, including additional information with
respect to the exchange privilege.
22
<PAGE> 61
APPENDIX A
WAIVERS OF SALES CHARGES
This Appendix sets forth the various circumstances in which all applicable sales
charges are waived (Section I), the initial sales charge and the contingent
deferred sales charge ("CDSC") for Class A shares are waived (Section II), and
the CDSC for Class B shares is waived (Section III).
I. WAIVERS OF ALL APPLICABLE SALES CHARGES
In the following circumstances, the initial charge imposed on purchases of Class
A shares and the CDSC imposed on certain redemptions of Class A shares and on
redemptions of Class B shares, as applicable, 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 Massachusetts Financial Services Company ("MFS"), Sun Life
Assurance Company of Canada ("Sun Life") or any of their subsidiary
companies;
- Trustees and retired trustees of any investment company for which MFS Fund
Distributors, Inc. ("MFD") serves as distributor;
- Employees, directors, partners, officers and trustees of any sub-adviser to
any MFS Fund;
- Employees or registered representatives of dealers and other financial
institutions ("dealers") which have a sales agreement with MFD;
- Certain family members of any such individual and their spouses identified
above and certain trusts, pension, profit-sharing or other retirement plans
for the sole benefit of such persons, provided the shares are not resold
except to the MFS Fund which issued the Shares; and
- Institutional Clients of MFS or MFS Asset Management, Inc. ("AMI").
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.
A-1
<PAGE> 62
5. RETIREMENT PLANS (CDSC WAIVER ONLY). Shares redeemed on account of
distributions made under the following circumstances:
INDIVIDUAL RETIREMENT ACCOUNTS ("IRAS")
- Death or disability of the IRA owner.
SECTION 401(A) PLANS ("401(A) PLANS") AND SECTION 403(B) EMPLOYER SPONSORED
PLANS ("ESP PLANS")
- Death, disability or retirement of 401(a) or ESP Plan participant;
- Loan from 401(a) or ESP Plan (repayment of loans, however, will constitute
new sales for purposes of assessing sales charges);
- Financial hardship (as defined in Treasury Regulation Section
1.401(k)-1(d)(2), as amended from time to time);
- Termination of employment of 401(a) or ESP Plan participant (excluding,
however, a partial or other termination of the Plan);
- 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.
A-2
<PAGE> 63
II. WAIVERS OF CLASS A SALES CHARGES
In addition to the waivers set forth in Section I above, in the following
circumstances the initial sales charge imposed on purchases of Class A shares
and the CDSC imposed on certain redemptions of Class A shares are waived:
1. INVESTMENT OF REDEMPTION PROCEEDS FROM UNAFFILIATED MUTUAL FUNDS
- Shares acquired through the investment of redemption proceeds from another
open-end management investment company not distributed or managed by MFD or
its affiliates if: (i) the investment is made through a dealer and
appropriate documentation is submitted to MFD; (ii) the redeemed shares
were subject to an initial sales charge or deferred sales charge (whether
or not actually imposed); (iii) the redemption occurred no more than 90
days prior to the purchase of Class A shares; and (iv) the MFS Fund, MFD
or its affiliates have not agreed with such company or its affiliates,
formally or informally, to waive sales charges on Class A shares or
provide any other incentive with respect to such redemption and sale.
2. WRAP ACCOUNT INVESTMENTS
- Shares acquired by investments through certain dealers which have entered
into an agreement with MFD which includes a requirement that such shares be
sold for the sole benefit of clients participating in a "wrap" account or a
similar program under which such clients pay a fee to such dealer.
3. INVESTMENT BY INSURANCE COMPANY SEPARATE ACCOUNTS
- Shares acquired by insurance company separate accounts.
4. RETIREMENT PLANS
ADMINISTRATIVE SERVICES ARRANGEMENTS
- Shares acquired by retirement plans whose third party administrators or
dealers have entered into an administrative services agreement with MFD or
one of its affiliates to perform certain administrative services, subject
to certain operational and minimum size requirements specified from time to
time by MFD or one or more of its affiliates.
REINVESTMENT OF DISTRIBUTIONS FROM QUALIFIED RETIREMENT PLANS
- Shares acquired through the automatic reinvestment in Class A shares of
Class A or Class B distributions which constitute required withdrawals from
qualified retirement plans.
SHARES REDEEMED ON ACCOUNT OF DISTRIBUTIONS MADE UNDER THE FOLLOWING
CIRCUMSTANCES:
IRAS
- Distributions made on or after the IRA owner has attained the age of 59 1/2
years old; and
- Tax-free returns of excess IRA contributions.
401(a) PLANS
- Distributions made on or after the 401(a) Plan participant has attained the
age of 59 1/2 years old; and
- Certain involuntary redemptions and redemptions in connection with certain
automatic withdrawals from a 401(a) Plan.
A-3
<PAGE> 64
ESP PLANS AND SRO PLANS
- Distributions made on or after the ESP or SRO Plan participant has attained
the age of 59 1/2 years old.
III. WAIVERS OF CLASS B SALES CHARGES
- In addition to the waivers set forth in Section I above, in the following
circumstances the CDSC imposed on redemptions of Class B shares is waived:
1. SYSTEMATIC WITHDRAWAL PLAN
- Systematic Withdrawal Plan redemptions with respect to up to 10% per year
of the account value at the time of establishment.
2. DEATH OF OWNER
- Shares redeemed on account of the death of the account owner if the shares
are held solely in the deceased individual's name or in a living trust for
the benefit of the deceased individual.
3. DISABILITY OF OWNER
- Shares redeemed on account of the disability of the account owner if shares
are held either solely or jointly in the disabled individual's name or in a
living trust for the benefit of the disabled individual (in which case a
disability certification form is required to be submitted to the
Shareholder Servicing Agent).
4. RETIREMENT PLANS. Shares redeemed on account of distributions made under the
following circumstances:
IRAS, 401(A) PLANS, ESP PLANS AND SRO PLANS
- Distributions made on or after the IRA owner or the 401(a), ESP or SRO Plan
participant, as applicable, has attained the age of 70 1/2 years old, but
only with respect to the minimum distribution under applicable Internal
Revenue Code ("Code") rules.
SALARY REDUCTION SIMPLIFIED EMPLOYEE PENSION PLANS ("SAR-SEP PLANS")
- Distributions made on or after the SAR-SEP Plan participant has attained
the age of 70 1/2 years old, but only with respect to the minimum
distribution under applicable Code rules; and
- Death or disability of a SAR-SEP Plan participant.
A-4
<PAGE> 65
APPENDIX B
<TABLE>
TAXABLE EQUIVALENT YIELD TABLE
(UNDER FEDERAL INCOME TAX LAW AND RATES FOR 1995)
The table below shows the approximate taxable bond yields which are
equivalent to tax-exempt bond yields from 3% to 8% under federal income tax laws
that apply to 1995. (Such yields may differ under the laws applicable to
subsequent years.) Separate calculations, showing the applicable taxable income
brackets, are provided for investors who file joint returns and for those
investors who file individual returns.
<CAPTION>
SINGLE RETURN JOINT RETURN INCOME TAX-EXEMPT YIELD
- ----------------- ----------------- TAX ---------------------------------------------------
(TAXABLE INCOME)* BRACKET** 3% 4% 5% 6% 7% 8%
- --------------------------------------- --------- ---- ---- ---- ---- ----- -----
1995 1995 EQUIVALENT TAXABLE YIELD
---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$ 0-$ 23,350 $ 0-$ 39,000 15.00% 3.53% 4.71% 5.88% 7.06% 8.24% 9.41%
$ 23,350-$ 56,550 $ 39,000-$ 94,250 28.00 4.17 5.56 6.94 8.33 9.72 11.11
$ 56,550-$117,950 $ 94,250-$143,600 31.00 4.35 5.80 7.25 8.70 10.14 11.59
$117,950-$256,500 $143,600-$256,500 36.00 4.69 6.25 7.81 9.38 10.94 12.50
$256,500 & Over $256,500 & Over 39.60 4.97 6.62 8.28 9.93 11.59 13.25
<FN>
*Net amount subject to Federal personal income tax after deductions and
exemptions.
**The effective marginal income tax rate will be increased if personal
exemptions are phased out (for the phase out period only) and if a portion of
itemized deductions are disallowed. This increase in the marginal rates, if
applicable, will cause a corresponding increase in the equivalent taxable
yields.
</TABLE>
While it is expected that a substantial portion of the interest income
distributed to the Fund's shareholders will be exempt from federal income taxes,
portions of such distributions from time to time may be subject to federal
income taxes or a federal alternative minimum tax.
B-1
<PAGE> 66
APPENDIX C
DESCRIPTION OF MUNICIPAL BONDS
Municipal Bonds include debt obligations issued to obtain funds for various
public purposes, including the construction of a wide range of public facilities
such as bridges, highways, housing, hospitals, mass transportation, schools,
streets and water and sewer works. Other public purposes for which Municipal
Bonds may be issued include refunding outstanding obligations, obtaining funds
for general operating expenses and obtaining funds to loan to other public
institutions and facilities. In addition, certain types of industrial
development bonds are issued by or on behalf of public authorities to obtain
funds to provide privately-operated housing facilities, sports facilities,
convention or trade show facilities, airport, mass transit, port or parking
facilities, air or water pollution control facilities for water supply, gas,
electricity or sewage or solid waste disposal. Such obligations are included in
the term Municipal Bonds if the interest paid thereon qualifies as exempt from
federal income tax. Other types of industrial development bonds, the proceeds of
which are used for the construction, equipment, repair or improvement of
privately operated industrial or commercial facilities, may constitute Municipal
Bonds, although the current federal tax laws place substantial limitations on
the size of such issues.
The two principal classifications of Municipal Bonds are "general obligation"
and "revenue" bonds. General obligation bonds are secured by the issuer's pledge
of its good faith, credit and taxing power for the payment of principal and
interest. The payment of such bonds may be dependent upon an appropriation by
the issuer's legislative body. The characteristics and enforcement of general
obligation bonds vary according to the law applicable to the particular issuer.
Revenue bonds are payable only from the revenues derived from a particular
facility or class of facilities, or, in some cases, from the proceeds of a
special excise or other specific revenue source. Industrial development bonds
which are Municipal Bonds are in most cases revenue bonds and do not generally
constitute the pledge of the credit of the issuer of such bonds.
Municipal Bonds also include participations in municipal leases. These are
undivided interests in a portion of an obligation in the form of a lease or
installment purchase which is issued by state and local governments to acquire
equipment and facilities. Municipal leases frequently have special risks not
normally associated with general obligation or revenue bonds. Leases and
installment purchase or conditional sale contracts (which normally provide for
title to the leased asset to pass eventually to the governmental issuer) have
evolved as a means for governmental issuers to acquire property and equipment
without meeting the constitutional and statutory requirements for the issuance
of debt. The debt-issuance limitations are deemed to be inapplicable because of
the inclusion in many leases or contracts of "non-appropriation" clauses that
provide that the governmental issuer has no obligation to make future payments
under the lease or contract unless money is appropriated for such purpose by the
appropriate legislative body on a yearly or other periodic basis. Although the
obligations will be secured by the leased equipment or facilities, the
disposition of the property in the event of non-appropriation or foreclosure
might, in some cases, prove difficult. In light of these concerns, the Fund has
adopted and follows procedures for determining whether municipal lease
securities purchased by the Fund are liquid and for monitoring the liquidity of
municipal lease securities held in the Fund's portfolio. The procedures require
that a number of factors be used in evaluating the liquidity of a municipal
lease security, including, the frequency of trades and quotes for the security,
the number of dealers willing to purchase or sell the security and the number of
other potential purchasers, the willingness of dealers to undertake to make a
market in the security, the nature of the marketplace in which the security
trades, the credit quality of the security and other factors which the Adviser
may deem relevant. There are, of course, variations in the security of Municipal
Bonds, both within a particular classification and between classifications,
depending on numerous factors.
The yields on Municipal Bonds are dependent on a variety of factors, including
general money market conditions, supply and demand and general conditions of the
Municipal Bond market, size of a particular offering, the maturity of the
obligation and rating of the issue.
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DESCRIPTION OF OTHER INVESTMENTS
U.S. GOVERNMENT OBLIGATIONS -- are issued by the Treasury and include bills,
certificates of indebtedness, notes and bonds. Agencies and instrumentalities of
the U.S. Government are established under the authority of an act of Congress
and include, but are not limited to, the Government National Mortgage
Association, the Tennessee Valley Authority, the Bank for Cooperatives, the
Farmers Home Administration, Federal Home Loan Banks, Federal Intermediate
Credit Banks, Federal Land Banks and the Federal National Mortgage Association.
CERTIFICATES OF DEPOSIT -- are certificates issued against funds deposited
in a commercial bank, are for a definite period of time, earn a specified rate
of return and are normally negotiable.
BANKERS' ACCEPTANCES -- are short-term credit instruments used to finance
the import, export, transfer or storage of goods. They are termed "accepted"
when a bank guarantees their payment at maturity.
COMMERCIAL PAPER -- refers to promissory notes issued by corporations in
order to finance their short-term credit needs.
The ratings of Moody's Investors Service, Inc. ("Moody's"), Standard & Poor's
Ratings Group ("S&P") and Fitch Investors Service, Inc. ("Fitch") represent
their opinions as to the quality of various Municipal Bonds. It should be
emphasized, however, that ratings are not absolute standards of quality.
Consequently, Municipal 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.
DESCRIPTION OF MUNICIPAL BOND RATINGS
Moody's
Aaa: Bonds which are rated Aaa are judged to be of the best quality. They carry
the smallest degree of investment risk and are generally referred to as "gilt
edged." Interest payments are protected by a large or by an exceptionally stable
margin and principal is secure. While the various protective elements are likely
to change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
Aa: Bonds which are rated Aa are judged to be of high quality by all standards.
Together with the Aaa group they comprise what are generally known as high grade
bonds. They are rated lower than the best bonds because margins of protection
may not be as large as in Aaa securities or fluctuation of protective elements
may be of greater amplitude or there may be other elements present which make
the long term risks appear somewhat larger than in Aaa securities.
A: Bonds which are rated A possess many favorable investment attributes and are
to be considered as upper-medium-grade obligations. Factors giving security to
principal and interest are considered adequate, but elements may be present
which suggest a susceptibility to impairment sometime in the future.
Baa: Bonds which are rated Baa are considered as medium-grade obligations,
(i.e., they are neither highly protected nor poorly secured). Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
S&P
AAA: Bonds rated AAA have the highest rating assigned by S&P. Capacity to pay
interest and repay principal is extremely strong.
AA: Bonds rated AA have a very strong capacity to pay interest and repay
principal and differs from the higher rated issues only in small degree.
C-2
<PAGE> 68
A: Bonds rated A have a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than bonds in higher rated categories.
BBB: Bonds rated BBB are regarded as having an adequate capacity to pay interest
and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
bonds in this category than in higher rated categories.
Fitch
AAA: Bonds considered to be investment grade and of the highest credit quality.
The obligor has an exceptionally strong ability to pay interest and repay
principal, which is unlikely to be affected by reasonably foreseeable events.
AA: Bonds considered to be investment grade and of very high credit quality. The
obligor's ability to pay interest and repay principal is very strong, although
not quite as strong as bonds rated 'AAA'. Because bonds rated in the 'AAA' and
'AA' categories are not significantly vulnerable to foreseeable future
developments, short-term debt of these issuers is generally rated 'F-1+'.
A: Bonds considered to be investment grade and of high credit quality. The
obligor's ability to pay interest and repay principal is considered to be
strong, but may be more vulnerable to adverse changes in economic conditions and
circumstances than bonds with higher ratings.
BBB: Bonds considered to be investment grade and of satisfactory credit quality.
The obligor's ability to pay interest and repay principal is considered to be
adequate. Adverse changes in economic conditions and circumstances, however, are
more likely to have adverse impact on these bonds, and therefore impair timely
payment. The likelihood that the ratings of these bonds will fall below
investment grade is higher than for bonds with higher ratings.
C-3
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<TABLE>
<S> <C>
[LOGO]
Investment Adviser
Massachusetts Financial Services Company
500 Boylston Street
Boston, MA 02116
(617) 954-5000
Distributor MFS[R] MUNICIPAL BOND FUND
MFS Fund Distributors, Inc.
500 Boylston Street Prospectus
Boston, MA 02116 January 1, 1996
(617) 954-5000
Custodian and Dividend Disbursing Agent
State Street Bank & Trust Company
225 Franklin Street
Boston, MA 02110
Shareholder Servicing Agent
MFS Service Center, Inc.
500 Boylston Street
Boston, MA 02116
Toll-free: (800) 225-2606
Mailing Address:
P.O. Box 2281
Boston, MA 02107-9906
Independent Auditors
Deloitte & Touche LLP
125 Summer Street
Boston, MA 02110
[LOGO]
MFS[R] MUNICIPAL BOND FUND
500 Boylston Street
Boston, MA 02116
MMB-1 1/96 106M 17/217
</TABLE>
<PAGE> 70
[LOGO]
<TABLE>
<S> <C>
MFS(R) MUNICIPAL STATEMENT OF
BOND FUND ADDITIONAL INFORMATION
(A member of the MFS Family of Funds(R)) January 1, 1996
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1. Definitions............................................................................. 2
2. Investment Objective, Policies and Restrictions......................................... 2
3. Management of the Fund.................................................................. 8
Trustees............................................................................. 8
Officers............................................................................. 8
Investment Adviser................................................................... 9
Custodian............................................................................ 10
Shareholder Servicing Agent.......................................................... 10
Distributor.......................................................................... 10
4. Portfolio Transactions and Brokerage Commissions........................................ 11
5. Shareholder Services.................................................................... 12
Investment and Withdrawal Programs................................................... 12
Exchange Privilege................................................................... 14
6. Tax Status.............................................................................. 14
7. Determination of Net Asset Value and Performance........................................ 16
8. Class B Distribution Plan............................................................... 18
9. Description of Shares, Voting Rights and Liabilities.................................... 19
10. Independent Auditors and Financial Statements........................................... 20
Appendix A.............................................................................. 21
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MFS MUNICIPAL BOND FUND
A Series of MFS Series Trust IV
500 Boylston Street, Boston, Massachusetts 02116
(617) 954-5000
This Statement of Additional Information (the "SAI") sets forth information
which may be of interest to investors but which is not necessarily included in
the Fund's Prospectus, dated January 1, 1996. 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.
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1. DEFINITIONS
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"Fund" -- MFS Municipal Bond Fund, a
diversified series of
MFS(R) Series Trust IV
(the "Trust"), a Massa-
chusetts business trust.
The Trust was known as
Massachusetts Cash
Management Trust until its
name changed on August 27,
1993.
"MFS" or the -- Massachusetts Financial
"Adviser" Services Company, a
Delaware corporation.
"MFD" -- MFS Fund Distributors,
Inc., a Delaware
corporation.
"Prospectus" -- The Prospectus of the
Fund, dated January 1,
1996, as amended or
supplemented from time to
time.
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2. INVESTMENT OBJECTIVE, POLICIES AND RESTRICTIONS
INVESTMENT OBJECTIVE. The Fund's investment objective is to provide as high a
level of current income exempt from federal income taxes as is considered
consistent with prudent investing and protection of shareholders' capital. 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.
"WHEN-ISSUED" SECURITIES: The Fund may purchase securities on a "when-issued"
or on a "forward delivery" basis. When the Fund commits to purchase a security
on a "when-issued" or on a "forward delivery" basis, it will set up procedures
consistent with the General Statement of Policy of the Securities and Exchange
Commission (the "SEC") concerning such purchases. Since that policy currently
recommends that an amount of the Fund's assets equal to the amount of the
purchase be held aside or segregated to be used to pay for the commitment, the
Fund will always have cash, short-term money market instruments or high quality
debt securities sufficient to cover any commitments or to limit any potential
risk. However, although the Fund does not intend to make such purchases for
speculative purposes and intends to adhere to the provisions of the SEC policy,
purchases of securities on such bases may involve more risk than other types of
purchases. For example, the Fund may have to sell assets which have been set
aside in order to meet redemptions. Also, if the Fund determines it is necessary
to sell the "when-issued" or "forward delivery" securities before delivery, the
Fund may incur a loss because of market fluctuations since the time the
commitment to purchase such securities was made and any gain or loss would not
be tax-exempt.
REPURCHASE AGREEMENTS: As described in the Prospectus, the Fund may enter into
repurchase agreements with sellers who are member firms (or a subsidiary
thereof) of the New York Stock Exchange (the "Exchange") or members of the
Federal Reserve System, recognized primary U.S. Government securities dealers or
institutions which the Adviser has determined to be of comparable
creditworthiness. The securities that the Fund purchases and holds through its
agent are U.S. Government securities, the values of which are equal to or
greater than the repurchase price agreed to be paid by the seller. The
repurchase price may be higher than the purchase price, the difference being
income to the Fund, or the purchase and repurchase prices may be the same, with
interest at a standard rate due to the Fund together with the repurchase price
on repurchase. In either case, the income to the Fund is unrelated to the
interest rate on the U.S. Government securities.
The repurchase agreement provides that in the event the seller fails to pay the
price agreed upon on the agreed upon delivery date or upon demand, as the case
may be, the Fund will have the right to liquidate the securities. If at the time
the Fund is contractually entitled to exercise its right to liquidate the
securities, the seller is subject to a proceeding under the bankruptcy laws or
its assets are otherwise subject to a stay order, the Fund's exercise of its
right to liquidate the securities may be delayed and result in certain losses
and costs to the Fund. The Fund has adopted and follows procedures which are
intended to minimize the risks of repurchase agreements. For example, the Fund
only enters into repurchase agreements after the Adviser has determined that the
seller is creditworthy, and the Adviser monitors that seller's creditworthiness
on an ongoing basis. Moreover, under such agreements, the value of the
securities (which are marked to market every business day) is required to be
greater than the repurchase price, and the Fund has the right to make margin
calls at any time if the value of the securities falls below the agreed upon
margin. The Fund may not invest more than 15% of its assets in repurchase
agreements maturing in more than seven days.
INVERSE FLOATING RATE OBLIGATIONS: The Fund may invest in so-called "inverse
floating rate obligations" or "residual interest" bonds or certificates
structured to have similar features. In creating such an obligation, a
municipality issues a certain amount of debt and pays a fixed interest rate. A
portion of the debt is issued as variable rate short-term obligations, the
interest rate of which is reset at short intervals, typically ranging from
thirty-five days to one year. The other portion of the debt is issued as inverse
floating rate obligations, the interest rate of which is calculated based on the
difference between the entire amount of interest paid by the issuer on all of
the debt and the interest paid on the short-term obligation. Under usual
circumstances, the holder of the inverse floating rate obligation can generally
purchase an equal principal amount of the short-term obligation and link the two
obligations in order to create long-term fixed-rate bonds. Because the interest
rate on the inverse floating rate obligation is determined by subtracting the
short-term rate from a fixed amount, the interest rate will decrease as the
short-term rate increases and will increase as the short-term rate decreases.
The magnitude of increases and decreases in the market value of inverse floating
rate obligations may be approximately twice as large (or more if the inverse
instrument is
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issued in principal amount greater than the principal amount of the short-term
piece) as the comparable change in the market value of an equal principal amount
of long-term bonds which bear interest at the rate paid by the issuer and have
similar credit quality, redemption and maturity provisions.
OPTIONS: The Fund intends to write covered put and call options and purchase
put and call options on fixed income securities that are traded on U.S.
securities exchanges and over-the-counter. Call options written by the Fund give
the holder the right to buy the underlying securities from the Fund at a fixed
exercise price; put options written by the Fund give the holder the right to
sell the underlying securities to the Fund at a fixed exercise price. A call
option written by the Fund is "covered" if the Fund owns the underlying security
covered by the call or has an absolute and immediate right to acquire that
security without additional cash consideration (or for additional cash
consideration held in a segregated account by its custodian) upon conversion or
exchange of other securities held in its portfolio. A call option is also
covered if the Fund holds a call on the same security and in the same principal
amount as the call written where the exercise price of the call held (a) is
equal to or less than the exercise price of the call written or (b) is greater
than the exercise price of the call written if the difference is maintained by
the Fund in cash, short-term money market instruments or high quality debt
securities in a segregated account with its custodian. A put option written by
the Fund is "covered" if the Fund maintains cash, short-term money market
instruments or high quality debt securities with a value equal to the exercise
price in a segregated account with its custodian, or else holds a put on the
same security and in the same principal amount as the put written where the
exercise price of the put held is (a) equal to or greater than the exercise
price of the put written or (b) is less than the exercise price of the put
written if the difference is maintained by the Fund in cash, short-term money
market instruments or high quality debt securities in a segregated account with
its custodian. Put and call options written by the Fund may also be covered in
such other manner as may be in accordance with the requirements of the exchange
on which, or the counter party with which, the option is traded, and applicable
laws and regulations. The writer of an option may have no control over when the
underlying securities must be sold, in the case of a call option, or purchased,
in the case of a put option, since with regard to certain options, the writer
may be assigned an exercise notice at any time prior to the termination of the
obligation.
Effecting a closing transaction in the case of a written call option will permit
the Fund to write another call option on the underlying security with either a
different exercise price or expiration date or both, or in the case of a written
put option will permit the Fund to write another put option to the extent that
the exercise price thereof is secured by deposited cash, short-term money market
instruments or high quality debt securities. Such transactions permit the Fund
to generate additional premium income, which will partially offset declines in
the value of portfolio securities or increases in the cost of securities to be
acquired. Also, effecting a closing transaction will permit the cash or proceeds
from the concurrent sale of any securities subject to the option to be used for
other Fund investments. If the Fund desires to sell a particular security from
its portfolio on which it has written a call option, it will effect a closing
transaction prior to or concurrent with the sale of the security.
The Fund will realize a profit from a closing transaction if the price of the
transaction is less than the premium received from writing the option or is more
than the premium paid to purchase the option; the Fund will realize a loss from
a closing transaction if the price of the transaction is more than the premium
received from writing the option or is less than the premium paid to purchase
the option. Because increases in the market price of a call option will
generally reflect increases in the market price of the underlying security, any
loss resulting from the closing out of a call option is likely to be offset in
whole or in part by appreciation of the underlying security owned by the Fund.
An option position may be closed out only where there exists a secondary market
for an option of the same series. If a secondary market does not exist, it might
not be possible to effect closing transactions in particular options with the
result that the Fund would have to exercise the options in order to realize any
profit. If the Fund is unable to effect a closing purchase transaction in a
secondary market, it will not be able to sell the underlying security until the
option expires or it delivers the underlying security upon exercise. Reasons for
the absence of a liquid secondary market include the following: (i) there may be
insufficient trading interest in certain options; (ii) restrictions may be
imposed by a national securities exchange on opening transactions or closing
transactions or both; (iii) trading halts, suspensions or other restrictions may
be imposed with respect to particular classes or series of options or underlying
securities; (iv) unusual or unforeseen circumstances may interrupt normal
operations on an exchange; (v) the facilities of an exchange or the Options
Clearing Corporation (the "OCC") may not at all times be adequate to handle
current trading volume; or (vi) one or more exchanges could, for economic or
other reasons, decide or be compelled at some future date to discontinue the
trading of options (or a particular class or series of options), in which event
the secondary market on that exchange (or in that class or series of options)
would cease to exist, although outstanding options on that exchange that had
been issued by the OCC as a result of trades on that exchange would continue to
be exercisable in accordance with their terms.
The Fund may write options in connection with buy-and-write transactions; that
is, the Fund may purchase a security and then write a call option against that
security. The exercise price of the call the Fund determines to write will
depend upon the expected price movement of the underlying security. The exercise
price of a call option may be below ("in-the-money"), equal to ("at-the-money")
or above ("out-of-the-money") the current value of the underlying security at
the time the option is written. If the call options are exercised in such
transactions, the Fund's maximum gain will be the premium received by it for
writing the option, adjusted upwards or downwards by the difference between the
Fund's purchase price of the security and the exercise price. If the options are
not exercised and the price of the
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underlying security declines, the amount of such decline will be offset in part,
or entirely, by the premium received.
The writing of covered put options is similar in terms of risk/return
characteristics to buy-and-write transactions. Put options may be used by the
Fund in the same market environments that call options are used in equivalent
buy-and-write transactions.
The Fund may write combinations of put and call options on the same security, a
practice known as a "straddle." By writing a straddle, the Fund undertakes a
simultaneous obligation to sell and purchase the same security in the event that
one of the options is exercised. If the price of the security subsequently rises
sufficiently above the exercise price to cover the amount of the premium and
transaction costs, the call will likely be exercised and the Fund will be
required to sell the underlying security at a below market price. This loss may
be offset, however, in whole or in part, by the premiums received on the writing
of the two options. Conversely, if the price of the security declines by a
sufficient amount, the put will likely be exercised. The writing of straddles
will likely be effective, therefore, only where the price of a security remains
stable and neither the call nor the put is exercised. In an instance where one
of the options is exercised, the loss on the purchase or sale of the underlying
security may exceed the amount of the premiums received.
The Fund may purchase put options to hedge against a decline in the value of its
portfolio. By using put options in this way, the Fund will reduce any profit it
might otherwise have realized in the underlying security by the amount of the
premium paid for the put option and by transaction costs.
The Fund may purchase call options to hedge against an increase in the price of
securities that the Fund anticipates purchasing in the future. The premium paid
for the call option plus any transaction costs will reduce the benefit, if any,
realized by the Fund upon exercise of the option, and, unless the price of the
underlying security rises sufficiently, the option may expire worthless to the
Fund.
The Fund may also purchase warrants on fixed income securities. A warrant on a
fixed income security is a long-dated call option that provides the holder with
the right, but not the obligation, to purchase from an issuer a fixed income
security with a specified par value, coupon, and maturity at a fixed exercise
price on a specified date or between specified dates. Typically, the fixed
income securities that are deliverable pursuant to the warrant will be
noncallable securities. Warrants may be issued as entirely separate securities
or they may be attached to, but subsequently detachable from, a fixed income
security of the same issuer.
The staff of the SEC has taken the position that purchased over-the-counter
options and assets used to cover written over-the-counter options are illiquid
and, therefore, together with other illiquid securities, cannot exceed a certain
percentage 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
portion of the formula price as illiquid for purposes of the SEC illiquidity
ceiling imposed by the SEC staff. The Fund may also write over-the-counter
options with non-primary dealers and will treat the assets used to cover these
options as illiquid for purposes of such SEC illiquidity ceiling.
FUTURES CONTRACTS: The Fund may enter into contracts for the future delivery
of fixed income securities or contracts based on Municipal Bond or other
financial indices, including any index of fixed income securities, as such
contracts become available for trading ("Futures Contracts"). The Fund may enter
into Futures Contracts for hedging purposes as well as non-hedging purposes. A
"sale" of a Futures Contract means a contractual obligation to deliver the
securities called for by the contract at a specified price in a fixed delivery
month or, in the case of a Futures Contract on an index of securities, to make
or receive a cash settlement. A "purchase" of a Futures Contract means a
contractual obligation to acquire the securities called for by the contract at a
specified price in a fixed delivery month or, in the case of a Futures Contract
on an index of securities, to make or receive a cash settlement. Futures
Contracts have been designed by exchanges which have been designated as
"contract markets" by the Commodity Futures Trading Commission (the "CFTC"), and
must be executed through a futures commission merchant, or brokerage firm, which
is a member of the relevant contract market. Existing contract markets include
the Chicago Board of Trade and the International Monetary Market of the Chicago
Mercantile Exchange. Futures Contracts are traded on these markets, and, through
their clearing corporations, the exchanges guarantee performance of the
contracts as between the clearing members of the exchange.
At the same time a Futures Contract is purchased or sold, the Fund must allocate
cash or securities as a deposit payment ("initial deposit"). The initial deposit
varies but may be as low as 5% or less of the value of the contract. Daily
thereafter, the Futures Contract is valued and the payment of "variation margin"
may be required since each day the Fund would provide or receive cash that
reflects any decline or increase in the contract's value.
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At the time of delivery of securities pursuant to a Futures Contract based on
fixed income securities, adjustments are made to recognize differences in value
arising from the delivery of securities with a different interest rate from that
specified in the contract. In some (but not many) cases, securities called for
by a Futures Contract may not have been issued when the contract was written.
A Futures Contract based on an index of securities, such as a Municipal Bond
index Futures Contract, provides for a cash payment, equal to the amount, if
any, by which the value of the index at maturity is above or below the value of
the index at the time the contract was entered into, times a fixed index
"multiplier". The index underlying such a Futures Contract is generally a broad
based index of securities designed to reflect movements in the relevant market
as a whole. The index assigns weighted values to the securities included in the
index, and its composition is changed periodically.
Although Futures Contracts call for the actual delivery or acquisition of
securities or, in the case of Futures Contracts based on an index, the making or
acceptance of a cash settlement at a specified future time, the contractual
obligation is usually fulfilled before such date by buying or selling, as the
case may be, on a commodities exchange, an identical Futures Contract calling
for settlement in the same month, subject to the availability of a liquid
secondary market. The Fund incurs brokerage fees when it purchases and sells
Futures Contracts.
The purpose of the acquisition or sale of a Futures Contract, in the case of a
portfolio such as that of the Fund, which holds or intends to acquire long-term
fixed income securities, is to attempt to protect the Fund from fluctuations in
interest rates without actually buying or selling long-term fixed income
securities. For example, if the Fund owns long-term bonds, and interest rates
were expected to increase, the Fund might enter into Futures Contracts for the
sale of debt securities. Such a sale would have much the same effect as selling
an equivalent value of the long-term bonds owned by the Fund. If interest rates
did increase, the value of the debt securities in the portfolio would decline,
but the value of the Futures Contracts would increase at approximately the same
rate, thereby keeping the net asset value of the Fund from declining as much as
it otherwise would have. The Fund could accomplish similar results by selling
bonds with long maturities and investing in bonds with short maturities when
interest rates are expected to increase. However, the use of Futures Contracts
as an investment technique allows the Fund to maintain a hedging position
without having to sell its portfolio securities.
Similarly, when it is expected that interest rates may decline, Futures
Contracts may be purchased to attempt to hedge against anticipated purchases of
long-term bonds at higher prices. Since the fluctuations in the value of Futures
Contracts should be similar to that of long-term bonds, the Fund could take
advantage of the anticipated rise in the value of long-term bonds without
actually buying them until the market had stabilized. At that time, the Futures
Contracts could be liquidated and the Fund could then buy long-term bonds on the
cash market. To the extent the Fund enters into Futures Contracts for this
purpose, the assets in the segregated asset account maintained to cover the
Fund's obligations with respect to such Futures Contracts will consist of cash,
short-term money market instruments or high quality debt securities from its
portfolio in an amount equal to the difference between the fluctuating market
value of such Futures Contracts and the aggregate value of the initial and
variation margin payments made by the Fund with respect to such Futures
Contracts, thereby assuring that the positions are unleveraged.
The ordinary spreads between prices in the cash and futures markets, due to
differences in the natures of those markets, are subject to distortions. First,
all participants in the futures market are subject to initial deposit and
variation margin requirements. Rather than meeting additional variation margin
requirements, investors may close out Futures Contracts through offsetting
transactions which could distort the normal relationship between the cash and
futures markets. Second, the liquidity of the futures market depends on
participants entering into offsetting transactions rather than making or taking
delivery. To the extent participants decide to make or take delivery, liquidity
in the futures market could be reduced, thus producing distortion. Third, from
the point of view of speculators, the margin deposit requirements in the futures
market are less onerous than margin requirements in the securities market.
Therefore, increased participation by speculators in the futures market may
cause temporary price distortions. Due to the possibility of distortion, a
correct forecast of general interest rate trends by the Adviser may still not
result in a successful transaction.
In addition, Futures Contracts entail risks. Although the Fund believes that use
of such contracts will benefit the Fund, if the Adviser's investment judgment
about the general direction of interest rates is incorrect, the Fund's overall
performance would be poorer than if it had not entered into any such contract.
For example, if the Fund has hedged against the possibility of an increase in
interest rates which would adversely affect the price of bonds held in its
portfolio and interest rates decrease instead, the Fund will lose part or all of
the benefit of the increased value of its bonds which it has hedged because it
will have offsetting losses in its futures positions. In addition, in such
situations, if the Fund has insufficient cash, it may have to sell bonds from
its portfolio to meet daily variation margin requirements. Such sales of bonds
may be, but will not necessarily be, at increased prices which reflect the
rising market. The Fund may have to sell securities at a time when it may be
disadvantageous to do so. The Fund may invest in Future Contracts for hedging
and for non-hedging purposes, subject to applicable law.
OPTIONS ON FUTURES CONTRACTS: The Fund may purchase and write options on
Futures Contracts ("Options on Futures Contracts") for hedging purposes and for
non-hedging purposes, subject to applicable law. An Option on a Futures Contract
provides the holder with the right to enter into a "long" position in the
underlying Futures Contract, in the case of a call option, or a "short" position
in the underlying Futures Contract, in the case of a put option, at a fixed
exercise price up to a stated expiration date or, in the case of certain
options, on such date. Such Options on Futures Contracts will be traded on
contract
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markets regulated by the CFTC. Depending on the pricing of the option compared
to either the price of the Futures Contract upon which it is based or the price
of the underlying debt securities, it may or may not be less risky than
ownership of the Futures Contract or underlying debt securities. As with the
purchase of Futures Contracts, when the Fund is not fully invested it may
purchase a call Option on a Futures Contract to hedge against a market advance
due to declining interest rates.
The writing of a call Option on a Futures Contract constitutes a partial hedge
against declining prices of the securities which are deliverable upon exercise
of the Futures Contract. If the future price at expiration of the option is
below the exercise price, the Fund will retain the full amount of the option
premium which provides a partial hedge against any decline that may have
occurred in the Fund's portfolio holdings. The writing of a put Option on a
Futures Contract constitutes a partial hedge against increasing prices of the
securities which are deliverable upon exercise of the Futures Contract. If the
futures price at expiration of the option is higher than the exercise price, the
Fund will retain the full amount of the option premium, less related transaction
costs, which provides a partial hedge against any increase in the price of
securities which the Fund intends to purchase. If a put or call option the Fund
has written is exercised, the Fund will incur a loss which will be reduced by
the amount of the premium it receives, less related transaction costs. Depending
on the degree of correlation between changes in the value of its portfolio
securities and changes in the value of its futures positions, the Fund's losses
from existing Options on Futures Contracts may to some extent be reduced or
increased by changes in the value of portfolio securities. The writer of an
Option on a Futures Contract is subject to the requirement of initial and
variation margin payments.
The Fund may cover the writing of call Options on Futures Contracts (a) through
purchases of the underlying Futures Contract, (b) through ownership of the
security, or securities included in the index, underlying the Futures Contract,
or (c) through the holding of a call on the same Futures Contract and in the
same principal amount as the call written where the exercise price of the call
held (i) is equal to or less than the exercise price of the call written or (ii)
is greater than the exercise price of the call written if the difference is
maintained by the Fund in cash, short-term money market instruments or high
quality debt securities in a segregated account with its custodian. The Fund may
cover the writing of put Options on Futures Contracts (a) through sales of the
underlying Futures Contract, (b) through segregation of cash, short-term money
market instruments or high quality debt securities in an amount equal to the
value of the security or index underlying the Futures Contract, or (c) through
the holding of a put on the same Futures Contract and in the same principal
amount as the put written where the exercise price of the put held is equal to
or greater than the exercise price of the put written, or is less than the
exercise price of the put written if the difference is maintained by the Fund in
cash, short-term money market instruments or high quality debt securities in a
segregated account with its custodian. Put and call Options on Futures Contracts
written by the Fund may also be covered in such other manner as may be in
accordance with the requirements of the exchange on which they are traded and
applicable laws and regulations.
The purchase of a put Option on a Futures Contract is similar in some respects
to the purchase of protective put options on portfolio securities. The Fund will
purchase a put Option on a Futures Contract to hedge the Fund's portfolio
against the risk of rising interest rates.
The amount of risk the Fund assumes when it purchases an Option on a Futures
Contract is the premium paid for the option plus related transaction costs,
although in order to realize a profit it may be necessary to exercise the option
and close out the underlying Futures Contract. In addition to the correlation
risks discussed above, the purchase of an option also entails the risk that
changes in the value of the underlying Futures Contract will not be fully
reflected in the value of the option purchased.
ADDITIONAL RISKS OF OPTIONS ON FIXED INCOME SECURITIES, FUTURES CONTRACTS AND
OPTIONS ON FUTURES CONTRACTS: Various additional risks exist with respect to the
trading of options and Futures Contracts. For example, the Fund's ability
effectively to hedge all or a portion of its portfolio through transactions in
such instruments will depend on the degree to which price movements in the
underlying index or instrument correlate with price movements in the relevant
portion of the Fund's portfolio. The trading of futures and options entails the
additional risk of imperfect correlation between movements in the futures or
option price and the price of the underlying index or obligation, while the
trading of options also entails the risk of imperfect correlation between
securities used to cover options written and the securities underlying such
options. The anticipated spread between the prices may be distorted because of
various factors, which are set forth under "Futures Contracts" above.
The Fund's ability to engage in options and futures strategies will also depend
on the availability of liquid markets in such instruments. "Options" above sets
forth certain reasons why a liquid secondary market may not exist. Transactions
in these instruments are also subject to the risk of brokerage firm or clearing
house insolvencies.
The liquidity of a secondary market in a Futures Contract or option thereon may
be adversely affected by "daily price fluctuation limits", established by
exchanges, which limit the amount of fluctuation in the price of a contract
during a single trading day and prohibit trading beyond such limit. In addition,
the exchanges on which futures and options are traded may impose limitations
governing the maximum number of positions on the same side of the market and
involving the same underlying instrument which may be held by a single investor,
whether acting alone or in concert with others (regardless of whether such
contracts are held on the same or different exchanges or held or written in one
or more accounts or through one or more brokers).
Options on securities may be traded over-the-counter. In an over-the-counter
trading environment, many of the protections afforded to exchange participants
will not be available. For example, there are no clearing house performance
guarantees and the Fund will be subject to the risk of default by a counter
6
<PAGE> 76
party. In addition, there are no daily price fluctuation limits, and adverse
market movements could therefore continue to an unlimited extent over a period
of time. Although the purchaser of an option cannot lose more than the amount of
the premium plus related transaction costs, this entire amount could be lost.
It should also be noted that the Fund may enter transactions in Futures
Contracts and Options on Futures Contracts not only for hedging purposes, but
also for non-hedging purposes intended to increase portfolio returns.
Non-hedging transactions in such investments involve greater risks and may
result in losses which may not be offset by increases in the value of portfolio
securities or declines in the cost of securities to be acquired. The Fund will
only write covered options, such that cash or securities necessary to satisfy an
option exercise will be segregated at all times, unless the option is covered in
such other manner as may be in accordance with the rules of the exchange on
which the option is traded and applicable laws and regulations. Nevertheless,
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.
PORTFOLIO TRADING: The Fund intends to fully manage its portfolio by buying
and selling securities, as well as holding securities to maturity. In managing
its portfolio the Fund seeks to take advantage of market developments and yield
disparities, which may include use of the following strategies:
(1) shortening the average maturity of its portfolio in anticipation of a
rise in interest rates so as to minimize depreciation of principal;
(2) lengthening the average maturity of its portfolio in anticipation of a
decline in interest rates so as to maximize tax-exempt yield;
(3) selling one type of debt security (e.g., revenue bonds) and buying
another (e.g., general obligation bonds) when disparities arise in the
relative values of each; and
(4) changing from one debt security to an essentially similar debt security
when their respective yields are distorted due to market factors.
------------------------------
The investment objective and policies described above and the policies with
respect to portfolio trading described above may be changed without shareholder
approval.
INVESTMENT RESTRICTIONS. The Fund has adopted the following restrictions which
cannot be changed without the approval of the holders of a majority of the
Fund's 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, except as a temporary measure for extraordinary or
emergency purposes, and then only in an amount not exceeding 10% of its gross
assets, or pledge, mortgage or hypothecate an amount of its assets taken at
market value which would exceed 15% of its gross assets, in each case taken at
the lower of cost or market value and subject to a 300% asset coverage
requirement (for the purpose of this restriction, collateral arrangements with
respect to options, Futures Contracts and Options on Futures Contracts and
payments of initial and variation margin in connection therewith are not
considered a pledge of assets);
(2) Underwrite securities issued by other persons except insofar as the Fund
may technically be deemed an underwriter under the Securities Act of 1933 in
selling a portfolio security;
(3) Purchase or sell real estate (including limited partnership interests
but excluding Municipal Bonds secured by real estate or interests therein),
interests in oil, gas or mineral leases, commodities or commodity contracts
(except Futures Contracts and Options on Futures Contracts) in the ordinary
course of its business;
(4) Make loans to other persons except through the use of repurchase
agreements or the purchase of commercial paper. Not more than 10% of its total
assets will be invested in repurchase agreements maturing in more than seven
days. For these purposes the purchase of a portion of an issue of debt
securities which is part of an issue to the public shall not be considered the
making of a loan;
(5) 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 or its agencies or instrumentalities, or
invest more than 25% of its total assets taken at market value in securities
of issuers in any one industry;
(6) 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 Trust, or is a member, partner, officer or Director of the
Adviser, if after the purchase of the securities of such issuer by the Fund
one or more of such persons owns beneficially more than 1/2 of 1% of the
shares or securities, or both, all taken at market value, of such issuer, and
such persons owning more than 1/2 of 1% of such shares or securities together
own beneficially more than 5% of such shares or securities, or both, all taken
at market value;
(7) 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 deposits on margin in connection with options, Futures Contracts and
Options on Futures Contracts;
(8) Sell any security which the Fund does not own unless by virtue of its
ownership of other securities it has at the time
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<PAGE> 77
of sale a right to obtain securities without payment of further consideration
equivalent in kind and amount to the securities sold and provided that if such
right is conditional the sale is made upon the same conditions; or
(9) Purchase or sell any put or call option or any combination thereof,
provided that this shall not prevent the writing, purchasing and selling of
puts, calls or combinations thereof with respect to securities and Futures
Contracts.
As a matter of non-fundamental policy, the Fund may not 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 assets would be invested in such securities.
For the purposes of the Fund's investment restrictions, the issuer of a
tax-exempt security is deemed to be the entity (public or private) ultimately
responsible for the payment of the principal of and interest on the security.
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 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 Trustees
and officers are listed below, together with their principal occupations during
the past five years. (Their titles may have varied during that period.)
TRUSTEES
A. KEITH BRODKIN,* Chairman and President
Massachusetts Financial Services Company, Chairman, President and Director
RICHARD B. BAILEY*
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
Private Investor
Address: 211 Lindsay Pond Road, Concord, Massachusetts
J. ATWOOD IVES
Eastern Enterprises (diversified holding company), Chairman and Chief Executive
Officer (since December 1991); General Cinema Corporation, Vice Chairman and
Chief Financial Officer (prior to December 1991); The Neiman Marcus Group,
Inc., Vice Chairman and Chief Financial Officer (prior to February 1992)
Address: 9 Riverside Road, Weston, Massachusetts
LAWRENCE T. PERERA
Hemenway & Barnes (attorneys), Partner
Address: 60 State Street, Boston, Massachusetts
WILLIAM J. POORVU
Harvard University Graduate School of Business Administration, Adjunct
Professor; CBL & Associates Properties, Inc. (a real estate investment trust),
Director; The Baupost Fund (a registered investment company), Vice Chairman
(since November 1993), Chairman and Trustee (prior to November 1993)
Address: Harvard Business School, Soldiers Field Road, Cambridge, Massachusetts
CHARLES W. SCHMIDT
Private Investor; OHM Corporation, Director; The Boston Company, Director;
Boston Safe Deposit and Trust Company, Director; Mohawk Paper Company,
Director
Address: 30 Colpitts Road, Weston, Massachusetts
ARNOLD D. SCOTT*
Massachusetts Financial Services Company, Senior Executive Vice President,
Secretary and Director
JEFFREY L. SHAMES*
Massachusetts Financial Services Company, President and Director
ELAINE R. SMITH
Independent Consultant; Brigham and Women's Hospital, Executive Vice President
and Chief Operating Officer (from August 1990 to September 1992)
Address: Weston, Massachusetts
DAVID B. STONE
North American Management Corp. (investment adviser), Chairman and Director;
Eastern Enterprises, Director
Address: 10 Post Office Square, Suite 300, Boston, Massachusetts
OFFICERS
W. THOMAS LONDON,* Treasurer
Massachusetts Financial Services Company, Senior Vice President
STEPHEN E. CAVAN,* Secretary and Clerk
Massachusetts Financial Services Company, Senior Vice President, General Counsel
and Assistant Secretary
JAMES R. BORDEWICK, JR.,* Assistant Secretary
Massachusetts Financial Services Company, Vice President and Associate General
Counsel
ROBERT A. DENNIS,* Vice President
Massachusetts Financial Services Company, Senior Vice President
GEOFFREY L. KURINSKY,* Vice President
Massachusetts Financial Services Company, Senior Vice President
JAMES O. YOST,* Assistant Treasurer
Massachusetts Financial Services Company, Vice President
- ---------------
*"Interested persons" (as defined in the Investment Company Act of 1940 (the
"1940 Act") of the Adviser, whose address is 500 Boylston Street, Boston,
Massachusetts 02116.
Each Trustee and officer holds comparable positions with certain MFS affiliates
or with certain other funds of which MFS or a subsidiary of MFS is the
investment adviser or distributor. Mr. Brodkin, the Chairman of MFD, Messrs.
Shames and Scott, Directors of MFD, and Mr. Cavan, the Secretary of MFD hold
similar positions with certain other MFS affiliates. Mr. Bailey is a Director of
Sun Life Assurance Company of Canada (U.S.) ("Sun Life of Canada (U.S.)"), the
corporate parent of MFS.
The Fund pays the compensation of non-interested Trustees and Mr. Bailey (who
currently receive a fee of $4,500 per year plus $375 per meeting and $175 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
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<PAGE> 78
age 73 and if the Trustee has completed at least five years of service, he would
be entitled to annual payments during his lifetime of up to 50% of such
Trustee's average annual compensation (based on the three years prior to his
retirement) depending on his length of service. A Trustee may also retire prior
to age 73 and receive reduced payments if he has completed at least five years
of service. Under the plan, a Trustee (or his beneficiaries) will also receive
benefits for a period of time in the event the Trustee is disabled or dies.
These benefits will also be based on the Trustee's average annual compensation
and length of service. There is no retirement plan provided by the Trust for
Messrs. Brodkin, Scott and Shames. The Fund will accrue its allocable share of
compensation expenses each year to cover current year's service and amortize
past service cost.
Set forth in Exhibit A hereto is certain information concerning the cash
compensation paid to the Trustees and benefits accrued, and estimated benefits
payable, under the retirement plan.
As of November 30, 1995, all Trustees and officers as a group owned less than 1%
of the outstanding shares of the Fund.
As of November 30, 1995, Merrill Lynch, Pierce, Fenner & Smith Inc. P.O. Box
45286, Jacksonville, FLA 32232-5286 was the record holder of approximately 5.41%
of the outstanding Class B shares of the Fund.
The Trust's Declaration of Trust provides that it will indemnify its Trustees
and officers against liabilities and expenses incurred in connection with
litigation in which they may be involved because of their offices with the
Trust, unless, as to liabilities to the Trust or its shareholders, it is finally
adjudicated that they engaged in willful misfeasance, bad faith, gross
negligence or reckless disregard of the duties involved in their offices, or
with respect to any matter, unless it is adjudicated that they did not act in
good faith in the reasonable belief that their actions were in the best interest
of the Trust. In the case of settlement, such indemnification will not be
provided unless it has been determined pursuant to the Declaration of Trust that
such officers or Trustees have not engaged in willful misfeasance, bad faith,
gross negligence or reckless disregard of their duties.
INVESTMENT ADVISER
MFS and its predecessor organizations have a history of money management dating
from 1924. MFS is a wholly owned subsidiary of Sun Life of Canada (U.S.) which
in turn is a wholly owned subsidiary of Sun Life Assurance Company of Canada
("Sun Life").
The Adviser manages the Fund pursuant to an Investment Advisory Agreement, dated
September 1, 1993 (the "Advisory Agreement"). The Adviser provides the Fund with
overall investment advisory and administrative services, as well as general
office facilities. Subject to such policies as the Trustees may determine, the
Adviser makes investment decisions for the Fund. For these services and
facilities, the Adviser receives a management fee computed and paid monthly on
the basis of a formula based upon a percentage of the Fund's average daily net
assets plus a percentage of its gross income (i.e., income other than gains from
the sale of securities) in each case on an annualized basis for the Fund's then
current fiscal year. The applicable percentages are reduced as assets and income
reach the following levels:
<TABLE>
<CAPTION>
ANNUAL RATE OF MANAGEMENT FEE
BASED ON AVERAGE DAILY NET ANNUAL RATE OF MANAGEMENT FEE
ASSETS BASED ON GROSS INCOME
- ------------------------------- -------------------------------
<S> <C>
.220% of the first $200 million 4.12% of the first $16 million
.187% of average daily net 3.51% of gross income in excess
assets in excess of $200 million of 16 million
.168% of average daily net 3.16% of gross income in excess
assets in excess of $200 million of $160 million
</TABLE>
For the Fund's fiscal years ended October 31, 1993, August 31, 1994 and August
31, 1995, MFS received management fees of $8,551,732, $7,253,533 and $8,210,290,
respectively.
In order to comply with the expense limitations of certain state securities
commissions, the Adviser will reduce its management fee or otherwise reimburse
the Fund for any expenses, exclusive of interest, taxes and brokerage
commissions, incurred by the Fund in any fiscal year to the extent such expenses
exceed the most restrictive of such state expense limitations. The Adviser will
make appropriate adjustments to such reimbursements in response to any amendment
or rescission of the various state requirements. Any such adjustment would not
become effective until the beginning of the Fund's next fiscal year following
the date of such amendments or the date on which such requirements become no
longer applicable.
The Fund pays all of its expenses (other than those assumed by MFS or MFD),
including: Trustees fees discussed above; governmental fees; interest charges;
taxes; membership dues in the Investment Company Institute allocable to the
Fund; fees and expenses of independent auditors, of legal counsel, and of any
transfer agent, registrar or dividend disbursing agent of the Fund; expenses of
repurchasing and redeeming shares; expenses of preparing, printing and mailing
share certificates, shareholder reports, notices, proxy statements and reports
to governmental officers and commissions; brokerage and other expenses connected
with the execution, recording and settlement of portfolio security transactions;
insurance premiums; fees and expenses of State Street Bank and Trust Company,
the Fund's custodian, for all services to the Fund, including safekeeping of
funds and securities and maintaining required books and accounts; expenses of
calculating the net asset value of the Fund's shares; and expenses of
shareholder meetings. Expenses relating to the issuance, registration and
qualification of shares of the Fund and the preparation, printing and mailing of
prospectuses for such purposes are borne by the Fund except that its
Distribution Agreement with MFD requires MFD to pay for prospectuses which are
to be used for sales purposes. For a list of the Fund's expenses, including the
compensation paid to the Trustees who are not officers of the Fund, during the
Fund's fiscal year ended August 31, 1995, see "Financial Statements -- Statement
of Operations" in the Annual Report.
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
9
<PAGE> 79
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, 1996, 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 a majority of the Fund's shares (as
defined in "Investment Restrictions") or by either party on not more than 60
days' nor less than 30 days' written notice. The Advisory Agreement provides
that if MFS ceases to serve as Adviser to the Fund, the Fund will change its
name so as to delete the initials "MFS". The Advisory Agreement further provides
that MFS may render services to others and may permit fund clients in addition
to the Fund to use the initials "MFS" in their names. The Advisory Agreement
also provides that neither MFS nor its personnel shall be liable for any error
of judgment or mistake of law or for any loss arising out of any investment or
for any act or omission in the execution and management of the Fund, except for
willful misfeasance, bad faith or gross negligence in the performance of its or
their duties or by reason of reckless disregard of its or their obligations and
duties under the Advisory Agreement.
CUSTODIAN
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, including
repurchase agreements, issued by the Custodian and may deal with the Custodian
as principal in securities transactions. The Custodian also acts as the dividend
disbursing agent for the Fund. The Custodian has contracted with the Adviser for
the Adviser to perform certain accounting functions related to options
transactions for which the Adviser receives remuneration on a cost basis.
SHAREHOLDER SERVICING AGENT
MFS Service Center, Inc. (the "Shareholder Servicing Agent"), a wholly owned
subsidiary of MFS, is the Fund's shareholder servicing agent, pursuant to a
Shareholder Servicing Agreement, effective August 1, 1985, as amended (the
"Agency Agreement") with the Fund. The Shareholder Servicing Agent's
responsibilities under the Agency Agreement include administering and performing
transfer agent functions and 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 each class of shares at an effective rate of up to
0.15% and up to 0.22% attributable to Class A and Class B shares, respectively.
In addition, the Shareholder Servicing Agent is 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 disbursing agent of the
Fund, has contracted with the Shareholder Servicing Agent to administer and
perform certain dividend and distribution disbursing functions for the Fund.
DISTRIBUTOR
MFD, a wholly owned subsidiary of MFS, serves as distributor for the continuous
offering of shares of the Fund pursuant to a distribution agreement dated
January 1, 1995 (the "Distribution Agreement"). Prior to January 1, 1995, MFS
Financial Services, Inc. ("FSI"), another wholly owned subsidiary of MFS, was
the Fund's distributor. Where this SAI refers to MFD in relation to the receipt
or payment of money with respect to a period or periods prior to January 1,
1995, such reference shall be deemed to include FSI, as the predecessor in
interest to MFD.
CLASS A SHARES: MFD acts as agent in selling Class A shares of the Fund to
dealers. The public offering price of Class A shares of the Fund is their net
asset value next computed after the sale plus a sales charge which varies based
upon the quantity purchased. The public offering price of Class A shares of the
Fund is calculated by dividing the net asset value of a Class A share by the
difference (expressed as a decimal) between 100% and the sales charge percentage
of offering price applicable to the purchase (see "Purchases" in the
Prospectus). The sales charge scale set forth in the Prospectus applies to
purchases of Class A shares of the Fund alone or in combination with shares of
all classes of certain other funds in the MFS Family of Funds (the "MFS Funds")
and other funds (as noted under Right of Accumulation) by any person, including
members of a family unit (e.g., husband, wife and minor children) and bona fide
trustees, and also applies to purchases made under the Right of Accumulation or
a Letter of Intent (see "Investment and Withdrawal Programs"). A group might
qualify to obtain quantity sales charge discounts (see "Investment and
Withdrawal Programs").
Class A shares of the Fund may be sold at their net asset value to certain
persons and in certain instances as described in the Prospectus. Such sales are
made without a sales charge to promote good will with employees and others with
whom MFS, MFD and/or the Fund have business relationships, and because the sales
effort, if any, involved in making such sales is negligible.
MFD allows discounts to dealers (which are alike for all dealers) from the
applicable public offering price of the Class A shares. Dealer allowances
expressed as a percentage of offering price for all offering prices are set
forth in the Prospectus (see "Purchases" in the Prospectus). The difference
between the total amount invested and the sum of (a) the net proceeds to
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<PAGE> 80
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 underwriter may vary and the total sales
charge may be more or less than the sales charge calculated using the sales
charge expressed as a percentage of offering price or as a percentage of the net
amount invested as listed in the Prospectus. In the case of the maximum sales
charge, the dealer retains 4% and MFD retains approximately 3/4 of 1% of the
public offering price. In addition, MFD pays a commission to dealers who
initiate and are responsible for purchases of $1 million or more as described in
the Prospectus.
CLASS B SHARES: MFD acts as agent in selling Class B shares of the Fund to
dealers. The public offering price of Class B shares is their net asset value
next computed after the sale (see "Purchases" in the Prospectus).
GENERAL: Neither MFD nor dealers are permitted to delay 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 August 31, 1995, MFD and certain other
financial institutions received net commissions of $329,416 and $2,085,672,
respectively (as their concession on gross commissions of $2,415,088). The Fund
received $177,845,426, representing the aggregate net asset value of such
shares. During the Fund's fiscal year ended August 31, 1994, MFD and certain
other financial institutions received net commissions of $647,256 and
$3,402,551, respectively (as their concession on gross commissions of
$4,049,807). The Fund received $212,584,258, representing the aggregate net
asset value of such shares. During the Fund's fiscal year ended October 31,
1993, MFD and certain other financial institutions received net commissions of
$1,126,248 and $7,243,011, respectively (as their concession on gross commission
of $8,369,259). The Fund received $307,187,506 representing the aggregate net
asset value of such shares. During the Fund's fiscal year ended August 31, 1995
the CDSC imposed upon the redemption of Class A and Class B shares was $6,621
and $221,978, respectively.
The Distribution Agreement will remain in effect until August 1, 1996, and will
continue in effect thereafter only if such continuance is specifically approved
at least annually by the Board of Trustees or by vote of a majority of the
Trust's shares (as defined in "Investment Restrictions") and, in either case, by
a majority of the Trustees who are not parties to the Distribution Agreement or
interested persons of any such party. The Distribution Agreement terminates
automatically if it is assigned and may be terminated without penalty by either
party on not more than 60 days' nor less than 30 days' notice.
4. PORTFOLIO TRANSACTIONS AND
BROKERAGE COMMISSIONS
Specific decisions to purchase or sell securities for the Fund are made by a
portfolio committee, consisting of employees of the Adviser who are appointed
and supervised by its senior officers. Changes in the Fund's investments are
reviewed by the Board of Trustees. Members of the Fund's portfolio committee may
serve other clients of the Adviser or any subsidiary of the Adviser in a similar
capacity.
The primary consideration in placing portfolio security transactions is
execution at the most favorable price. The Adviser has complete freedom as to
the markets in and broker-dealers through which it seeks this result. Municipal
Bonds and other debt securities are traded principally in the over-the-counter
market on a net basis through dealers acting for their own account and not as
brokers. The cost of securities purchased from underwriters includes an
underwriter's commission or concession, and the prices at which securities are
purchased and sold from and to dealers include a dealer's mark-up or mark-down.
The Adviser attempts to negotiate with underwriters to decrease the commission
or concession for the benefit of the Fund. The Adviser normally seeks to deal
directly with the primary market makers unless, in its opinion, better prices
are available elsewhere. Securities firms or futures commission merchants may
receive brokerage commissions on transactions involving Futures Contracts and
Options on Futures Contracts. Subject to the requirement of seeking execution at
the best available price, securities may, as authorized by the Advisory
Agreement, be bought from or sold to dealers who have furnished statistical,
research and other information or services to the Adviser. At present no
arrangements for the recapture of commission payments are in effect.
Consistent with the foregoing primary consideration, the Rules of Fair Practice
of the NASD and such other policies as the Trustees may determine, the Adviser
may consider sales of shares of the Fund and of the other investment company
clients of MFD as a factor in the selection of broker-dealers to execute the
Fund's portfolio transactions.
In certain instances there may be securities which are suitable for the Fund's
portfolio as well as for that of one or more of the other clients of the Adviser
or any subsidiary of the Adviser. Investment decisions for the Fund and for such
other clients are made with a view to achieving their respective investment
objectives. It may develop that a particular security is bought or sold for only
one client even though it might be held by, or bought or sold for, other
clients. Likewise, a particular security may be bought for one or more clients
when one or more other clients are selling that same security. Some simultaneous
transactions are inevitable when several clients receive investment advice from
the same investment adviser, particularly when the same security is suitable for
the investment objectives of more than one client. When two or more clients are
simultaneously engaged in the purchase or sale of the same security, the
securities are allocated among clients in a manner believed 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
11
<PAGE> 81
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 $100,000 or more of Class A shares of the Fund
alone or in combination with shares of either class of other MFS Funds or 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 period or 36-month period, as
applicable), the shareholder will be notified and the escrowed shares will be
released.
If the intended investment is not completed, the Shareholder Servicing Agent
will redeem an appropriate number of the escrowed shares in order to realize
such difference. Shares remaining after any such redemption will be released by
the Shareholder Servicing Agent. By completing and signing the Account
Application or separate Letter of Intent application, the shareholder
irrevocably appoints the Shareholder Servicing Agent his attorney to surrender
for redemption any or all escrowed shares with full power of substitution in the
premises.
RIGHT OF ACCUMULATION: A shareholder qualifies for cumulative quantity
discounts on the purchase of Class A shares when that shareholder's new
investment, together with the current offering price value of all the holdings
of all classes of shares of that shareholder in the MFS Funds or MFS Fixed Fund
(a bank collective investment fund) reaches a discount level (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 $25,000 of Class A
shares of the Fund, the sales charge for the $25,000 purchase would be at the
rate of 4% (the rate applicable to single transactions of $100,000). A
shareholder must provide the Shareholder Servicing Agent (or his investment
dealer must provide MFD) with information to verify that the quantity sales
charge discount is applicable at the time the investment is made.
DISTRIBUTION INVESTMENT PROGRAM: Distributions of dividends and capital gains
made by the Fund with respect to a particular class of shares may be
automatically invested in shares of the same class of shares 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 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 shares in any year pursuant to a SWP generally
are limited to 10% of the value of the account at the time of establishment of
the SWP. SWP payments are drawn from the proceeds of share redemptions (which
would be a return of principal and, if reflecting a gain, would be taxable).
Redemptions of Class B shares will be made in the following order: (i) any "Free
Amount"; (ii) to the extent necessary, any "Reinvested Shares"; and (iii) to the
extent necessary, the "Direct Purchase" subject to the lowest CDSC (as such
terms are defined in "Contingent Deferred Sales Charge" in the Prospectus). The
CDSC will be waived in the case of redemptions of Class B shares pursuant to a
SWP, but will not be waived in the case of SWP redemptions of Class A shares
which are subject to a CDSC. To the extent that
12
<PAGE> 82
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
or 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 the imposition of a
CDSC on certain redemptions. The shareholder may deposit into the account
additional shares of the Fund, change the payee or change the dollar amount of
each payment. The Shareholder Servicing Agent may charge the account for
services rendered and expenses incurred beyond those normally assumed by the
Fund with respect to the liquidation of shares. No charge is currently assessed
against the account, but one could be instituted by the Shareholder Servicing
Agent on 60 days' notice in writing to the shareholder in the event that the
Fund ceases to assume the cost of these services. The Fund may terminate any SWP
for an account if the value of the account falls below $5,000 as a result of
share redemptions (other than as a result of a SWP) or an exchange of shares of
the Fund for shares of another MFS Fund. Any SWP may be terminated at any time
by either the shareholder or the Fund.
INVEST BY MAIL: Additional investments of $50 or more may be made at any time
by mailing a check payable to the Fund directly to the Shareholder Servicing
Agent. The shareholder's account number and the name of his investment dealer
must be included with each investment.
GROUP PURCHASES: A bona fide group and all its members may be treated as a
single purchaser and, under the Right of Accumulation (but not a Letter of
Intent), obtain quantity sales charge discounts on the purchase of Class A
shares if the group (1) gives its endorsement or authorization to the investment
program so it may be used by the investment dealer to facilitate solicitation of
the membership, thus effecting economies of sales effort; (2) has been in
existence for at least six months and has a legitimate purpose other than to
purchase mutual fund shares at a discount; (3) is not a group of individuals
whose sole organizational nexus is as credit cardholders of a company,
policyholders of an insurance company, customers of a bank or broker-dealer,
clients of an investment adviser or other similar groups; and (4) agrees to
provide certification of membership of those members investing money in the MFS
Funds upon the request of MFD.
AUTOMATIC EXCHANGE PLAN: Shareholders having account balances of at least
$5,000 in any MFS Fund may exchange their shares for the same class of shares of
the other MFS Funds, if available for sale, under the Automatic Exchange Plan.
The Automatic Exchange Plan provides for automatic exchanges of funds from the
shareholder's account in an MFS Fund for investment in the same class of shares
of other MFS Funds selected by the shareholder. Under the Automatic Exchange
Plan, exchanges of at least $50 each may be made to up to four different funds
effective on the seventh day of each month or of every third month, depending
whether monthly or quarterly exchanges are elected by the shareholder. If the
seventh day of the month is not a business day, the transaction will be
processed on the next business day. Generally, the initial exchange will occur
after receipt and processing by the Shareholder Servicing Agent of an
application in good order. Exchanges will continue to be made from a
shareholder's account in any MFS Fund, as long as the balance of the account is
sufficient to complete the 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 an 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 and the
timing of exchanges (monthly or quarterly), or termination of a shareholder's
participation in the Automatic Exchange Plan will be made after instructions in
writing or by telephone (an "Exchange Change Request") are received by the
Shareholder Servicing Agent in proper form (i.e., if in writing -- signed by the
record owner(s) exactly as shares are registered; if by telephone -- proper
account identification is given by the dealer or shareholder of record). Each
Exchange Change Request (other than termination of participation in the program)
must involve at least $50. Generally, if an Exchange Change Request is received
by telephone or in writing before the close of business on the last business day
of a month, the Exchange Change Request will be effective for the following
month's exchange.
A shareholder's right to make additional investments in any of the MFS Funds, to
make exchanges of shares from one MFS Fund to another and to withdraw from an
MFS Fund, as well as a shareholder's other rights and privileges are not
affected by a shareholder's participation in the Automatic Exchange Plan.
The Automatic Exchange Plan is part of the Exchange Privilege. For additional
information regarding the Automatic Exchange Plan, including the treatment of
any CDSC, see "Exchange Privilege" below.
REINSTATEMENT PRIVILEGE: Shareholders of the Fund and shareholders of the
other MFS Funds (except MFS Money Market Fund, MFS Government Money Market Fund
and holders of Class A shares of MFS Cash Reserve Fund in the case where the
shares are acquired through direct purchase or reinvested
13
<PAGE> 83
dividends) who have redeemed their shares have a one-time right to reinvest the
redemption proceeds in 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 12 months of the
initial purchase in the case of certain Class A shares, a CDSC will be imposed
upon redemption. Although redemptions and repurchases of shares are taxable
events, a reinvestment within such 90-day period of time in the same fund may be
considered a "wash sale" and may result in the inability to recognize currently
all or a portion of any loss realized on the original redemption for federal
income tax purposes. Please see your tax adviser for further information.
EXCHANGE PRIVILEGE -- Subject to the requirements set forth below, some or all
of the shares in an account with the Fund for which payment has been received by
the Fund (i.e., an established account) may be exchanged for shares of the same
class of any of the other MFS Funds (if available for sale) at net asset value.
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) record keeping system made available by the Shareholder Servicing
Agent) or all the shares in the account. Each exchange involves the redemption
of the shares of the Fund to be exchanged and the purchase at net asset value
(i.e., without a sales charge) of shares of the same class of the other MFS
Fund. Any gain or loss on the redemption of the shares exchanged is reportable
on the shareholder's federal income tax return. No more than five exchanges may
be made in any one Exchange Request by telephone. If an Exchange Request is
received by the Shareholder Servicing Agent prior to the close of regular
trading on the New York Stock Exchange (the "Exchange"), the exchange usually
will occur on that day if all of the requirements set forth above have been
complied with at that time. However, payment of the redemption proceeds by the
Fund, and thus the purchase of shares of the other MFS Fund, may be delayed for
up to seven days if the Fund determines that such a delay would be in the best
interest of all its shareholders. Investment dealers which have satisfied
criteria established by MFD may also communicate a shareholder's Exchange
Request to MFD by facsimile subject to the requirements set forth above.
No CDSC is imposed on exchanges among the MFS Funds, although liability for the
CDSC is carried forward to the exchanged shares. For purposes of calculating the
CDSC upon redemption of shares acquired in an exchange, the purchase of shares
acquired in one or more exchanges is deemed to have occurred at the time of the
original purchase of the exchanged shares.
Additional information with respect to any of the MFS Funds, including a copy of
its current prospectus, may be obtained from investment dealers or the
Shareholder Servicing Agent. A shareholder considering an exchange should obtain
and read the prospectus of the other MFS Fund and consider the differences in
objectives and policies before making any exchange. Shareholders of the other
MFS Funds (except holders of shares of MFS Money Market Fund, MFS Government
Money Market Fund and Class A shares of MFS Cash Reserve Fund acquired through
direct purchase or reinvested dividends prior to June 1, 1992) have the right to
exchange their shares for shares of the Fund, subject to the conditions, if any,
set forth in their respective prospectuses. In addition, unitholders of the MFS
Fixed Fund (a bank collective investment fund) have the right to exchange their
units (except units acquired through direct purchase) for shares of the Fund,
subject to the conditions, if any, imposed upon such unitholders by the MFS
Fixed Fund.
Any state income tax advantages for investment in shares of each state specific
series of MFS Municipal Series Trust may only benefit residents of such states.
Investors should consult with their own tax advisers to be sure this is an
appropriate investment, based on their residency and each state's income tax
laws.
The exchange privilege (or any aspect of it) may be changed or discontinued and
is subject to certain limitations, including certain restrictions on purchases
by market timers (see "Purchases" in the Prospectus).
6. TAX STATUS
The Fund has elected to be treated and intends to qualify each year as a
"regulated investment company" under Subchapter M of the Internal Revenue Code
of 1986, as amended (the "Code"), by meeting all applicable requirements of
Subchapter M, including requirements as to the nature of the Fund's gross
income, the amount of Fund distributions, and the composition and holding period
of the Fund's portfolio assets. Because the Fund intends to distribute all of
its net investment income and net realized capital gains to shareholders in
accordance with the timing requirements imposed by the Code, it is not expected
that the Fund will be required to pay federal income or excise taxes. If the
Fund should fail to qualify as a "regulated investment company" in any year, the
Fund would incur a regular corporate federal income tax upon its taxable income
and Fund distributions would generally be taxable as ordinary dividend income to
the shareholders.
14
<PAGE> 84
That part of the Fund's net investment income which is attributable to interest
from tax-exempt securities and which is distributed to shareholders will be
designated by the Fund as an "exempt-interest dividend" under the Code and will
generally be exempt from federal income tax in the hands of shareholders so long
as at least 50% of the total value of the Fund's assets consists of tax-exempt
securities at the close of each quarter of the Fund's taxable year.
Distributions of tax-exempt interest earned from certain securities may,
however, be treated as an item of tax preference for shareholders under the
federal alternative minimum tax, and all exempt-interest dividends may increase
a corporate shareholder's alternative minimum tax. The percentage of income
designated as tax-exempt will be applied uniformly to all distributions by the
Fund of net investment income made during each fiscal year and may differ from
the actual tax-exempt percentage for any particular month. Except when the Fund
provides actual monthly percentage breakdowns, the percentage of income
designated as tax-exempt will be applied uniformly to all distributions by the
Fund of net investment income made during each taxable year of the Fund and may
differ from the percentage of distributions consisting of tax-exempt interest in
any particular month. Shareholders are required to report exempt-interest
dividends received from the Fund on their federal income tax returns.
The Fund may also recognize some net investment income that is not tax-exempt
from investments in taxable securities and from certain securities (including
Municipal Bonds) purchased at a market discount, as well as capital gains and
losses as a result of the disposition of securities and from certain options and
futures transactions. Shareholders of the Fund will have to pay federal income
taxes, and any state or local income taxes, on the non-exempt interest dividends
and capital gain distributions they receive from the Fund. That portion of net
investment income distributions not designated as tax-exempt and any
distributions from net short-term capital gains (whether paid in cash or
reinvested in additional shares) are taxable to shareholders as ordinary income
for federal income tax purposes. Because the Fund expects to earn primarily
tax-exempt interest income, it is expected that no Fund dividends will qualify
for the dividends received deduction for corporations. Distributions of net
capital gains (i.e., the excess of the net long-term capital gains over the
short-term capital losses), whether paid in cash or reinvested in additional
shares, are taxable to the Fund's shareholders as long-term capital gains for
federal income tax purposes regardless of how long they have held their shares.
Fund dividends declared in October, November, or December that are payable to
shareholders of record in such a month, and that are paid the following January,
will be taxable to shareholders as if received on December 31 of the year in
which they are declared.
Interest on indebtedness incurred by shareholders to purchase or carry shares of
the Fund will not be deductible for Federal income tax purposes. Exempt-interest
dividends are taken into account in calculating the amount of social security
and railroad retirement benefits that may be subject to federal income tax.
Entities or persons who are "substantial users" (or persons related to
"substantial users") of facilities financed by certain private activity bonds
should consult their tax advisers before purchasing shares of the Fund.
"Substantial user" is defined generally as including a "nonexempt person" who
regularly uses in trade or business a part of a facility financed from the
proceeds of certain private activity bonds.
In general, any gain or loss realized upon a taxable disposition of shares of
the Fund by a shareholder that holds such shares as a capital asset will be
treated as long-term capital gain or loss if the shares have been held for more
than twelve months and otherwise as a short-term capital gain or loss. However,
any loss realized upon a disposition of shares in the Fund held for six months
or less will be disallowed to the extent of any exempt-interest dividends
received with respect to those shares. If not disallowed, any such loss will be
treated as a long-term capital loss to the extent of any distributions of net
capital gain made with respect to those shares. Any loss realized upon a
redemption of shares may also be disallowed under rules relating to wash sales.
Gain may be increased (or loss reduced) upon a redemption of Class A shares of
the Fund within ninety days after their purchase followed by any purchase
(including purchases by exchange or by reinvestment) without payment of an
additional sales charge of Class A shares of the Fund or of any other 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. The
Fund's investment in zero coupon bonds and certain securities purchased at a
market discount will cause it to realize 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 Options on Futures
Contracts will be subject to special tax rules that may affect the amount,
timing, and character of Fund income and distributions to shareholders. For
example, certain positions held by the Fund on the last business day of each
taxable year will be marked to market (i.e., treated as if closed out) on such
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 Options on Futures Contracts to the extent necessary to meet the
requirements of Subchapter M of the Code.
15
<PAGE> 85
Dividends and certain other payments to persons who are not citizens or
residents of the United States or U.S. entities ("Non-U.S. Persons") are
generally subject to U.S. tax withholding at a rate of 30%. The Fund intends to
withhold U.S. federal income tax at the rate of 30% on taxable dividends and
other payments to Non-U.S. Persons that are subject to such withholding,
regardless of whether a lower treaty rate may be permitted. Any amounts
overwithheld may be recovered by such persons by filing a claim for refund with
the U.S. Internal Revenue Service within the time period applicable to such
claims. The Fund is also required in certain circumstances to apply backup
withholding at a rate of 31% on taxable dividends and redemption proceeds paid
to any shareholder (including a Non-U.S. Person) who does not furnish to the
Fund certain information and certifications or who is otherwise subject to
backup withholding. Backup withholding will not, however, be applied to payments
that have been subject to 30% withholding.
As long as it qualifies as a regulated investment company under the Code, the
Fund will not be required to pay Massachusetts income or excise taxes.
The exemption of exempt-interest dividends for federal income tax purposes does
not necessarily result in exemption under the income or other tax laws of any
state or local taxing authority. Some states do exempt from tax that portion of
the exempt-interest dividend which represents interest received by a regulated
investment company on its holding of securities of that state and its political
subdivisions and instrumentalities. Therefore, the Fund will report annually to
its shareholders the percentage of interest income earned by the Fund during the
preceding year on Municipal Bonds and will indicate, on a state-by-state basis
only, the source of such income. Each shareholder is advised to consult his own
tax adviser regarding the exemption of exempt-interest dividends under
applicable state or local law.
7. DETERMINATION OF NET ASSET VALUE AND PERFORMANCE
NET ASSET VALUE: The net asset value per share of each class of the Fund is
determined each day during which the Exchange is open for trading. (As of the
date of this SAI, the Exchange is open for trading every weekday except for the
following holidays or the days on which they are observed: New Year's Day,
Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day and Christmas Day.) This determination is made once during each
such day as of the close of regular trading on the Exchange by deducting the
amount of the liabilities attributable to the class from the value of the assets
attributable to the class and dividing the difference by the number of shares of
the class outstanding. Debt securities (other than short-term obligations),
including listed issues, are valued on the basis of valuations furnished by a
pricing service which utilizes both dealer-supplied valuations and electronic
data processing techniques which take into account appropriate factors such as
institution-size trading in similar groups of securities, yield, quality, coupon
rate, maturity, type of issue, trading characteristics and other market data,
without exclusive reliance upon exchange or over-the-counter prices, since such
valuations are believed to reflect more accurately the fair value of such
securities. Use of the pricing service has been approved by the Trust's Board of
Trustees. 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. Positions in listed options, Futures
Contracts and Options on Futures Contracts will normally be valued at the
settlement price on the exchange on which they are primarily traded. Positions
in over-the-counter options will be valued using dealer supplied valuations.
Portfolio securities for which there are no such valuations are valued at fair
value as determined in good faith by or at the direction of the Board of
Trustees.
PERFORMANCE INFORMATION
TOTAL RATE OF RETURN: The Fund will calculate its total rate of return for each
class of shares for certain periods by determining the average annual compounded
rates of return over those periods that would cause an investment of $1,000
(made with all dividends and distributions reinvested and reflecting the CDSC or
the maximum public offering price) to reach the value of that investment at the
end of the periods. The Fund may also calculate (i) a total rate of return,
which is not reduced by the CDSC (4% maximum for Class B shares) and therefore
may result in a higher rate of return, (ii) a total rate of return assuming an
initial account value of $1,000, which will result in a higher rate of return
since the value of the initial account will not be reduced by the maximum sales
charge (currently 4.75%) and/or (iii) total rates of return which represent
aggregate performance over a period or year-by-year performance, and which may
or may not reflect the effect of the maximum or other sales charge or CDSC. The
Fund's average annual total rate of return for Class A shares reflecting the
initial investment at the maximum public offering price for the one-year,
five-year and ten-year periods ended August 31, 1995 was 2.24%, 7.77% and 8.77%
respectively. The Fund's average annual total rate of return for Class A shares,
not giving effect to the sales charge on the initial investment, for the
one-year, five-year and ten-year periods ended August 31, 1995 was 7.31%, 8.82%
and 9.29% respectively.
The Fund's average annual total rate of return for Class B shares, reflecting
the CDSC, for the one-year period ended August 31, 1995 and the period from
September 7, 1993 to August 31, 1995 was 2.35% and -0.30%, respectively. The
Fund's average annual rate of return for Class B shares, not reflecting the CDSC
for the one-year period ended August 31, 1995 and the period from September 7,
1993 to August 31, 1995 was 6.35% and 1.56%, respectively.
PERFORMANCE RESULTS: The performance results for Class A shares below, based on
an assumed initial investment of $10,000 in Class A shares, cover the period
from January 1, 1985 to December 31, 1994. It has been assumed that dividend and
capital gain distributions were reinvested in additional shares. These
performance results, as well as any yield, tax-equivalent yield or total rate of
return quotation provided by the Fund, should not be considered as
representative of the per-
16
<PAGE> 86
formance of the Fund in the future since the net asset value and public offering
price of shares of the Fund will vary based not only on the type, quality and
maturities of the securities held in the Fund's portfolio, but also on changes
in the current value of such securities and on changes in the expenses of the
Fund. These factors and possible differences in the methods used to calculate
yields, tax-equivalent yields and total rates of return should be considered
when comparing the yield, tax-equivalent yield and total rate of return of the
Fund to yields, tax-equivalent yields and total rates of return published for
other investment companies or other investment vehicles. Total rate of return
reflects the performance of both principal and income. Current net asset value
as well as account balance information may be obtained by calling 1-800-MFS-TALK
(637-8255).
<TABLE>
MFS MUNICIPAL BOND FUND -- CLASS A
<CAPTION>
VALUE OF VALUE OF VALUE OF
YEAR ENDED INITIAL $10,000 CAPITAL GAIN REINVESTED TOTAL
DECEMBER 31, INVESTMENT DISTRIBUTIONS DIVIDENDS VALUE
- ------------ --------------- ------------ ---------- -------
<S> <C> <C> <C> <C>
1985 10,276 325 890 11,491
1986 10,891 820 1,874 13,585
1987 10,338 778 2,711 13,827
1988 10,665 921 3,852 15,438
1989 10,645 1,358 4,934 16,937
1990 10,584 1,350 6,068 18,002
1991 11,034 1,710 7,571 20,315
1992 11,198 2,041 8,982 22,221
1993 11,793 2,309 11,163 25,265
1994 10,420 2,040 11,163 23,623
</TABLE>
EXPLANATORY NOTES: The results shown in the table assume that the initial
investment was reduced by the current maximum applicable sales charge of 4.75%.
No adjustment has been made for any income taxes payable by shareholders.
YIELD: Any yield quotation for a class of shares of the Fund is based on the
annualized net investment income per share allocated to such class of the Fund
over a 30-day period. The yield for a class of shares of the Fund is calculated
by dividing the net investment income per share of the Fund allocated to such
class earned during the period by the maximum offering price per share of such
class of the Fund on the last day of that period. The resulting figure is then
annualized. Net investment income per share of a class is determined by dividing
(i) the dividends and interest earned by the Fund and allocated to such class
during the period, minus accrued expenses of such class for the period, by (ii)
the average number of Fund 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 for Class A shares. The Fund's yield
calculations assume a maximum sales charge of 4.75%. The yield for Class A
shares and Class B shares of the Fund for the 30-day period ended August 31,
1995 was 5.15% and 4.45%, respectively.
TAX-EQUIVALENT YIELD: The Fund's tax-equivalent yield is calculated by
determining the rate of return that would have to be achieved on a fully taxable
investment to produce the after-tax equivalent of the Fund's yield. In
calculating tax-equivalent yield, the Fund assumes certain tax brackets for
shareholders. The tax-equivalent yield for Class A shares of the Fund for the
30-day period ended August 31, 1995 was 7.15% (assuming a tax bracket of 28%)
and 7.46% (assuming a tax bracket of 31%). The tax-equivalent yield for Class B
shares of the Fund for the 30-day period ended August 31, 1995 was 6.18%
(assuming a tax bracket of 28%) and 6.45% (assuming a tax bracket of 31%).
CURRENT DISTRIBUTION RATE: Yield, which is calculated according to a formula
prescribed by the Securities and Exchange Commission, is not indicative of the
amounts which were or will be paid to the Fund's shareholders. Amounts paid to
shareholders of each class are reflected in the quoted "current distribution
rate" for that class. The current distribution rate for a class is computed by
dividing the total amount of dividends per share paid by the Fund to
shareholders of that class during the past twelve months by the maximum public
offering price of that class at the end of such period. Under certain
circumstances, such as when there has been a change in the amount of dividend
payout, or a fundamental change in investment policies, it might be appropriate
to annualize the dividends paid over the period such policies were in effect,
rather than using the dividends during the past twelve months. The current
distribution rate differs from the yield computation because it may include
distributions to shareholders from sources other than dividends and interest,
such as premium income for option writing, short-term capital gains and return
of invested capital, and is calculated over a different period of time. The
Fund's current distribution rate calculation for Class A shares assumes a
maximum sales charge of 4.75%. The Fund's current distribution rate calculation
for Class B shares assumes no CDSC is paid. The current distribution rate for
Class A shares of the Fund for the twelve-month period ended on August 31, 1995
was 5.27%. The current distribution rate for Class B shares of the Fund based on
the annualization of the last dividend paid during the last fiscal year was
4.56%.
From time to time the Fund may, as appropriate, quote Fund rankings or reprint
all or a portion of evaluations of fund performance and operations appearing in
various independent publications, including but not limited to the following:
Money, Fortune, U.S. News and World Report, Kiplinger's Personal Finance, The
Wall Street Journal, Barron's, Investors Business Daily, Newsweek, Financial
World, Financial Planning, Investment Advisor, USA Today, Pensions and
Investments, SmartMoney, Forbes, Global Finance, Registered Representative,
Institutional Investor, the Investment Company Institute, Johnson's Charts,
Morningstar, Lipper Analytical Services, Inc., CDA Wiesenberger, Shearson Lehman
and Salomon Bros. Indices, Ibbotson, Business Week, Lowry Associates, Media
General, Investment Company Data, The New York Times, Your Money, Strangers
Investment Advisor, Financial Planning on Wall Street, Standard and Poor's,
Individual Investor, The 100 Best Mutual Funds You Can Buy, by Gordon K.
Williamson, Consumer Price Index, and Sanford C. Bernstein & Co. Fund
performance may also be compared to the performance of other mutual funds
tracked by financial or business publications or periodicals.
The Fund may also quote evaluations mentioned in independent radio or television
broadcasts.
17
<PAGE> 87
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 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.
The Fund may advertise examples of the effects of periodic investment plans,
including the principle of dollar cost averaging. In such a program, an investor
invests a fixed dollar amount in a fund at periodic intervals, thereby
purchasing fewer shares when prices are high and more shares when prices are
low. While such a strategy does not assure a profit or guard against a loss in a
declining market, the investor's average cost per share can be lower than if
fixed numbers of shares are purchased at the same intervals.
MFS FIRSTS: MFS has a long history of innovations.
-- 1924 -- Massachusetts Investors Trust is established as the first mutual
fund in America.
-- 1924 -- Massachusetts Investors Trust is the first mutual fund to make
full public disclosure of its operations in shareholder reports.
-- 1932 -- One of the first internal research departments is established to
provide in-house analytical capability for an investment management firm.
-- 1933 -- Massachusetts Investors Trust is the first mutual fund to register
under the Securities Act of 1933 ("Truth in Securities Act" or "Full
Disclosure Act").
-- 1936 -- Massachusetts Investors Trust is the first mutual fund to let
shareholders take capital gain distributions either in additional shares
or in cash.
-- 1976 -- MFS Municipal Bond Fund is among the first municipal bond funds
established.
-- 1979 -- Spectrum becomes the first combination fixed/ variable annuity
with no initial sales charge.
-- 1981 -- MFS World Governments Fund is established as America's first
globally diversified fixed-income mutual fund.
-- 1984 -- MFS Municipal High Income Fund is the first mutual fund to seek
high tax-free income from lower-rated municipal securities.
-- 1986 -- MFS Managed Sectors Fund becomes the first mutual fund to target
and shift investments among industry sectors for shareholders.
-- 1986 -- MFS Municipal Income Trust is the first closed-end, high-yield
municipal bond fund traded on the New York Stock Exchange.
-- 1987 -- MFS Multimarket Income Trust is the first closed-end, multimarket
high income fund listed on the New York Stock Exchange.
-- 1989 -- MFS 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 World Growth Fund is the first global emerging markets fund to
offer the expertise of two sub-advisers.
-- 1993 -- MFS becomes money manager of MFS Union Standard Trust, the first
Trust to invest in companies deemed to be union-friendly by an Advisory
Board of senior labor officials, senior managers of companies with
significant labor contracts, academics and other national labor leaders
or experts.
8. CLASS B DISTRIBUTION PLAN
The Trustees have adopted a Distribution Plan for Class B shares (the
"Distribution Plan") pursuant to Section 12(b) of the 1940 Act and Rule 12b-1
thereunder (the "Rule") after having concluded that there is a reasonable
likelihood that the Distribution Plan would benefit the Fund and its
shareholders. The Distribution Plan is designed to promote sales, thereby
increasing the net assets of the Fund attributable to Class B shares. Such an
increase may reduce the Fund's Class B expense ratio to the extent 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 "Class B
Distribution Plan," which is incorporated herein by reference. The following
information supplements this Prospectus discussion.
SERVICE FEES: Except in the case of the first year service fee, no service fees
will be paid to any securities dealer who is the holder or dealer of record for
investors who own Class B shares having an aggregate net asset value of less
than $750,000 or such other amount as may be determined 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
18
<PAGE> 88
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
fiscal year ended August 31, 1995, 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
DISTRIBUTION PLAN FUND BY MFD BY DEALERS
<S> <C> <C> <C>
Class B Distribution Plan $427,858 $ 362,957 $64,901
</TABLE>
GENERAL: The Distribution Plan will remain in effect until August 1, 1996, 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
the Plan ("Distribution Plan Qualified Trustees"). The Distribution Plan also
requires that the Fund and MFD each shall provide the Trustees, and the Trustees
shall review, at least quarterly, a written report of the amounts expended (and
purposes therefor) under the Plan. The Distribution Plan may be terminated at
any time by vote of a majority of the Distribution Plan Qualified Trustees or by
vote of the holders of a majority of the Class B shares of the Fund (as defined
in "Investment Restrictions"). All agreements relating to the Distribution Plan
entered into between the Fund or MFD and other organizations must be approved by
the Board of Trustees, including a majority of the Distribution Plan Qualified
Trustees. Agreements under the Distribution Plan must be in writing, will be
terminated automatically if assigned, and may be terminated at any time without
payment of any penalty, by vote of a majority of the Distribution Plan Qualified
Trustees or by vote of the holders of a majority of the Class B shares of the
Fund. The Distribution Plan may not be amended to increase materially the amount
of permitted distribution expenses without the approval of a majority of the
Class B shares of the Fund (as defined in "Investment Restrictions") or may be
materially amended in any case without a vote of the Trustees and a majority of
the Distribution Plan Qualified Trustees. The selection and nomination of
Distribution Plan Qualified Trustees shall be committed to the discretion of the
non-interested Trustees then in office. No Trustee who is not an "interested
person" has any financial interest in any of the Distribution Plan or in any
related agreement.
9. DESCRIPTION OF SHARES, VOTING RIGHTS AND LIABILITIES
The Trust's Declaration of Trust permits the Trustees to issue an unlimited
number of full and fractional Shares of Beneficial Interest (without par value)
of one or more series and to divide or combine the shares of any series into a
greater or lesser number of shares without thereby changing the proportionate
beneficial interests in that series. The Trustees have currently authorized
shares of the Fund and three other series. The Declaration of Trust further
authorizes the Trustees to classify or reclassify any series of shares into one
or more classes. Pursuant thereto, the Trustees have authorized the issuance of
two classes of shares for this series of the Trust, Class A shares and Class B
shares. Each share of a class of the Fund represents an equal proportionate
interest in the assets of the Fund allocable to that class. 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
(subject to any expenses attributable 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.
Shareholders are entitled to one vote for each share held and may vote in the
election of Trustees and on other matters submitted to meetings of shareholders.
Although Trustees are not elected annually by the shareholders, shareholders
have under certain circumstances the right to remove one or more Trustees in
accordance with the provisions of section 16(c) of the 1940 Act. No material
amendment may be made to the Trust's Declaration of Trust without the
affirmative vote of a majority of its shares (as defined in "Investment
Restrictions") or without a meeting by an instrument in writing, signed by a
majority of the Trustees and consented to by the holders of not less than a
majority of the shares outstanding and entitled to vote. Shares have no
preemptive or conversion rights (except as described in the Prospectus under
"Purchases -- Conversion of Class B Shares"). Shares are fully paid and
nonassessable. The Trust may enter into a merger or consolidation, or sell all
or substantially all of its assets (or all or substantially all of the assets
belonging to any series of the Trust), if approved by the vote of the holders of
two-thirds of the Trust's outstanding shares voting as a single class, or of the
affected series of the Trust, as the case may be, except that if the Trustees of
the Trust recommend such merger, consolidation or sale, the approval by vote of
the holders of a majority of the Trust's or the affected series' outstanding
shares (as defined in "Investment Restrictions") will be sufficient. The Trust
or any series of the Trust may also be terminated (i) upon liquidation and
distribution of its assets, if approved by the vote of the holders of two-thirds
of its outstanding shares, or (ii) by the Trustees by written notice to the
shareholders of the Trust or the affected series. If not so terminated the Trust
will continue indefinitely.
The Trust is an entity of the type commonly known as a "Massachusetts business
trust". Under Massachusetts law, shareholders of such a trust may, under certain
circumstances, be held personally liable as partners for its obligations.
However, the Declaration of Trust contains an express disclaimer of shareholder
liability for acts or obligations of the Trust and provides for indemnification
and reimbursement of expenses out of the Trust property for any shareholder held
personally liable for the obligations of the Trust. The Declaration of Trust
also provides that the Trust shall maintain appropriate insurance (for example,
fidelity bonding and errors and omissions insurance)
19
<PAGE> 89
for the protection of the Trust, its shareholders, Trustees, officers, employees
and agents covering possible tort and other liabilities. Thus, the risk of a
shareholder incurring financial loss on account of shareholder liability is
limited to circumstances in which both inadequate insurance existed and the
Trust itself was unable to meet its obligations.
The Declaration of Trust further provides that obligations of the Trust are not
binding upon the Trustees individually but only upon the property of the Trust
and that the Trustees will not be liable for any action or failure to act, but
nothing in the Declaration of Trust protects a Trustee against any liability to
which he would otherwise be subject by reason of willful misfeasance, bad faith,
gross negligence, or reckless disregard of the duties involved in the conduct of
his office.
10. INDEPENDENT AUDITORS AND
FINANCIAL STATEMENTS
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 August 31, 1995, the Statement of Assets and
Liabilities at August 31, 1995, the Statement of Operations for the year ended
August 31, 1995, the Statement of Changes in Net Assets for the year ended
August 31, 1995, the ten months ended August 31, 1994 and for the year ended
October 31, 1993, the Notes to Financial Statements and the Independent
Auditors' Report, each of which is included in the Annual Report to shareholders
of the Fund, are incorporated by reference into this SAI and have been so
incorporated in reliance upon the report of Deloitte & Touche LLP, independent
auditors, as experts in accounting and auditing. A copy of the Annual Report
accompanies this SAI.
20
<PAGE> 90
APPENDIX A
<TABLE>
TRUSTEE COMPENSATION TABLE
<CAPTION>
RETIREMENT BENEFIT TOTAL TRUSTEE
TRUSTEE FEES ACCRUED AS ESTIMATED FEES FROM
FROM PART OF FUND CREDITED YEARS FUND AND
TRUSTEE FUND(1) EXPENSE(1) OF SERVICE(2) FUND COMPLEX(3)
- ----------------------------------------------------- ------------ ------------------ -------------- ---------------
<S> <C> <C> <C> <C>
Richard B. Bailey.................................... $7,050 $1,168 8 $ 226,221
A. Keith Brodkin..................................... 0 0 N/A 0
Peter G. Harwood..................................... 7,400 693 5 105,812
J. Atwood Ives....................................... 7,025 1,194 17 106,482
Lawrence T. Perera................................... 6,675 3,085 23 96,592
William Poorvu....................................... 7,400 3,094 23 106,482
Charles W. Schmidt................................... 7,050 2,935 16 98,397
Arnold D. Scott...................................... 0 0 N/A 0
Jeffrey L. Shames.................................... 0 0 N/A 0
Elaine R. Smith...................................... 7,050 1,139 27 98,397
David B. Stone....................................... 7,400 1,796 11 104,007
<FN>
- ---------------
(1) For fiscal year ended August 31, 1995.
(2) Based on normal retirement age of 73.
(3) For calendar year 1994. All Trustees receiving compensation served as
Trustees of 20 funds within the MFS fund complex (having aggregate net
assets at December 31, 1994, of approximately $14 Billion) except Mr.
Bailey, who served as Trustee of 56 funds within the MFS fund complex
(having aggregate net assets at December 31, 1994, of approximately $24
Billion.
</TABLE>
<TABLE>
ESTIMATED ANNUAL BENEFITS PAYABLE BY FUND UPON RETIREMENT(4)
<CAPTION>
YEARS OF SERVICE
AVERAGE -------------------------------------------------
TRUSTEE FEES 3 5 7 10 OR MORE
- ------------ ------ ------ ------ ----------
<S> <C> <C> <C> <C>
$6,010 $ 902 $1,503 $2,104 $3,005
6,435 965 1,609 2,252 3,218
6,860 1,029 1,715 2,401 3,430
7,285 1,093 1,821 2,550 3,643
7,710 1,157 1,928 2,699 3,855
8,135 1,220 2,034 2,847 4,068
<FN>
- ---------------
(4) Other funds in the MFS fund complex provide similar retirement benefits to
the Trustees.
</TABLE>
21
<PAGE> 91
INVESTMENT ADVISER
Massachusetts Financial Services Company
500 Boylston Street, Boston, MA 02116
617-954-5000
DISTRIBUTOR
MFS Fund Distributors, Inc.
500 Boylston Street, Boston, MA 02116
(617)954-5000
CUSTODIAN AND DIVIDEND DISBURSING AGENT
State Street Bank and Trust Company
225 Franklin Street, Boston, MA 02110
SHAREHOLDER SERVICING AGENT
MFS Service Center, Inc.
500 Boylston Street, Boston, MA 02116
Toll free: (800)-225-2606
Mailing Address:
P.O. Box 2281, Boston, MA 02107-9906
INDEPENDENT AUDITORS
Deloitte & Touche LLP
125 Summer Street, Boston, MA 02110
MFS(R)
MUNICIPAL
BOND FUND
500 BOYLSTON STREET
BOSTON, MA 02116
[LOGO]
MMB-13 1/96 500 17/217
<PAGE> 92
<PAGE>
[LOGO] MFS [SM] Annual Report for
Year Ended
THE FIRST NAME IN MUTUAL FUNDS August 31, 1995
MFS[R] Municipal Bond Fund
[A photo of a bridge.]
<PAGE>
MFS MUNICIPAL BOND FUND
Trustees
A. Keith Brodkin* - Chairman and President
Richard B. Bailey* - Private Investor;
Former Chairman and Director (until 1991),
Massachusetts Financial Services Company
Peter G. Harwood - Private Investor
J. Atwood Ives - Chairman and Chief Executive
Officer, Eastern Enterprises
Lawrence T. Perera - Partner,
Hemenway & Barnes
William J. Poorvu - Adjunct Professor,
Harvard University Graduate School of
Business Administration
Charles W. Schmidt - Private Investor
Arnold D. Scott* - Senior Executive Vice
President and Secretary, Massachusetts
Financial Services Company
Jeffrey L. Shames* - President, Massachusetts
Financial Services Company
Elaine R. Smith - Independent Consultant
David B. Stone - Chairman, North American
Management Corp. (Investment Advisers)
Investment Adviser
Massachusetts Financial Services Company
500 Boylston Street
Boston, MA 02116-3741
Distributor
MFS Fund Distributors, Inc.
500 Boylston Street
Boston, MA 02116-3741
Portfolio Manager
Robert A. Dennis*
Treasurer
W. Thomas London*
Assistant Treasurer
James O. Yost*
Secretary
Stephen E. Cavan*
Assistant Secretary
James R. Bordewick, Jr.*
Custodian
State Street Bank and Trust Company
Auditors
Deloitte & Touche LLP
Investor Information
For MFS stock and bond market outlooks,
call toll free: 1-800-637-4458 anytime from
a touch-tone telephone.
For information on MFS mutual funds,
call your financial adviser or, for an
information kit, call toll free:
1-800-637-2929 any business day from
9 a.m. to 5 p.m. Eastern time (or leave
a message anytime).
Investor Service
MFS Service Center, Inc.
P.O. Box 2281
Boston, MA 02107-9906
For general information, call toll free:
1-800-225-2606 any business day from
8 a.m. to 8 p.m. Eastern time.
For service to speech- or hearing-impaired,
call toll free: 1-800-637-6576 any business
day from 9 a.m. to 5 p.m. Eastern time.
(To use this service, your phone must be
equipped with a Telecommunications Device
for the Deaf.)
For share prices, account balances and
exchanges, call toll free: 1-800-MFS-TALK
(1-800-637-8255) anytime from a touch-tone
telephone.
* Affiliated with the Investment Adviser
<PAGE>
LETTER TO SHAREHOLDERS
Dear Shareholders:
The municipal bond market has recovered handsomely from 1994's sharp setback.
Yields of longer-term high-grade bonds have declined about 75 basis points
(0.75%) from the end of 1994 through August 31, 1995, as the bond market has
responded to the economy's slowing growth rate consistent with diminishing fears
of inflation. Intense price competition, restrained wage growth and government
downsizing have contributed to the positive outlook for inflation. This outlook
has also been improved by prospects for meaningful federal deficit reduction and
the recent recovery of the dollar in currency markets. For the year ended August
31, 1995, Class A shares of the Fund provided a total return of +7.31%, while
Class B shares had a total return of +6.35%. Both of these figures assume the
reinvestment of distributions but exclude the effects of any sales charges.
Complete performance information for the Fund is provided on pages four and five
of this report.
Economic Outlook
Moderate, but sustainable growth appears to be the hallmark of the economic
expansion's fifth year. After slowing earlier in the summer, consumer spending
and homebuying were showing renewed strength by August 31, while businesses
continued to work off excess inventories and reduce factory output. Meanwhile,
overseas economies, particularly those of Germany and Japan, have not recovered
as expected, limiting U.S. export growth. However, we believe the Federal
Reserve Board's consistent and, so far, successful efforts to fight inflation
seem to be giving consumers and businesses enough confidence to help maintain
21/2% to 3% real (adjusted for inflation) growth in gross domestic product, at
least through 1995.
Interest Rates
Although the Federal Reserve implemented a one-quarter percentage point decrease
in short-term interest rates in July, the effects of its seven rate increases,
which began in early 1994 and ended in February of this year, are still being
felt throughout the economy. While there have been some increases in commodity
prices, companies have not been able to pass along most of those higher costs,
partly because of the need to keep fighting for market share, but also because
wages and benefits of U.S. workers are still growing at a pace that is near or
perhaps below the inflation rate, limiting consumer buying power. At the end of
July, the nation's employment cost index had risen at a rate of just 2.8% over
the previous year, helping to contain cost pressures. At the same time, however,
the bond markets have apparently become convinced that economic growth will be
contained for the near future and have allowed long-term interest rates to
decline slightly. Although previous monetary easing by the Federal Reserve has
1
<PAGE>
LETTER TO SHAREHOLDERS - continued
been followed by additional rate reductions, prospects for further decreases in
the current environment are uncertain. Still, with long-term government bonds
yielding approximately 6.6%, in an environment of 2 1/2% to 3% inflation, real
rates of return in the fixed-income markets remain relatively attractive.
Municipal Bond Market
While municipal bonds have provided impressive returns so far this year, they
have significantly underperformed many segments of the taxable bond market.
Indeed, for the six-month period ended August 31, yields of longer-term U.S.
Treasuries declined by about 85 basis points (0.85%), while municipal yields
declined by a meager 10 basis points (0.10%). Over this period, the ratio of
long-term, AAA-rated municipal yields to comparable U.S. Treasury yields rose
from 80% to 87%, the highest level for this ratio since late 1993, leaving
municipals very attractively priced (although principal value and interest on
Treasury securities are guaranteed by the U.S. government if held to maturity).
The municipal bond market's underperformance seemed to begin soon after
the media began to focus on various proposals for radical tax reform. If
enacted, a substantial reduction in federal income tax rates, some type of flat
tax and/or the loss of municipal bonds' unique tax-exempt status would certainly
have negative implications for valuations of outstanding municipal bonds. The
unresolved status of the Orange County, California bankruptcy also depressed
market psychology, while the soaring equity markets have offered a strong
challenge to all fixed-income investments. Thus, while the supply of new issues
is down 25% from the corresponding period in 1994, and despite the continuation
of a heavy volume of bond calls, demand for long-term municipals has been
disappointing this year, leading to the dramatic increase in yield ratios
between the tax-exempt and taxable markets.
For the long-term municipal bond investor, we believe the current yield
ratios may provide an attractive opportunity, in spite of near-term
uncertainties. Serious consideration of tax reform, for example, is probably two
years off, in our opinion, and a truly radical overhaul of the current system
still seems politically unlikely. At today's ratios, municipals have seemingly
already adjusted for a more moderate version of tax reform, such as the
imposition of lower marginal rates as part of a flat-tax system. As for Orange
County, the market clearly recognized that situation as a unique, isolated
instance of fiscal irresponsibility. We believe the overall fiscal health of
state and local governments is its strongest in years. As for the stock market,
clearly it is not going to go up forever. Thus, its strength as a competitor to
municipal bonds seems likely to weaken at some point.
2
<PAGE>
LETTER TO SHAREHOLDERS - continued
Portfolio Performance and Strategy
Total returns for the Fund's Class A and Class B shares for the year ended
August 31, 1995 underperformed the +8.86% return of the Lehman Brothers
Municipal Bond Index (the Lehman Index), an unmanaged index of municipal bonds
rated Baa or better. The performance of Class A shares was nearly identical to,
while Class B shares slightly underperformed the average return of +7.34%
reported by Lipper Analytical Services, Inc. (an independent firm which reports
mutual fund performance) for other municipal bond funds with similar investment
objectives and policies. In the general municipal debt category, the Fund's
Class A shares ranked 109th out of 211 funds for the past year. Nevertheless,
over longer time periods, the Fund has one of the better performance records in
its peer group; according to Lipper, the Fund's Class A shares ranked 24th out
of 99 funds in its general municipal debt category for the past five years, and
13th out of 54 fund for the past 10 years. Also, the Fund would have performed
better, compared to the Lehman Index, had it restructured itself earlier and
more aggressively to take advantage of this year's trend of declining interest
rates.
Given our generally favorable outlook for the bond market, the Fund
remains well-invested in long-term maturities seeking to participate in the
price appreciation resulting from declining interest rates. In an effort to
maximize performance and minimize call risk, about 33% of the Fund is invested
in bonds that are non-callable. Finally, reflecting the fact that yield
differentials between qualities remain historically narrow, the Fund remains
predominantly invested in high-quality securities; currently nearly 70% of the
Fund is invested in securities rated by Standard & Poor's Corporation AA or
higher.
We appreciate your support and welcome any questions or comments you may
have.
Respectfully,
/s/ A. Keith Brodkin /s/ Robert A. Dennis
A. Keith Brodkin Robert A. Dennis
Chairman and President Portfolio Manager
September 12, 1995
3
<PAGE>
PORTFOLIO MANAGER PROFILE
A graduate of Massachusetts Institute of Technology and its Sloan School of
Management, Robert Dennis began his career at MFS in 1980 and was promoted to
Vice President - Investments in 1983. In 1986, he was named a Senior Vice
President. He has been the Portfolio Manager of MFS Municipal Bond Fund since
1984.
TAX FORM SUMMARY
Of the dividends paid from the net investment income for the fiscal year ended
August 31, 1995, 100% were exempt interest dividends which are tax exempt for
purposes of regular federal income tax.
PERFORMANCE
The information below and on the following page illustrates the historical
performance of MFS Municipal Bond Fund Class A shares in comparison to various
market indicators. Fund results in the graph reflect the deduction of the 4.75%
maximum sales charge; benchmark comparisons are unmanaged and do not reflect any
fees or expenses. You cannot invest in an index. All results reflect the
reinvestment of all dividends and capital gains.
Class B shares were offered effective September 7, 1993. Information on Class B
share performance appears on the next page.
GROWTH OF A HYPOTHETICAL $10,000 INVESTMENT
(For the 5-Year Period ended August 31, 1995)
[Line graph representing the growth of a $10,000 investment for the 5-year
period ended August 31, 1995. The graph is scaled from $8,000 to $18,000 in
$2,000 segments. The years are marked from 1990 to 1995. There are three lines
drawn to scale. One is a solid line representing MFS Municipal Bond Fund (Class
A), a second line of short dashes represents the Lehman Brothers Municipal Bond
Index, and a third line of long dashes represents the Consumer Price Index.]
MFS Municipal Bond Fund $14,534
Lehman Brothers Municipal Bond Index $15,201
Consumer Price Index $11,619
4
<PAGE>
GROWTH OF A HYPOTHETICAL $10,000 INVESTMENT
(For the 10-Year Period ended August 31, 1995)
[Line graph representing the growth of a $10,000 investment for the 10-year
period ended August 31, 1995. The graph is scaled from $5,000 to $30,000
segments. The years are marked from 1985 to 1995. There are three lines drawn to
scale. One is a solid line representing MFS Municipal Bond Fund (Class A), a
second line of short dashes represents the Lehman Brothers Municipal Bond Index,
and a third line of long dashes represents the Consumer Price Index.]
MFS Municipal Bond Fund $23,172
Lehman Brothers Municipal Bond Index $24,713
Consumer Price Index $14,159
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS
1 Year 3 Years 5 Years 10 Years
<S> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------------
MFS Municipal Bond Fund (Class A) including 4.75% sales charge +2.24% +4.81% +7.77% +8.77%
- ------------------------------------------------------------------------------------------------------------------------------------
MFS Municipal Bond Fund (Class A) at net asset value +7.31% +6.53% +8.82% +9.29%
- ------------------------------------------------------------------------------------------------------------------------------------
MFS Municipal Bond Fund (Class B) with CDSC+ +2.35% -- -- -0.30%*
- ------------------------------------------------------------------------------------------------------------------------------------
MFS Municipal Bond Fund (Class B) without CDSC +6.35% -- -- +1.56%*
- ------------------------------------------------------------------------------------------------------------------------------------
Average general municipal debt fund +7.34% +6.12% +8.28% +8.80%
- ------------------------------------------------------------------------------------------------------------------------------------
Lehman Brothers Municipal Bond Index +8.86% +6.95% +8.74% +9.47%
- ------------------------------------------------------------------------------------------------------------------------------------
Consumer Price Index ++ +2.62% +2.76% +3.05% +3.54%
- ------------------------------------------------------------------------------------------------------------------------------------
<FN>
* For the period from the commencement of offering of Class B shares,
September 7, 1993 to August 31, 1995.
+ These returns reflect the current maximum Class B contingent deferred sales
charge (CDSC) of 4%.
++ The Consumer Price Index is a popular measure of change in prices.
</FN>
</TABLE>
In the above table, we have included the average annual total returns of all
general municipal debt funds (including the Fund) tracked by Lipper Analytical
Services, Inc. for the applicable time periods (211, 117, 99 and 54 funds for
the 1-, 3-, 5- and 10-year periods ended August 31, 1995, respectively). Because
these returns do not reflect any applicable sales charges, we have also included
the Fund's results at net asset value (no sales charge) for comparison.
All results are historical and, therefore, are not an indication of future
results. The principal value and income return of an investment in a mutual fund
will vary with changes in market conditions, and shares, when redeemed, may be
worth more or less than their original cost.
5
<PAGE>
<TABLE>
<CAPTION>
PORTFOLIO OF INVESTMENTS - August 31, 1995
Municipal Bonds - 94.2%
====================================================================================================================================
S&P
Bond Rating Principal Amount
(Unaudited) Issuer (000 Omitted) Value
- ------------------------------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C>
General Obligations - 18.8%
AA Birmingham, AL, 5.125s, 2017 $ 8,500 $ 7,627,305
AAA Clark County, NV, School District, MBIA, 7s, 2010 4,000 4,563,840
A+ Commonwealth of Massachusetts, 7s, 2007 4,590 5,068,645
A+ Commonwealth of Massachusetts, 6.5s, 2008 6,400 7,126,592
AAA Commonwealth of Massachusetts, FGIC, 7s, 2009 7,000 8,040,550
AAA Cook County, IL, MBIA, 7.25s, 2007 6,500 7,633,925
AAA Cook County, IL, FGIC, 5.5s, 2022 10,000 9,219,600
BBB Detroit, MI, 6.25s, 2009 3,000 2,954,580
AAA District of Columbia, MBIA, 6s, 2011 6,000 6,039,180
AAA Du Page County, IL, Stormwater Project Rev.,
5.6s, 2021 5,000 4,810,200
AAA Fairfax County, VA, 5.2s, 2013 5,150 4,851,609
AA Florida Board of Education, Capital Outlay,
9.125s, 2014 1,735 2,404,172
AA Honolulu, HI, City and County, 5.25s, 2012 13,000 12,415,780
AAA Los Angeles, CA, MBIA, 5.25s, 2012 6,500 5,989,880
AAA Los Angeles, CA, MBIA, 5.25s, 2013 6,500 5,939,765
AA- Los Angeles County, CA, Public Works Financing
Authority Rev. (Flood Control), 5s, 2017 33,995 29,722,848
BBB+ New York City, NY, 7.5s, 2002 12,500 13,767,750
BBB+ New York City, NY, 7.75s, 2004 9,020 9,929,035
BBB+ New York City, NY, 7.5s, 2006 5,000 5,503,050
BBB+ New York City, NY, 7.65s, 2006 5,000 5,542,700
BBB+ New York City, NY, 7.5s, 2007 15,500 16,876,865
BBB+ New York City, NY, 7.5s, 2008 10,000 10,866,000
BBB+ New York City, NY, 7.7s, 2009 4,000 4,437,920
BBB+ New York City, NY, 6.375s, 2012 5,000 4,995,550
BBB+ New York City, NY, 8.25s, 2013 60 68,176
BBB+ New York City, NY, 8.25s, 2015 240 274,169
BBB+ New York City, NY, 6.67s, 2016** 4,000 3,990,000
BBB+ New York City, NY, 8s, 2018 25 28,140
AA Richmond, VA, Public Improvement, 5.5s, 2023 9,505 8,975,952
A State of California, 5.5s, 2011 3,750 3,604,388
A State of California, 5.5s, 2013 5,000 4,807,350
A State of California, 5.5s, 2015 11,500 10,838,980
AAA State of California, AMBAC, 5.5s, 2014 10,485 9,969,557
AAA State of California, FGIC, 5.5s, 2015 10,980 10,364,351
AAA State of California, MBIA, 5.5s, 2012 14,500 13,902,600
AAA State of California, MBIA, 5.125s, 2017 3,090 2,747,195
AA State of Florida, Broward County Expressway
Authority, 10s, 2014 4,350 6,336,341
AA State of Nevada (Municipal Bond Bank), 6.8s, 2012 85 89,787
AA State of Texas, 5s, 2014 25,450 23,109,364
AA State of Texas (Superconductor Project), 5.5s, 2020 12,700 11,981,434
AA State of Washington, 6.75s, 2010 3,880 4,377,222
AA State of Washington, 5.75s, 2012 5,000 5,052,500
AA State of Washington, 6s, 2012 4,360 4,522,018
</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
PORTFOLIO OF INVESTMENTS - continued
Municipal Bonds - continued
====================================================================================================================================
S&P
Bond Rating Principal Amount
(Unaudited) Issuer (000 Omitted) Value
- ------------------------------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C>
General Obligations - continued
AA State of Washington, 4.875s, 2015 $ 9,500 $ 8,410,730
AA State of Washington, 5s, 2017 5,000 4,452,150
AA State of Washington (Motor Vehicle Fuel Tax),
6.125s, 2017 6,400 6,653,632
AA State of Washington, 6.4s, 2017 8,900 9,554,684
AA State of Washington, 5.5s, 2018 27,090 25,903,729
--------------
$ 376,341,790
- ------------------------------------------------------------------------------------------------------------------------------------
State and Community Lease Revenue - 28.9%
AAA Alameda County, CA, Certificates of Participation
(Santa Rita Jail Project), MBIA, 5.7s, 2014 $ 4,000 $ 3,889,840
A- California Public Works Board, Lease Rev. (Community
College Projects), 5.625s, 2013 12,605 11,763,616
A- California Public Works Board, Lease Rev. (Community
College Projects), 5.625s, 2018 3,750 3,425,363
A- California Public Works Board, Lease Rev. (Department
of Corrections), 5.5s, 2019 10,000 8,973,800
AAA California Public Works Board, Lease Rev. (Department
of Corrections), AMBAC, 5.25s, 2013 6,795 6,296,451
AAA California Public Works Board, Lease Rev. (Department
of Corrections), MBIA, 5.375s, 2012 6,500 6,111,625
AAA California Public Works Board, Lease Rev. (Department
of Corrections), MBIA, 5.375s, 2019 20,055 18,365,566
A- California Public Works Board, Lease Rev. (University
of California Projects), 5.25s, 2013 4,200 3,728,466
A California Public Works Board, Lease Rev. (University
of California Projects), 5.5s, 2014 7,000 6,408,360
A- California Public Works Board, Lease Rev. (University
of California Projects), 5.5s, 2014 5,000 4,603,300
A California Public Works Board, Lease Rev. (University
of California Projects), 5.5s, 2019 13,345 12,005,829
A- California Public Works Board, Lease Rev. (University
of California Projects), 5s, 2023 19,000 15,626,930
AAA Charlotte, NC, Certificates of Participation (Convention
Facility Project), AMBAC, 5.25s, 2020 5,420 4,979,842
AAA Chicago, IL, Board of Education Lease Certificates,
MBIA, 6.25s, 2009+ 5,160 5,498,599
AAA Chicago, IL, Board of Education Lease Certificates,
MBIA, 6.25s, 2015 27,295 28,316,652
AAA Commonwealth of Pennsylvania, Certificates of
Participation, AMBAC, 5s, 2015 29,765 26,332,798
AAA Hillsborough County, FL, School Board, AMBAC,
5.625s, 2015 4,500 4,349,925
A+ Indiana Office Building Community Capital Complex
Rev., 6.9s, 2011 9,500 10,558,110
AAA Indiana Office Building Community Capital Complex
Rev., AMBAC, 5.25s, 2015 10,195 9,269,867
7
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
PORTFOLIO OF INVESTMENTS - continued
Municipal Bonds - continued
====================================================================================================================================
S&P
Bond Rating Principal Amount
(Unaudited) Issuer (000 Omitted) Value
- ------------------------------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C>
State and Community Lease Revenue - continued
A+ Massachusetts Bay Transportation Authority,
6.1s, 2013 $ 10,200 $ 10,587,702
A+ Massachusetts Bay Transportation Authority,
5.875s, 2015 4,500 4,564,665
A+ Massachusetts Bay Transportation Authority, 5.5s, 2021 12,250 11,531,170
A+ Massachusetts Bay Transportation Authority, 7s, 2021 10,185 11,641,557
A Metropolitan Government of Nashville & Davidson
Counties, TN, 7s, 2011 5,280 5,762,170
BBB Metropolitan Transportation Authority, NY, Service
Contract, 7.4s, 2001 4,075 4,554,057
BBB Metropolitan Transportation Authority, NY, Service
Contract, 7.375s, 2008 5,000 5,672,750
BBB Metropolitan Transportation Authority, NY, Service
Contract, 5.75s, 2013 5,600 5,386,024
BBB Metropolitan Transportation Authority, NY, Service
Contract, 5.5s, 2017 10,850 10,029,849
A+ Missouri Regional Convention & Sports Complex
Authority, 5.5s, 2013 13,085 12,366,241
A+ Missouri Regional Convention & Sports Complex
Authority, 5.6s, 2017 4,000 3,749,680
BBB New York Dormitory Authority Rev. (City University
System), 5.75s, 2009 10,000 9,870,800
BBB New York Dormitory Authority Rev. (City University
System), 7s, 2009 13,765 15,284,518
BBB New York Dormitory Authority Rev. (City University
System), 7.5s, 2010 15,650 18,009,394
BBB New York Dormitory Authority Rev. (City University
System), 5.75s, 2013 22,150 21,118,032
BBB New York Dormitory Authority Rev. (City University
System), 5.75s, 2018 8,975 8,514,403
BBB+ New York Dormitory Authority Rev. (State University
Educational Facilities), 7.375s, 2010 16,100 18,386,844
BBB+ New York Dormitory Authority Rev. (State University
Educational Facilities), 5.25s, 2015 8,125 7,301,288
BBB+ New York Dormitory Authority Rev. (State University
Educational Facilities), 5.5s, 2019 8,000 7,363,040
BBB+ New York Dormitory Authority Rev. (State University
Educational Facilities), 5.25s, 2021 7,875 6,972,919
BBB+ New York Medical Care Facilities Finance Agency,
8.875s, 2007 4,205 4,610,404
BBB+ New York Medical Care Facilities Finance Agency
(Mental Health Services), 7.875s, 2020 4,050 4,556,088
AAA New York Medical Care Facilities Finance Agency
(Mental Health Services), FGIC, 5.375s, 2014 16,010 15,103,674
AAA New York Medical Care Facilities Finance Agency
(Mental Health Services), FGIC, 5.25s, 2019 25,950 23,666,400
</TABLE>
8
<PAGE>
<TABLE>
<CAPTION>
PORTFOLIO OF INVESTMENTS - continued
Municipal Bonds - continued
====================================================================================================================================
S&P
Bond Rating Principal Amount
(Unaudited) Issuer (000 Omitted) Value
- ------------------------------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C>
State and Community Lease Revenue - continued
AAA New York Medical Care Facilities Finance Agency
(Mental Health Services), FSA, 5.375s, 2014 $ 10,550 $ 9,896,322
BBB New York Urban Development Corp. (Correctional
Facilities), 5.5s, 2009 7,710 7,428,893
BBB New York Urban Development Corp. (Correctional
Facilities) 5.75s, 2013 22,575 21,286,644
BBB New York Urban Development Corp. (Correctional
Facilities) 5.5s, 2014 5,000 4,632,750
BBB New York Urban Development Corp. (Correctional
Facilities) 5.5s, 2015 31,200 28,482,168
BBB New York Urban Development Corp. (Correctional
Facilities) 5.5s, 2016 5,300 4,855,118
BBB New York Urban Development Corp. (Correctional
Facilities), 5.25s, 2021 10,000 8,653,900
AAA Rhode Island Convention Center Authority,
MBIA, 5.25s, 2015 15,500 14,417,325
AAA Rhode Island Convention Center Authority,
MBIA, 5s, 2023 31,110 26,557,363
AAA Rhode Island Public Buildings Authority Rev.,
AMBAC, 5.25s, 2010 5,000 4,796,650
BBB+ St. Louis County, MO, Regional Convention and
Sports Complex Authority, 5.75s, 2021 4,760 4,421,183
AAA Vallejo, CA, Sanitation & Flood Control District,
Certificates of Participation, FGIC, 5s, 2019 7,000 6,085,310
--------------
$ 578,622,234
- ------------------------------------------------------------------------------------------------------------------------------------
Refunded and Special Obligations* - 23.0%
AAA Alameda County, CA, Certificates of Participation,
MBIA, 7.25s, 2000 $ 29,900 $ 34,472,007
AAA Austin, TX, Utility Systems Rev., 10.75s, 2000+ 2,615 3,305,308
AAA Austin, TX, Water, Sewer & Electric Rev., 14.25s, 1997 1,305 1,519,372
AA Chicago, IL, Metropolitan Water Reclamation District,
6.8s, 2000 5,000 5,549,800
AAA Chicago, IL, Public Building Rev., ETM, MBIA,
7.125s, 2015 6,590 7,252,625
AAA Clark County, NV, School District, MBIA, 7s, 2001 10,050 11,384,741
A+ Commonwealth of Massachusetts, 6.875s, 2001 4,825 5,480,042
AAA Commonwealth of Massachusetts, FGIC, 7.25s, 2000 11,220 12,693,410
AAA Delaware County, PA, Hospital Rev. (Delaware
Memorial Hospital), MBIA, 7.2s, 1999 10,175 11,485,337
AAA Detroit, MI, Water Supply System Rev., FGIC,
7.25s, 2000 4,575 5,220,212
A Eden Township, CA, Health Facilities Authority
(Eden Hospital), 7.8s, 1998 4,000 4,461,280
AAA Florida Board of Education Administration, Capital
Outlay, ETM, 9.125s, 2014 265 360,747
NR Indianapolis, IN, Local Public Improvement Rev.,
7.4s, 2000 3,710 4,248,432
9
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
PORTFOLIO OF INVESTMENTS - continued
Municipal Bonds - continued
====================================================================================================================================
S&P
Bond Rating Principal Amount
(Unaudited) Issuer (000 Omitted) Value
- ------------------------------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C>
Refunded and Special Obligations* - continued
AAA Maryland Health & Higher Educational Facilities
Authority Rev. (University of Maryland Medical
System), FGIC, 7s, 2001 $ 7,945 $ 9,095,992
AAA Massachusetts Port Authority Rev., ETM, 13s, 2013 3,500 5,735,310
AAA Massachusetts Water Resources Authority, 7.5s, 2000 15,850 18,122,890
AAA Massachusetts Water Resources Authority, 7.625s, 2000 15,760 18,100,833
AAA Metropolitan Transportation Authority, NY, Service
Contract, 7.5s, 2000 4,350 5,020,596
AAA Michigan Hospital Finance Authority Rev. (Oakwood
Hospital), FGIC, 7.1s, 2000 4,000 4,538,280
AAA Michigan Hospital Finance Authority Rev. (Oakwood
Hospital), FGIC, 7.2s, 2000 18,590 21,206,543
AAA Michigan Municipal Bond Authority (Wayne County),
FGIC, 7s, 2000 10,000 11,285,400
AAA Missouri Regional Convention & Sports Complex
Authority, 6.8s, 2003 8,950 10,215,262
AAA Missouri Regional Convention & Sports Complex
Authority, 6.9s, 2003 21,520 24,703,669
BBB+ New York City, NY, 8s, 2001 2,475 2,953,492
BBB+ New York City, NY, 8.25s, 2001 2,940 3,543,082
BBB New York Dormitory Authority Rev. (City
University System), 7.875s, 2000 10,600 12,405,392
AAA New York Medical Care Facilities Finance Agency
(Mental Health Services), 8.875s, 1997 3,745 4,157,250
AAA New York Medical Care Facilities Finance Agency
(Mental Health Services), 7.875s, 2000 5,590 6,561,542
NR New York Urban Development Corp. (Correctional
Facilities), 7.625s, 2001 7,570 8,836,083
NR New York Urban Development Corp. (Correctional
Facilities), 7.375s, 2002 4,000 4,686,440
AAA Pennsylvania Convention Center Authority Rev.,
FGIC, 6.7s, 2016 51,195 57,350,175
AAA Philadelphia, PA, Municipal Authority Rev.,
FGIC, 7.8s, 1998 385 426,322
AAA Philadelphia, PA, Municipal Authority Rev.,
FGIC, 7.8s, 2000 3,765 4,297,823
AAA Philadelphia, PA, Municipal Authority Rev.,
FGIC, 7.1s, 2001 6,000 6,943,080
AAA Philadelphia, PA, Municipal Authority Rev., MBIA,
7.125s, 2001 4,500 5,213,340
AAA Philadelphia, PA, School District, MBIA, 7s, 2001 9,440 10,734,507
AA- Richmond, VA, 7s, 2000 4,750 5,323,230
AAA San Diego, CA, Regional Building Authority Lease
Rev., MBIA, 7.25s, 2000 4,000 4,526,880
AAA Santa Clara County, CA, Certificates of Participation
(American Baptist Homes West), CA-MTG-INS,
8s, 1998 5,200 5,777,824
</TABLE>
10
<PAGE>
<TABLE>
<CAPTION>
PORTFOLIO OF INVESTMENTS - continued
Municipal Bonds - continued
====================================================================================================================================
S&P
Bond Rating Principal Amount
(Unaudited) Issuer (000 Omitted) Value
- ------------------------------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C>
Refunded and Special Obligations* - continued
AAA Southern California Public Power Authority Rev.,
12s, 1997 $ 2,400 $ 2,735,664
AA State of Florida (Roads), 7.375s, 1999 4,000 4,511,760
AAA State of Florida, Jacksonville Transportation Authority,
ETM, 9.2s, 2015 2,000 2,840,580
AAA Sullivan County, TN, Health, Educational and Housing
Facilities Board Rev., MBIA, 7.25s, 2000 4,000 4,529,840
AAA Washington Public Power Supply System Rev.,
Nuclear Project #2, 7.375s, 2000 28,845 33,000,411
AA Washington Public Power Supply System Rev.,
Nuclear Project #2, 7.625s, 2001 10,815 12,539,776
AA Washington Public Power Supply System Rev.,
Nuclear Project #3, 7.25s, 2000 20,000 22,549,600
--------------
$ 461,902,181
- ------------------------------------------------------------------------------------------------------------------------------------
Multi-Family Housing Revenue - 0.2%
NR Colorado Housing Finance Authority, 8.3s, 2023 $ 4,000 $ 4,192,920
- ------------------------------------------------------------------------------------------------------------------------------------
Insured Health Care Revenue - 5.8%
AAA California Statewide Communities Development
Authority Rev. (St. Joseph Health System),
AMBAC, 5.5s, 2014 $ 18,735 $ 17,601,345
AAA California Statewide Communities Development
Authority Rev. (Sutter Health), MBIA, 5.5s, 2013+ 9,000 8,516,880
AAA California Statewide Communities Development
Authority Rev. (Sutter Health), MBIA, 5.5s, 2023 11,100 10,225,320
AAA Colorado Health Facilities Authority Rev. (PSL
Health Systems), FSA, 7.25s, 2016 4,905 5,456,469
AAA Davenport, IA, Hospital Rev. (St. Luke's Hospital),
AMBAC, 7.4s, 2020 2,715 2,985,876
AAA Fresno, CA, Health Facilities Rev. (Holy Cross Health
System), MBIA, 5.625s, 2015 8,000 7,568,560
AAA Illinois Health Facilities Authority (Methodist Health
Project), AMBAC, 9.365s, 2021*** 3,000 3,350,100
AAA Maryland Health & Higher Educational Facilities
Authority Rev. (Francis Scott Key Medical Center),
FGIC, 5s, 2013 3,200 2,889,888
AAA Massachusetts Health & Educational Facilities Authority
(University Hospital), MBIA, 7.25s, 2019 4,500 4,945,320
AAA Medical Center Hospital Authority, GA,
Rev., MBIA, 8.293s, 2010*** 4,000 4,419,400
AAA Metropolitan Health Facilities Development Corp., TX
(Wilson N. Jones Memorial Hospital), 5.6s, 2017 4,250 4,031,465
AAA Michigan Hospital Finance Authority Rev. (Sisters of Mercy),
MBIA, 5.375s, 2014 9,000 8,562,060
AAA Peninsula Ports Authority, VA, Hospital Facilities Rev.
(Whittaker Memorial Hospital), FHA, 8.7s, 2023 1,595 1,718,995
AAA Salt Lake City, UT, Hospital Rev. (Intermountain
Health Care), AMBAC, 9.16s, 2020*** 2,000 2,195,460
11
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Municipal Bonds - continued
====================================================================================================================================
S&P
Bond Rating Principal Amount
(Unaudited) Issuer (000 Omitted) Value
- ------------------------------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C>
Insured Health Care Revenue - continued
AAA Sayre, PA, Health Care Facilities Authority Rev.
(Guthrie Healthcare Systems), AMBAC, 7s, 2011 $ 6,000 $ 6,452,460
AAA Tampa, FL, Rev. (Allegany Health System -
St. Mary's), MBIA, 5.125s, 2023 10,700 9,432,157
AAA Tarrant County, TX, Health Facilities Development
Corp. (Fort Worth Osteopathic), MBIA, 6s, 2021 6,000 6,118,800
AAA Washington County, PA, Hospital Authority
(Washington Hospital), AMBAC, 7.15s, 2017 9,000 9,811,620
--------------
$ 116,282,175
- ------------------------------------------------------------------------------------------------------------------------------------
Health Care Revenue - 1.5%
A+ Cuyahoga County, OH, Hospital Rev. (Cleveland Clinic),
8s, 2015 $ 8,550 $ 9,172,440
AA- Maryland Health & Higher Educational Facilities
Authority Rev. (The Johns Hopkins Hospital),
5s, 2023 7,595 6,544,687
NR Travis County, TX, Health Facilities Development Corp.
(Daughters of Charity/Seton Medical Center),
10.125s, 2015 14,815 15,236,042
--------------
$ 30,953,169
- ------------------------------------------------------------------------------------------------------------------------------------
Electric and Gas Utility Revenue - 5.8%
A Georgia Municipal Electric Authority, 7.8s, 2020 $ 7,000 $ 7,473,480
AAA Georgia Municipal Electric Authority, MBIA,
6.375s, 2016 5,000 5,241,650
AAA Municipal Electric Authority of Georgia, Special
Obligation, AMBAC, 6.5s, 2017 8,510 9,178,290
AAA North Carolina Municipal Power Agency Rev.
(Catawba Electric), MBIA, 5s, 2018 6,500 5,741,190
AAA Northern California Transmission Agency (Oregon
Transmission), MBIA, 7s, 2013 4,000 4,530,120
AA- Orlando, FL, Utilities Commission, Water & Electric
Rev., 5.25s, 2023 5,000 4,506,150
AAA Piedmont Municipal Power Agency, SC, Electric Rev.,
FGIC, 6.25s, 2021 4,150 4,356,587
AAA Sacramento, CA, Municipal Utility District, Electric
Rev., FGIC, 5.25s, 2012 3,500 3,258,745
AA- Southern California Public Power Authority,
Transmission Project Rev., 0s, 2005 11,185 6,614,362
AAA Southern California Public Power Authority,
Transmission Project Rev., MBIA, 5.25s, 2014 14,940 13,715,667
AA Washington Public Power Supply System Rev.,
Nuclear Project #1, 5.375s, 2015 12,500 11,197,500
AAA Washington Public Power Supply System Rev.,
Nuclear Project #1, MBIA, 5.6s, 2015 4,720 4,444,305
AAA Washington Public Power Supply System Rev.,
Nuclear Project #1, MBIA, 5.7s, 2017 8,450 7,985,166
AA Washington Public Power Supply System Rev.,
Nuclear Project #2, 5.625s, 2012 15,530 14,599,753
</TABLE>
12
<PAGE>
<TABLE>
<CAPTION>
PORTFOLIO OF INVESTMENTS - continued
Municipal Bonds - continued
====================================================================================================================================
S&P
Bond Rating Principal Amount
(Unaudited) Issuer (000 Omitted) Value
- ------------------------------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C>
Electric and Gas Utility Revenue - continued
AA Washington Public Power Supply System Rev.,
Nuclear Project #2, 7s, 2012 $ 6,000 $ 6,309,960
AAA Washington Public Power Supply System Rev.,
Nuclear Project #3, FGIC, 0s, 2005 6,895 4,132,449
AAA Washington Public Power Supply System Rev.,
Nuclear Project #3, MBIA, 0s, 2010 5,860 2,425,806
--------------
$ 115,711,180
- ------------------------------------------------------------------------------------------------------------------------------------
Water and Sewer Utility Revenue - 1.2%
AAA East Bay, CA, Municipal Utility District, MBIA,
5s, 2014 $ 7,900 $ 7,023,890
AAA Los Angeles County, CA, Sanitation Districts
Financing Authority Rev. (Capital Projects),
MBIA, 5.25s, 2019 11,700 10,533,510
AAA Philadelphia, PA, Water & Wastewater Rev., CGIC,
5s, 2016 4,500 3,953,835
AAA Philadelphia, PA, Water & Wastewater Rev., MBIA,
5.5s, 2014 3,310 3,148,770
--------------
$ 24,660,005
- ------------------------------------------------------------------------------------------------------------------------------------
Turnpike Revenue - 2.3%
NR Arapahoe County, CO, Capital Improvement Trust
Fund Rev., 6.9s, 2015 $ 2,500 $ 2,560,850
BBB- Foothill/Eastern Transportation Corridor Agency Rev.
(California Toll Road), 6s, 2034 6,500 5,907,720
A New Jersey Turnpike Authority, 6.5s, 2016 11,755 12,728,432
BBB Triborough Bridge & Tunnel Authority, NY,
7.25s, 2010 22,905 25,382,863
--------------
$ 46,579,865
- ------------------------------------------------------------------------------------------------------------------------------------
Airport and Port Revenue - 0.6%
AAA Connecticut Airport Rev., FGIC, 7.65s, 2012 $ $ 5,000 $ 5,719,850
AAA Denver, CO, City and County Airport Rev., MBIA,
5.6s, 2020 6,850 6,521,200
--------------
$ 12,241,050
- ------------------------------------------------------------------------------------------------------------------------------------
Sales and Excise Tax Revenue - 3.7%
AAA Illinois Dedicated Tax Rev. (Civic Center), AMBAC,
6.25s, 2011 $ 3,640 $ 3,821,781
AAA Illinois Sales Tax Rev. (Public Improvement), 0s, 2009 8,965 4,111,259
AAA Los Angeles County, CA, Metropolitan Transportation
Authority Sales Tax Rev., AMBAC, 5.5s, 2017 14,000 13,167,980
AAA Los Angeles County, CA, Metropolitan Transportation
Authority Sales Tax Rev., FGIC, 5s, 2021 38,500 33,290,180
AA- Metropolitan Atlanta Rapid Transit Authority, GA,
6.25s, 2018 4,580 4,832,724
AAA Rhode Island Depositors Economic Protection Corp.,
FSA, 5.75s, 2014 14,800 14,579,332
--------------
$ 73,803,256
- ------------------------------------------------------------------------------------------------------------------------------------
13
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
PORTFOLIO OF INVESTMENTS - continued
Municipal Bonds - continued
====================================================================================================================================
S&P
Bond Rating Principal Amount
(Unaudited) Issuer (000 Omitted) Value
- ------------------------------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C>
Industrial Revenue (Corporate Guarantee) - 0.8%
AAA Brazos River, TX, Authority Rev. (Houston Light and
Power), MBIA, 5.6s, 2017 $ 4,000 $ 3,861,400
AAA Mercer County, ND, Pollution Control (Antelope
Valley Station), AMBAC, 7.2s, 2013 4,000 4,640,720
AAA Michigan State Strategic Fund Rev. (Detroit Edison),
MBIA, 7s, 2008 3,000 3,448,890
AAA Northeast Maryland Waste Disposal Authority (Harford
County Resource Recovery), MBIA, 7.2s, 2005 3,000 3,452,220
--------------
$ 15,403,230
- ------------------------------------------------------------------------------------------------------------------------------------
Universities - 0.7%
AA+ Massachusetts State Health and Educational Facilities
Authority Rev. (MIT), 5s, 2023 $ 3,000 $ 2,674,140
AAA Pennsylvania Higher Educational Facilities Authority,
College & University Rev. (Hahnemann University),
MBIA, 7.2s, 2019 4,015 4,314,960
AA+ Texas A & M University (Permanent University Fund),
0s, 2007 6,695 3,578,678
AA+ Texas A &MUniversity (Permanent University Fund),
0s, 2008 7,175 3,637,510
--------------
$ 14,205,288
- ------------------------------------------------------------------------------------------------------------------------------------
Special Assessment District - 0.6%
AAA Brea, CA, Redevelopment Agency (Redevelopment
Projects), MBIA, 5.75s, 2023 $ 12,470 $ 11,903,987
AAA Culver City, CA, Redevelopment Finance Authority,
AMBAC, 7.1s, 2010 560 611,341
--------------
$ 12,515,328
- ------------------------------------------------------------------------------------------------------------------------------------
Other - 0.3%
Harris County, TX, 4.25s, 1996 $ 2,000 $ 2,005,558
AA- York County, PA, Industrial Development Rev.,
8.2s, 2014 4,250 4,656,555
--------------
$ 6,662,113
- ------------------------------------------------------------------------------------------------------------------------------------
Total Municipal Bonds (Identified Cost, $1,745,555,495) $1,890,075,784
- ------------------------------------------------------------------------------------------------------------------------------------
Floating Rate Demand Notes - 2.3%
- ------------------------------------------------------------------------------------------------------------------------------------
Issuer
- ------------------------------------------------------------------------------------------------------------------------------------
Allegheny County, PA, Hospital, due 2020 $ 1,100 $ 1,100,000
Charleston County, SC, Industrial Rev., due 2003 400 400,000
Charleston County, SC, Industrial Rev. (Massey Coal),
due 2007 1,500 1,500,000
Georgia Hospital Financing Authority Rev., due 2001 2,700 2,700,000
Hillsborough County, FL, Pollution Control Rev., due 2018 9,600 9,600,000
Jackson County, MS, Pollution Control Rev. (Chevron), due 2016 1,805 1,805,000
Jackson County, MS, Pollution Control Rev. (Chevron), due 2023 2,900 2,900,000
Lubbock, TX, Health Facilities (St. Joseph's), due 2013 1,850 1,850,000
New York City, NY, Municipal Water Finance Authority, due 2023 1,480 1,480,000
New York City, NY, Municipal Water Finance Authority, due 2024 5,500 5,500,000
</TABLE>
14
<PAGE>
<TABLE>
<CAPTION>
PORTFOLIO OF INVESTMENTS - continued
Floating Rate Demand Notes - continued
====================================================================================================================================
Principal Amount
Issuer (000 Omitted) Value
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
New York City, NY, Municipal Water Finance Authority, due 2025 $ 300 $ 300,000
Peninsula Ports, VA, Authority (Shell Oil Co.), due 2005 1,400 1,400,000
Peninsula Ports, VA, Authority, due 2016 1,300 1,300,000
Perry County, MS, Pollution Control Rev., due 2002 2,050 2,050,000
St. Charles Parish, LA, Pollution Control Rev., due 2022 1,200 1,200,000
Southwest, TX, Higher Education Authority, due 2015 3,000 3,000,000
Sullivan County, TN, Industrial Development Pollution Control
Rev., due 2016 1,700 1,700,000
Uinta County, WY, Pollution Control Rev. (Chevron), due 2020 4,700 4,700,000
Uinta County, WY, Pollution Control Rev. (Chevron), due 2022 800 800,000
- ------------------------------------------------------------------------------------------------------------------------------------
Total Floating Rate Demand Notes (Identified Cost, $45,285,000) $ 45,285,000
- ------------------------------------------------------------------------------------------------------------------------------------
Non-Floating Rate Demand Notes - 0.1%
- ------------------------------------------------------------------------------------------------------------------------------------
New York City, NY, Municipal Finance Authority, due 2022 $ 1,400 $ 1,400,000
Peninsula Ports, VA, Authority, due 2016 1,000 1,000,000
- ------------------------------------------------------------------------------------------------------------------------------------
Total Non-Floating Rate Demand Notes (Identified Cost, $2,400,000) $ 2,400,000
- ------------------------------------------------------------------------------------------------------------------------------------
Warrants - 0.1%
- ------------------------------------------------------------------------------------------------------------------------------------
Intermountain Power Agency, Utah Power Supply Rev., expire 5/30/96 $ 20,000 $ 1,600,000
- ------------------------------------------------------------------------------------------------------------------------------------
Total Investments (Identified Cost, $1,793,240,495) $1,939,360,784
Other Assets, Less Liabilities - 3.3% 65,209,863
- ------------------------------------------------------------------------------------------------------------------------------------
Net Assets - 100.0% $2,004,570,647
- ------------------------------------------------------------------------------------------------------------------------------------
<FN>
*Dates indicated are refunding dates.
**Indexed security.
***Inverse floating rate security.
+Security segregated as collateral for an open futures contract.
</FN>
</TABLE>
See notes to financial statements
15
<PAGE>
FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Statement of Assets and Liabilities
================================================================================
August 31, 1995
- --------------------------------------------------------------------------------
<S> <C>
Assets:
Investments, at value (identified cost, $1,793,240,495) $ 1,939,360,784
Cash 44,051,251
Receivable for investments sold 4,722,692
Receivable for Fund shares sold 1,240,299
Interest receivable 27,004,873
Other assets 26,627
---------------
Total assets $ 2,016,406,526
---------------
Liabilities:
Distributions payable $ 3,597,578
Payable for investments purchased 5,435,255
Payable for Fund shares reacquired 2,098,327
Payable for daily variation margin on open futures contracts 200,000
Payable to affiliates -
Management fee 48,171
Shareholder servicing agent fee 6,433
Distribution fee 9,122
Accrued expenses and other liabilities 440,993
---------------
Total liabilities $ 11,835,879
---------------
Net assets $ 2,004,570,647
===============
Net assets consist of:
Paid-in capital $ 1,886,722,749
Unrealized appreciation on investments 146,157,788
Accumulated net realized loss on investments (23,353,148)
Accumulated distributions in excess of net investment income (4,956,742)
---------------
Total $ 2,004,570,647
===============
Shares of beneficial interest outstanding 185,032,058
===============
Class A shares:
Net asset value and redemption price per share
(net assets of $1,948,548,002 / 179,857,494 shares of
beneficial interest outstanding) $10.83
======
Offering price per share (100/95.25) $11.37
======
Class B shares:
Net asset value and offering price per share
(net assets of $56,022,645 / 5,174,564 shares of
beneficial interest outstanding) $10.83
======
On sales of $100,000 or more, the offering price of Class A shares is reduced. A
contingent deferred sales charge may be imposed on redemptions of Class A and
Class B shares.
</TABLE>
See notes to financial statements
16
<PAGE>
FINANCIAL STATEMENTS - continued
<TABLE>
<CAPTION>
Statement of Operations
================================================================================
Year Ended August 31, 1995
- --------------------------------------------------------------------------------
<S> <C>
Net investment income:
Interest income $ 124,252,599
-------------
Expenses -
Management fee $ 8,210,290
Trustees' compensation 78,398
Shareholder servicing agent fee (Class A) 2,179,815
Shareholder servicing agent fee (Class B) 106,468
Distribution and service fee (Class B) 427,858
Custodian fees 430,364
Postage 176,941
Printing 120,216
Auditing fees 72,144
Legal fees 12,959
Miscellaneous 633,995
-------------
Total expenses $ 12,449,448
-------------
Net investment income $ 111,803,151
-------------
Realized and unrealized gain (loss) on investments:
Realized gain (loss) (identified cost basis) -
Investment transactions $ 3,503,468
Futures contracts (20,167,272)
-------------
Net realized loss on investments $ (16,663,804)
-------------
Change in unrealized appreciation (depreciation) -
Investments $ 45,505,532
Futures contacts 1,789,032
-------------
Net unrealized gain on investments $ 47,294,564
-------------
Net realized and unrealized gain on investments $ 30,630,760
-------------
Increase in net assets from operations $ 142,433,911
=============
</TABLE>
See notes to financial statements
17
<PAGE>
FINANCIAL STATEMENTS - continued
<TABLE>
<CAPTION>
Statement of Changes in Net Assets
====================================================================================================================================
Year Ended Ten Months Ended Year Ended
August 31, 1995 August 31, 1994 October 31, 1993
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Increase (decrease) in net assets:
From operations -
Net investment income $ 111,803,151 $ 97,314,488 $ 116,912,608
Net realized gain (loss) on investments (16,663,804) (5,170,469) 37,195,278
Net unrealized gain (loss) on investments 47,294,564 (143,768,588) 164,691,254
--------------- --------------- ---------------
Increase (decrease) in net assets
from operations $ 142,433,911 $ (51,624,569) $ 318,799,140
--------------- --------------- ---------------
Distributions declared to shareholders -
From net investment income (Class A) $ (109,114,422) $ (89,895,416) $ (120,496,324)
From net investment income (Class B) (2,258,122) (1,157,886) (30,652)
From net realized gain on investments (Class A) -- (29,910,644) (26,678,481)
From net realized gain on investments (Class B) -- (173,779) --
In excess of net investment income (Class A) -- (6,715,969) (6,260,261)
In excess of net investment income (Class B) -- (6,615) (925)
In excess of net realized gain on investments
(Class A) -- (5,268,443) --
In excess of net realized gain on investments
(Class B) -- (85,666) --
--------------- --------------- ---------------
Total distributions declared to shareholders $ (111,372,544) $ (133,214,418) $ (153,466,643)
--------------- --------------- ---------------
Fund share (principal) transactions -
Net proceeds from sale of shares $ 1,013,395,465 $ 419,165,214 $ 287,246,301
Net asset value of shares issued to shareholders
in reinvestment of distributions 65,324,925 78,691,850 90,336,552
Cost of shares reacquired (1,180,849,407) (442,427,997) (215,763,795)
--------------- --------------- ---------------
Increase (decrease) in net assets from
Fund share transactions $ (102,129,017) $ 55,429,067 $ 161,819,058
--------------- --------------- ---------------
Total increase (decrease) in net assets $ (71,067,650) $ (129,409,920) $ 327,151,555
Net assets:
At beginning of period 2,075,638,297 2,205,048,217 1,877,896,662
--------------- --------------- ---------------
At end of period (including accumulated
distributions in excess of net investment
income of $4,956,742, $6,722,584 and
$6,261,186, respectively) $ 2,004,570,647 $ 2,075,638,297 $ 2,205,048,217
--------------- --------------- ---------------
</TABLE>
See notes to financial statements
18
<PAGE>
FINANCIAL STATEMENTS - continued
<TABLE>
<CAPTION>
Financial Highlights
====================================================================================================================================
Ten Months
Year Ended Ended
August 31, August 31, Year Ended October 31,
-----------------------------------------
1995 1994 1993 1992 1991 1990
- ------------------------------------------------------------------------------------------------------------------------------------
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 $10.68 $11.64 $10.73 $10.80 $10.11 $10.53
------ ------ ------ ------ ------ ------
Income from investment operations++-
Net investment income $ 0.60 $ 0.51 $ 0.61 $ 0.66 $ 0.68 $ 0.68
Net realized and unrealized gain
(loss) on investments 0.15 (0.77) 1.14 0.09 0.69 (0.13)
------ ------ ------ ------ ------ ------
Total from investment
operations $ 0.75 $(0.26) $ 1.75 $ 0.75 $ 1.37 $ 0.55
------ ------ ------ ------ ------ ------
Less distributions declared
to shareholders -
From net investment
income $(0.60) $(0.47) $(0.66) $(0.66) $(0.68) $(0.69)
In excess of net
investment income -- (0.04) (0.03) -- -- --
From net realized gain
on investments -- (0.16) (0.15) (0.16) -- (0.27)
In excess of net realized
gain on investments -- (0.03) -- -- -- --
From paid-in capital -- -- -- -- -- (0.01)
------ ------ ------ ------ ------ ------
Total distributions
declared to
shareholders $(0.60) $(0.70) $(0.84) $(0.82) $(0.68) $(0.97)
------ ------ ------ ------ ------ ------
Net asset value -
end of period $10.83 $10.68 $11.64 $10.73 $10.80 $10.11
====== ====== ====== ====== ====== ======
Total return# 7.31% (2.33)% 16.97% 7.35% 13.85% 5.42%
Ratios (to average net assets)/Supplemental data:
Expenses 0.61% 0.59%+ 0.59% 0.57% 0.59% 0.60%
Net investment income 5.70% 5.49%+ 5.63% 6.12% 6.47% 6.69%
Portfolio turnover 90% 74% 56% 87% 98% 160%
Net assets at end of period
(000,000 omitted) $1,949 $2,031 $2,195 $1,878 $1,715 $1,409
<FN>
+ Annualized.
++ Per share data for the periods subsequent to October 31, 1993 is based on average shares outstanding.
# 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.
</FN>
</TABLE>
See notes to financial statements
19
<PAGE>
FINANCIAL STATEMENTS - continued
<TABLE>
<CAPTION>
Financial Highlights - continued
====================================================================================================================================
Year Ended October 31,
---------------------------------------------------------------
1989 1988 1987 1986 1985
- ------------------------------------------------------------------------------------------------------------------------------------
Class A
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value -
beginning of period $ 10.57 $ 9.71 $ 11.00 $ 10.02 $ 9.12
--------- --------- --------- --------- ---------
Income from investment operations -
Net investment income $ 0.72 $ 0.73 $ 0.72 $ 0.78 $ 0.82
Net realized and
unrealized gain (loss)
on investments 0.04 0.86 (0.90) 1.27 0.89
--------- --------- --------- --------- ---------
Total from invest-
ment operations $ 0.76 $ 1.59 $ (0.18) $ 2.05 $ 1.71
--------- --------- --------- --------- ---------
Less distributions declared
to shareholders -
From net investment
income $ (0.72) $ (0.73) $ (0.72) $ (0.78) $ (0.81)
From net realized gain
on investments (0.08) -- (0.39) (0.29) --
--------- --------- --------- --------- ---------
Total distributions
declared to
shareholders $ (0.80) $ (0.73) $ (1.11) $ (1.07) $ (0.81)
--------- --------- --------- --------- ---------
Net asset value -
end of period $ 10.53 $ 10.57 $ 9.71 $ 11.00 $ 10.02
========= ========= ========= ========= =========
Total return# 7.54% 16.95% (1.98)% 21.79% 19.64%
Ratios (to average net assets)/Supplemental data:
Expenses 0.64% 0.65% 0.61% 0.64% 0.69%
Net investment income 6.87% 7.16% 6.96% 7.45% 8.50%
Portfolio turnover 199% 190% 218% 164% 225%
Net assets at end of period
(000,000 omitted) $ 1,259 $ 1,003 $ 903 $ 844 $ 469
<FN>
# 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.
</FN>
</TABLE>
See notes to financial statements
20
<PAGE>
FINANCIAL STATEMENTS - continued
<TABLE>
<CAPTION>
Financial Highlights - continued
====================================================================================================================================
Year Ended Ten Months Ended Year Ended
August 31, August 31, October 31,
1995 1994 1993**
- ------------------------------------------------------------------------------------------------------------------------------------
Class B
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value -
beginning of period $10.67 $11.63 $11.68
------ ------ ------
Income from investment operations++ -
Net investment income $ 0.49 $ 0.40 $ 0.07
Net realized and
unrealized gain (loss)
on investments 0.16 (0.77) (0.05)
------ ------ ------
Total from invest-
ment operations $ 0.65 $(0.37) $ 0.02
------ ------ ------
Less distributions declared
to shareholders -
From net investment
income $(0.49) $(0.40) $(0.07)***
From net realized gain
on investments -- (0.16) --
In excess of net realized
gain on investments -- (0.03) --
------ ------ ------
Total distributions
declared to
shareholders $(0.49) $(0.59) $(0.07)
------ ------ ------
Net asset value -
end of period $10.83 $10.67 $11.63
------ ------ ------
Total return 6.35% (3.25)% 1.49%+
Ratios (to average net assets)/Supplemental data:
Expenses 1.60% 1.72%+ 1.70%+
Net investment income 4.68% 4.41%+ 3.85%+
Portfolio turnover 90% 74% 56%
Net assets at end of period
(000,000 omitted) $ 56 $ 45 $ 10
<FN>
+ Annualized.
++ Per share data for the periods subsequent to October 31, 1993 is based on average shares outstanding.
** For the period from the date of issue of Class B shares, September 7, 1993 to October 31, 1993.
*** Includes a per share distribution in excess of net investment income of $0.002.
</FN>
</TABLE>
See notes to financial statements
21
<PAGE>
NOTES TO FINANCIAL STATEMENTS
(1) Business and Organization
MFS Municipal Bond Fund (the Fund) is a diversified series of MFS Series Trust
IV (the Trust). The Trust is organized as a Massachusetts business trust and is
registered under the Investment Company Act of 1940, as amended, as an open-end
management investment company.
(2) Significant Accounting Policies
Investment Valuations - Debt securities (other than short-term obligations which
mature in 60 days or less), including listed issues, are valued on the basis of
valuations furnished by dealers or by a pricing service with consideration to
factors such as institutional-size trading in similar groups of securities,
yield, quality, coupon rate, maturity, type of issue, trading characteristics
and other market data, without exclusive reliance upon exchange or
over-the-counter prices. Short-term obligations, which mature in 60 days or
less, are valued at amortized cost, which approximates market value. Futures
contracts, options and options on futures contracts listed on commodities
exchanges are valued at closing settlement prices. Over-the-counter options are
valued by brokers through the use of a pricing model which takes into account
closing bond valuations, implied volatility and short-term repurchase rates.
Securities for which there are no such quotations or valuations are valued at
fair value as determined in good faith by or at the direction of the Trustees.
Repurchase Agreements - The Fund may enter into repurchase agreements with
institutions that the Fund's investment adviser has determined are creditworthy.
Each repurchase agreement is recorded at cost. The Fund requires that the
securities purchased in a repurchase transaction be transferred to the custodian
in a manner sufficient to enable the Fund to obtain those securities in the
event of a default under the repurchase agreement. The Fund monitors, on a daily
basis, the value of the securities transferred to ensure that the value,
including accrued interest, of the securities under each repurchase agreement is
greater than amounts owed to the Fund under each such repurchase agreement.
Written Options - The Fund may write covered call or put options for which
premiums are received and are recorded as liabilities, and are subsequently
adjusted to the current value of the options written. Premiums received from
writing options which expire are treated as realized gains. Premiums received
from writing options which are exercised or are closed are offset against the
proceeds or amount paid on the transaction to determine the realized gain or
loss. If a put option is exercised, the premium reduces the cost basis of the
security purchased by the Fund. The Fund, as writer of an option, may have no
control over whether the underlying security may be sold (call) or purchased
(put) and, as a result, bears the market risk of an unfavorable change in the
price of the securities underlying the written option. In general, written call
options may serve as a partial hedge against decreases in value in the
underlying securities to the extent of the premium received. Written options may
also be used as a part of an income producing strategy reflecting the view of
the Fund's management on the direction of interest rates.
22
<PAGE>
NOTES TO FINANCIAL STATEMENTS - continued
Futures Contracts - The Fund may enter into futures contracts for the delayed
delivery of securities or contracts based on financial indices at a fixed price
on a future date. In entering such contracts, the Fund is required to deposit
either in cash or securities an amount equal to a certain percentage of the
contract amount. Subsequent payments are made or received by the Fund each day,
depending on the daily fluctuations in the value of the underlying security, and
are recorded for financial statement purposes as unrealized gains or losses by
the Fund. The Fund's investment in futures contracts is designed to hedge
against anticipated future changes in interest rates or securities prices.
Investments in interest rate futures for purposes other than hedging may be made
to modify the duration of the portfolio without incurring the additional
transaction costs involved in buying and selling the underlying securities.
Should interest rates or securities prices move unexpectedly, the Fund may not
achieve the anticipated benefits of the futures contracts and may realize a
loss.
Investment Transactions and Income - Investment transactions are recorded on the
trade date. Interest income is recorded on the accrual basis. All premium and
original issue discount are amortized or accreted for financial statement and
tax reporting purposes as required by federal income tax regulations.
Tax Matters and Distributions - The Fund's policy is to comply with the
provisions of the Internal Revenue Code (the Code) applicable to regulated
investment companies and to distribute to shareholders all of its net income,
including any net realized gain on investments. Accordingly, no provision for
federal income or excise tax is provided. The Fund files a tax return annually
using tax accounting methods required under provisions of the Code which may
differ from generally accepted accounting principles, the basis on which these
financial statements are prepared. Accordingly, the amount of net investment
income and net realized gain reported on these financial statements may differ
from that reported on the Fund's tax return and, consequently, the character of
distributions to shareholders reported in the financial highlights may differ
from that reported to shareholders on Form 1099-DIV.
Distributions paid by the Fund from net interest received on tax-exempt
municipal bonds are not includable by shareholders as gross income for federal
income tax purposes because the Fund intends to meet certain requirements of the
Code applicable to regulated investment companies, which will enable the Fund to
pay exempt-interest dividends. The portion of such interest, if any, earned on
private activity bonds issued after August 7, 1986 may be considered a
tax-preference item to shareholders. Distributions to shareholders are recorded
on the ex-dividend date.
The Fund distinguishes between distributions on a tax basis and a financial
reporting basis and requires that only distributions in excess of tax basis
earnings and profits are reported in the financial statements as a return of
capital. Differences in the recognition or classification of income between the
financial statements and tax earnings and profits which result in temporary
over-distributions for financial statement purposes, are classified as
distributions in excess of net investment income or accumulated net realized
gains.
23
<PAGE>
NOTES TO FINANCIAL STATEMENTS - continued
During the year ended August 31, 1995, $1,335,235 was reclassified from
accumulated net investment income to accumulated net realized gain on
investments due to differences between book and tax accounting. This change had
no effect on the net assets or net asset value per share.
At August 31, 1995, the accumulated distributions exceeded book income because
of differences in book and tax accounting for dividends declared but not paid at
year end.
At August 31, 1995, the Fund, for federal income tax purposes, had a capital
loss carryforward of $16,113,077, which may be applied against any net taxable
realized gains of each succeeding year until the earlier of its utilization or
expiration on August 31, 2002 ($5,959,343) and August 31, 2003 ($10,153,734).
Multiple Classes of Shares of Beneficial Interest - The Fund offers Class A and
Class B shares. The two classes of shares differ in their respective shareholder
servicing agent, distribution and service fees. All shareholders bear the common
expenses of the Fund pro rata, based on average daily net assets of each class,
without distinction between share classes. Dividends are declared separately for
each class. No class has preferential dividend rights; differences in per share
dividend rates are generally due to differences in separate class expenses.
(3) Transactions with Affiliates
Investment Adviser - The Fund has an investment advisory agreement with
Massachusetts Financial Services Company (MFS) to provide overall investment
advisory and administrative services, and general office facilities. The
management fee is computed daily and paid monthly at an effective annual rate of
0.19% of average daily net assets and 3.59% of investment income.
The Fund pays no compensation directly to its Trustees who are officers of the
investment adviser, or to officers of the Fund, all of whom receive remuneration
for their services to the Fund from MFS. Certain of the officers and Trustees of
the Fund are officers or directors of MFS, MFS Fund Distributors, Inc. (MFD) and
MFS Service Center, Inc. (MFSC). The Fund has an unfunded defined benefit plan
for all of its independent Trustees and Mr. Bailey. Included in Trustees'
compensation is a net periodic pension expense of $21,347 for the year ended
August 31, 1995.
Distributor - MFD, a wholly owned subsidiary of MFS, as distributor, received
$329,416 as its portion of the sales charge on sales of Class A shares of the
Fund. The Trustees have adopted a distribution plan relating solely to Class B
shares pursuant to Rule 12b-1 of the Investment Company Act of 1940 as follows:
The Class B distribution plan provides that the Fund will pay MFD a distribution
fee of 0.75% per annum, and a service fee of up to 0.25% per annum, of the
Fund's average daily net assets attributable to Class B shares. The service fee
is not charged on Class B shares held over one year. MFD will pay to securities
dealers that enter into a sales agreement with MFD all or a portion of the
service fee attributable to Class B shares. The service fee is intended to be
additional consideration for services rendered by the dealer with
24
<PAGE>
NOTES TO FINANCIAL STATEMENTS - continued
respect to Class B shares. MFD retains the service fee for accounts not
attributable to a securities dealer, which amounted to $106,468 for Class B
shares for the year ended August 31, 1995. Fees incurred under the distribution
plan during the year ended August 31, 1995 were 0.88% of average daily net
assets attributable to Class B shares on an annualized basis.
A contingent deferred sales charge is imposed on shareholder redemptions of
Class A shares, on purchases of $1 million or more, in the event of a
shareholder redemption within twelve months following the share purchase. A
contingent deferred sales charge is imposed on shareholder redemptions of Class
B shares in the event of a shareholder redemption within six years of purchase.
MFD receives all contingent deferred sales charges. Contingent deferred sales
charges imposed during the year ended August 31, 1995 were $6,621 and $221,978
for Class A and Class B shares, respectively.
Shareholder Servicing Agent - MFSC, a wholly owned subsidiary of MFS, earns a
fee for its services as shareholder servicing agent. The fee is calculated as a
percentage of the average daily net assets of each class of shares at an
effective annual rate of up to 0.15% and up to 0.22% attributable to Class A and
Class B shares, respectively.
(4) Portfolio Securities
Purchases and sales of investments, other than U.S. government securities,
purchased option transactions and short-term obligations, aggregated
$1,725,547,749 and $1,887,039,954, respectively.
The cost and unrealized appreciation or depreciation in value of the investments
owned by the Fund, as computed on a federal income tax basis, are as follows:
Aggregate cost $ 1,796,032,798
===============
Gross unrealized appreciation $ 145,173,472
Gross unrealized depreciation (1,845,486)
---------------
Net unrealized appreciation $ 143,327,986
===============
(5) Shares of Beneficial Interest
The Fund's Declaration of Trust permits the Trustees to issue an unlimited
number of full and fractional shares of beneficial interest (without par value).
Transactions in Fund shares were as follows:
<TABLE>
<CAPTION>
Class A Shares Year Ended Ten Months Ended Year Ended
August 31, 1995 August 31, 1994 October 31, 1993
------------------------------- ---------------------------- -----------------------------
Shares Amount Shares Amount Shares Amount
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Shares sold 93,895,405 $ 988,178,343 34,484,881 $ 374,991,527 24,520,472 $ 276,503,989
Shares issued to share-
holders in reinvestment
of distributions 6,046,921 63,804,833 7,028,609 77,691,863 8,091,561 90,315,455
Shares reacquired (110,192,105) (1,164,453,444) (39,960,254) (434,165,148) (19,054,148) (215,497,820)
------------ --------------- ----------- ------------- ----------- -------------
Net increase
(decrease) (10,249,779) $ (112,470,268) 1,553,236 $ 18,518,242 13,557,885 $ 151,321,624
============ =============== =========== ============= =========== =============
</TABLE>
25
<PAGE>
NOTES TO FINANCIAL STATEMENTS - continued
<TABLE>
<CAPTION>
Class B Shares Year Ended Ten Months Ended Year Ended
August 31, 1995 August 31, 1994 October 31, 1993*
------------------------------- ---------------------------- -----------------------------
Shares Amount Shares Amount Shares Amount
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Shares sold 2,382,993 $ 25,217,122 3,988,525 $ 44,173,687 917,981 $ 10,742,312
Shares issued to share-
holders in reinvestment
of distributions 143,928 1,520,092 91,605 999,987 1,813 21,097
Shares reacquired (1,559,038) (16,395,963) (770,579) (8,262,849) (22,664) (265,975)
---------- ------------- --------- ------------- ------- ------------
Net increase 967,883 $ 10,341,251 3,309,551 $ 36,910,825 897,130 $ 10,497,434
========== ============= ========= ============= ======= ============
<FN>
* For the period from commencement of offering of Class B shares, September 7, 1993 to October 31, 1993.
</FN>
</TABLE>
(6) Line of Credit
The Fund entered into an agreement which enables it to participate with other
funds managed by MFS in an unsecured line of credit with a bank which permits
borrowings up to $350 million, collectively. Borrowings may be made to
temporarily finance the repurchase of Fund shares. Interest is charged to each
fund, based on its borrowings, at a rate equal to the bank's base rate. In
addition, a commitment fee, based on the average daily unused portion of the
line of credit, is allocated among the participating funds at the end of each
quarter. The commitment fee allocated to the Fund for the year ended August 31,
1995 was $34,272.
(7) Financial Instruments
The Fund trades financial instruments with off-balance sheet risk in the normal
course of its investing activities in order to manage exposure to market risks
such as interest rates. These financial instruments include futures contracts.
The notional or contractual amounts of these instruments represent the
investment the Fund has in particular classes of financial instruments and does
not necessarily represent the amounts potentially subject to risk. The
measurement of the risks associated with these instruments is meaningful only
when all related and offsetting transactions are considered. A summary of
obligations under these financial instruments at August 31, 1995, is as follows:
<TABLE>
<CAPTION>
Futures Contracts
Unrealized
Appreciation
Expiration Contracts Position (Depreciation)
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
September 1995 200 U.S. Treasury Bonds Short $ 212,500
September 1995 200 Municipal Bonds Short (175,000)
---------
$ 37,500
---------
</TABLE>
At August 31, 1995, the Fund had sufficient cash and/or securities to cover
margin requirements on open futures contracts.
26
<PAGE>
NOTES TO FINANCIAL STATEMENTS - continued
The Fund also invests in indexed securities whose value may be linked to
interest rates or other financial indicators. Indexed securities are
fixed-income securities whose proceeds at maturity (principal-indexed
securities) or interest rates (coupon-indexed securities) rise and fall
according to the change in one or more specified underlying instruments. Indexed
securities may be more volatile than the underlying instrument itself. The
following is a summary of such securities held at August 31, 1995:
<TABLE>
<CAPTION>
Unrealized
Description Index Principal Value Depreciation
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Coupon-Indexed Securities: PSA Municipal
New York City, NY, 6.67s, 2016 Swap $4,000,000 $3,990,000 $10,000
=======
</TABLE>
27
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Trustees of MFS Series Trust IV and Shareholders
of MFS Municipal Bond Fund:
We have audited the accompanying statement of assets and liabilities, including
the portfolio of investments, of MFS Municipal Bond Fund (one of the series
constituting MFS Series Trust IV) as of August 31, 1995, the related statement
of operations for the year then ended, the statement of changes in net assets
for the year then ended, the ten months ended August 31, 1994 and the year ended
October 31, 1993, and the financial highlights for each of the years in the
ten-year period ended August 31, 1995. These financial statements and financial
highlights are the responsibility of the Fund's management. Our responsibility
is to express an opinion on these financial statements and financial highlights
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of the securities owned at
August 31, 1995 by correspondence with the custodian and brokers. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of MFS Municipal Bond
Fund at August 31, 1995, the results of its operations, the changes in its net
assets, and its financial highlights for the respective stated periods in
conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Boston, Massachusetts
October 6, 1995
---------------------------
This report is prepared for the general information of shareholders. It is
authorized for distribution to prospective investors only when preceded or
accompanied by a current prospectus.
28
<PAGE>
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 1-800-637-2929
any business day from 9 a.m. to 5 p.m. Eastern time (or, leave a message any
time). This material should be read carefully before investing or sending money.
STOCK
================================================================================
Massachusetts Investors Trust
- --------------------------------------------------------------------------------
Massachusetts Investors Growth Stock Fund
- --------------------------------------------------------------------------------
MFS [R] Capital Growth Fund
- --------------------------------------------------------------------------------
MFS [R] Emerging Growth Fund
- --------------------------------------------------------------------------------
MFS [R] Gold & Natural Resources Fund
- --------------------------------------------------------------------------------
MFS [R] Growth Opportunities Fund
- --------------------------------------------------------------------------------
MFS [R] Managed Sectors Fund
- --------------------------------------------------------------------------------
MFS [R] OTC Fund
- --------------------------------------------------------------------------------
MFS [R] Research Fund
- --------------------------------------------------------------------------------
MFS [R] Value Fund
STOCK AND BOND
================================================================================
MFS [R] Total Return 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
(formerly MFS [R] Income & Opportunity Fund)
- --------------------------------------------------------------------------------
LIMITED MATURITY BOND
================================================================================
MFS [R] Government Limited Maturity Fund
- --------------------------------------------------------------------------------
MFS [R] Limited Maturity Fund
- --------------------------------------------------------------------------------
MFS [R] Municipal Limited Maturity Fund
- --------------------------------------------------------------------------------
WORLD
================================================================================
MFS [R] World Asset Allocation Fund
- --------------------------------------------------------------------------------
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
(closed to new investors)
- --------------------------------------------------------------------------------
MFS [R] Municipal Income Fund
- --------------------------------------------------------------------------------
STATE TAX-FREE BOND
================================================================================
Alabama, Arkansas, California, Florida,
Georgia, Louisiana, Maryland, Massachusetts, Mississippi, New York,
North Carolina, Pennsylvania,
South Carolina, Tennessee, Texas, Virginia, Washington, West Virginia
- --------------------------------------------------------------------------------
MONEY MARKET
================================================================================
MFS [R] Cash Reserve Fund
- --------------------------------------------------------------------------------
MFS [R] Government Money Market Fund
- --------------------------------------------------------------------------------
MFS [R] Money Market Fund
- --------------------------------------------------------------------------------
<PAGE>
MFS [R] MUNICIPAL Bulk Rate
BOND FUND U.S. Postage
P A I D
500 Boylston Street Permit #55638
Boston, MA 02116 Boston, MA
[LOGO]
MMB-2 10/95 63M 17/217
<PAGE> 93
<TABLE>
<S> <C>
PROSPECTUS
January 1, 1996
MFS(R) OTC FUND Class A Shares of Beneficial Interest
Class B Shares of Beneficial Interest
(A member of the MFS Family of Funds(R)) Class C Shares of Beneficial Interest
- -----------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
PAGE
-----
<S> <C> <C>
1. Expense Summary..................................................................... 2
2. The Fund............................................................................ 3
3. Condensed Financial Information..................................................... 4
4. Investment Objective and Policies................................................... 5
5. Investment Techniques............................................................... 5
6. Risk Factors........................................................................ 9
7. Management of the Fund.............................................................. 12
8. Information Concerning Shares of the Fund........................................... 13
Purchases........................................................................ 13
Exchanges........................................................................ 17
Redemptions and Repurchases...................................................... 18
Distribution Plans............................................................... 20
Distributions.................................................................... 22
Tax Status....................................................................... 22
Net Asset Value.................................................................. 22
Description of Shares, Voting Rights and Liabilities............................. 23
Performance Information.......................................................... 23
Expenses......................................................................... 24
9. Shareholder Services................................................................ 24
Appendix A.............................................................................. A-1
</TABLE>
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
MFS OTC FUND
500 Boylston Street, Boston, Massachusetts 02116 (617) 954-5000
This Prospectus pertains to the MFS OTC Fund (the "Fund"), a non-diversified
series of MFS Series Trust IV (the "Trust"), an open-end investment company
presently consisting of four series. The investment objective of the Fund is to
seek to obtain long-term growth of capital. The Fund seeks to achieve this
objective by investing at least 65% of its assets, under normal circumstances,
in securities principally traded on the over-the-counter (OTC) securities
market. THE FUND IS INTENDED FOR INVESTORS WHO UNDERSTAND AND ARE WILLING TO
ACCEPT THE RISKS ENTAILED IN SEEKING LONG-TERM GROWTH OF CAPITAL. See "Risk
Factors." The minimum initial investment generally is $1,000 per account (see
"Purchases").
The Fund's investment adviser and distributor are Massachusetts Financial
Services Company ("MFS") and MFS Fund Distributors, Inc. ("MFD"), respectively,
both of which are located at 500 Boylston Street, Boston, Massachusetts 02116.
INVESTMENT PRODUCTS ARE NOT INSURED BY THE FDIC OR ANY OTHER GOVERNMENT AGENCY,
AND ARE NOT DEPOSITS OR OTHER OBLIGATIONS OF, OR GUARANTEED BY, ANY FINANCIAL
INSTITUTION. SHARES OF MUTUAL FUNDS ARE SUBJECT TO INVESTMENT RISK, INCLUDING
POSSIBLE LOSS OF THE PRINCIPAL AMOUNT INVESTED, AND WILL FLUCTUATE IN VALUE. YOU
MAY RECEIVE MORE OR LESS THAN YOU PAID WHEN YOU REDEEM YOUR SHARES.
This Prospectus sets forth concisely the information concerning the Fund that a
prospective investor ought to know before investing. The Fund has filed with the
Securities and Exchange Commission (the "SEC") a Statement of Additional
Information (the "SAI"), dated January 1, 1996, as amended or supplemented from
time to time, which contains more detailed information about the Fund. The SAI
is incorporated into this Prospectus by reference. See page 25 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).
INVESTORS SHOULD READ THIS PROSPECTUS AND RETAIN IT FOR FUTURE REFERENCE.
<PAGE> 94
1. EXPENSE SUMMARY
<TABLE>
<CAPTION>
SHAREHOLDER TRANSACTION EXPENSES: CLASS A CLASS B CLASS C
---------- ------- -------
<S> <C> <C> <C>
Maximum Initial Sales Charge Imposed on Purchases of
Fund Shares (as a percentage of offering price)... 5.75% 0.00% 0.00%
Maximum Contingent Deferred Sales Charge (as a
percentage of original purchase price or
redemption proceeds, as applicable)............... See Below(1) 4.00% 0.00%
ANNUAL OPERATING EXPENSES (AS A PERCENTAGE OF AVERAGE NET
ASSETS):
Management Fees..................................... 0.75% 0.75% 0.75%
Rule 12b-1 Fees..................................... 0.00%(2) 0.94%(3) 1.00%(3)
Other Expenses...................................... 0.54% 0.61% 0.54%
---- ---- ----
Total Operating Expenses............................ 1.29% 2.30% 2.29%
<FN>
- ---------------
(1) Purchases of $1 million or more are not subject to an initial sales charge;
however, a contingent deferred sales charge (a "CDSC") of 1% will be imposed
on such purchases in the event of certain redemption transactions within 12
months following such purchases (see "Information Concerning Shares of the
Fund -- Purchases").
(2) The Fund has adopted a Distribution Plan for its Class A shares in
accordance with Rule 12b-1 under the Investment Company Act of 1940, as
amended (the "1940 Act"), which provides that it will pay
distribution/service fees aggregating up to (but not necessarily all of)
0.35% per annum of the average daily net assets attributable to the Class A
shares (see "Distribution Plans"). Payment of the 0.25% per annum service
fee will commence on the date that net assets attributable to Class A shares
first equal or exceed $40 million. Payment of the 0.10% per annum
distribution fee will commence on such date as the Trustees of the Trust may
determine. See "Distribution Plans" below. 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.
(3) The Fund has adopted separate Distribution Plans for its Class B and its
Class C shares in accordance with Rule 12b-1 under the 1940 Act, which
provide that it will pay distribution/service fees aggregating up to (but
not necessarily all of) 1.00% per annum of the average daily net assets
attributable to the Class B shares under the Class B Distribution Plan and
the Class C shares under the Class C Distribution Plan. Except in the case
of the 0.25% per annum Class B service fee paid by the Fund in connection
with the sale of Class B shares, payment of the Class B service fee will not
commence until such date as the service fee first becomes payable under the
Class A Distribution Plan (see footnote (2) above) (see also "Distribution
Plans"). Distribution expenses paid under these Plans, together with any
CDSC payable upon redemption of Class B 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.
</TABLE>
2
<PAGE> 95
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>
(1)
1 year..................................... $ 70 $ 63 $ 23 $ 23
3 years.................................... 96 102 72 72
5 years.................................... 124 143 123 123
10 years.................................... 204 238(2) 238(2) 263
<FN>
- ---------------
(1) Assumes no redemption.
(2) Class B shares convert to Class A shares approximately eight years after
purchase; therefore, years nine and ten reflect Class A expenses.
</TABLE>
The purpose of the expense table above is to assist investors in understanding
the various costs and expenses that a shareholder of the Fund will bear directly
or indirectly. More complete descriptions of the following expenses of the Fund
are set forth in the following sections: (i) varying sales charges on share
purchases -- "Purchases"; (ii) varying CDSCs -- "Purchases"; (iii) management
fees -- "Investment Adviser"; and (iv) Rule 12b-1 (i.e., distribution
plan) fees -- "Distribution Plans".
THE "EXAMPLE" SET FORTH ABOVE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST
OR FUTURE EXPENSES OF THE FUND; ACTUAL EXPENSES MAY BE GREATER OR LESS THAN
THOSE SHOWN.
2. THE FUND
The Fund is a non-diversified series of the Trust, an open-end management
investment company which was organized as a business trust under the laws of The
Commonwealth of Massachusetts in 1981. The Trust presently consists of four
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 for its portfolio. Three classes
of shares of the Fund are currently offered to the general public. Class A
shares are offered at net asset value plus an initial sales charge (or a CDSC in
the case of certain purchases of $1 million or more) and subject to a
Distribution Plan providing for a distribution fee and service fee. Class B
shares are offered at net asset value without an initial sales charge but are
subject to a CDSC and a Distribution Plan providing for a distribution fee and a
service fee which are greater than the Class A distribution fee and service fee.
Class B shares will convert to Class A shares approximately eight years after
purchase. Class C shares are offered at net asset value without an initial sales
charge or a CDSC but are subject to a Distribution Plan providing for an annual
distribution fee and service fee which are equal to the Class B annual
distribution fee and service fee. Class C shares do not convert to any other
class of shares of the Fund.
The Trust's Board of Trustees provides broad supervision over the affairs of the
Fund. The Adviser is responsible for the management of the Fund's assets and the
officers of the Trust are responsible for the Fund's operations. The Adviser
manages the portfolio from day to day in accordance with the Fund's investment
objective and policies. The selection of investments and the way they are
managed depend on conditions and trends in the economy and the financial
marketplaces. The Fund also offers to buy back (redeem) its shares from its
shareholders at any time at net asset value, less any applicable CDSC.
3
<PAGE> 96
3. CONDENSED FINANCIAL INFORMATION
The following information has been audited since the inception 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, as
experts in accounting and auditing. The Fund's current independent auditors are
Deloitte & Touche LLP.
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
-------------------------------------------------------------------
1995 1994* 1995 1994* 1995 1994**
------- ------- ------- ------- ------- -------
CLASS A CLASS B CLASS C
------------------- ------------------- -------------------
<S> <C> <C> <C> <C> <C> <C>
Per share data (for a share outstanding
throughout each period):
Net asset value -- beginning of period.......... $ 8.68 $ 7.83 $ 8.59 $ 7.83 $ 8.61 $ 7.80
------- ------- ------- ------- ------- -------
Income from investment operations++ --
Net investment loss......................... $ (0.03) $ (0.05) $ (0.13) $ (0.12) $ (0.14) $ (0.04)
------- ------- ------- ------- ------- -------
Net realized and unrealized gain on
investments............................... 1.69 0.90 1.69 0.88 1.69 0.85
------- ------- ------- ------- ------- -------
Total from investment operations................ $ 1.66 $ 0.85 $ 1.56 $ 0.76 $ 1.55 $ 0.81
------- ------- ------- ------- ------- -------
Less distributions declared to shareholders
from net realized gain on investments......... $ (0.26) $ -- $ (0.21) $ -- $ (0.25) $ --
------- ------- ------- ------- ------- -------
Total distributions declared to shareholders.... $ (0.26) $ -- $ (0.21) $ -- $ (0.25) $ --
------- ------- ------- ------- ------- -------
Net asset value -- end of period................ $ 10.08 $ 8.68 $ 9.94 $ 8.59 $ 9.91 $ 8.61
======= ======= ======= ======= ======= =======
Total return#................................... 19.77% 10.86% 18.75% 9.71% 18.63% 10.38%
Ratios (to average net assets)/Supplemental
datasec.:
Expenses.................................... 1.29% 1.50%+ 2.29% 2.57%+ 2.30% 2.50%+
------- ------- ------- ------- ------- -------
Net investment loss......................... (0.40)% (0.87)%+ (1.44)% (2.02)%+ (1.55)% (2.22)%+
------- ------- ------- ------- ------- -------
Portfolio turnover.............................. 218% 82% 218% 82% 218% 82%
------- ------- ------- ------- ------- -------
Net assets at end of period (000 omitted)....... $30,194 $17,776 $61,742 $36,849 $ 3,209 $ 87
------- ------- ------- ------- ------- -------
<FN>
- ---------------
* For the period from the commencement of investment operations, December 1, 1993 to August 31, 1994.
** For the period from the commencement of offering of Class C shares, August 1, 1994 to August 31, 1994.
+ Annualized.
++ Per share data is based upon average shares outstanding.
# 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.
sec. The investment adviser did not impose a portion of its management fee and distribution fee, respectively, for
the periods indicated. If these fees had been incurred by the Fund, the net investment loss per share and the
ratios would have been:
</TABLE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Net investment loss....................... -- $(0.08) -- $(0.15) -- $(0.05)
Ratios (to average net assets)
Expenses................................ -- 2.03%+ -- 3.10%+ -- 3.03%+
Net investment loss..................... -- (1.40)%+ -- (2.56)%+ -- (2.71)%+
</TABLE>
4
<PAGE> 97
4. INVESTMENT OBJECTIVE AND POLICIES
INVESTMENT OBJECTIVE -- The Fund's investment objective is to seek to obtain
long-term growth of capital.
INVESTMENT POLICIES -- The Fund seeks to achieve its objective by investing,
under normal market conditions, at least 65% of its total assets in securities
principally traded on the over-the-counter (OTC) securities market (see "Risk
Factors -- OTC Securities" below). OTC securities tend to be securities of
companies which are smaller or newer than those listed on the New York or
American Stock Exchanges. Issuers of the securities which are traded on the OTC
market include, among others, industrial corporations, financial service
institutions, public utilities, and transportation companies. OTC securities
include both equity and fixed income securities (including obligations of the
U.S. Government). The Fund may also invest in securities of companies that are
not traded on the OTC securities market that represent opportunities for capital
appreciation. The Fund will seek to invest in companies that are undervalued
relative to present or future earnings, cash flow or book value. While the Fund
intends to invest primarily in equity securities, the Fund may also invest in
fixed income securities (see "Investment Techniques -- Equity Securities" and
- -- "Fixed Income Securities" below). The Fund may also invest up to 35% (and
generally expects to invest between 0% and 20%) of its net assets in foreign
securities which are not traded on a U.S. exchange (not including American
Depositary Receipts)(see "Risk Factors -- Foreign Securities" below).
The Fund will not purchase a security, under normal circumstances, if it would
result in less than 65% of its total assets being invested in OTC securities
(the "65% limitation"). Securities that were principally traded on the OTC
securities market when purchased but which have since been listed on the New
York or American Stock Exchange or a foreign exchange will be considered to fall
within the Fund's 65% limitation for 12 months after the date the security was
listed on an exchange.
5. INVESTMENT TECHNIQUES
EQUITY SECURITIES: The Fund may invest in all types of equity securities,
including the following: common stocks, preferred stocks and preference stocks;
securities such as bonds, warrants or rights that are convertible into stocks;
and depositary receipts for those securities.
FIXED INCOME SECURITIES: Debt securities in which the Fund may invest include
all types of long- or short-term debt obligations, such as bonds, debentures,
notes and commercial paper. Fixed income securities in which the Fund may invest
include securities in the lower rating categories of recognized rating agencies
(and comparable unrated securities) (see "Risk Factors -- Lower Rate of Fixed
Income Securities" below). Fixed income securities in which the Fund may invest
also include zero coupon bonds, deferred interest bonds and bonds on which the
interest is payable in kind. Such investments involve certain risks. See the
SAI.
INVESTMENTS FOR TEMPORARY DEFENSIVE PURPOSES: When the Adviser believes that
investing for defensive purposes is appropriate, such as during periods of
unusual market conditions, part or all of the Fund's assets may be temporarily
invested in cash (including foreign currency) or cash equivalent short-term
obligations including, but not limited to, certificates of deposit, commercial
paper, short-term notes, obligations issued or guaranteed by the U.S. Government
or any of its agencies or instrumentalities and repurchase agreements.
EMERGING MARKET SECURITIES: Consistent with the Fund's investment objective and
policies, the Fund may invest in securities of issuers (which may include
foreign governments and their subdivisions, agencies or instrumentalities)
located in emerging markets. Emerging markets include any country: (i) having an
"emerging stock market" as defined by the International Finance Corporation;
(ii) with low-to middle-income economies according to the International Bank for
Reconstruction and Development (the World Bank); (iii) listed in World Bank
publications as developing; or (iv) determined by MFS to be an emerging market
as defined above. The Adviser determines whether an issuer's principal
activities are located in an emerging market country by considering such factors
as its country of organization, the principal trading market for its securities
and the source of its revenues and assets. The issuer's principal activities
generally are deemed to be located in a particular country if: (a) the security
is issued or guaranteed by the government of that country or any of its
agencies, authorities or instrumentalities; (b) the issuer is organized under
the laws of, and maintains a principal office in, that country; (c) the issuer
has its principal securities trading
5
<PAGE> 98
market in that country; (d) the issuer derives 50% or more of its total revenues
from goods sold to 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, Costa Rica,
Jordan, Mexico, Nigeria, the Philippines, 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.
REPURCHASE AGREEMENTS: The Fund may enter into repurchase agreements in order
to earn income on available cash or as a temporary defensive measure. Under a
repurchase agreement, the Fund acquires securities subject to the seller's
agreement to repurchase at a specified time and price. If the seller becomes
subject to a proceeding under the bankruptcy laws or its assets are otherwise
subject to a stay order, the Fund's right to liquidate the securities may be
restricted (during which time the value of the securities could decline). As
discussed in the SAI, the Fund has adopted certain procedures intended to
minimize risk.
LENDING OF SECURITIES: The Fund may seek to increase its income by lending
portfolio securities. Such loans will usually be made only 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. 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 will continue to collect the
equivalent of interest on the securities loaned and will also receive either
interest (through investment in cash collateral) or a fee (if the collateral is
U.S. Government securities).
"WHEN-ISSUED" SECURITIES: The Fund may purchase securities on a "when-issued"
or on a "forward delivery" basis, which means that the securities will be
delivered to the Fund at a future date usually beyond customary settlement time.
The commitment to purchase a security for which payment will be made on a future
date may be deemed a separate security. The Fund does not pay for the securities
until received, and does not start earning interest on the securities until the
contractual settlement date. In order to invest its assets immediately, while
awaiting delivery of securities purchased on such bases, the Fund will normally
invest in cash, short-term money market instruments and high quality debt
securities.
INDEXED SECURITIES: The Fund may invest in indexed securities whose value is
linked to foreign currencies, interest rates, commodities, indices, or other
financial indicators. Most indexed securities are short to intermediate term
fixed-income securities whose values at maturity or interest rates rise or fall
according to the change in one or more specified underlying instruments. Indexed
securities may be positively or negatively indexed (i.e., their value may
increase or decrease if the underlying instrument appreciates), and may have
return characteristics similar to direct investments in the underlying
instrument or to one or more options on the underlying instrument. Indexed
securities may be more volatile than the underlying instrument itself.
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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.
RESTRICTED SECURITIES: The Fund may also purchase securities that are not
registered under the Securities Act of 1933 ("1933 Act") ("restricted
securities"), including those that can be offered and sold to "qualified
institutional buyers" under Rule 144A under the 1933 Act ("Rule 144A
securities"). The Trust's Board of Trustees determines, based upon a continuing
review of the trading markets for a specific Rule 144A security, whether such
security is 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, will retain sufficient oversight and be ultimately responsible for the
determinations. The Board will carefully monitor the Fund's investments in Rule
144A securities, focusing on such important factors, among others, as valuation,
liquidity and availability of information. This investment practice could have
the effect of decreasing the level of liquidity in the Fund to the extent that
qualified institutional buyers become for a time uninterested in purchasing Rule
144A securities held in the Fund's portfolio. Subject to the Fund's 15%
limitation on investments in illiquid investments, the Fund may also invest in
restricted securities that may not be sold under Rule 144A, which presents
certain risks. As a result, the Fund might not be able to sell these securities
when the Adviser wishes to do so, or might have to sell them at less than fair
value. In addition, market quotations are less readily available. Therefore,
judgment may at times play a greater role in valuing these securities than in
the case of unrestricted securities.
CORPORATE ASSET-BACKED SECURITIES: The Fund may invest in corporate
asset-backed securities. These securities, issued by trusts and special purpose
corporations, are backed by a pool of assets, such as credit card or automobile
loan receivables, representing the obligations of a number of different parties.
Corporate asset-backed securities present certain risks. For instance, in the
case of credit card receivables, these securities may not have the benefit of
any security interest in the related collateral. See the SAI for further
information on these securities.
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 investment income and will
offset in part the reduced value of a portfolio security in connection with
which the option may have been written or the increased cost of portfolio
securities to be acquired. In contrast, however, if the price of the security
underlying the option moves adversely to the Fund's position, the option may be
exercised and the Fund will be required to purchase or sell the security at a
disadvantageous price, resulting in losses which may only be partially offset by
the amount of the premium. The Fund may also write combinations of put and call
options on the same security, known as "straddles." Such transactions can
generate additional premium income but also present increased risk.
The Fund may purchase put or call options in anticipation of declines in the
value of portfolio securities or increases in the value of securities to be
acquired. In the event that such declines or increases occur, the Fund may be
able to offset the resulting adverse effect on its portfolio, in whole or in
part, through the options purchased. The risk assumed by the Fund in connection
with such transactions is limited to the amount of the premium and related
transaction costs associated with the option, although the Fund may be required
to forfeit such amounts in the event that the prices of securities underlying
the options do not move in the direction or to the extent anticipated.
The Fund may also enter into options on the yield "spread," or yield
differential, between two securities, a transaction referred to as a "yield
curve" option, for hedging purposes and non-hedging purposes (which may be
speculative). 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
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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 "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 INDICES: The Fund may write (sell) covered call and put
options and purchase call and put options on stock indices. The Fund may write
options on stock indices for the purpose of increasing its gross income and to
protect its portfolio against declines in the value of securities it owns or
increases in the value of securities to be acquired. When the Fund writes an
option on a stock index, and the value of the index moves adversely to the
holder's position, the option will not be exercised, and the Fund will either
close out the option at a profit or allow it to expire unexercised. The Fund
will thereby retain the amount of the premium, which will increase its gross
income and offset part of the reduced value of portfolio securities or the
increased cost of securities to be acquired. Such transactions, however, will
constitute only partial hedges against adverse price fluctuations, since any
such fluctuations will be offset only to the extent of the premium received by
the Fund for the writing of the option. In addition, if the value of an
underlying index moves adversely to the Fund's option position, the option may
be exercised, and the Fund will experience a loss which may only be partially
offset by the amount of the premium received.
The Fund may also purchase put or call options on stock indices in order,
respectively, to hedge its investments against a decline in value or to attempt
to reduce the risk of missing a market or industry segment advance. The Fund's
possible loss in either case will be limited to the premium paid for the option,
plus related transaction costs.
OPTIONS ON FOREIGN CURRENCIES: The Fund may also purchase and write options on
foreign currencies ("Options on Foreign Currencies") for the purpose of
protecting against declines in the dollar value of portfolio securities and
against increases in the dollar cost of securities to be acquired. As in the
case of other types of options, however, the writing of an Option on Foreign
Currency will constitute only a partial hedge, up to the amount of the premium
received, and the Fund may be required to purchase or sell foreign currencies at
disadvantageous exchange rates, thereby incurring losses. The purchase of an
Option on Foreign Currency may constitute an effective hedge against
fluctuations in exchange rates although, in the event of rate movements adverse
to the Fund's position, it may forfeit the entire amount of the premium paid for
the option plus related transaction costs. The Fund may also choose to, or be
required to, receive delivery of the foreign currencies underlying Options on
Foreign Currencies it has entered into. Under certain circumstances, such as
where the Adviser believes that the applicable exchange rate is unfavorable at
the time the currencies are received or the Adviser anticipates, for any other
reason, that the exchange rate will improve, the Fund may hold such currencies
for an indefinite period of time. See "Investment Objective and
Policies -- Foreign Securities" in the SAI for information on the risks
associated with holding foreign currency.
FUTURES CONTRACTS: The Fund may enter into stock index and foreign currency
futures contracts (collectively "Futures Contracts"). Such transactions will be
entered into for hedging purposes, in order to protect the Fund's current or
intended investments from the effects of changes in exchange rates or declines
in the stock market. 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. Futures Contracts may also be entered
into for non-hedging purposes, to the extent permitted by applicable law, which
involves greater risks and could result in losses which are not offset by gains
on other portfolio assets. The Fund will not enter into any Futures Contract if
immediately thereafter the value of securities and other obligations underlying
all such Futures Contracts would exceed 50% of the value of its total assets.
OPTIONS ON FUTURES CONTRACTS: The Fund may 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
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or sale of the underlying Futures Contracts because 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. Options on Futures Contracts may also be entered into
for non-hedging purposes (which may be speculative) to the extent permitted
under applicable law, which involves greater risks and could result in losses
which are not offset by gains on other portfolio assets.
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 (which may be
speculative). By entering into transactions in Forward Contracts, for hedging
purposes, the Fund may be required to forego the benefits of advantageous
changes in exchange rates and, in the case of Forward Contracts entered into for
non-hedging purposes, the Fund may sustain losses which will reduce its gross
income. Such transactions, therefore, could be considered speculative. Forward
Contracts are traded over-the-counter and not on organized commodities or
securities exchanges. As a result, Forward Contracts operate in a manner
distinct from exchange-traded instruments, and their use involves certain risks
beyond those associated with transactions in Futures Contracts or options traded
on exchanges. The Fund may choose to, or be required to, receive delivery of the
foreign currencies underlying Forward Contracts it has entered into. Under
certain circumstances, such as where the Adviser believes that the applicable
exchange rate is unfavorable at the time the currencies are received or the
Adviser anticipates, for any other reason, that the exchange rate will improve,
the Fund may hold such currencies for an indefinite period of time. The Fund may
also enter into a Forward Contract on one currency to hedge against risk of loss
arising from fluctuations in the value of a second currency (referred to as a
"cross hedge") if, in the judgment of the Adviser, a reasonable degree of
correlation can be expected between movements in the values of the two
currencies. The Fund has established procedures consistent with statements of
the SEC and its staff regarding the use of Forward Contracts by registered
investment companies, which requires use of segregated assets or "cover" in
connection with the purchase and sale of such contracts. See "Investment
Objective and Policies -- Foreign Securities" in the SAI for information on the
risks associated with holding foreign currency.
6. RISK FACTORS
OTC SECURITIES: Investing in securities traded on the OTC securities market can
involve greater risk than is customarily associated with investing in securities
traded on the New York or American Stock Exchanges since OTC securities are
generally securities of companies which are smaller or newer than those listed
on the New York or American Stock Exchange. For example, these companies often
have limited product lines, markets, or financial resources, may be dependent
for management on one or a few key persons, and can be more susceptible to
losses. Also, their securities may be thinly traded (and therefore have to be
sold at a discount from current prices or sold in small lots over an extended
period of time), may be followed by fewer investment research analysts and may
be subject to wider price swings and thus may create a greater chance of loss
than securities of larger capitalization or established companies. Shares of the
Fund, therefore, are subject to greater fluctuation in value than shares of a
conservative equity fund or of a growth fund which invests entirely in proven
growth stocks. Therefore, the Fund is intended for long-term investors who
understand and can accept the risks entailed in seeking long-term growth of
capital. The Fund is not meant to provide a vehicle for those who wish to play
short-term swings in the stock market. Accordingly, 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.
FIXED INCOME SECURITIES: To the extent the Fund invests in fixed income
securities, the net asset value of the Fund may change as the general levels of
interest rates fluctuate. When interest rates decline, the value of fixed income
securities can be expected to rise. Conversely, when interest rates rise, the
value of fixed income securities can be expected to decline.
LOWER RATED FIXED INCOME SECURITIES: The Fund may invest up to 20% of its net
assets in fixed income securities that are in the lower rating categories (rated
Ba or lower by Moody's Investors Service, Inc. ("Moody's") or BB or lower by
Standard &
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Poor's Ratings Group ("S&P") or Fitch Investors Service, Inc. ("Fitch") and
comparable unrated securities (commonly known as "junk bonds"). 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 than securities in
the higher rating categories. 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, 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 certain adverse market conditions to sell these lower rated securities to
meet redemption requests or to respond to changes in the market.
The Fund may also invest in fixed income securities rated Baa by Moody's or BBB
by S&P or Fitch and comparable unrated securities. These securities, while
normally exhibiting adequate protection parameters, have speculative
characteristics and changes in economic conditions or other circumstances are
more likely to lead to a weakened capacity to make principal and interest
payments than in the case of higher grade fixed income securities. See the SAI
for more information on lower rated securities.
FOREIGN SECURITIES: Investing in securities of foreign issuers generally
involves risks not ordinarily associated with investing in securities of
domestic issuers. These include changes in currency rates, exchange control
regulations, governmental administration or economic or monetary policy (in the
United States or abroad) or circumstances in dealings between nations. Costs may
be incurred in connection with conversions between various currencies. Special
considerations may also include more limited information about foreign issuers,
higher brokerage costs, different accounting standards and thinner trading
markets. Foreign securities markets may also be less liquid, more volatile and
less subject to government supervision than in the United States. Investments in
foreign countries could be affected by other factors including expropriation,
confiscatory taxation and potential difficulties in enforcing contractual
obligations and could be subject to extended settlement periods. The Fund may
hold foreign currency received in connection with investments in foreign
securities when, in the judgment of the Adviser, it would be beneficial to
convert such currency into U.S. dollars at a later date, based on anticipated
changes in the relevant exchange rate. The Fund may also hold foreign currency
in anticipation of purchasing foreign securities. See the SAI for further
discussion of foreign securities and the holding of foreign currency, as well as
the associated risks.
EMERGING MARKETS: 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
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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. See the SAI for a further discussion of
emerging market securities as well as the associated risks.
OPTIONS, FUTURES CONTRACTS AND FORWARD CONTRACTS: Although the Fund will enter
into certain transactions in options, Futures Contracts, Options on Futures
Contracts and Options on Foreign Currencies for hedging purposes, such
transactions nevertheless involve certain risks. For example, a lack of
correlation between the instrument underlying an option on 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 or Futures
Contracts and Forward Contracts for other than hedging purposes, 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.
NON-DIVERSIFIED STATUS: The Fund has registered as a "non-diversified"
investment company. As a result, the Fund is limited as to the percentage of its
assets which may be invested in the securities of any one issuer only by its own
investment restrictions and the diversification requirements imposed by the
Internal Revenue Code of 1986, as amended (the "Code"). U.S. Government
securities which are generally considered free of credit risk and are assured as
to payment of principal and interest if held to maturity are not subject to any
investment limitation. Since the Fund may invest a relatively high percentage of
its assets in a limited number of issuers, the Fund may be more susceptible to
any single economic, political or regulatory occurrence and to the financial
conditions of the issuers in which it invests. For these reasons, an investment
in shares of the Fund should not be considered to constitute a complete
investment program.
------------------------
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 Rules
of Fair Practice of the National Association of Securities Dealers, Inc. (the
"NASD"), and such other policies as the Trustees may determine, the Adviser may
consider sales of shares of the Fund and of the other investment company clients
of MFD, the Fund's distributor, as a factor in the selection of broker-dealers
to execute the Fund's portfolio transactions. From time to time, the Adviser may
direct certain portfolio transactions to broker-dealer firms which, in turn,
have agreed to pay a portion of the Fund's operating expenses (e.g., fees
charged by the custodian of the Fund's assets). For a further discussion of
portfolio trading, see "Portfolio Transactions and Brokerage Commissions" in the
SAI.
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While it is not generally the Fund's policy to invest or trade for short-term
profits, the Fund may dispose of a portfolio security whenever the Adviser is of
the opinion that such security no longer has an appropriate appreciation
potential or when another security appears to offer relatively greater
appreciation potential. 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 a
change in the portfolio is otherwise appropriate. For the fiscal year ended
August 31, 1995, the Fund had a portfolio turnover rate of over 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, including Options,
Options on Foreign Currency, Futures Contracts, Options on Futures Contracts and
Forward Contracts, are not fundamental and may be changed without shareholder
approval. A change in the Fund's investment objective may result in the Fund
having an investment objective different from the objective which the
shareholder considered appropriate at the time of investment in the Fund.
The SAI includes a discussion of other investment policies and a listing of
specific investment restrictions which govern the Fund's investment policies.
The specific investment restrictions listed in the SAI may be changed without
shareholder approval unless indicated otherwise (see "Investment Restrictions"
in the SAI). The Fund's investment limitations, policies and rating standards
are adhered to at the time of purchase or utilization of assets; a subsequent
change in circumstances will not be considered to result in a violation of
policy.
7. MANAGEMENT OF THE FUND
INVESTMENT ADVISER -- The Adviser manages the Fund pursuant to an Investment
Advisory Agreement, dated October 20, 1993 (the "Advisory Agreement"). The
Adviser provides the Fund with overall investment advisory and administrative
services, as well as general office facilities. Mark Regan has been the Fund's
portfolio manager since the Fund's inception. Mr. Regan is a Vice President of
the Adviser and has been an investment analyst with the Adviser since 1989.
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, equal to 0.75% of
the average daily net assets of the Fund on an annualized basis. For the Fund's
fiscal year ended August 31, 1995, management fees paid to MFS under the
Advisory Agreement were $594,194, equivalent, on an annualized basis, to 0.75%
of the Fund's average daily net assets.
MFS also serves as investment adviser to each of the other funds in the MFS
Family of Funds (the "MFS Funds") and to MFS(R)/Sun Life Series Trust, MFS
Institutional Trust, MFS Union Standard Trust, MFS Variable Insurance Trust, MFS
Municipal Income Trust, MFS Government Markets Income Trust, MFS Multimarket
Income Trust, MFS Intermediate Income Trust, MFS Charter Income Trust, MFS
Special Value Trust, Sun Growth Variable Annuity Fund, Inc. and seven variable
accounts, each of which is a registered investment company established by Sun
Life Assurance Company of Canada (U.S.) ("Sun Life of Canada (U.S.)") in
connection with the sale of various fixed/variable annuity contracts. MFS and
its wholly owned subsidiary, MFS Asset Management, Inc., also 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 $41.5 billion on behalf of approximately 1.8 million investor
accounts as of November 30, 1995. As of such date, the MFS organization managed
approximately $17.3 billion in assets in equity securities and $20.4 billion of
assets in fixed income securities. Approximately $3.3 billion of assets managed
by MFS are invested in securities of foreign issuers and non-U.S. dollar
denominated securities of U.S. issuers. MFS is a wholly owned subsidiary of Sun
Life of Canada (U.S.) which in turn is a wholly owned subsidiary of Sun Life
Assurance Company of Canada ("Sun Life"). The Directors of MFS are A. Keith
Brodkin, Jeffrey L. Shames, John R. Gardner, John D. McNeil and Arnold D. Scott.
Mr. Brodkin is the Chairman, Mr. Shames is the President and Mr. Scott is the
Secretary and a Senior Executive Vice President of MFS. Messrs. McNeil and
Gardner are the Chairman and the President, respectively, of Sun Life. Sun Life,
a mutual
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life insurance company, is one of the largest international life insurance
companies and has been operating in the U.S. since 1895, establishing a
headquarters office here in 1973. The executive officers of MFS report to the
Chairman of Sun Life.
A. Keith Brodkin, the Chairman and a director of MFS, is the Chairman, President
and a Trustee of the Trust. W. Thomas London, Stephen E. Cavan, James O. Yost
and James R. Bordewick, Jr., all of whom are officers of MFS, are officers of
the Trust.
MFS has established a strategic alliance with Foreign & Colonial Management Ltd.
("Foreign & Colonial"). Foreign & Colonial is a subsidiary of two of the world's
oldest financial services institutions, the London-based Foreign Colonial
Investment Trust PLC, which pioneered the idea of investment management in 1868,
and HYPO-BANK (Bayerische Hypotheken-und Weschsel-Bank AG), the oldest publicly
listed bank in Germany, founded in 1835. As part of this alliance, the portfolio
managers and investment analysts of MFS and Foreign & Colonial will share their
views on a variety of investment related issues, such as the economy, securities
markets, portfolio securities and their issuers, investment recommendations,
strategies and techniques, risk analysis, trading strategies and other portfolio
management matters. MFS will have access to the extensive international equity
investment expertise of Foreign & Colonial, and Foreign & Colonial will have
access to the extensive U.S. equity investment expertise of MFS. One or more MFS
investment analysts are expected to work for an extended period with Foreign &
Colonial's portfolio managers and investment analysts at their offices in
London. In return, one or more Foreign & Colonial employees are expected to work
in a similar manner at MFS' Boston offices.
In certain instances there may be securities which are suitable for the Fund's
portfolios as well as for portfolios of other clients of MFS or clients of
Foreign & Colonial. Some simultaneous transactions are inevitable when several
clients receive investment advice from MFS and Foreign & Colonial, particularly
when the same security is suitable for more than one client. While in some cases
this arrangement could have a detrimental effect on the price or availability of
the security as far as the Fund is concerned, in other cases, however, it may
produce increased investment opportunities for the Fund.
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
Shares of the Fund may be purchased at the public offering price through any
dealer and other financial institutions ("dealers") having a selling agreement
with MFD. Dealers may also charge their customers fees relating to investment in
the Fund.
The Fund offers three classes of shares (Class A, B and 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:
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<PAGE> 106
<TABLE>
- -------------------------------------------------------------------------------------------------------
<CAPTION>
SALES CHARGE* AS PERCENTAGE DEALER
OF: 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**
- -------------------------------------------------------------------------------------------------------
<FN>
*Because of rounding in the calculation of offering price, actual sales charges
may be more or less than those calculated using the percentages above.
**A CDSC will apply to such purchases, as discussed below.
</TABLE>
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 subject to an initial sales charge). In the
following two circumstances, Class A shares are also 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; and
(ii) on investments in Class A shares by certain retirement plans subject to the
Employee Retirement Income Security Act of 1974, as amended, if the
sponsoring organization demonstrates to the satisfaction of MFD that either
(a) the employer has at least 25 employees or (b) the aggregate purchases
by the retirement plan of Class A shares of the MFS Funds will be in an
amount of at least $250,000 within a reasonable period of time, as
determined by MFD in its sole discretion.
In the case of such purchases, MFD will pay a commission to dealers as follows:
1% on sales up to $5 million, plus 0.25% on the amount in excess of $5 million.
Purchases of $1 million or more for each shareholder account will be aggregated
over a 12-month period (commencing from the date of the first such purchase) for
purposes of determining the level of commissions to be paid during the period
with respect to such account. In addition, with respect to sales to retirement
plans under the second circumstance described above, MFD may pay a commission,
on sales in excess of $5 million to certain retirement plans, of 1% to certain
dealers which, at MFD's invitation, enter into an agreement with MFD in which
the dealer agrees to return any commission paid to it on the sale (or on a pro
rata portion thereof) if the shareholder redeems his or her shares within a
period of time after purchase as specified by MFD.
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.
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<PAGE> 107
<TABLE>
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:
<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.
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 Class B Distribution Plan (see
"Distribution Plans" 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).
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.
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 Distribution Plan applicable to
Class B shares. See "Distribution Plans" below. However, for purposes of
conversion to Class A shares, all shares in a shareholder's account that were
purchased through the reinvestment of dividends and distributions paid in
respect of Class B shares (and which have not converted to Class A shares as
provided in the following sentence) will be held in a separate sub-account. Each
time any Class B shares in the shareholder's account (other than those in the
sub-account) convert to Class A shares, a portion of the Class B shares then in
the sub-account will also convert to Class A shares. The portion will be
determined by the ratio that the shareholder's Class B shares not acquired
through reinvestment of dividends and distributions that are converting to Class
A shares bear to the shareholder's total Class B shares not acquired through
reinvestment. The conversion of Class B shares to Class A shares is subject to
the continuing availability of a ruling from the Internal Revenue Service or an
opinion of counsel that such conversion will not constitute a taxable event for
federal tax purposes. There can be no assurance that such ruling or opinion will
be available, and the conversion of Class B shares to Class A shares will not
occur if such ruling or opinion is not available. In such event, Class B shares
would continue to be subject to higher expenses than Class A shares for an
indefinite period.
CLASS C SHARES: Class C shares are offered at net asset value without an
initial sales charge or a CDSC. Class C shares do not convert to any other class
of the Fund. The maximum investment in Class C shares that may be made is
$5,000,000 per transaction.
15
<PAGE> 108
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.
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.
RIGHT TO REJECT PURCHASE ORDERS/MARKET TIMING. Purchases and exchanges should be
made for investment purposes only. The Fund and MFD each reserve the right to
reject any specific purchase order or to restrict purchases by a particular
purchaser (or group of related purchasers). The Fund or MFD may reject or
restrict any purchases by a particular purchaser or group, forexample, when such
purchase is contrary to the best interests of the Fund's other shareholders or
otherwise would disrupt the management of the Fund.
MFD may enter into an agreement with shareholders who intend to make exchanges
among certain classes of shares of certain MFS Funds (as determined by MFD)
which follow a timing pattern, and with individuals or entities acting on such
shareholders' behalf (collectively, "market timers"), setting forth the terms,
procedures and restrictions with respect to such exchanges. In the absence of
such an agreement, it is the policy of the Fund and MFD to reject or restrict
purchases by market timers if (i) more than two exchange purchases are effected
in a timed account in the same calendar quarter or (ii) a purchase would result
in shares being held in timed accounts by market timers representing more than
(x) one percent of the Fund's net assets or (y) specified dollar amounts in the
case of certain MFS Funds which may include the Fund and which may change from
time to time. The Fund and MFD each reserve the right to request market timers
to redeem their shares at net asset value, less any applicable CDSC, if either
of these restrictions is violated.
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 shares of certain specified MFS Funds sold by such dealer during a
specified sales period. In addition, from time to time, MFD, at its expense, may
provide additional commissions, compensation or promotional incentives
("concessions") to dealers which sell shares of the Fund. Such concessions
provided by MFD may include financial assistance to dealers in connection with
preapproved conferences or seminars, sales or training programs for invited
registered representatives, payment for travel expenses, including lodging,
incurred by registered representatives for such seminars or training programs,
seminars for the public, advertising and sales campaigns regarding one or more
MFS Fund, and/or other dealer-sponsored events. From time to time, MFD may make
expense reimbursements for special training of a dealer's registered
representatives in group meetings or to help pay the expenses of sales contests.
Other concessions may be offered to the extent not prohibited by state laws or
any self-regulatory agency, such as the NASD.
SPECIAL INVESTMENT PROGRAMS. For shareholders who elect to participate in
certain investment programs (e.g., the Automatic Investment Plan) or other
shareholder services, MFD or its affiliates may either (i) give a gift of
nominal value, such as a hand-held calculator or (ii) make a nominal charitable
contribution on their behalf.
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<PAGE> 109
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). In addition, Class C
shares may be exchanged for shares of the MFS Money Market Fund at net asset
value.
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: 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)
17
<PAGE> 110
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 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. A
shareholder should read the prospectus of the other MFS Fund and consider the
differences in objectives, policies and restrictions before making any exchange.
For federal and (generally) state income tax purposes, an exchange is treated as
a sale of the shares exchanged and, therefore, an exchange could result in a
gain or loss to the shareholder making the exchange. Exchanges by telephone are
automatically available to most non-retirement plan accounts and certain
retirement plan accounts. For further information regarding exchanges by
telephone, see "Redemptions by Telephone." The exchange privilege (or any aspect
of it) may be changed or discontinued and is subject to certain limitations,
including certain restrictions on purchases by market timers. Special
procedures, privileges and restrictions with respect to exchanges may apply to
market timers who enter into an agreement with MFD, as set forth in such
agreement. See "Purchases -- General -- Right to Reject Purchase Orders/Market
Timing."
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.
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. See "Tax
Status" below.
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
18
<PAGE> 111
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 or Class B shares
("Direct Purchases") will be subject to a CDSC for a period of 12 months (in the
case of purchases of $1 million or more of Class A shares or purchases by
certain retirement plans of Class A shares) or six years (in the case of
purchases of Class B shares). Purchases of Class A shares made during a calendar
month, regardless of when during the month the investment occurred, will age one
month on the last day of the month and each subsequent month. Class B shares
purchased on or after January 1, 1993 will be aggregated on a calendar month
basis -- all transactions made during a calendar month, regardless of when
during the month they have occurred, will age one year at the close of business
on the last day of such month in the following calendar year and each subsequent
year. For Class B shares of the Fund purchased prior to January 1, 1993,
transactions will be aggregated on a calendar year basis -- all transactions
made during a calendar year, regardless of when during the year they have
occurred, will age one year at the close of business on December 31 of that year
and each subsequent year.
At the time of a redemption, the amount by which the value of a shareholder's
account for a particular class of shares represented by Direct Purchases exceeds
the sum of the six calendar year aggregations (12 months in the case of
purchases of $1 million or more of Class A shares or purchases by certain
retirement plans of Class A shares) of Direct Purchases may be redeemed without
charge ("Free Amount"). Moreover, no CDSC is ever assessed on additional shares
acquired through the automatic reinvestment of dividends or capital gain
distributions ("Reinvested Shares"). Therefore, at the time of redemption of a
particular class, (i) any Free Amount is not subject to the CDSC, and (ii) the
amount of 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
19
<PAGE> 112
within 12 months of the initial purchase for certain Class A share purchases, a
CDSC will be imposed upon redemption. Such purchases under the Reinstatement
Privilege are subject to all limitations in the SAI regarding this privilege.
IN-KIND DISTRIBUTIONS. Subject to compliance with applicable regulations, the
Fund has reserved the right to pay the redemption or repurchase price of shares
of the Fund, either totally or partially, by a distribution in-kind of
securities (instead of cash) from the Fund's portfolio. The securities
distributed in such a distribution would be valued at the same amount as that
assigned to them in calculating the net asset value for the shares being sold.
If a shareholder received a distribution in-kind, the 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." 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 PLANS
The Trustees have adopted separate Distribution Plans for Class A, Class B and
Class C shares pursuant to Section 12(b) of the 1940 Act and Rule 12b-1
thereunder (the "Distribution Plans"), after having concluded that there is a
reasonable likelihood that the Distribution Plans would benefit the Fund and its
shareholders.
In certain circumstances, the fees described below have not yet been imposed or
are being waived. These circumstances are described below under the heading
"Current Level of Distribution and Service Fees."
FEATURES COMMON TO EACH DISTRIBUTION PLAN: The Distribution Plans have certain
common features, as described below.
SERVICE FEES. Each 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 each
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. Each 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 Plans, as does the use
of MFD of such distribution fees. Such amounts and uses are described below in
the discussion of the separate Distribution Plans. 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.
20
<PAGE> 113
OTHER COMMON FEATURES. Fees payable under each Distribution Plan are charged to,
and therefore reduce, income allocated to shares of the Designated Class. The
Distribution Plans have substantially identical provisions with respect to their
operating policies and their initial approval, renewal, amendment and
termination.
FEATURES UNIQUE TO EACH DISTRIBUTION PLAN: The Distribution Plans have certain
features that are unique to each class of shares, as described below.
CLASS A DISTRIBUTION PLAN. 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 Class A 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 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 Class A 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 DISTRIBUTION PLAN. 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 Class B 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 DISTRIBUTION PLAN. Class C shares are offered at net asset value without
a sales charge or a CDSC. See "Purchases -- Class C Shares" above. Unlike the
case with respect to the sale of Class A and Class B shares, where the dealer
retains a portion of the initial sales charge (Class A shares) or receives an
up-front payment from MFD (Class B shares), a dealer who sells Class C shares
does not receive any initial payment, but instead receives distribution and
service fees equal, on an annual basis, to 1% of the Fund's average daily net
assets attributable to Class C shares owned by investors for whom the dealer is
the holder or dealer of record.
This ongoing 1% fee is comprised of the 0.25% per annum service fee paid to MFD
under the Class C 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 Class C 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 0.00%,
0.94% and 1.00% per annum of the Fund's net assets, respectively. Payment of the
0.25% per annum Class A service fee will commence on the date that net assets
attributable to Class A shares first equal or exceed $40 million. Payment of the
0.10% per annum Class A distribution fee will commence on such date as the
Trustees of the Trust may determine. Except in the case of the 0.25% per annum
Class B service fee paid by the Fund in connection with the sale of
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Class B shares, payment of the Class B service fee will not commence until such
date as the service fee first becomes payable under the Class A Distribution
Plan.
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. 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. Distribution paid by the Fund with respect to Class A shares will
generally be greater than those paid with respect to Class B and Class C shares
because expenses attributable to Class B and Class C shares will generally be
higher.
TAX STATUS
The Fund is treated as an entity separate from the other series of the Trust for
federal income tax purposes. In order to minimize the taxes the Fund would
otherwise be required to pay, the Fund intends to qualify each year as a
"regulated investment company" under Subchapter M of the Code, and to make
distributions to its shareholders in accordance with the timing requirements
imposed by the Code. It is expected that the Fund will not be required to pay
any federal income or excise taxes, although foreign-source income received by
the Fund may be subject to foreign withholding taxes.
Shareholders of the Fund normally will have to pay federal income taxes (and any
state or local taxes,) on the dividends and capital gain distributions they
receive from the Fund, whether paid in cash or additional shares. A portion of
the dividends received from the Fund (but none of the Fund's capital gain
distributions) may qualify for the dividends-received deduction for
corporations. Shortly before the end of each calendar year, each shareholder
will receive a statement setting forth the federal income tax status of all
dividends and distributions for that year, including the portion taxable as
ordinary income, the portion taxable as long-term capital gain, the portion, if
any, representing a return of capital (which is free of current taxes but
results in a basis reduction), and the amount, if any, of federal income tax
withheld.
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 a rate of 30% on
dividends and certain other payments that are subject to such withholding and
that are made to persons who are neither citizens nor residents of the U.S.,
regardless of whether a lower rate may be permitted under an applicable treaty.
The Fund is also required in certain circumstances to apply backup withholding
at a rate of 31% on taxable dividends and certain redemption proceeds paid to
any shareholder (including a shareholder who is neither a citizen nor a resident
of the U.S.) who does not furnish to the Fund certain information and
certifications or who is otherwise subject to backup withholding. However,
backup withholding will not be applied to payments that have been subject to 30%
withholding. Prospective shareholders 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 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 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
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<PAGE> 115
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 four series of the Trust, has three classes of shares, entitled
Class A, Class B and Class C Shares of Beneficial Interest (without par value).
The Trust 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 its Distribution
Plan or on any other matter that affects solely that class of shares, but will
otherwise vote together with all other classes of shares of the series on all
other matters. The Trust does not intend to hold annual shareholder meetings.
The Declaration of Trust provides that a Trustee may be removed from office in
certain instances (see "Description of Shares, Voting Rights and Liabilities" in
the 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 assignments and in certain other limited
circumstances.
The Trust is an entity of the type commonly known as a "Massachusetts business
trust." Under Massachusetts law, shareholders of such a trust may, under certain
circumstances, be held personally liable as partners for its obligations.
However, the risk of a shareholder incurring financial loss on account of
shareholder liability is limited to circumstances in which both inadequate
insurance (e.g., fidelity bonding and errors and omissions insurance) existed
and the Trust itself was unable to meet its obligations.
PERFORMANCE INFORMATION
From time to time, the Fund will provide total rate of return quotations for
each class of shares and may also quote fund rankings in the relevant fund
category from various sources, such as the Lipper Analytical Services, Inc. and
Wiesenberger Investment Companies Service. Total rate of return quotations will
reflect the average annual percentage change over stated periods in the value of
an investment in each class of shares of the Fund made at the maximum public
offering price of the shares of that class with all distributions reinvested and
which, if quoted for periods of six years or less, will give effect to the
imposition of the CDSC assessed upon redemptions of the Fund's Class B shares.
Such total rate of return quotations may be accompanied by quotations which do
not reflect the reduction in value of the initial investment due to the sales
charge or the deduction of a CDSC, and which will thus be higher. The Fund's
total rate of return quotations are based on historical performance and are not
intended to indicate future performance. Total rate of return reflects all
components of investment return over a stated period of time. The Fund's
quotations may from time to time be used in advertisements, shareholder reports
or other communications to shareholders. For a discussion of the manner in which
the Fund will calculate its total rate of return, see the SAI. For further
information about the Fund's performance for the fiscal year ended, August 31,
1995, 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.
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<PAGE> 116
EXPENSES
The Trust pays the compensation of the Trustees who are not officers of MFS and
all expenses of the Fund (other than those assumed by MFS) including but not
limited to: governmental fees; interest charges; taxes; membership dues in the
Investment Company Institute allocable to the Fund, fees and expenses of
independent auditors, of legal counsel, and of any transfer agent, registrar or
dividend disbursing agent of the Fund; expenses of repurchasing and redeeming
shares and servicing shareholder accounts; expenses of preparing, printing and
mailing prospectus, periodic reports, notices and proxy statements to
shareholders and to governmental officers and commissions; brokerage and other
expenses connected with the execution, recording and settlement of portfolio
security transactions, insurance premiums; fees and expenses of Investors Bank &
Trust Company, the Trust's Custodian, for all services to the Fund, including
safekeeping of funds and securities and maintaining required books and accounts;
expenses of calculating the net asset value of shares of the Fund; and expenses
of shareholder meetings. Expenses relating to the issuance, registration and
qualification of shares of the Fund and the preparation, printing and mailing of
prospectuses are borne by the Fund except that the Distribution Agreement with
MFD requires MFD to pay for prospectuses that are to be used to sales purposes.
Expenses of the Trust which are not attributable to a specific series of the
Trust are allocated among the series in a manner believed by management of the
Trust to be fair and equitable.
MFS has agreed to pay for an indefinite period, the expenses of the Fund such
that the aggregate operating expenses of the Fund's Class A, Class B and Class C
shares do not exceed, on an annualized basis, 1.50%, 2.57% and 2.50%,
respectively, of its average daily net assets with respect to each such class;
provided, however, that this obligation may be terminated or revised at any time
by MFS without the consent of the Trust or the Fund by notice in writing from
MFS to the Trust on behalf of the Fund.
9. SHAREHOLDER SERVICES
Shareholders with questions concerning the shareholder services described below
or concerning other aspects of the Fund, should contact their investment dealer
or the Shareholder Servicing Agent (see back cover for address and phone
number).
ACCOUNT AND CONFIRMATION STATEMENTS -- Each shareholder will receive
confirmation statements showing the transaction activity in his account. At the
end of each calendar year, each shareholder will receive information regarding
the tax status of reportable dividends and distributions for that year (see "Tax
Status" above).
DISTRIBUTION OPTIONS -- The following options are available to all accounts
(except Systematic Withdrawal Plan accounts) and may be changed as often as
desired by notifying the Shareholder Servicing Agent:
-- Dividends and capital gain distributions reinvested in additional shares.
This option will be assigned if no other option is specified.
-- Dividends in cash; capital gain distributions reinvested in additional
shares.
-- Dividends and capital gain distributions in cash.
Reinvestments (net of any tax withholding) will be made in additional full and
fractional shares of the same class of shares at the net asset value in effect
on the record date. Dividends and capital gain distributions in amounts less
than $10 will automatically be reinvested in additional shares of the Fund. If a
shareholder has elected to receive dividends and/or capital gain distributions
in cash and the postal or other delivery service is unable to deliver checks to
the shareholder's address of record, such shareholder's distribution option will
automatically be converted to having all dividends and other distributions
reinvested in additional shares. Any request to change a distribution option
must be received by the Shareholder Servicing Agent by the record date for a
dividend or distribution in order to be effective for that dividend or
distribution. No interest will accrue on amounts represented by uncashed
distribution or redemption checks.
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<PAGE> 117
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 trust) within a 13-month period (or
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 any class of shares of that
shareholder in the MFS Funds and MFS Fixed Fund (a bank collective trust),
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 in shares of the same class of another
MFS Fund, if shares of such fund are available for sale (without a sales charge
and not subject to any applicable CDSC).
SYSTEMATIC WITHDRAWAL PLAN -- A shareholder may direct the Shareholder
Servicing Agent to send him (or anyone he designates) regular periodic payments
based upon the value of his account. Each payment under a Systematic Withdrawal
Plan (a "SWP") must be at least $100, except in certain limited circumstances.
The aggregate withdrawals of Class B shares in any year pursuant to a SWP will
not be subject to a CDSC and are generally limited to 10% of the value of the
account at the time of the establishment of the SWP. The CDSC will not be waived
in the case of SWP redemptions of Class A shares which are subject to a CDSC.
DOLLAR COST AVERAGING PROGRAMS --
AUTOMATIC INVESTMENT PLAN: Cash investments of $50 or more may be made
through a shareholder's checking account twice monthly, monthly or quarterly.
Required forms are available from the Shareholder Servicing Agent or investment
dealers.
AUTOMATIC EXCHANGE PLAN: Shareholders having account balances of at least
$5,000 in any MFS Fund may exchange their shares for the same class of shares of
the other MFS Funds (and, in the case of Class C shares, for shares of the MFS
Money Market Fund) under the Automatic Exchange Plan, a dollar cost averaging
program. The Automatic Exchange Plan provides for automatic monthly or quarterly
exchanges of funds from the shareholder's account in an MFS Fund for investment
in the same class of shares of other MFS Funds selected by the shareholder.
Under the Automatic Exchange Plan, exchanges of at least $50 each may be made to
up to four different funds. A shareholder should consider the objectives and
policies of a fund and review its prospectus before electing to exchange money
into such fund through the Automatic Exchange Plan. No transaction fee is
imposed in connection with exchange transactions under the Automatic Exchange
Plan. However, exchanges of shares of MFS Money Market Fund, MFS Government
Money Market Fund or Class A shares of MFS Cash Reserve Fund will be subject to
any applicable sales charge. For federal and (generally) state income tax
purposes, an exchange is treated as a sale of the shares exchanged and,
therefore, could result in a capital gain or loss to the shareholder making the
exchange. See the 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.
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<PAGE> 118
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 charge included
in share purchases in the case of Class A shares and because of the assessment
of the CDSC for certain share redemptions in the case of Class A shares.
TAX-DEFERRED RETIREMENT PLANS -- Except as noted under "Purchases -- Class C
shares," shares of the Fund may be purchased by all types of tax-deferred
retirement plans, including IRAs, SEP-IRA plans, 401(k) plans, 403(b) plans and
other corporate pension and profit-sharing plans. Investors should consult with
their tax advisers before establishing any of the tax-deferred retirement plans
described above.
------------------------
The Fund's SAI, dated January 1, 1996, contains more detailed information about
the Fund, including, but not limited to, information related to (i) the Fund's
investment objective, policies and restrictions, (ii) Trustees, officers and
investment adviser, (iii) portfolio transactions and brokerage commissions, (iv)
Distribution Plans, (v) the method used to calculate total rate of return
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.
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APPENDIX A
WAIVERS OF SALES CHARGES
This Appendix sets forth the various circumstances in which all applicable sales
charges are waived (Section I), the initial sales charge and the contingent
deferred sales charge ("CDSC") for Class A shares are waived (Section II), and
the CDSC for Class B shares is waived (Section III).
I. WAIVERS OF ALL APPLICABLE SALES CHARGES
In the following circumstances, the initial charge imposed on purchases of Class
A shares and the CDSC imposed on certain redemptions of Class A shares and on
redemptions of Class B shares, as applicable, 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 Massachusetts Financial Services Company ("MFS"), Sun Life
Assurance Company of Canada ("Sun Life") or any of their subsidiary
companies;
- Trustees and retired trustees of any investment company for which MFS Fund
Distributors, Inc. ("MFD") serves as distributor;
- Employees, directors, partners, officers and trustees of any sub-adviser to
any MFS Fund;
- Employees or registered representatives of dealers and other financial
institutions ("dealers") which have a sales agreement with MFD;
- Certain family members of any such individual and their spouses identified
above and certain trusts, pension, profit-sharing or other retirement plans
for the sole benefit of such persons, provided the shares are not resold
except to the MFS Fund which issued the shares; and
- Institutional Clients of MFS or MFS Asset Management, Inc. ("AMI").
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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5. RETIREMENT PLANS (CDSC WAIVER ONLY). Shares redeemed on account of
distributions made under the following circumstances:
INDIVIDUAL RETIREMENT ACCOUNTS ("IRAS")
- Death or disability of the IRA owner.
SECTION 401(a) PLANS ("401(a) PLANS") AND SECTION 403(b) EMPLOYER SPONSORED
PLANS ("ESP PLANS")
- Death, disability or retirement of 401(a) or ESP Plan participant;
- Loan from 401(a) or ESP Plan (repayment of loans, however, will constitute
new sales for purposes of assessing sales charges);
- Financial hardship (as defined in Treasury Regulation Section
1.401(k)-1(d)(2), as amended from time to time);
- Termination of employment of 401(a) or ESP Plan participant (excluding,
however, a partial or other termination of the Plan);
- 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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II. WAIVERS OF CLASS A SALES CHARGES
In addition to the waivers set forth in Section I above, in the following
circumstances the initial sales charge imposed on purchases of Class A shares
and the CDSC imposed on certain redemptions of Class A shares are waived:
1. INVESTMENT OF REDEMPTION PROCEEDS FROM UNAFFILIATED MUTUAL FUNDS
- Shares acquired through the investment of redemption proceeds from another
open-end management investment company not distributed or managed by MFD or
its affiliates if: (i) the investment is made through a dealer and
appropriate documentation is submitted to MFD; (ii) the redeemed shares
were subject to an initial sales charge or deferred sales charge (whether
or not actually imposed); (iii) the redemption occurred no more than 90
days prior to the purchase of Class A shares; and (iv) the MFS Fund, MFD
or its affiliates have not agreed with such company or its affiliates,
formally or informally, to waive sales charges on Class A shares or
provide any other incentive with respect to such redemption and sale.
2. WRAP ACCOUNT INVESTMENTS
- Shares acquired by investments through certain dealers which have entered
into an agreement with MFD which includes a requirement that such shares be
sold for the sole benefit of clients participating in a "wrap" account or a
similar program under which such clients pay a fee to such dealer.
3. INVESTMENT BY INSURANCE COMPANY SEPARATE ACCOUNTS
- Shares acquired by insurance company separate accounts.
4. RETIREMENT PLANS
ADMINISTRATIVE SERVICES ARRANGEMENTS
- Shares acquired by retirement plans whose third party administrators or
dealers have entered into an administrative services agreement with MFD or
one of its affiliates to perform certain administrative services, subject
to certain operational and minimum size requirements specified from time to
time by MFD or one or more of its affiliates.
REINVESTMENT OF DISTRIBUTIONS FROM QUALIFIED RETIREMENT PLANS
- Shares acquired through the automatic reinvestment in Class A shares of
Class A or Class B distributions which constitute required withdrawals from
qualified retirement plans.
SHARES REDEEMED ON ACCOUNT OF DISTRIBUTIONS MADE UNDER THE FOLLOWING
CIRCUMSTANCES:
IRAS
- Distributions made on or after the IRA owner has attained the age of 59 1/2
years old; and
- Tax-free returns of excess IRA contributions.
401(a) PLANS
- Distributions made on or after the 401(a) Plan participant has attained the
age of 59 1/2 years old; and
- Certain involuntary redemptions and redemptions in connection with certain
automatic withdrawals from a 401(a) Plan.
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<PAGE> 122
ESP PLANS AND SRO PLANS
- Distributions made on or after the ESP or SRO Plan participant has attained
the age of 59 1/2 years old.
III. WAIVERS OF CLASS B SALES CHARGES
- In addition to the waivers set forth in Section I above, in the following
circumstances the CDSC imposed on redemptions of Class B shares is waived:
1. SYSTEMATIC WITHDRAWAL PLAN
- Systematic Withdrawal Plan redemptions with respect to up to 10% per year
of the account value at the time of establishment.
2. DEATH OF OWNER
- Shares redeemed on account of the death of the account owner if the shares
are held solely in the deceased individual's name or in a living trust for
the benefit of the deceased individual.
3. DISABILITY OF OWNER
- Shares redeemed on account of the disability of the account owner if shares
are held either solely or jointly in the disabled individual's name or in a
living trust for the benefit of the disabled individual (in which case a
disability certification form is required to be submitted to the
Shareholder Servicing Agent).
4. RETIREMENT PLANS. Shares redeemed on account of distributions made under the
following circumstances:
IRAS, 401(a) PLANS, ESP PLANS AND SRO PLANS
- Distributions made on or after the IRA owner or the 401(a), ESP or SRO Plan
participant, as applicable, has attained the age of 70 1/2 years old, but
only with respect to the minimum distribution under applicable 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.
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<TABLE>
<S> <C>
[LOGO]
Investment Adviser
Massachusetts Financial Services Company
500 Boylston Street
Boston, MA 02116
(617) 954-5000
Distributor MFS[R] OTC FUND
MFS Fund Distributors, Inc.
500 Boylston Street Prospectus
Boston, MA 02116 January 1, 1996
(617) 954-5000
Custodian
Investors Bank & Trust Company
89 South Street
Boston, MA 02111
Dividend Disbursing Agent
State Street Bank and Trust Company
225 Franklin Street
Boston, MA 02110
Shareholder Servicing Agent
MFS Service Center, Inc.
500 Boylston Street
Boston, MA 02116
Toll-free: (800) 225-2606
Mailing Address:
P.O. Box 2281
Boston, MA 02107-9906
Independent Auditors
Deloitte & Touche LLP
125 Summer Street
Boston, MA 02110
[LOGO]
MFS[R] OTC FUND
500 Boylston Street
Boston, MA 02116
OTC-1 1/96/94M 83/283/383
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LOGO STATEMENT OF
MFS(R) OTC FUND ADDITIONAL INFORMATION
(A Member of the MFS Family of Funds(R))
January 1, 1996
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Page
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1. Definitions........................................................................... 2
2. Investment Objective, Policies and Restrictions....................................... 2
3. Management of the Fund................................................................ 13
Trustees.............................................................................. 13
Officers.............................................................................. 13
Investment Adviser.................................................................... 14
Custodian............................................................................. 14
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...................................... 21
8. Distribution Plans.................................................................... 23
9. Description of Shares, Voting Rights and Liabilities.................................. 24
10. Independent Auditors and Financial Statements......................................... 25
Appendix A............................................................................ 26
</TABLE>
MFS OTC FUND
A Series of MFS Series Trust IV
500 Boylston Street, Boston, Massachusetts 02116
(617) 954-5000
This Statement of Additional Information (the "SAI") sets forth information
which may be of interest to investors but which is not necessarily included in
the Fund's Prospectus, dated January 1, 1996. 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> 125
1. DEFINITIONS
<TABLE>
<S> <C>
"Fund" -- MFS OTC Fund, a
non-diversified series of
MFS Series Trust IV (the
"Trust"), a Massachusetts
business trust. The Trust
was known as Massachusetts
Cash Management Trust until
its name was changed on
August 27, 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 January 1, 1996, as
amended or supplemented
from time to time.
</TABLE>
2. INVESTMENT OBJECTIVE, POLICIES AND
RESTRICTIONS
INVESTMENT OBJECTIVE. The Fund's investment objective is to seek to obtain
long-term growth of capital. The following discussion of the Fund's investment
policies and restrictions supplements, and should be read in conjunction with,
the information set forth in the "Investment Objective and Policies" section of
the Prospectus. 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.
NON-DIVERSIFIED STATUS: The Fund has registered as a "non-diversified"
investment company. As a result, under the Investment Company Act of 1940 (the
"1940 Act") the Fund is limited only by its own investment restrictions as to
the percentage of its assets which may be invested in the securities of any one
issuer. However, in spite of the flexibility under the 1940 Act, the Fund would
still have to meet quarterly diversification requirements under the Internal
Revenue Code of 1986, as amended (the "Code") in order for the Fund to qualify
as a regulated investment company. (See "Tax Status" below for more
information.) As a result of the Code's diversification requirements, the Fund
may not have the latitude to take full advantage of the relative absence of 1940
Act diversification requirements.
ZERO COUPON BONDS, DEFERRED INTEREST BONDS AND PIK BONDS: Fixed income
securities that the Fund may invest in 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 or
purchased at a significant discount from face value. The discount approximates
the total amount of interest the bonds will accrue and compound over the period
until maturity or the first interest payment date at a rate of interest
reflecting the market rate of the security at the time of issuance. While zero
coupon bonds do not require the periodic payment of interest, deferred interest
bonds provide for a period of delay before the regular payment of interest
begins. PIK bonds are debt obligations which provide that the issuer thereof
may, at its option, pay interest on such bonds in cash or in the form of
additional debt obligations. Such investments benefit the issuer by mitigating
its need for cash to meet debt service, but also require a higher rate of return
to attract investors who are willing to defer receipt of such cash. Such
investments may experience greater volatility in market value due to changes in
interest rates than debt obligations which make regular payments of interest.
The Fund will accrue income on such investments for tax and accounting purposes,
as required, which is distributable to shareholders and which, because no cash
is received at the time of accrual, may require the liquidation of other
portfolio securities to satisfy the Fund's distribution obligations.
SECURITIES LENDING: 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 (or 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 paid by the issuer on the securities loaned and would also receive
compensation based on investment of cash collateral. The Fund would not,
however, have the right to vote any securities having voting rights during the
existence of the loan, but would call the loan in anticipation of an important
vote to be taken among holders of the securities or of the giving or withholding
of their consent on a material matter affecting the investment. As with other
extensions of credit, there are risks of delay in recovery or even loss of
rights in the collateral should the borrower of the securities fail financially.
However, the loans would be made only to firms deemed by the Adviser to be of
good standing, and when, in the judgment of the Adviser, the consideration which
could be earned currently from securities loans of this type justifies the
attendant risk. If the Adviser determines to lend securities, it is not intended
that the value of the securities loaned would exceed 30% 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 subsidiaries 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
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<PAGE> 126
together with the repurchase price on repurchase. In either case, the income to
the Fund is unrelated to the interest rate on the U.S. Government securities.
The repurchase agreement provides that in the event the seller fails to pay the
price agreed upon on the agreed upon delivery date or upon demand, as the case
may be, the Fund will have the right to liquidate the securities. If, at the
time the Fund is contractually entitled to exercise its right to liquidate the
securities, the seller is subject to a proceeding under the bankruptcy laws or
its assets are otherwise subject to a stay order, the Fund's exercise of its
right to liquidate the securities may be delayed and result in certain losses
and costs to the Fund. The Fund has adopted and follows procedures which are
intended to minimize the risks of repurchase agreements. For example, the Fund
only enters into repurchase agreements after the Adviser has determined that the
seller is creditworthy, and the Adviser monitors that seller's creditworthiness
on an ongoing basis. Moreover, under such agreements, the value of the
securities (which are marked to market every business day) is required to be
greater than the repurchase price, and the Fund has the right to make margin
calls at any time if the value of the securities falls below the agreed upon
margin.
"WHEN-ISSUED" SECURITIES: When the Fund commits to purchase a security on a
"when-issued" or "forward delivery" basis, it will set up procedures consistent
with the General Statement of Policy of the Securities and Exchange Commission
(the "SEC") concerning such purchases. Since that policy currently recommends
that an amount of the Fund's assets equal to the amount of the purchase be held
aside or segregated to be used to pay for the commitment, the Fund will always
have cash, short-term money market instruments or high quality debt securities
sufficient to cover any commitments or to limit any potential risk. However,
although the Fund does not intend to make such purchases for speculative
purposes and intends to adhere to the provisions of the SEC policy, purchases of
securities on such bases may involve more risk than other types of purchases.
For example, the Fund may have to sell assets which have been set aside in order
to meet redemptions. Also, if the Fund determines it necessary to sell the
"when-issued" or "forward delivery" securities before delivery, it may incur a
loss because of market fluctuations since the time the commitment to purchase
such securities was made.
INDEXED SECURITIES: The Fund may purchase securities whose prices are indexed to
the prices of other securities, securities indices, currencies, precious metals
or other commodities, or other financial indicators. Indexed securities
typically, but not always, are debt securities or deposits whose value at
maturity 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.
MORTGAGE "DOLLAR ROLL" TRANSACTIONS: As described in the Prospectus, the Fund
may enter into mortgage "dollar roll" transactions pursuant to which it sells
mortgage-backed securities for delivery in the future and simultaneously
contracts to repurchase substantially similar securities on a specified future
date. During the roll period, the Fund foregoes principal and interest paid on
the mortgage-backed securities. The Fund is compensated for the lost interest by
the difference between the current sales price and the lower price for the
future purchase (often referred to as the "drop") as well as by the interest
earned on the cash proceeds of the initial sale. The Fund may also be
compensated by receipt of a commitment fee.
FOREIGN SECURITIES: The Fund may invest up to 35% (and generally expects to
invest between 0% and 20%) of its total assets in foreign securities which are
not traded on a U.S. exchange (not including American Depositary Receipts). As
discussed in the Prospectus, investing in foreign securities generally
represents a greater degree of risk than investing in domestic securities due to
possible exchange rate fluctuations, less publicly available information, more
volatile markets, less securities regulation, less favorable tax provisions, war
or expropriation. As a result of its investments in foreign securities, the Fund
may receive interest or dividend payments, or the proceeds of the sale or
redemption of such securities, in the foreign currencies in which such
securities are denominated. Under certain circumstances, such as where the
Adviser believes that the applicable exchange rate is unfavorable at the time
the currencies are received or the Adviser anticipates, for any other reason,
that the exchange rate will improve, the Fund may hold such currencies for an
indefinite period of time. While the holding of currencies will permit the Fund
to take advantage of favorable movements in the applicable exchange rate, such
strategy also exposes the Fund to risk of loss if exchange rates move in a
direction adverse to the Fund's position. Such losses could reduce any profits
or increase any losses sustained by the Fund from the sale or redemption of
securities and could reduce the dollar value of interest or dividend payments
received.
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<PAGE> 127
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. 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, depositaries 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 depositary 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.
CORPORATE ASSET-BACKED SECURITIES: The Fund may invest in corporate asset-backed
securities. These securities, issued by trusts and special purpose corporations,
are backed by a pool of assets, such as credit card and automobile loan
receivables, representing the obligations of a number of different parties.
Corporate asset-backed securities present certain risks. For instance, in the
case of credit card receivables, these securities may not have the benefit of
any security interest in the related collateral. Credit card receivables are
generally unsecured and the debtors are entitled to the protection of a number
of state and federal consumer credit laws, many of which give such debtors the
right to set off certain amounts owed on the credit cards, thereby reducing the
balance due. Most issuers of automobile receivables permit the servicers to
retain possession of the underlying obligations. If the servicer were to sell
these obligations to another party, there is a risk that the purchaser would
acquire an interest superior to that of the holders of the related automobile
receivables. In addition, because of the large number of vehicles involved in a
typical issuance and technical requirements under state laws, the trustee for
the holders of the automobile receivables may not have a proper security
interest in all of the obligations backing such receivables. Therefore, there is
the possibility that recoveries on repossessed collateral may not, in some
cases, be available to support payments on these securities.
Corporate asset-backed securities are often backed by a pool of assets
representing the obligations of a number of different parties. To lessen the
effect of failures by obligors to make payments on underlying assets, the
securities may contain elements of credit support which fall into two
categories: (i) liquidity protection and (ii) protection against losses
resulting from ultimate default by an obligor on the underlying assets.
Liquidity protection refers to the provision of advances, generally by the
entity administering the pool of assets, to ensure that the receipt of payments
on the underlying pool occurs in a timely fashion. Protection against losses
resulting from ultimate default ensures payment through insurance policies or
letters of credit obtained by the issuer or sponsor from third parties. The Fund
will not pay any additional or separate fees for credit support. The degree of
credit support provided for each issue is generally based on historical
information respecting the level of credit risk associated with the underlying
assets. Delinquency or loss in excess of that anticipated or failure of the
credit support could adversely affect the return on an investment in such a
security.
RISKS OF INVESTING IN LOWER RATED BONDS: The Fund may invest in fixed income
securities rated Baa by Moody's Investors Service, Inc. ("Moody's") or BBB by
Standard & Poor's Ratings Group ("S&P") or Fitch Investors Service, Inc.
("Fitch") and comparable unrated securities. These securities, while normally
exhibiting adequate protection parameters, have speculative characteristics and
changes in economic conditions or other circumstances are more likely to lead to
a weakened capacity to make principal and interest payments than in the case of
higher grade fixed income securities.
The Fund may also invest in fixed income securities rated Ba or lower by Moody's
or BB or lower by S&P or Fitch and comparable unrated securities (commonly known
as "junk bonds") to the extent described in the Prospectus. No minimum rating
standard is required by the Fund. These securities are considered speculative
and, while generally providing greater income than investments in higher rated
securities, will involve greater risk of principal and income (including the
possibility of default or bankruptcy of the issuers of such securities) and may
involve greater volatility of price (especially during periods of economic
uncertainty or change) than securities in the higher rating categories and
because yields vary over time, no specific level of income can ever be assured.
These lower rated high yielding fixed income securities generally tend to
reflect economic changes (and the outlook for economic growth), short-term
corporate and industry developments and the market's perception of their credit
quality (especially during times of adverse publicity) to a greater extent than
higher rated securities which react primarily to fluctuations in the general
level of interest rates (although these lower rated fixed income securities are
also affected by changes in interest rates). In the past,
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<PAGE> 128
economic downturns or an increase in interest rates have, under certain
circumstances, caused a higher incidence of default by the issuers of these
securities and may do so in the future, especially in the case of highly
leveraged issuers. The prices for these securities may be affected by
legislative and regulatory developments. For example, federal rules require that
savings and loan associations gradually reduce their holdings of high-yield
securities. An effect of such legislation may be to depress the prices of
outstanding lower rated high yielding fixed income securities. The market for
these lower rated fixed income securities may be less liquid than the market for
investment grade fixed income securities. Furthermore, the liquidity of these
lower rated securities may be affected by the market's perception of their
credit quality. Therefore, the Adviser's judgment may at times play a greater
role in valuing these securities than in the case of investment grade fixed
income securities, and it also may be more difficult during times of certain
adverse market conditions to sell these lower rated securities to meet
redemption requests or to respond to changes in the market.
While the Adviser may refer to ratings issued by established credit rating
agencies, it is not the Fund's policy to rely exclusively on ratings issued by
these rating agencies, but rather to supplement such ratings with the Adviser's
own independent and ongoing review of credit quality. To the extent the Fund
invests in these lower rated securities, the achievement of its investment
objectives 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 bonds on which interest is payable in kind ("PIK Bonds") which are
described above.
OPTIONS ON SECURITIES: The Fund may write (sell) covered call and put options on
securities and purchase call and put options on securities. The Fund may write
options on securities for the purpose of increasing its return on such
securities and for hedging purposes.
A call option written by the Fund is covered if the Fund owns the security
underlying the call or has an absolute and immediate right to acquire such
security without additional cash consideration (or for additional cash
consideration held in a segregated account by its custodian) upon conversion or
exchange of other securities held in its portfolio. A call option is also
covered if a Fund holds a call on the same security and in the same principal
amount as the call written where the exercise price of the call held (a) is
equal to or less than the exercise price of the call written or (b) is greater
than the exercise price of the call written if the difference is maintained by
the Fund in cash or high grade debt securities. A put option written by the Fund
is covered if the Fund maintains cash or high grade debt securities with a value
equal to the exercise price in a segregated account with its custodian, or else
holds a put on the same security and in the same principal amount as the put
written where the exercise price of the put held (i) is equal to or greater than
the exercise price of the put written or (ii) is less than the exercise price of
the put written if the difference is maintained by the Fund in cash or high
grade debt securities. Put and call options written by the Fund may also be
covered in such other manner as may be in accordance with the requirements of
the exchange on which, or the counterparty with which, the option is traded, and
applicable laws and regulations.
Effecting a closing transaction in the case of a written call option will permit
the Fund to write another call option on the underlying security with either a
different exercise price or expiration date or both, or in the case of a written
put option will permit the Fund to write another put option to the extent that
the exercise price thereof is secured by deposited cash or short-term
securities. Such transactions permit the Fund to generate additional premium
income, which will partially offset declines in the value of portfolio
securities or increases in the cost of securities to be acquired. Also,
effecting a closing transaction will permit the proceeds from the concurrent
sale of any securities subject to the option to be used for other investments of
the Fund, provided that another option on such security is not written. If the
Fund desires to sell a particular security from its portfolio on which it has
written a call option, it will effect a closing transaction in connection with
the option prior to or concurrent with the sale of the security.
The Fund will realize a profit from a closing transaction if the premium paid in
connection with the closing of an option written by the Fund is less than the
premium received from writing the option, or if the premium received in
connection with the closing of an option purchased by the Fund is more than the
premium paid for the original purchase. Conversely, the Fund will suffer a loss
if the premium paid or received in connection with a closing transaction is more
or less, respectively, than the premium received or paid in establishing the
option position. Because increases in the market price of a call option will
generally reflect increases in the market price of the underlying security, any
loss resulting from the closing out of a call option previously written by the
Fund is likely to be offset in whole or in part by appreciation of the
underlying security owned by the Fund.
The Fund may write options in connection with buy-and-write transactions; that
is, the Fund may purchase a security and then write a call option against that
security. The exercise price of the call option the Fund determines to write
will depend upon the expected price movement of the underlying security. The
exercise price of a call option may be below ("in-the-money"), equal to
("at-the-money") or above ("out-of-the-money") the current value of the
underlying security at the time the option is written. If the call options are
exercised in such transactions, the Fund's maximum gain will be the premium
received by it for writing the option, adjusted upwards or downwards by the
difference between the Fund's purchase price of the security and the exercise
price, less related transaction costs. If the options are not exercised and the
price of the underlying security declines, the amount of such decline will be
offset in part, or entirely, by the premium received.
The writing of covered put options is similar in terms of risk/return
characteristics to buy-and-write transactions. Put options could be used by the
Fund in the same market environ-
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<PAGE> 129
ments 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.
OPTIONS ON STOCK INDICES: The Fund may write (sell) covered call and put options
on stock indices and purchase call and put options on stock indices for the
purpose of increasing its gross income and to protect its portfolio against
declines in the value of securities it owns or increases in the value of
securities to be acquired.
The Fund may cover call options on stock indices by owning securities whose
price changes, in the opinion of the Adviser, are expected to be similar to
those of the index, or by having an absolute and immediate right to acquire such
securities without additional cash consideration (or for additional cash
consideration held in a segregated account by its custodian) upon conversion or
exchange of other securities in its portfolio. Nevertheless, where the Fund
covers a call option on a stock index through ownership of securities, such
securities may not match the composition of the index and, in that event, the
Fund will not be fully covered and could be subject to risk of loss in the event
of adverse changes in the value of the index. The Fund may also cover call
options on stock indices by holding a call on the same index and in the same
principal amount as the call written where the exercise price of the call held
(a) is equal to or less than the exercise price of the call written or (b) is
greater than the exercise price of the call written if the difference is
maintained by the Fund in cash or high grade debt securities in a segregated
account with its custodian. The Fund may cover put options on stock indices by
maintaining cash or high grade debt securities with a value equal to the
exercise price in a segregated account with its custodian, or else by holding a
put on the same security and in the same principal amount as the put written
where the exercise price of the put held (a) is equal to or greater than the
exercise price of the put written or (b) is less than the exercise price of the
put written if the difference is maintained by the Fund in cash or high grade
debt securities. Put and call options on stock indices written by the Fund may
also be covered in such other manner as may be in accordance with the rules of
the exchange on which, or the counterparty with which, the option is traded, and
applicable laws and regulations.
The Fund will receive a premium from writing a put or call option, which
increases the Fund's gross income in the event the option expires unexercised or
is closed out at a profit. If the value of an index on which the Fund has
written a call option falls or remains the same, the Fund will realize a profit
in the form of the premium received (less transaction costs) that could offset
all or a portion of any decline in the value of the securities it owns. If the
value of the index rises, however, the Fund will realize a loss in its call
option position, which will reduce the benefit of any unrealized appreciation in
the Fund's stock investments. By writing a put option, the Fund assumes the risk
of a decline in the index. To the extent that the price changes of securities
owned by a Fund correlate with changes in the value of the index, writing
covered put options on indices will increase the Fund's losses in the event of a
market decline, although such losses will be offset in part by the premium
received for writing the option.
The purchase of call options on stock indices may be used by the Fund to attempt
to reduce the risk of missing a broad market advance, or an advance in an
industry or market segment, at a time when the Fund holds uninvested cash or
short-term debt securities awaiting investment. When purchasing call options for
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this purpose, the Fund will also bear the risk of losing all or a portion of the
premium paid, and related transaction costs, if the value of the index does not
rise. The purchase of call options on stock indices when the Fund is
substantially fully invested is a form of leverage, up to the amount of the
premium and related transaction costs, and involves risks of loss and of
increased volatility similar to those involved in purchasing calls on securities
the Fund owns.
The Fund also may purchase put options on stock indices to hedge its investments
against a decline in value. By purchasing a put option on a stock index, the
Fund will seek to offset a decline in the value of securities it owns through
appreciation of the put option. If the value of the Fund's investments does not
decline as anticipated, or if the value of the option does not increase, the
Fund's loss will be limited to the premium paid for the option, plus related
transaction costs. The success of this strategy will largely depend on the
accuracy of the correlation between the changes in value of the index and the
changes in value of the Fund's security holdings.
YIELD CURVE OPTIONS: The Fund may also enter into options on the "spread," or
yield differential, between two fixed income securities, in transactions
referred to as "yield curve" options. In contrast to other types of options, a
yield curve option is based on the difference between the yields of designated
securities, rather than the prices of the individual securities, and is settled
through cash payments. Accordingly, a yield curve option is profitable to the
holder if this differential widens (in the case of a call) or narrows (in the
case of a put), regardless of whether the yields of the underlying securities
increase or decrease.
Yield curve options may be used for the same purposes as other options on
securities. Specifically, the Fund may purchase or write such options for
hedging purposes. For example, the Fund may purchase a call option on the yield
spread between two securities, if it owns one of the securities and anticipates
purchasing the other security and wants to hedge against an adverse change in
the yield spread between the two securities. The Fund may also purchase or write
yield curve options for other than hedging purposes (i.e., in an effort to
increase its current income) if, in the judgment of the Adviser, the Fund will
be able to profit from movements in the spread between the yields of the
underlying securities. The trading of yield curve options is subject to all of
the risks associated with the trading of other types of options. In addition,
however, such options present risk of loss even if the yield of one of the
underlying securities remains constant, if the spread moves in a direction or to
an extent which was not anticipated. Yield curve options written by the Fund
will be "covered". A call (or put) option is covered if the Fund holds another
call (or put) option on the spread between the same two securities and maintains
in a segregated account with its custodian cash or cash equivalents sufficient
to cover the Fund's net liability under the two options. Therefore, the Fund's
liability for such a covered option is generally limited to the difference
between the amount of the Fund's liability under the option written by the Fund
less the value of the option held by the Fund. Yield curve options may also be
covered in such other manner as may be in accordance with the requirements of
the counterparty with which the option is traded and applicable laws and
regulations. Yield curve options are traded over-the-counter and because they
have been only recently introduced, established trading markets for these
securities have not yet developed. 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 the Fund's investment in these securities.
The staff of the SEC has taken the position that purchased over-the-counter
options and assets used to cover written over-the-counter options are illiquid
and, therefore, together with other illiquid securities, cannot exceed a certain
percentage of the Fund's assets (the "SEC illiquidity ceiling"). Although the
Adviser disagrees with this position, the Adviser intends to limit the Fund's
writing of over-the-counter options in accordance with the following procedure.
Except as provided below, the Fund intends to write over-the-counter options
only with primary U.S. Government securities dealers recognized by the Federal
Reserve Bank of New York. Also, the contracts which the Fund has in place with
such primary dealers will provide that the Fund has the absolute right to
repurchase an option it writes at any time at a price which represents the fair
market value, as determined in good faith through negotiation between the
parties, but which in no event will exceed a price determined pursuant to a
formula in the contract. Although the specific formula may vary between
contracts with different primary dealers, the formula will generally be based on
a multiple of the premium received by the Fund for writing the option, plus the
amount, if any, of the option's intrinsic value (i.e., the amount that the
option is in-the-money). The formula may also include a factor to account for
the difference between the price of the security and the strike price of the
option if the option is written out-of-money. The Fund will treat all or a part
of the formula price as illiquid for purposes of the SEC illiquidity ceiling.
The Fund may also write over-the-counter options with non-primary dealers,
including foreign dealers, and will treat the assets used to cover these options
as illiquid for purposes of such SEC illiquidity ceiling.
OPTIONS ON FOREIGN CURRENCIES: The Fund may purchase and write put and call
options on foreign currencies ("Options on Foreign Currencies") for the purpose
of protecting against declines in the dollar value of foreign portfolio
securities and against increases in the dollar cost of foreign securities to be
acquired. For example, a decline in the dollar value of a foreign currency in
which portfolio securities are denominated will reduce the dollar value of such
securities, even if their value in the foreign currency remains constant. In
order to protect against such diminutions in the value of portfolio securities,
the Fund may purchase put Options on the Foreign Currency. If the value of the
currency did decline, the Fund would have the right to sell such currency for a
fixed amount in dollars and would thereby offset, in whole or in part, the
adverse effect on its portfolio which otherwise would have resulted.
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Conversely, where a rise in the dollar value of a currency in which securities
to be acquired are denominated is projected, thereby increasing the cost of such
securities, the Fund may purchase call options thereon. The purchase of such
options could offset, at least partially, the effects of the adverse movements
in exchange rates. As in the case of other types of options, however, the
benefit to the Fund deriving from purchases of Options on Foreign Currencies
would be reduced by the amount of the premium and related transaction costs. In
addition, where currency exchange rates do not move in the direction or to the
extent anticipated, the Fund could sustain losses on transactions in Options on
Foreign Currencies which would require it to forego a portion or all of the
benefits of advantageous changes in such rates.
The Fund may write Options on Foreign Currencies for the same types of hedging
purposes. For example, where the Fund anticipates a decline in the dollar value
of foreign-denominated securities due to adverse fluctuations in exchange rates
it may, instead of purchasing a put option, write a call option on the relevant
currency. If the expected decline occurred, the option would most likely not be
exercised, and the diminution in value of portfolio securities would be offset
by the amount of the premium received less related transaction costs. As in the
case of other types of options, therefore, the writing of Options on Foreign
Currencies will constitute only a partial hedge.
FUTURES CONTRACTS: The Fund may enter into stock index and foreign currency
futures contracts ("Futures Contracts") for hedging purposes or for non-hedging
purposes (which may be speculative) to the extent permitted by applicable law. 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 the Fund's current or intended stock investments from broad fluctuations
in stock prices. For example, the 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 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 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, the 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. The 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 the 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.
OPTIONS ON FUTURES CONTRACTS: The Fund may write or purchase options to buy or
sell Futures Contracts ("Options on Futures Contracts"), for hedging purposes or
for non-hedging purposes (which may be speculative) to the extent permitted by
applicable law. The writing of a call Option on a Futures Contract constitutes 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
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retain the full amount of the option premium, less related transaction costs,
which provides a partial hedge against any decline that may have occurred in the
Fund's portfolio holdings. The writing of a put Option on a Futures Contract
constitutes a partial hedge against increasing prices of the securities or other
instruments required to be delivered under the terms of the Futures Contract. If
the futures price at expiration of the option is higher than the exercise price,
the Fund will retain the full amount of the option premium, less related
transaction costs, which provides a partial hedge against any increase in the
price of securities which the Fund intends to purchase. If a put or call option
the Fund has written is exercised, the Fund will incur a loss which will be
reduced by the amount of the premium it receives. Depending on the degree of
correlation between changes in the value of its portfolio securities and changes
in the value of its futures positions, the Fund's losses from existing Options
on Futures Contracts may to some extent be reduced or increased by changes in
the value of portfolio securities.
The Fund may cover the writing of call Options on Futures Contracts (a) through
purchases of the underlying Futures Contract, (b) through ownership of the
instrument, or instruments included in the index, underlying the Futures
Contract, or (c) through the holding of a call on the same Futures Contract and
in the same principal amount as the call written where the exercise price of the
call held (i) is equal to or less than the exercise price of the call written or
(ii) is greater than the exercise price of the call written if the difference is
maintained by the Fund in cash and high grade debt securities in a segregated
account with its custodian. The Fund may cover the writing of put Options on
Futures Contracts (a) through sales of the underlying Futures Contract, (b)
through segregation of cash or cash equivalents in an amount equal to the value
of the security or index underlying the Futures Contract, or (c) through the
holding of a put on the same Futures Contract and in the same principal amount
as the put written where the exercise price of the put held (i) is equal to or
greater than the exercise price of the put written or (ii) is less than the
exercise price of the put written if the difference is maintained by the Fund in
cash or high grade debt securities in a segregated account with its custodian.
Put and Call Options on Futures Contracts written by the Fund may also be
covered in such other manner as may be in accordance with the 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.
In order to assure that the Fund will not be deemed to be a "commodity pool" for
purposes of the Commodity Exchange Act, regulations of the Commodity Futures
Trading Commission (the "CFTC") require that the Fund enter into transactions in
Futures Contracts and Options on Futures Contracts only (i) for bona fide
hedging purposes (as defined in CFTC regulations), or (ii) for non-hedging
purposes, provided that the aggregate initial margin and premiums on such
non-hedging positions does not exceed 5% of the liquidation value of the Fund's
assets. In addition, the Fund must comply with the requirements of various state
securities laws in connection with such transactions.
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 (which
may be speculative). The Fund may also enter into Forward Contracts for
"cross-hedging" as noted in the Prospectus. Transactions in Forward Contracts
entered into for hedging purposes will include forward purchases or sales of
foreign currencies for the purpose of protecting the dollar value of securities
denominated in a foreign currency or protecting the dollar equivalent of
interest or dividends to be paid on such securities. By entering into such
transactions, however, the Fund may be required to forego the benefits of
advantageous changes in exchange rates. The Fund may also enter into
transactions in Forward Contracts for other than hedging purposes which presents
greater profit potential but also involves increased risk. For example, if the
Adviser believes that the value of a particular foreign currency will increase
or decrease relative to the value of the U.S. dollar, the Fund may purchase or
sell such currency, respectively, through a Forward Contract. If the expected
changes in the value of the currency occur, the Fund will realize profits which
will increase its gross income. Where exchange rates do not move in the
direction or to the extent anticipated, however, the Fund may sustain losses
which will reduce its gross income. Such transactions, therefore, could be
considered speculative.
The Fund has established procedures consistent with statements by the SEC and
its staff regarding the use of Forward Contracts by registered investment
companies, which require the use of segregated assets or "cover" in connection
with the purchase and sale of such contracts. In those instances in which the
Fund satisfies this requirement through segregation of assets, it will maintain
cash, cash equivalents or high grade debt
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securities, which will be marked to market on a daily basis, in an amount equal
to the value of its commitments under Forward Contracts.
RISK FACTORS: IMPERFECT CORRELATION OF HEDGING INSTRUMENTS WITH THE FUND'S
PORTFOLIO -- The Fund's ability effectively to hedge all or a portion of its
portfolio through transactions in options, Futures Contracts, and Forward
Contracts will depend on the degree to which price movements in the underlying
index or instrument correlate with price movements in the relevant portion of
the Fund's portfolio. Because the securities in the Fund's portfolio will most
likely not be the same as those securities underlying a stock index, the
correlation between movements in the portfolio and in the securities underlying
the index will not be perfect. The trading of Futures Contracts and options
entails the additional risk of imperfect correlation between movements in the
futures or option price and the price of the underlying index or obligation. The
anticipated spread between the prices may be distorted due to the differences in
the nature of the markets, such as differences in margin requirements, the
liquidity of such markets and the participation of speculators in such markets.
In this regard, trading by speculators in options and Futures Contracts has in
the past occasionally resulted in market distortions, which may be difficult or
impossible to predict, particularly near the expiration of such contracts. It
should be noted that Futures Contracts or options based upon a narrower index of
securities, such as those of a particular industry group, may present greater
risk than options or Futures Contracts based on a broad market index, because a
narrower index is more susceptible to rapid and extreme fluctuations as a result
of changes in the value of a small number of securities. The trading of Options
on Futures Contracts also entails the risk that changes in the value of the
underlying Futures Contracts will not be fully reflected in the value of the
option. Further, with respect to options on securities, options on stock 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 its
Adviser, there would be expected to be a sufficient degree of correlation
between movements in the value of the instrument and movements in the value of
the relevant portion of the Fund's portfolio for such hedge to be effective.
There can be no assurance that the Adviser's judgment will be accurate.
It should also be noted that the Fund may enter into transactions in options,
futures contracts, options on futures contracts and forward contracts not only
for hedging purposes, but also for non-hedging purposes, which may include for
speculative purposes, including 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. Because the
Fund would engage in the purchase or sale of Futures Contracts, the writing of
Options on Futures Contracts, and the purchase and writing of options on
securities and stock indexes in part for hedging purposes, 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 writes options on securities or options on stock indexes for other than
hedging purposes, the margin require-
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ments associated with such transactions could expose the Fund to greater risk.
TRADING AND POSITION LIMITS -- The exchanges on which Futures Contracts and
options are traded may impose limitations governing the maximum number of
positions on the same side of the market and involving the same underlying
instrument which may be held by a single investor, whether acting alone or in
concert with others (regardless of whether such contracts are held on the same
or different exchanges or held or written in one or more accounts or through one
or more brokers). In addition, the CFTC and the various contract markets have
established limits referred to as "speculative position limits" on the maximum
net long or net short position which any person may hold or control in a
particular futures or option contract. An exchange may order the liquidation of
positions found to be in violation of these limits and it may impose other
sanctions or restrictions. The Adviser does not believe that these trading and
position limits will have any adverse impact on the strategies for hedging the
portfolio of the Fund.
RISK OF OPTIONS ON FUTURES CONTRACTS -- The amount of risk the Fund assumes when
it purchases an Option on a Futures Contract is the premium paid for the option,
plus related transaction costs. In order to profit from an option purchased,
however, it may be necessary to exercise the option and to liquidate the
underlying Futures Contract, subject to the risks of the availability of a
liquid offset market described herein. The writer of an Option on a Futures
Contract is subject to the risks of commodity futures trading, including the
requirement of initial and variation margin payments, as well as the additional
risk that movements in the price of the option may not correlate with movements
in the price of the underlying index or Futures Contract.
ADDITIONAL RISKS OF TRANSACTIONS NOT CONDUCTED ON EXCHANGES -- Transactions in
Forward Contracts are subject to all of the correlation, liquidity and other
risks outlined above. In addition, however, such transactions are subject to the
risk of governmental actions affecting trading in or the prices of currencies
underlying such contracts, which could restrict or eliminate trading and could
have a substantial adverse effect on the value of positions held by the Fund. In
addition, the value of such positions could be adversely affected by a number of
other complex political and economic factors applicable to the countries issuing
the underlying currencies. Further, unlike trading in most other types of
instruments, there is no systematic reporting of last sale information with
respect to the foreign currencies underlying contracts thereon. As a result, the
available information on which trading systems will be based may not be as
complete as the comparable data on which the Fund makes investment and trading
decisions in connection with other transactions. Moreover, because the foreign
currency market is a global, twenty-four 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.
The Fund has adopted the additional restriction that it will not enter into a
Futures Contract if, immediately thereafter, the value of securities and other
obligations underlying all such Futures Contracts would exceed 50% of the value
of the Fund's total assets. Moreover, the Fund will not purchase put and call
options if, as a result, more than 5% of its total assets would be invested in
such options.
When the Fund purchases a Futures Contract, an amount of cash and cash
equivalents will be deposited in a segregated account with the Fund's custodian
so that the amount so segregated will at all times equal the value of the
Futures Contract, thereby insuring that the 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 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
Fund's 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
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the Trust (or a class or series, as applicable) present at a meeting if holders
of more than 50% of the outstanding shares of the Trust (or a class or series,
as applicable) are represented at such meeting in person or by proxy):
The Fund may not:
(1) borrow amounts in excess of 33 1/3% of its assets including amounts
borrowed, and then only as a temporary measure for extraordinary or emergency
purposes;
(2) underwrite securities issued by other persons except insofar as the Fund
may technically be deemed an underwriter under the Securities Act of 1933 in
selling a portfolio security;
(3) purchase or sell real estate (including limited partnership interests
but excluding securities secured by real estate or interests therein and
securities of companies, such as real estate investment trusts, which deal in
real estate or interests therein), interests in oil, gas or mineral leases,
commodities or commodity contracts (excluding options on securities, stock
indexes and foreign currency ("Options"), Options on Futures Contracts and any
other type of option, Futures Contracts and any other type of futures contract
and Forward Contracts) in the ordinary course of its business. The Fund
reserves the freedom of action to hold and to sell real estate, mineral
leases, commodities or commodity contracts (including Options, Options on
Futures Contracts, and any other type of option, Futures Contracts, any other
type of futures contract and Forward Contracts) acquired as a result of the
ownership of securities;
(4) issue any senior securities except as permitted by the 1940 Act. For
purposes of this restriction, collateral arrangements with respect to any type
of option (including Options on Futures Contracts and Options), Forward
Contracts and any type of futures contract (including Futures Contracts) and
collateral arrangements with respect to initial and variation margin are not
deemed to be the issuance of a senior security;
(5) make loans to other persons. For these purposes the purchase of
short-term commercial paper, the purchase of a portion or all of an issue of
debt securities, the lending of portfolio securities, or the investment of the
Fund's assets in repurchase agreements, shall not be considered the making of
a loan; or
(6) purchase any securities of an issuer of a particular industry, if as a
result, more than 25% of its gross assets would be invested in securities of
issuers whose principal business activities are in the same industry (except
obligations issued or guaranteed by the U.S. Government or its agencies and
instrumentalities and repurchase agreements collateralized by such
obligations).
Except with respect to Investment Restriction (1), these investment restrictions
are adhered to at the time of purchase or utilization of assets; a subsequent
change in circumstances will not be considered to result in a violation of
policy.
In addition, the Fund has the following nonfundamental policies which may be
changed without shareholder approval. The Fund will not:
(1) invest in illiquid investments, including securities subject to legal or
contractual restrictions on resale or for which there is no readily available
market (e.g., trading in the security is suspended, or, in the case of
unlisted securities, where no market exists), unless the Board of Trustees has
determined that such securities are liquid based on 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. Repurchase agreements maturing in
more than seven days will be deemed to be illiquid for purposes of the Fund's
limitation on investment in illiquid securities;
(2) invest more than 5% of the value of the Fund's net assets, valued at the
lower of cost or market, in warrants. Included within such amount, but not to
exceed 2% of the value of the Fund's net assets, may be warrants which are not
listed on the New York or American Stock Exchange. Warrants acquired by the
Fund in units or attached to securities may be deemed to be without value:
(3) invest for the purpose of exercising control or management;
(4) purchase securities issued by any other investment company in excess of
the amount permitted by the 1940 Act.
(5) purchase or retain securities of an issuer any of whose officers,
directors, trustees or security holders is an officer or Trustee of the Fund,
or is an officer or a director of the investment adviser of the Fund, if one
or more of such persons also owns beneficially more than 0.5% of the
securities of such issuer, and such persons owning more than 0.5% of such
securities together own beneficially more than 5% of such securities;
(6) purchase any securities or evidences of interest therein on margin,
except that the Fund may obtain such short-term credit as may be necessary for
the clearance of any transaction and except that the Fund may make margin
deposits in connection with any type of option (including Options on Futures
Contracts and options), any type of futures contract (including Futures
Contracts), and Forward Contracts;
(7) 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;
(8) invest more than 5% of its gross assets in companies which, including
predecessors, controlling persons, sponsoring entities, general partners and
guarantors, have a record of less than three years' continuous operation or
relevant business experience;
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(9) pledge, mortgage or hypothecate in excess of 33 1/2% of its gross
assets. For purposes of this restriction, collateral arrangements with respect
to any type of option, (including Options on Futures Contracts and Options),
any type of futures contracts (including Futures Contracts), Forward Contracts
and payments of initial and variation margin in connection therewith, are not
considered a pledge of assets; or
(10) purchase or sell any put or call option or any combination thereof,
provided that this shall not prevent (a) the purchase, ownership, holding or
sale of (i) warrants where the grantor of the warrants is the issuer of the
underlying securities or (ii) put or call options or combinations thereof with
respect to securities, indexes of securities, foreign currency or futures
contracts (including Futures Contracts) or (b) the purchase, ownership,
holding or sale of contracts for the future delivery of securities or
currencies.
These investment restrictions are adhered to at the time of purchase or
utilization of assets; a subsequent change in circumstances will not be
considered to result in a violation of policy.
3. MANAGEMENT OF THE FUND
The Board of Trustees provides broad supervision over the affairs of the Fund.
The Adviser is responsible for the management of the Fund's assets, and the
officers of the Trust are responsible for the Fund's operations. The Trust's
officers and Trustees are listed below, together with their principal
occupations during the past five years. (Their titles may have varied during
that period.)
TRUSTEES
A. KEITH BRODKIN,* Chairman and President
Massachusetts Financial Services Company, Chairman
RICHARD B. BAILEY*
Private Investor; Massachusetts Financial Services Company, former Chairman and
Director (prior to September 30, 1991); Cambridge Bancorp, Director; Cambridge
Trust Company, Director
PETER G. HARWOOD
Private Investor
Address: 211 Lindsay Pond Road, Concord, Massachusetts
J. ATWOOD IVES
Eastern Enterprises (diversified holding company), Chairman and Chief Executive
Officer (since December 1991); General Cinema Corporation, Vice Chairman and
Chief Financial Officer (prior to December 1991); The Neiman Marcus Group,
Inc., Vice Chairman and Chief Financial Officer (prior to February 1992)
Address: 9 Riverside Road, Weston, Massachusetts
LAWRENCE T. PERERA
Hemenway & Barnes (attorneys), Partner
Address: 60 State Street, Boston, Massachusetts
WILLIAM J. POORVU
Harvard University Graduate School of Business Administration, Adjunct
Professor; CBL Associates Properties, Inc. (a real estate investment trust),
Director; The Baupost Fund (a registered investment company), Vice Chairman
(since November 1993), Chairman and Trustee (prior to November 1993)
Address: Harvard Business School, Soldier's Field Road, Cambridge, Massachusetts
CHARLES W. SCHMIDT
Private Investor; OHM Corporation, Director; The Boston Company, Director;
Boston Safe Deposit and Trust Company, Director; Mohawk Paper Company,
Director
Address: 30 Colpitts Road, Weston, Massachusetts
ARNOLD D. SCOTT*
Massachusetts Financial Services Company, Senior Executive Vice President,
Secretary and Director
JEFFREY L. SHAMES*
Massachusetts Financial Services Company, President and Director
ELAINE R. SMITH
Independent Consultant; Brigham and Women's Hospital, Executive Vice President
and Chief Operating Officer (from August 1990 to September 1992)
Address: Weston, Massachusetts
DAVID B. STONE
North American Management Corp. (investment adviser), Chairman and Director;
Eastern Enterprises, Director
Address: Ten Post Office Square, Suite 300, Boston Massachusetts
OFFICERS
ROBERT A. DENNIS,* Vice President
Massachusetts Financial Services Company, Senior Vice President
GEOFFREY L. KURINSKY,* Vice President
Massachusetts Financial Services Company, Senior Vice President
W. THOMAS LONDON,* Treasurer
Massachusetts Financial Services Company, Senior Vice President
STEPHEN E. CAVAN,* Secretary and Clerk
Massachusetts Financial Services Company, Senior Vice President, General Counsel
and Assistant Secretary
JAMES R. BORDEWICK, JR.,* Assistant Secretary
Massachusetts Financial Services Company, Vice President, and Associate General
Counsel
JAMES O. YOST,* Assistant Treasurer
Massachusetts Financial Services Company, Vice President
- ---------------
*"Interested persons" (as defined in the Investment Company Act of 1940, as
amended (the "1940 Act")) of the Adviser whose address is 500 Boylston Street,
Boston, Massachusetts 02116.
Each Trustee and officer holds comparable positions with certain affiliates of
MFS or with certain other funds of which MFS or a subsidiary of MFS is the
investment adviser or distributor. Mr. Brodkin, the Chairman of MFD, Messrs.
Shames and Scott, Directors of MFD, and Mr. Cavan, the Secretary of MFD, hold
similar positions with certain other MFS affiliates. Mr. Bailey is a Director of
Sun Life Assurance Company of Canada (U.S.) ("Sun Life of Canada (U.S.)"), the
corporate parent of MFS.
The Fund pays the compensation of non-interested Trustees and Mr. Bailey (who
currently receive a fee of $500 per year plus $35 per meeting and $30 per
committee meeting attended, respectively, together with such Trustee's
out-of-pocket expenses) and has adopted a retirement plan for non-interested
Trustees and Mr. Bailey. Under the 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
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during his lifetime of up to 50% of such Trustee's average annual compensation
(based on the three years prior to his retirement) depending on his length of
service. A Trustee may also retire prior to age 73 and receive reduced payments
if he has completed at least five years of service. Under the plan, a Trustee
(or his beneficiaries) will also receive benefits for a period of time in the
event the Trustee is disabled or dies. These benefits will also be based on the
Trustee's average annual compensation and length of service. There is no
retirement plan provided by the Trust for Messrs. Brodkin, Scott and Shames. The
Fund will accrue its allocable share of compensation expenses each year to cover
current year's service and amortize past service cost.
Set forth in Appendix A hereto is certain information concerning the cash
compensation paid to the Trustees and benefits accrued, and estimated benefits
payable under the retirement plan.
As of November 30, 1995, the Trustees and officers, as a group owned 2.58% of
the Fund's shares outstanding.
As of November 30, 1995, MFS Defined Contribution Plan, c/o Massachusetts
Financial Services Company, 500 Boylston Street, Boston, MA 02116-3740, was the
record owner of approximately 6.74% of the outstanding Class A shares of the
Fund. As of November 30, 1995, Merrill Lynch, Pierce, Fenner & Smith Inc., P.O.
Box 45286, was the record owner of approximately 8.30% of the outstanding Class
B shares of the Fund. As of November 30, 1995, Church Development Fund, Inc.,
905 South Euclid Street, Fullerton, CA 92632-2808, was the record owner of
approximately 11.07% of the outstanding Class C shares of the Fund.
The Declaration of Trust provides that the Trust will indemnify the Trustees and
officers against liabilities and expenses incurred in connection with litigation
in which they may be involved because of their offices with the Trust, unless,
as to liabilities to the Trust or its shareholders, it is finally adjudicated
that they engaged in willful misfeasance, bad faith, gross negligence or
reckless disregard of the duties involved in their offices, or with respect to
any matter unless it is adjudicated that they did not act in good faith in the
reasonable belief that their actions were in the best interest of the Trust. In
the case of a 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 the duties involved in their offices.
INVESTMENT ADVISER
MFS and its predecessor organizations have a history of money management dating
from 1924. MFS is a wholly owned subsidiary of Sun Life of Canada (U.S.), which
in turn is a wholly owned subsidiary of Sun Life Assurance Company of Canada
("Sun Life").
The Adviser manages the Fund pursuant to an Investment Advisory Agreement, dated
October 20, 1993 (the "Advisory Agreement"). The Adviser provides the Fund with
overall investment advisory and administrative services, as well as general
office facilities. Subject to such policies as the Trustees may determine, the
Adviser makes investment decisions for the Fund. For these services and
facilities, the Adviser receives a management fee, computed and paid monthly,
equal to 0.75% of the average daily net assets of the Fund on an annualized
basis. For the Fund's fiscal year ended August 31, 1995, the MFS received
management fees under the Advisory Agreement of $594,194, equivalent, on an
annualized basis, to 0.75% of the Fund's average daily net assets.
In order to comply with the expense limitations of certain state securities
commissions, the Adviser will reduce its management fee or otherwise reimburse
the Fund for any expenses, exclusive of interest, taxes and brokerage
commissions, incurred by the Fund in any fiscal year to the extent such expenses
exceed the most restrictive of such state expense limitations. The Adviser will
make appropriate adjustments to such reimbursements in response to any amendment
or rescission of the various state requirements.
MFS has agreed to bear certain of these Fund expenses for a certain period of
time, as described in the Prospectus under "Information Concerning Shares of the
Fund -- Expenses." 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
its portfolio transactions, and, in general, administering its affairs.
The Advisory Agreement will remain in effect until August 1, 1996, 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 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. MFS may render services to others
and that neither the Adviser nor its personnel shall be liable for any error of
judgment or mistake of law or for any loss arising out of any investment or for
any act or omission in the execution and management of the Fund, except for
willful misfeasance, bad faith or gross negligence in the performance of its or
their duties or by reason of reckless disregard of its or their obligations and
duties under the Advisory Agreement.
CUSTODIAN
Investors Bank & Trust Company (the "Custodian") is the custodian of the Fund's
assets. The Custodian's responsibilities include safekeeping and controlling the
Fund's cash and securities, handling the receipt and delivery of securities,
determining
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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 shares
of each class of the Fund. The Custodian does not determine the investment
policies of the Fund or decide which securities the Fund will buy or sell. The
Fund may, however, invest in securities of the Custodian and may deal with the
Custodian as principal in securities transactions. The Trustees have reviewed
and approved as in the best interests of the Fund and its shareholders
subcustodial arrangements with the Chase Manhattan Bank, N.A. for securities of
the Fund held outside the United States.
SHAREHOLDER SERVICING AGENT
MFS Service Center, Inc. (the "Shareholder Servicing Agent"), a wholly owned
subsidiary of MFS, is the Fund's shareholder servicing agent, pursuant to a
Shareholder Servicing Agreement, dated 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 will receive a fee calculated as a percentage of the
average daily net assets of each class of shares at an effective annual rate of
up to 0.15%, up to 0.22% and up to 0.15% attributable to Class A, Class B and
Class C shares, respectively. In addition, the Shareholder Servicing Agent will
be reimbursed by the Fund for certain expenses incurred by the Shareholder
Servicing Agent on behalf of the Fund. State Street Bank and Trust Company, the
dividend and distribution disbursing agent of the Fund, has contracted with the
Shareholder Servicing Agent to administer and perform certain dividend and
distribution disbursing functions for the Fund.
DISTRIBUTOR
MFD, a wholly owned subsidiary of MFS, serves as distributor for the continuous
offering of shares of the Fund pursuant to a Distribution Agreement with the
Trust, 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 net asset value of a Class A share by the
difference (expressed as a decimal) between 100% and the sales charge percentage
of offering price applicable to the purchase (see "Purchases" in the
Prospectus). The sales charge scale set forth in the Prospectus applies to
purchases of Class A shares of the Fund alone or in combination with shares of
all classes of certain other funds in the MFS Family of Funds (the "MFS Funds")
and other funds (as noted under Right of Accumulation) by any person, including
members of a family unit (e.g., husband, wife and minor children) and bona fide
trustees, and also applies to purchases made under the Right of Accumulation or
a Letter of Intent (see "Investment and Withdrawal Programs" in this SAI). A
group might qualify to obtain quantity sales charge discounts (see "Investment
and Withdrawal Programs").
Class A shares of the Fund may be sold at their net asset value to certain
persons or in certain circumstances as described in the Prospectus. Such sales
are made without a sales charge to promote good will with employees and others
with whom MFS, MFD and/or the Fund have business relationships, and because the
sales effort, if any, involved in making such sales is negligible.
MFD allows discounts to dealers (which are alike for all dealers) from the
applicable public offering price of the Class A shares. Dealer allowances
expressed as a percentage of offering price for all offering prices are set
forth in the Prospectus (see "Purchases" in the Prospectus). The difference
between the total amount invested and the sum of (a) the net proceeds to the
Fund and (b) the dealer commission is the commission paid to the distributor.
Because of rounding in the computation of offering price, the portion of the
sales charge paid to the distributor may vary and the total sales charge may be
more or less than the sales charge calculated using the sales charge expressed
as a percentage of the offering price or as a percentage of the net amount
invested as listed in the Prospectus. In the case of the maximum sales charge,
the dealer retains 5% and MFD retains approximately 3/4 of 1% of the public
offering price. In addition, MFD, on behalf of the Fund, will pay a commission
to dealers who initiate and are responsible for purchases of $1 million or more
as described in the Prospectus.
CLASS B SHARES AND CLASS C SHARES: MFD acts as agent in selling Class B and
Class C shares of the Fund to dealers. The public offering price of Class B and
Class C shares is their net asset value next computed after the sale (see
"Purchases" in the Prospectus).
GENERAL: Neither MFD nor dealers are permitted to delay 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 August 31, 1995, MFD and certain other
financial institutions received net commissions of $35,335 and $227,774,
respectively (as their concession on gross commissions of $263,109) for selling
Class A shares of the Fund. The Fund received $14,267,289, representing the
aggregate net asset value of such shares. During the Fund's fiscal year ended
August 31, 1994, MFD and certain other financial institutions received net
commissions of $49,661 and
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$294,951, respectively (as their concession on gross sales charges of $344,612)
for selling Class A shares of the Fund; the Fund received $11,106,278
representing the aggregate net asset value of such shares. During the Fund's
fiscal year ended August 31, 1995, the CDSC imposed on redemption of Class A and
Class B shares was $41 and $132,216, respectively. During the Fund's fiscal year
ended August 31, 1994, the CDSC imposed on redemption of Class B shares was
$14,776.
The Distribution Agreement will remain in effect until August 1, 1996, and will
continue in effect thereafter only if such continuance is specifically approved
at least annually by the Board of Trustees or by vote of a majority of the
Trust's shares (as defined in "Investment Restrictions") and, in either case, by
a majority of the Trustees who are not parties to the Distribution Agreement or
interested persons of any such party. The Distribution Agreement terminates
automatically if it is assigned and may be terminated without penalty by either
party on not more than 60 days' nor less than 30 days' notice.
4. PORTFOLIO TRANSACTIONS AND BROKERAGE
COMMISSIONS
Specific decisions to purchase or sell securities for the Fund are made by
person's affiliated with the Adviser. Any such person may serve other clients of
the Adviser or any subsidiary of the Adviser in similar capacities. 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 general level of their
brokerage commissions. In the case of securities traded in the over-the-counter
market (where no stated commissions are paid but the prices include a dealer's
markup or markdown), the Adviser normally seeks to deal directly with the
primary market-makers, unless, in its opinion, best execution is available
elsewhere. In the case of securities purchased from underwriters, the cost of
such securities generally includes a fixed underwriting commission or
concession. From time to time, soliciting dealer fees are available to the
Adviser on the tender of the Fund's portfolio securities in so-called tender or
exchange offers. Such soliciting dealer fees are in effect recaptured for the
Fund by the Adviser. At present no other recapture arrangements are in effect.
Consistent with the foregoing primary consideration, the Rules of Fair Practice
of the NASD and such other policies as the Trustees may determine, the Adviser
may consider sales of shares of the Fund and of other investment company clients
of MFD as a factor in the selection of broker-dealers to execute the Fund's
portfolio transactions.
Under the Advisory Agreement and as permitted by Section 28(e) of the Securities
Exchange Act of 1934, the Adviser may cause the Fund to pay a broker-dealer
which provides brokerage and research services to the Adviser an amount of
commission for effecting a securities transaction for the Fund in excess of the
amount other broker-dealers would have charged for the transaction if the
Adviser determines in good faith that the greater commission is reasonable in
relation to the value of the brokerage and research services provided by the
executing broker-dealer viewed in terms of either a particular transaction or
the Adviser's overall responsibilities to the Fund or to its other clients. Not
all of such services are useful or of value in advising the Fund.
The term "brokerage and research services" includes: advice as to the value of
securities, the advisability of investing in, purchasing, or selling securities,
and the availability of securities or of purchasers or sellers of securities;
furnishing analyses and reports concerning issues, industries, securities,
economic factors and trends, portfolio strategy and the performance of accounts;
and effecting securities transactions and performing functions incidental
thereto such as clearance and settlement.
Although commissions paid on every transaction will, in the judgment of the
Adviser, be reasonable in relation to the value of the brokerage services
provided, commissions exceeding those which another broker might charge may be
paid to broker-dealers who were selected to execute transactions on behalf of
the Fund and the Adviser's other clients in part for providing advice as to the
availability of securities or of purchasers or sellers of securities and
services in effecting securities transactions and performing functions
incidental thereto such as clearance and settlement.
Broker-dealers may be willing to furnish statistical, research and other factual
information or services ("Research") to the Adviser for no consideration other
than brokerage or underwriting commissions. Securities may be bought or sold
from time to time through such broker-dealers on behalf of the Fund. The Fund's
Trustees (together with the Trustees of the other MFS Funds) have directed the
Adviser to allocate a total of $20,000 of commission business from the MFS Funds
to the Pershing Division of Donaldson, Lufkin & Jenrette as consideration for
the annual renewal of the Lipper Directors' Analytical Data Service (which
provides information useful to the Trustees in reviewing the relationship
between the Fund and the Adviser).
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. However, the Adviser is unable to quantify the amount of
commissions set forth below which were paid as a result of such Research because
a substantial number of transactions were effected through brokers which provide
Research but which were selected principally because of their execution
capabilities.
The management fee that the Fund pays to the Adviser will not be reduced as a
consequence of the Adviser's receipt of
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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.
For the Fund's fiscal year ended August 31, 1995, the Fund paid brokerage
commissions of $409,767. For the Fund's fiscal year ended August 31, 1994, the
Fund paid brokerage commissions of $125,633 on total transactions of
$97,913,747.
In certain instances there may be securities which are suitable for the Fund's
portfolio as well as for that of one or more of the other clients of the Adviser
or any subsidiary of the Adviser. Investment decisions for the Fund and for such
other clients are made with a view to achieving their respective investment
objectives. It may develop that a particular security is bought or sold for only
one client even though it might be held by, or bought or sold for, other
clients. Likewise, a particular security may be bought for one or more clients
when one or more other clients are selling that same security. Some simultaneous
transactions are inevitable when several clients receive investment advice from
the same investment adviser, particularly when the same security is suitable for
the investment objectives of more than one client. When two or more clients are
simultaneously engaged in the purchase or sale of the same security, the
securities are allocated among clients in a manner believed to be equitable to
each. It is recognized that in some cases this system could have a detrimental
effect on the price or volume of the security as far as the Fund is concerned.
In other cases, however, the Fund believes that its ability to participate in
volume transactions will produce better executions for the Fund.
5. SHAREHOLDER SERVICES
INVESTMENT AND WITHDRAWAL PROGRAMS -- The Fund makes available the following
programs designed to enable shareholders to add to their investment or withdraw
from it with a minimum of paper work. These are described below and, in certain
cases, in the 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 all classes of shares of other MFS Funds or 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 period or 36-month period, as
applicable), the shareholder will be notified and the escrowed shares will be
released.
If the intended investment is not completed, the Shareholder Servicing Agent
will redeem an appropriate number of the escrowed shares in order to realize
such difference. Shares remaining after any such redemption will be released by
the Shareholder Servicing Agent. By completing and signing the Account
Application or separate Letter of Intent application, the shareholder
irrevocably appoints the Shareholder Servicing Agent his attorney to surrender
for redemption any or all escrowed shares with full power of substitution in the
premises.
RIGHT OF ACCUMULATION: A shareholder qualifies for cumulative quantity discounts
on the purchase of Class A shares when that shareholder's new investment,
together with the current offering price value of all the holdings of all
classes of shares of that shareholder in the MFS Funds and 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 $37,500 and purchases an additional $12,500 of
Class A shares of the Fund, the sales charge for the $12,500 purchase would be
at the rate of 4.75% (the rate applicable to single transactions of
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<PAGE> 141
$50,000). A shareholder must provide the Shareholder Servicing Agent (or his
investment dealer must provide MFD) with information to verify that the quantity
sales charge discount is applicable at the time the investment is made.
DISTRIBUTION INVESTMENT PROGRAM: Distributions of dividends and capital gains
made by the Fund with respect to a particular class of shares may be
automatically invested in shares of the same class of one of the other MFS
Funds, if shares of the fund are available for sale. Such investments will be
subject to additional purchase minimums. Distributions will be invested at net
asset value (exclusive of any sales charge) and will not be subject to any CDSC.
Distributions will be invested at the close of business on the payable date for
the distribution. A shareholder considering the Distribution Investment Program
should obtain and read the prospectus of the other fund and consider the
differences in objectives and policies before making any investment.
SYSTEMATIC WITHDRAWAL PLAN: A shareholder may direct the Shareholder Servicing
Agent to send him (or anyone he designates) regular periodic payments based upon
the value of his account. Each payment under a Systematic Withdrawal Plan (a
"SWP") must be at least $100, except in certain limited circumstances. The
aggregate withdrawals of Class B shares in any year pursuant to a SWP generally
are limited to 10% of the value of the account at the time of the establishment
of the SWP. SWP payments are drawn from the proceeds of share redemptions (which
would be a return of principal and, if reflecting a gain, would be taxable).
Redemptions of Class B shares will be made in the following order: (i) any "Free
Amount"; (ii) to the extent necessary, any "Reinvested Shares"; and (iii) to the
extent necessary, the "Direct Purchase" subject to the lowest CDSC (as such
terms are defined in "Contingent Deferred Sales Charge" in the Prospectus). The
CDSC will be waived in the case of redemptions of Class B shares pursuant to a
SWP, but will not be waived in the case of SWP redemptions of Class A shares
which are subject to a CDSC. To the extent that redemptions for such periodic
withdrawals exceed dividend income reinvested in the account, such redemptions
will reduce and may eventually exhaust the number of shares in the shareholder's
account. All dividend and capital gain distributions for an account with a SWP
will be reinvested in full and fractional shares of the Fund at the net asset
value in effect at the close of business on the record date for such
distributions. To initiate this service, shares having an aggregate value of at
least $5,000 either must be held on deposit by, or certificates for such shares
must be deposited with, the Shareholder Servicing Agent. With respect to Class A
shares, maintaining a withdrawal plan concurrently with an investment program
would be disadvantageous because of the sales charges included in share
purchases and the imposition of a CDSC on certain redemptions. The shareholder
may deposit into the account additional shares of the Fund, change the payee or
change the dollar amount of each payment. The Shareholder Servicing Agent may
charge the account for services rendered and expenses incurred beyond those
normally assumed by the Fund with respect to the liquidation of shares. No
charge is currently assessed against the account, but one could be instituted by
the Shareholder Servicing Agent on 60 days' notice in writing to the shareholder
in the event that the Fund ceases to assume the cost of these services. The Fund
may terminate any SWP for an account if the value of the account falls below
$5,000 as a result of share redemptions (other than as a result of a SWP) or an
exchange of shares of the Fund for shares of another MFS Fund. Any SWP may also
be terminated at any time by either the shareholder or the Fund.
INVEST BY MAIL: Additional investments of $50 or more may be made at any time by
mailing a check payable to the Fund directly to the Shareholder Servicing Agent.
The shareholder's account number and the name of his investment dealer must be
included with each investment.
GROUP PURCHASES: A bona fide group and all of its members may be treated as a
single purchaser and, under the Right of Accumulation (but not a Letter of
Intent), obtain quantity sales charge discounts on the purchase of Class A
shares if the group (1) gives its endorsement or authorization to the investment
program so it may be used by the investment dealer to facilitate solicitation of
the membership, thus effecting economies of sales effort; (2) has been in
existence for at least six months and has a legitimate purpose other than to
purchase mutual fund shares at a discount; (3) is not a group of individuals
whose sole organizational nexus is as credit cardholders of a company,
policyholders of an insurance company, customers of a bank or broker-dealer,
clients of an investment adviser or other similar groups; and (4) agrees to
provide certification of membership of those members investing money in the MFS
Funds upon the request of MFD.
AUTOMATIC EXCHANGE PLAN: Shareholders having account balances of at least $5,000
in any MFS Fund may exchange their shares for the same class of shares of other
MFS Funds (if available for sale) (and, in the case of Class C shares, for
shares of the MFS Money Market Fund) under the Automatic Exchange Plan. The
Automatic Exchange Plan provides for automatic exchanges of funds from the
shareholder's account in a MFS Fund for investment in other MFS Funds selected
by the shareholder. Under the Automatic Exchange Plan, exchanges of at least $50
each may be made to up to four different funds effective on the seventh day of
each month or of every third month, depending whether monthly or quarterly
exchanges are elected by the shareholder. If the seventh day of the month is not
a business day, the transaction will be processed on the next business day.
Generally, the initial exchange will occur after receipt and processing by the
Shareholder Servicing Agent of an application in good order. Exchanges will
continue to be made from a shareholder's account in any MFS Fund, as long as the
balance of the account is sufficient to complete the exchanges. Additional
payments made to a shareholder's account 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 an exchange is scheduled, such funds may not be
available for exchanges until the following month; therefore, care should be
used to avoid
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<PAGE> 142
inadvertently terminating the Automatic Exchange Plan through exhaustion of the
account balance.
No transaction fee for exchanges will be charged in connection with the
Automatic Exchange Plan. However, exchanges of shares of MFS Money Market Fund,
MFS Government Money Market Fund and Class A shares of MFS Cash Reserve Fund
will be subject to any applicable sales charge. Changes in amounts to be
exchanged to each fund, the funds to which exchanges are to be made and the
timing of exchanges (monthly or quarterly), or termination of a shareholder's
participation in the Automatic Exchange Plan will be made after instructions in
writing or by telephone (an "Exchange Change Request") are received by the
Shareholder Servicing Agent in proper form (i.e., if in writing -- signed by the
record owner(s) exactly as shares of the MFS Fund are registered; if by
telephone -- proper account identification is given by the dealer or shareholder
of record). Each Exchange Change Request (other than termination of
participation in the program) must involve at least $50. Generally, if an
Exchange Change Request is received before the close of business on the last
business day of a month, the Exchange Change Request will be effective for the
following month's exchange.
A shareholder's right to make additional investments in any of the MFS Funds, to
make exchanges of shares from one MFS Fund to another and to withdraw from an
MFS Fund, as well as a shareholder's other rights and privileges, are not
affected by a shareholder's participation in the Automatic Exchange Plan.
The Automatic Exchange Plan is part of the Exchange Privilege. For additional
information regarding the Automatic Exchange Plan including the treatment of any
CDSC, see "Exchange Privilege" below.
REINSTATEMENT PRIVILEGE: Shareholders of the Fund and shareholders of the other
MFS Funds (except MFS Money Market Fund, MFS Government Money Market Fund and
holders of Class A shares of MFS Cash Reserve Fund in the case where the 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 their initial purchase in the case of Class B shares or within 12
months of the initial purchase of certain Class A shares, a CDSC will be imposed
upon redemption. Although redemptions and repurchases of shares are taxable
events, a reinvestment within a certain period of time in the same fund may be
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 for which payment has been received by the Fund (i.e., an
established account) may be exchanged for shares of the same class of any of the
other MFS Funds (if available for sale) at net asset value. In addition, Class C
shares may be exchanged for shares of MFS Money Market Fund at net asset value.
Exchanges will be made only after instructions in writing or by telephone (an
"Exchange Request") are received for an established account by the Shareholder
Servicing Agent.
Each Exchange Request must be in proper form (i.e., if in writing -- signed by
the record owner(s) exactly as the shares are registered; if by
telephone -- proper account identification is given by the dealer or shareholder
of record) and each exchange must involve either shares having an aggregate
value of at least $1,000 ($50 in the case of retirement plan participants whose
sponsoring organizations subscribe to the MFS FUNDamental 401(k) Plan or another
similar 401(k) recordkeeping system made available by 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 the Exchange Request is received by the
Shareholder Servicing Agent prior to the close of regular trading on the
Exchange, the exchange usually will occur on that day if all of the requirements
set forth above have been complied with at 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 in the other
MFS Funds (except holders of shares of MFS
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<PAGE> 143
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
MFS Funds, subject to the conditions, if any, set forth in their respective
prospectuses. In addition, unitholders of the MFS Fixed Fund (a bank collective
investment fund) have the right to exchange their units (except units acquired
through direct purchases) for shares of the Fund, subject to the conditions, if
any, imposed upon such unitholders by the MFS Fixed Fund.
Any state income tax advantages for investment in shares of each state-specific
series of MFS Municipal Series Trust may only benefit residents of such states.
Investors should consult their own tax advisers to be sure this is an
appropriate investment, based on their residency and each state's income tax
laws.
The exchange privilege (or any aspect of it) may be changed or discontinued and
is subject to certain limitations (see "Purchases" in the Prospectus).
TAX-DEFERRED RETIREMENT PLANS -- Shares of the Fund may be purchased by all
types of tax-deferred retirement plans. MFD makes available through investment
dealers plans and/or custody agreements for the following:
Individual Retirement Accounts (IRAs) (for individuals and their non-employed
spouses who desire to make limited contributions to a tax-deferred retirement
program and, if eligible, to receive a federal income tax deduction for
amounts contributed);
Simplified Employee Pension (SEP-IRA) Plans;
Retirement Plans Qualified under Section 401(k) of the Code;
403(b) Plans (deferred compensation arrangements for employees of public
school systems and certain non-profit organizations); and
Certain other qualified pension and profit-sharing plans.
The plan documents provided by MFD designate a trustee or custodian (unless
another trustee or custodian is designated by the individual or group
establishing the plan) and contain specific information about the plans. Each
plan provides that dividends and distributions will be reinvested automatically.
For further details with respect to any plan, including fees charged by the
trustee, custodian or MFD, tax consequences and redemption information, see the
specific documents for that plan. Plan documents other than those provided by
MFD may be used to establish any of the plans described above. Third party
administrative services, available for some corporate plans, may limit or delay
the processing of transactions.
Investors should consult with their tax 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 and holding period of the Fund's portfolio assets. Because the Fund
intends to distribute all of its net investment income and net realized capital
gains to shareholders in accordance with the timing requirements imposed by the
Code, it is not expected that the Fund will be required to pay any federal
income or excise taxes, although the Fund's foreign-source income may be subject
to foreign withholding taxes. If the Fund should fail to qualify as a "regulated
investment company" in any year, the Fund would incur a regular corporate
federal income tax upon its taxable income and Fund distributions would
generally be taxable as ordinary dividend income to shareholders.
Shareholders of the Fund normally will have to pay federal income taxes, and any
state or local taxes, on the dividends and capital gain distributions they
receive from the Fund. Dividends from ordinary income and any distributions from
net short-term capital gains, whether paid in cash or reinvested in additional
shares, are taxable to shareholders as ordinary income for federal income tax
purposes. A portion of the Fund's ordinary income dividends 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 the Fund's shareholders as long-term capital gains for federal income
tax purposes regardless of how long they have owned shares in the Fund. Fund
dividends declared in October, November or December, payable to shareholders of
record in such a month and paid the following January, will be taxable to
shareholders as if received on December 31 of the year in which they are
declared. The Fund will notify shareholders regarding the federal tax status of
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 such distribution may
thus pay the full price for the shares and then effectively receive a portion of
the purchase price back as a taxable distribution.
In general, any gain or loss realized upon a taxable disposition of shares of
the Fund by a shareholder that holds such shares as a capital asset will be
treated as long-term capital gain or loss if the shares have been held for more
than twelve months and otherwise as a short-term capital gain or loss. However,
any loss realized upon a disposition of shares in the Fund held for six months
or less will be treated as a long-term capital loss to the extent of any
distributions of net capital gain made with respect to those shares. Any loss
realized upon a disposition of shares may also be disallowed under rules
relating to wash sales. Gain may be increased (or loss reduced) upon a
redemption of Class A shares of the Fund within ninety days after their
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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, PIK bonds and certain
securities purchased at a market discount will cause the Fund to realize income
prior to the receipt of cash payments with respect to those securities. In order
to distribute this income and avoid a tax on the Fund, the Fund may be required
to liquidate portfolio securities that it might otherwise have continued to
hold, potentially resulting in additional taxable gain or loss to the Fund.
The Fund's transactions in options, Futures Contracts, and Forward Contracts
will be subject to special tax rules that may affect the amount, timing, and
character of Fund income and distributions to shareholders. For example, certain
positions held by the Fund on the last business day of each taxable year will be
marked to market (i.e., treated as if closed out) on that day, and any gain or
loss associated with the positions will be treated as 60% long-term and 40%
short-term capital gain or loss. Certain positions held by the Fund that
substantially diminish its risk of loss with respect to other positions in its
portfolio may constitute "straddles," and may be subject to special tax rules
that would cause deferral of Fund losses, adjustments in the holding periods of
Fund securities, and conversion of short-term into long-term capital losses.
Certain tax elections exist for straddles that may alter the effects of these
rules. The Fund will limit its activities in options, Futures Contracts, and
Forward Contracts to the extent necessary to meet the requirements of Subchapter
M of the Code.
Special tax considerations apply with respect to foreign investments of the
Fund. Foreign exchange gains and losses realized by the Fund will generally be
treated as ordinary income and losses. The holding 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 taxes on the Fund.
Investment income received by the Fund from foreign securities may be subject to
foreign income taxes withheld at the source; the Fund does not expect to be able
to pass through to shareholders foreign tax credits with respect to such foreign
taxes. The United States has entered into tax treaties with many foreign
countries that may entitle the Fund to a reduced rate of tax or an exemption
from tax on such income; the Fund intends to qualify for treaty reduced rates
where available. It is impossible to determine the effective rate of foreign tax
in advance since the amount of the Fund's assets to be invested within various
countries is not known.
Dividends and certain other payments to persons who are not citizens or
residents of the United States or U.S. entities ("Non-U.S. Persons") are
generally subject to U.S. tax withholding at a rate of 30%. The Fund intends to
withhold U.S. federal income tax at the rate of 30% on taxable dividends and
other payments to Non-U.S. Persons that are subject to such withholding,
regardless of whether a lower rate may be permitted under an applicable treaty.
Any amounts overwithheld may be recovered by such persons by filing a claim for
refund with the U.S. Internal Revenue Service within the time period appropriate
to such claims. 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 who does not furnish to the Fund certain information and
certifications or who is otherwise subject to backup withholding. Backup
withholding will not, however, be applied to payments that have been subject to
30% withholding. Distributions received from the Fund by Non-U.S. Persons may
also be subject to tax under the laws of their own jurisdictions.
As long as it qualifies as a regulated investment company under the Code, the
Fund will not be required to pay Massachusetts income or excise taxes.
7. DETERMINATION OF NET ASSET VALUE AND
PERFORMANCE
NET ASSET VALUE
The net asset value per share of each class of the Fund is determined each day
during which the Exchange is open for trading. (As of the date of this SAI, the
Exchange is open for trading every weekday except for the following holidays or
the day on which they are observed: New Year's Day, Presidents' Day, Good
Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and
Christmas Day.) This determination is made once 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
institution-size trading in similar groups of securities, yield, quality, coupon
rate, maturity, type of issue, trading characteristics and other market data,
without exclusive reliance upon exchange or over-the-counter prices, since such
valuations are believed to reflect more accurately the fair value of such
securities. 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
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exchange on which such securities, futures contracts or options are traded; but
if a securities exchange is not the principal market for securities, such
securities will, if market quotations are readily available, be valued at
current bid prices, unless such securities are reported on the NASDAQ system, in
which case they are valued at the last sale price or, if no sales occurred
during the day, at the last quoted bid price. Short-term obligations with a
remaining maturity in excess of 60 days will be valued based upon dealer
supplied valuations. Short-term obligations with a remaining maturity in excess
of 60 days will be valued upon dealer supplied valuations. Other short-term
obligations are valued at amortized cost, which constitutes fair value as
determined by the Board of Trustees. Portfolio securities for which there are no
such quotations or valuations are valued at fair value as determined in good
faith by or at the direction of the Board of Trustees.
Generally, trading in foreign securities is substantially completed each day at
various times prior to the close of regular trading on the Exchange.
Occasionally, events affecting the values of such securities may occur between
the times at which they are determined and the close of regular trading on the
Exchange which will not be reflected in the computation of the Fund's net asset
value unless the Trustees deem that such event would materially affect the net
asset value in which case an adjustment would be made.
All investments and assets are expressed in U.S. dollars based upon current
currency exchange rates. A share's net asset value is effective for orders
received by the dealer prior to its calculation and received by MFD, prior to
the close of that business day.
The Trustees annually review the appropriateness of the time of day as of which
the net asset value is computed.
PERFORMANCE INFORMATION
TOTAL RATE OF RETURN: The Fund will calculate its total rate of return for each
class of shares for certain periods by determining the average annual compounded
rates of return over those periods that would cause an investment of $1,000
(made with all distributions reinvested and reflecting the CDSC or the maximum
public offering price) to reach the value of that investment at the end of the
periods. The Fund may also calculate (i) a total rate of return, which is not
reduced by the CDSC (4% maximum for Class B shares) and therefore may result in
a higher rate of return, (ii) a total rate of return assuming an initial account
value of $1,000, which will result in a higher rate of return with respect to
Class A shares since the value of the initial account will not be reduced by the
maximum sales charge (currently 5.75%) and/or (iii) total rates of return which
represent aggregate performance over a period or year-by-year performance, and
which may or may not reflect the effect of the maximum or other sales charge or
CDSC. The Fund's average annual total rate of return for Class A shares
reflecting the initial investment at the maximum public offering price, for the
one-year period ended August 31, 1995 and for the period from December 1, 1993
(the Fund's commencement of investment operations) to August 31, 1995 was 12.87%
and 13.67%, respectively. The average annual total rate of return for Class A
shares, not giving effect to the initial sales charge, for the one-year period
ended August 31, 1995 and for the period from December 1, 1993 (the Fund's
commencement of investment operations) to August 31, 1995 was 19.77% and 17.60%,
respectively. The Fund's average annual total rate of return for Class B shares,
reflecting the CDSC, for the one-year period ended August 31, 1995 and for the
period from December 1, 1993 (the Fund's commencement of investment operations)
to August 31, 1995 was 14.75% and 14.28%, respectively. The Fund's average
annual total rate of return for Class B shares, not giving effect to the CDSC,
for the one-year period ended August 31, 1995 and for the period from December
1, 1993 (the Fund's commencement of investment operations) to August 31, 1995
was 18.75% and 16.33%, respectively. The Fund's average annual total rate of
return for Class C shares for the one-year period ended August 31, 1995 and for
the period from August 1, 1994 to August 31, 1995 was 18.63% and 28.30%,
respectively. The total rates of return presented above for Class A, B and C
shares, may not be indicative of future performance.
PERFORMANCE RESULTS: The performance results for Class A shares below, based on
an assumed initial investment of $10,000 in Class A shares, cover the period
from December 1, 1993 to December 31, 1994. It has been assumed that dividend
and capital gain distributions were reinvested in additional shares. These
performance results, as well as any yield, tax-equivalent yield or total rate of
return quotation provided by the Fund, should not be considered as
representative of the performance of the Fund in the future since the net asset
value and public offering price of shares of the Fund will vary based not only
on the type, quality and maturities of the securities held in the Fund's
portfolio, but also on changes in the current value of such securities and on
changes in the expenses of the Fund. These factors and possible differences in
the methods used to calculate yields, tax-equivalent yields and total rates of
return should be considered when comparing the yield, tax-equivalent yield and
total rate of return of the Fund to yields, tax-equivalent yields and total
rates of return published for other investment companies or other investment
vehicles. Total rate of return reflects the performance of both principal and
income. Current net asset value as well as account balance information may be
obtained by calling 1-800-MFS-TALK (637-8255).
<TABLE>
MFS OTC FUND -- CLASS A
<CAPTION>
VALUE OF VALUE OF VALUE OF
YEAR ENDED INITIAL $10,000 CAPITAL GAIN REINVESTED TOTAL
DECEMBER 31, INVESTMENT DISTRIBUTIONS DIVIDENDS VALUE
------------ --------------- ------------- ---------- -------
<S> <C> <C> <C> <C>
1993* 9,879 0 0 9,879
1994 9,999 0 314 10,313
<FN>
- ---------------
* For the period from the start of business December 1, 1993
to December 31, 1993.
EXPLANATORY NOTES: The results shown in the table assume that the initial
investment was reduced by the current maximum applicable sales charge of 5.75%.
No adjustment has been made for any income taxes payable by shareholders.
</TABLE>
From time to time the Fund may, as appropriate, quote Fund rankings or reprint
all or a portion of evaluations of fund
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<PAGE> 146
performance and operations appearing in various independent publications,
including but not limited to the following: Money, Fortune, U.S. News and World
Report, Kiplinger's Personal Finance, The Wall Street Journal, Barron's,
Investors Business Daily, Newsweek, Financial World, Financial Planning,
Investment Advisor, USA Today, Pensions and Investments, SmartMoney, Forbes,
Global Finance, Registered Representative, Institutional Investor, the
Investment Company Institute, Johnson's Charts, Morningstar, Lipper Analytical
Services, Inc., CDA Wiesenberger, Shearson Lehman and Salomon Bros. Indices,
Ibbotson, Business Week, Lowry Associates, Media General, Investment Company
Data, The New York Times, Your Money, Strangers Investment Advisor, Financial
Planning on Wall Street, Standard and Poor's, Individual Investor, The 100 Best
Mutual Funds You Can Buy, by Gordon K. Williamson, Consumer Price Index, and
Sanford C. Bernstein & Co. Fund performance may also be compared to the
performance of other mutual funds tracked by financial or business publications
or periodicals.
The Fund may also quote evaluations mentioned in independent radio or television
broadcasts.
From time to time the Fund may use charts and graphs to illustrate the past
performance of various indices such as those mentioned above and illustrations
using hypothetical rates of return to illustrate the effects of compounding and
tax-deferral.
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.
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 ("Truth in Securities Act" or "Full
Disclosure Act").
-- 1936 -- Massachusetts Investors Trust is the first mutual fund to allow
shareholders to take capital gain distributions either in additional shares
or cash.
-- 1976 -- MFS 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.
-- 1986 -- MFS Lifetime Investment ProgramSM is established as the first
complete family of 12b-1 mutual funds with no initial sales charge.
-- 1989 -- MFS 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 World Growth Fund is the first global emerging markets fund to
offer the expertise of two sub-advisers.
-- 1993 -- MFS becomes money manager of MFS Union Standard Trust, the first
Trust to invest in companies deemed to be union-friendly by an Advisory
Board of senior labor officials, senior managers of companies with
significant labor contracts, academics and other national labor leaders or
experts.
8. DISTRIBUTION PLANS
The Trustees have adopted separate Distribution Plans for Class A, Class B and
Class C shares (the "Distribution Plans") pursuant to Section 12(b) of the 1940
Act and Rule 12b-1 thereunder (the "Rule") after having concluded that there is
a reasonable likelihood that each Distribution Plan would benefit the Fund and
the respective class of shareholders. The Distribution Plans are designed to
promote sales, thereby increasing the net assets of the Fund. Such an increase
may reduce the 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.
23
<PAGE> 147
The Distribution Plans are described in the Prospectus under the caption
"Distribution Plans," which is incorporated herein by reference. The following
information supplements this Prospectus discussion.
SERVICE FEES. With respect to the Class A Distribution Plan, no service fees
will be paid: (i) to any dealer who is the holder or dealer of record for
investors who own Class A shares having an aggregate net asset value less than
$750,000, or such other amount as may be determined from time to time by MFD
(MFD, however, may waive this minimum amount requirement from time to time); or
(ii) to any insurance company which has entered into an agreement with the Fund
and MFD that permits such insurance company to purchase Class A shares from the
Fund at their net asset value in connection with annuity agreements issued in
connection with the insurance company's separate accounts. Dealers may from time
to time be required to meet certain other criteria in order to receive service
fees.
With respect to the Class B Distribution Plan, 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
any Distribution Plan for which there is no dealer of record or for which
qualification standards have not been met as partial consideration for personal
services and/or account maintenance services performed by MFD or its affiliates
for shareholder accounts.
DISTRIBUTION FEES: The purpose of distribution payments to MFD under the
Distribution Plans is to compensate MFD for its distribution services to the
Fund. MFD pays commissions to dealers as well as expenses of printing
prospectuses and reports used for sales purposes, expenses with respect to the
preparation and printing of sales literature and other distribution related
expenses, including, without limitation, the cost necessary to provide
distribution-related services, or personnel, travel, office expenses and
equipment.
<TABLE>
DISTRIBUTION AND SERVICE FEES PAID DURING THE FUND'S LAST FISCAL YEAR: During
the fiscal year ended August 31, 1995, the Fund paid the following Distribution
Plan expenses:
<CAPTION>
AMOUNT OF AMOUNT OF AMOUNT OF
DISTRIBUTION DISTRIBUTION DISTRIBUTION
AND SERVICE AND SERVICE AND SERVICE
FEES PAID BY FEES RETAINED FEES RECEIVED
DISTRIBUTION PLANS FUND BY MFD BY DEALERS
- -------------------------- ------------ ------------- -------------
<S> <C> <C> <C>
Class A Distribution Plan $0 $0 $0
Class B Distribution Plan $491,201 $390,962 $100,239
Class C Distribution Plan $15,495 $0 $15,495
</TABLE>
GENERAL: Each of the Distribution Plans will remain in effect until August 1,
1996, 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"). Each
of the Distribution Plans 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. Each of
the Distribution Plans 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 any of the Distribution Plans entered
into between the Fund or MFD and other organizations must be approved by the
Board of Trustees, including a majority of the Distribution Plan Qualified
Trustees. Agreements under any of the Distribution Plans must be in writing,
will be terminated automatically if assigned, and may be terminated at any time
without payment 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. None of the Distribution Plans may be amended to
increase materially the amount of permitted distribution expenses without the
approval of a majority of the respective class of the Fund's shares (as defined
in "Investment Restrictions") or may be materially amended in any case without a
vote of the Trustees and a majority of the Distribution Plan Qualified Trustees.
The selection and nomination of Distribution Plan Qualified Trustees shall be
committed to the discretion of the non-interested Trustees then in office. No
Trustee who is not an "interested person" has any financial interest in any of
the Distribution Plans or in any related agreement.
9. DESCRIPTION OF SHARES, VOTING RIGHTS
AND LIABILITIES
The Declaration of Trust permits the Trustees to issue an unlimited number of
full and fractional Shares of Beneficial Interest (without par value) of one or
more separate series and to divide or combine the shares of any series into a
greater or lesser number of shares without thereby changing the proportionate
beneficial interests in that series. The Trustees have currently authorized
shares of the Fund and three other series. The Declaration of Trust further
authorizes the Trustees to classify or reclassify any series of shares into one
or more classes. Pursuant thereto, the Trustees have authorized the issuance of
three classes of shares of each of the Trust's four series, Class A shares,
Class B shares and Class C shares. Each share of a class of the Fund represents
an equal proportionate interest in the assets of the Fund allocable to that
class. Upon liquidation of the Fund, 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
24
<PAGE> 148
series would participate equally in the earnings, dividends and assets allocable
to that class of the particular series.
Shareholders are entitled to one vote for each share held and may vote in the
election of Trustees and on other matters submitted to meetings of shareholders.
Although Trustees are not elected annually by the shareholders, shareholders
have, under certain circumstances, the right to remove one or more Trustees in
accordance with the provisions of section 16(c) of the 1940 Act. No material
amendment may be made to the Declaration of Trust without the affirmative vote
of a majority of the Trust shares (as defined in "Investment Restrictions") or
by an instrument in writing without a meeting, signed by a majority of Trustees
and consented to by the holders of not less than a majority of the shares
outstanding and entitled to vote. Shares have no pre-emptive or conversion
rights (except as described in the Prospectus under "Purchases -- Conversion of
Class B Shares"). Shares are fully paid and non-assessable. The Trust may enter
into a merger or consolidation, or sell all or substantially all of its assets
(or all or substantially all of the assets belonging to any series of the
Trust), if approved by the vote of the holders of two-thirds of the Trust's
outstanding shares voting as a single class, or of the affected series of the
Trust, as the case may be, except that if the Trustees of the Trust recommend
such merger, consolidation or sale, the approval by vote of the holders of a
majority of the Trust's or the affected series' outstanding shares (as defined
in "Investment Restrictions") will be sufficient. The Trust or any series of the
Trust may also be terminated (i) upon liquidation and distribution of its
assets, if approved by the vote of the holders of two-thirds of its outstanding
shares, or (ii) by the Trustees by written notice to the shareholders of the
Trust or the affected series. If not so terminated the Trust will continue
indefinitely.
The Trust is an entity of the type commonly known as a "Massachusetts business
trust." Under Massachusetts law, shareholders of such a trust may, under certain
circumstances, be held personally liable as partners for its obligations.
However, the Declaration of Trust contains an express disclaimer of shareholder
liability for acts, obligations or affairs of the Trust and provides for
indemnification and reimbursement of expenses out of the Trust property for any
shareholder held personally liable for the obligations of the Trust. The
Declaration of Trust also provides that the Trust shall maintain appropriate
insurance (for example, fidelity bonding and errors and omissions insurance) for
the protection of the Trust, its shareholders, Trustees, officers, employees and
agents covering possible tort and other liabilities. Thus, the risk of a
shareholder incurring financial loss on account of shareholder liability is
limited to circumstances in which both inadequate insurance existed and the
Trust itself was unable to meet its obligations.
The Declaration of Trust further provides that obligations of the Trust are not
binding upon the Trustees individually but only upon the property of the Trust
and that the Trustees will not be liable for any action or failure to act, but
nothing in the Declaration of Trust protects a Trustee against any liability to
which he would otherwise be subject by reason of willful misfeasance, bad faith,
gross negligence or reckless disregard of the duties involved in the conduct of
his office.
10. INDEPENDENT AUDITORS AND
FINANCIAL STATEMENTS
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 August 31, 1995, the Statement of Assets and
Liabilities at August 31, 1995, the Statement of Operations for the year ended
August 31, 1995, the Statement of Changes in Net Assets for the year ended
August 31, 1995 and the nine months ended August 31, 1994, the Notes to
Financial Statements and the Independent Auditors' Report, each of which is
included in the Annual Report to Shareholders of the Fund, are incorporated by
reference into this SAI and have been so incorporated in reliance upon the
report of Deloitte & Touche LLP, independent auditors, as experts in accounting
and auditing. A copy of the Annual Report accompanies this SAI.
25
<PAGE> 149
APPENDIX A
<TABLE>
TRUSTEE COMPENSATION
<CAPTION>
RETIREMENT BENEFIT TOTAL TRUSTEE
TRUSTEE FEES ACCRUED AS ESTIMATED FEES FROM
FROM PART OF FUND CREDITED YEARS FUND AND
TRUSTEE FUND(1) EXPENSE(1) OF SERVICE(2) FUND COMPLEX(3)
- ----------------------------------------------------- ------------ ------------------ -------------- ---------------
<S> <C> <C> <C> <C>
Richard B. Bailey.................................... $402 $ 80 6 $ 226,221
A. Keith Brodkin..................................... 0 0 N/A 0
Peter G. Harwood..................................... 442 91 5 105,812
J. Atwood Ives....................................... 397 91 15 106,482
Lawrence T. Perera................................... 357 78 14 96,592
William Poorvu....................................... 442 91 14 106,482
Charles W. Schmidt................................... 402 80 7 98,397
Arnold D. Scott...................................... 0 0 N/A 0
Jeffrey L. Shames.................................... 0 0 N/A 0
Elaine R. Smith...................................... 402 80 25 98,397
David B. Stone....................................... 442 89 7 104,007
<FN>
- ---------------
(1) For fiscal year ended August 31, 1995.
(2) Based on normal retirement age of 73.
(3) For calendar year 1994. All Trustees receiving compensation served as
Trustees of 20 funds within the MFS fund complex (having aggregate net
assets at December 31, 1994, of approximately $14 Billion) except Mr.
Bailey, who served as Trustee of 56 funds within the MFS fund complex
(having aggregate net assets at December 31, 1994, of approximately $24
Billion.
</TABLE>
<TABLE>
ESTIMATED ANNUAL BENEFITS PAYABLE BY FUND UPON RETIREMENT(4)
<CAPTION>
YEARS OF SERVICE
------------------------------------
AVERAGE 10
TRUSTEE OR
FEES 3 5 7 MORE
---- --- ---- ---- ----
<S> <C> <C> <C> <C>
$320 $48 $ 80 $112 $160
355 53 89 124 178
390 59 98 137 195
425 64 106 149 213
460 69 115 161 230
495 74 124 173 248
<FN>
- ---------------
(4) Other funds in the MFS fund complex provide similar retirement benefits to
the Trustees.
</TABLE>
26
<PAGE> 150
INVESTMENT ADVISER
Massachusetts Financial Services Company
500 Boylston Street, Boston, MA 02116
(617) 954-5000
DISTRIBUTOR
MFS Fund Distributors, Inc.
500 Boylston Street, Boston, MA 02116
(617) 954-5000
CUSTODIAN
Investors Bank & Trust Company
89 South Street, Boston, MA 02111
DIVIDEND DISBURSING AGENT
State Street Bank and Trust Company
225 Franklin Street, Boston, MA 02110
SHAREHOLDER SERVICING AGENT
MFS Service Center, Inc.
500 Boylston Street, Boston, MA 02116
Toll free: (800) 225-2606
Mailing Address:
P.O. Box 2281, Boston, MA 02107-9906
INDEPENDENT AUDITORS
Deloitte & Touche LLP
125 Summer Street, Boston, MA 02110
MFS(R) OTC FUND
500 BOYLSTON STREET
BOSTON, MA 02116
[LOGO]
OTC-13-1/96/500 83/283/383
<PAGE> 151
<PAGE>
[logo] MFS Annual Report for
THE FIRST NAME IN MUTUAL FUNDS Year Ended
August 31, 1995
MFS(R) OTC FUND
Front cover
A photo of computer disks.
<PAGE>
MFS(R) OTC FUND
<TABLE>
<S> <C>
TRUSTEES CUSTODIAN
A. Keith Brodkin<F1> - Chairman and President Investors Bank & Trust Company
Richard B. Bailey<F1> - Private Investor; AUDITORS
Former Chairman and Director (until 1991), Deloitte & Touche LLP
Massachusetts Financial Services Company
INVESTOR INFORMATION
Peter G. Harwood - Private Investor For MFS stock and bond market outlooks,
call toll free: 1-800-637-4458 anytime from
J. Atwood Ives - Chairman and Chief Executive a touch-tone telephone.
Officer, Eastern Enterprises
For information on MFS mutual funds,
Lawrence T. Perera - Partner, call your financial adviser or, for an
Hemenway & Barnes information kit, call toll free:
1-800-637-2929 any business day from
William J. Poorvu - Adjunct Professor, Harvard 9 a.m. to 5 p.m. Eastern time (or leave
University Graduate School of Business a message anytime).
Administration
INVESTOR SERVICE
Charles W. Schmidt - Private Investor MFS Service Center, Inc.
P.O. Box 2281
Arnold D. Scott<F1> - Senior Executive Vice Boston, MA 02107-9906
President and Secretary, Massachusetts
Financial Services Company For general information, call toll free:
1-800-225-2606 any business day from
Jeffrey L. Shames<F1> - President, Massachusetts 8 a.m. to 8 p.m. Eastern time.
Financial Services Company
For service to speech- or hearing-impaired,
Elaine R. Smith - Independent Consultant call toll free: 1-800-637-6576 any business
day from 9 a.m. to 5 p.m. Eastern time.
David B. Stone - Chairman, North American (To use this service, your phone must be equipped with a
Management Corp. (Investment Adviser) Telecommunications Device for the Deaf.)
INVESTMENT ADVISER For share prices, account balances and
Massachusetts Financial Services Company exchanges, call toll free: 1-800-MFS-TALK
500 Boylston Street (1-800-637-8255) anytime from a touch-tone telephone.
Boston, MA 02116-3741
DISTRIBUTOR
MFS Fund Distributors, Inc.
500 Boylston Street
Boston, MA 02116-3741
PORTFOLIO MANAGER
Mark Regan<F1>
TREASURER
W. Thomas London<F1>
ASSISTANT TREASURER
James O. Yost<F1>
SECRETARY
Stephen E. Cavan<F1>
ASSISTANT SECRETARY
James R. Bordewick, Jr.<F1>
<FN>
<F1> Affiliated with the Investment Adviser
</TABLE>
<PAGE>
LETTER TO SHAREHOLDERS
Dear Shareholders:
In a period that saw high levels of market volatility, then a massive surge in
the prices of U.S. stocks - particularly technology stocks - and, finally, a
levelling pullback in the prices of many of those same stocks, the Fund
performed in line with the Standard & Poor's 500 Composite Index (the S&P 500)
for the 12 months ended August 31, 1995. The S&P 500 is a popular, unmanaged
index of common stock performance. As investors began to anticipate the end of
the Federal Reserve Board's year-long effort to restrain inflation by raising
short-term interest rates, stock markets began gaining ground in the final
weeks of 1994, an advance that continued into the summer of 1995. In this
environment, the S&P 500 had a total return of +21.42%, while Class A shares
of the Fund had a total return of +19.77%, Class B shares had a total return
of +18.75% and Class C shares had a total return of +18.63%. All of the Fund's
returns include the reinvestment of distributions but exclude the effects of
any sales charges. Complete performance information for the Fund is provided
on pages four, five and six of this report.
Economic Outlook
Moderate, but sustainable growth appears to be the hallmark of the economic
expansion's fifth year. After slowing earlier in the summer, consumer spending
and homebuying were showing renewed strength by August 31, while businesses
continued to work off excess inventories and reduce factory output. Meanwhile,
overseas economies, particularly those of Germany and Japan, have not
recovered as expected, limiting U.S. export growth. However, we believe the
Federal Reserve's consistent and, so far, successful efforts to fight
inflation seem to be giving consumers and businesses enough confidence to help
maintain 2 1/2% to 3% real (adjusted for inflation) growth in gross domestic
product, at least through 1995.
Stock Market
After several months of very strong performance in 1995, the stock market
became somewhat volatile in the last few weeks before August 31 as concerns
about interest rates had a negative effect on stock prices. At the same time,
the technology sector, which had been one of the best-performing sectors this
year, came under significant pressure this summer because of concerns that
these stocks had become overpriced relative to expected earnings. Still, the
longer-term outlook for technology and other growth sectors, such as leisure
and household products, remains favorable, as do the prospects for many small-
company stocks because of their growth potential relative to larger companies.
Also, companies' increasing emphasis on cost containment, coupled with their
growing use of technology, have helped keep them competitive and reasonably
profitable. Finally, we have been watching with interest the recent series of
corporate mergers in such industries as banking, entertainment, health care
and consumer products. Unlike previous merger waves, which were often intended
to build conglomerates of loosely related or unrelated businesses, this year's
mergers of similar companies seem to be more rationally based on the goal of
helping the merged companies reduce costs and, in general, be more
competitive. Looking ahead, we believe these factors, along with a stabilizing
interest rate environment and a continuation of favorable earnings reports,
will help maintain the stock market's positive momentum.
Portfolio Performance and Strategy
The Fund's performance has been positively impacted by investments in a number
of areas, specifically technology, including software and networking
companies; communications, such as wireless communications and long distance
telephone companies; selected medical devices companies; and gaming companies.
Areas that have not performed well include health maintenance organizations
(HMOs), nursing homes and Canadian communications companies.
About 36% of the Fund has been invested in technology companies this year
and these holdings have dramatically outperformed the overall market. For
example, the explosion in demand for multimedia personal computers (PCs) has
driven the valuation of entertainment software companies that provide the
games and educational software that PC users demand. The Fund has large
weightings in this area, including such companies as Electronic Arts, the
Learning Company, Sierra On-Line, Spectrum Holobyte and Softkey. Meanwhile,
the move to distributed processing by corporations has resulted in several
significant long-term technology trends, including the development of improved
database software, benefiting companies such as Oracle, Informix and Sybase,
and communication developments between the different local area networks and
the new sources of data, helping companies like Cisco.
Gaming stocks, particularly casinos, have also contributed to the Fund's
performance as purchases were made at depressed levels in the fourth quarter
of 1994. Going forward, our strategy for investing in the gaming area is to
identify new or emerging gaming markets.
In the field of medical devices, the focus of our investments has been on
companies utilizing new or under-recognized products that can help reduce
costs or provide a higher value of medical care, such as Medisense, for the
monitoring of diabetes; Ventritex; EP Technologies; Zoll, for heart treatment;
and Uromed, for urological treatment.
While HMOs, nursing homes and Canadian communications companies have had
disappointing results in the past year, we have reviewed each of these areas
and believe they still offer tremendous opportunity over the next six to 12
months.
Finally, we believe the valuations of our holdings remain attractive,
based on estimated future growth rates. As these valuations change, positions
in the Fund will be evaluated and, where it seems necessary, modified
accordingly.
We appreciate your support and welcome any questions or comments you may
have.
Respectfully,
- ----------------------- ----------------------------
A photo of A. Keith A photo of Mark Regan, Portfolio
Brodkin, Chairman and Manager.
President.
- ----------------------- ----------------------------
/s/A. Keith Brodkin /s/Mark Regan
A. Keith Brodkin Mark Regan
Chairman and President Portfolio Manager
September 12, 1995
PORTFOLIO MANAGER PROFILE
Mark Regan began his career at MFS in 1989 as a research analyst. A graduate
of Cornell University and the Sloan School of Management at the Massachusetts
Institute of Technology, he was promoted to Investment Officer in 1990,
Assistant Vice President - Investments in 1991 and Vice President -
Investments in 1992. Mr. Regan has managed MFS OTC Fund since its inception in
1993.
OBJECTIVE AND POLICIES
The Fund's primary investment objective is to provide long-term growth of
capital.
The Fund seeks to achieve its objective by investing at least 65% of its
assets, under normal circumstances, in securities principally traded on the
over-the-counter (OTC) securities market. OTC securities tend to be securities
of companies which are smaller or newer than those listed on the New York or
American Stock Exchanges. The Fund may invest in securities of companies that
are not traded on the OTC securities market that represent opportunities for
capital appreciation, as well as in fixed-income securities.
TAX FORM SUMMARY
In January 1996, shareholders will be mailed a Tax Form Summary reporting the
federal tax status of all distributions paid during the calendar year 1995.
PERFORMANCE
The information on the following page illustrates the historical performance
of MFS OTC Fund Class A and Class B shares in comparison to various market
indicators. Class A share results reflect the deduction of the 5.75% maximum
sales charge. Class B share results reflect the current maximum contingent
deferred sales charge (CDSC) of 4%. Benchmark comparisons are unmanaged and do
not reflect any fees or expenses. You cannot invest in an index. All results
reflect the reinvestment of all dividends and capital gains.
Class C shares were offered effective August 1, 1994. Information on Class C
share performance appears on the next page.
GROWTH OF A HYPOTHETICAL $10,000 INVESTMENT
(For the Period from December 1, 1993* to August 31, 1995)
Line graph representing the growth of a $10,000 investment for the period from
December 1, 1993 to August 31, 1995. The graph is scaled from $8,000 to $13,000
in $1,000 segments. The years are marked in 3-month segments from 1993 to 1995.
There are five lines drawn to scale. One is a solid line representing MFS OTC
Fund (Class A), a second line of short dashes represents MFS OTC Fund (Class B),
a third line of medium-short dashes represents the S&P 500, a fourth line of
medium-long dashes represents the Russell 2000 Index, and a fifth line of long
dashes represents the Consumer Price Index.
MFS OTC Fund (Class A) $12,541
MFS OTC Fund (Class B) $12,509
S&P 500 $12,764
Russell 2000 Index $12,627
Consumer Price Index $10,487
AVERAGE ANNUAL TOTAL RETURNS
12/01/93*-
1 Year 8/31/95
- ------------------------------------------------------------------------------
MFS OTC Fund (Class A) including 5.75% sales charge +12.87% +13.67%
- ------------------------------------------------------------------------------
MFS OTC Fund (Class A) at net asset value +19.77% +17.60%
- ------------------------------------------------------------------------------
MFS OTC Fund (Class B) with CDSC(+) +14.75% +14.28%
- ------------------------------------------------------------------------------
MFS OTC Fund (Class B) without CDSC +18.75% +16.33%
- ------------------------------------------------------------------------------
MFS OTC Fund (Class C) +18.63% +28.30%#
- ------------------------------------------------------------------------------
Average small company growth fund +26.39% +16.08%
- ------------------------------------------------------------------------------
Russell 2000 Index(++) +20.79% +13.81%
- ------------------------------------------------------------------------------
Standard & Poor's 500 Composite Index +21.42% +14.96%
- ------------------------------------------------------------------------------
Consumer Price Index(S) + 2.62% + 2.75%
- ------------------------------------------------------------------------------
* For the period from the commencement of offering of Class A and Class B
shares, December 1, 1993 to August 31, 1995.
(+) These returns reflect the maximum CDSC of 4%.
# For the period from the commencement of offering of Class C shares,
August 1, 1994 to August 31, 1995. Class C shares have no initial sales
charge or CDSC but, along with Class B shares, have higher annual fees and
expenses than Class A shares.
(++) The Russell 2000 Index is an unmanaged index comprised of 2,000 of the
smallest U.S.-domiciled company common stocks which are traded on the New
York Stock Exchange, the American Stock Exchange and NASDAQ.
(S) The Consumer Price Index is a popular measure of change in prices.
In the preceding table, we have included the average annual total returns of
all small company growth funds (including the Fund) tracked by Lipper
Analytical Services, Inc. (an independent firm which reports mutual fund
performance) for the applicable time periods (281 and 218 funds for the one-
year period ended August 31, 1995, and for the period from December 1, 1993
through August 31, 1995, respectively). Because these returns do not reflect
any applicable sales charges, we have also included the Fund's results at net
asset value (no sales charge) for comparison.
All results are historical and, therefore, are not an indication of future
results. The principal value and income return of an investment in a mutual
fund will vary with changes in market conditions, and shares, when redeemed,
may be worth more or less than their original cost.
PORTFOLIO CONCENTRATION AS OF AUGUST 31, 1995
Percent of Percent of
Five Largest Industries Net Assets Ten Largest Holdings Net Assets
- --------------------------------------------------------------------------
Entertainment 17.3 Medisense, Inc. 7.0
- -------------------------------------- ----------------------------------
Computer Software - Personal Showboat, Inc. 5.6
Computers 16.2 ----------------------------------
- -------------------------------------- Spectrum Holobyte Industries 5.4
Medical and Health Technology and ----------------------------------
Services 14.3 Rogers Communications, Inc. 5.0
- -------------------------------------- ----------------------------------
Telecommunications 13.4 Argosy Gaming Corp. 4.5
- -------------------------------------- ----------------------------------
Medical and Health Products 11.1 Mid-Atlantic Medical Services,
- -------------------------------------- Inc. 4.2
----------------------------------
Electric Arts, Inc. 4.1
----------------------------------
Pacific Health Systems,
Inc., "B" 3.9
----------------------------------
Rogers Cantel Mobile Co. 3.8
----------------------------------
Cisco Systems, Inc. 3.4
----------------------------------
<PAGE>
PORTFOLIO OF INVESTMENTS - August 31, 1995
Common Stocks and Warrants - 97.1%
- -----------------------------------------------------------------------------
Issuer Shares Value
- -----------------------------------------------------------------------------
Business Machines - 0.5%
Affiliated Computer Services, "A"* 15,000 $ 448,125
- -----------------------------------------------------------------------------
Business Services - 0.1%
Global Directmail Corp.* 3,100 $ 85,250
HPR, Inc.* 500 12,500
------------
$ 97,750
- -----------------------------------------------------------------------------
Cellular Telephones - 1.7%
AirTouch Communications, Inc.* 50,000 $ 1,625,000
- -----------------------------------------------------------------------------
Computer Software - Personal Computers - 16.2%
ARCSYS, Inc.* 600 $ 24,000
Autodesk, Inc. 12,800 590,400
Eagle Point Software* 500 11,000
Electronic Arts, Inc.* 102,800 3,906,400
Learning Co.* 55,000 3,217,500
Network Peripherals* 145,700 2,058,013
Novadigm, Inc.* 700 14,000
Pure Software, Inc.* 900 24,975
Softkey International, Inc.* 11,000 438,625
Spectrum Holobyte Industries* 298,900 5,156,025
------------
$ 15,440,938
- -----------------------------------------------------------------------------
Computer Software - Systems - 9.6%
BDM International, Inc. 1,500 $ 37,687
BMC Software, Inc.* 46,000 1,960,750
Computron Software* 1,000 19,000
Compuware Corp.* 132,500 2,997,812
Datalogix International, Inc.* 900 21,150
Dendrite International, Inc.* 900 12,713
Discreet Logic, Inc.* 700 28,350
HNC Software* 500 12,437
Inference Corp.* 400 7,200
Informix Corp.* 20,000 560,000
Legato Systems, Inc.* 400 9,400
Netscape Communications* 700 34,650
ON Technology Corp.* 500 8,000
Oracle Systems Corp.* 10,000 401,250
Seer Technologies, Inc.* 600 10,050
Spyglass* 700 29,839
Sybase, Inc.* 92,100 2,958,712
Vantive Corp.* 500 6,438
------------
$ 9,115,438
- -----------------------------------------------------------------------------
Consumer Goods and Services - 0.1%
Oakley, Inc.* 1,400 $ 44,975
USA Detergents, Inc.* 700 12,950
------------
$ 57,925
- -----------------------------------------------------------------------------
Electronics - 5.3%
Advance Circuits, Inc.* 62,100 $ 1,311,862
C.P. Clare Corp.* 1,000 24,000
Intel Corp. 21,800 1,337,975
LTX Corp.* 158,400 1,801,800
MEMC Electronics Materials, Inc.* 4,400 135,300
National Semiconductor* 15,000 423,750
Ontrak Systems, Inc.* 700 18,813
Paradigm Technology* 700 23,100
Thermospectra Corp.* 700 12,513
------------
$ 5,089,113
- -----------------------------------------------------------------------------
Entertainment - 17.3%
Ambassadors International, Inc.* 3,000 $ 34,500
American Radio Systems Corp.* 1,300 37,050
Argosy Gaming Corp.* 300,100 4,276,425
Casino America, Inc.* 185,900 2,695,550
Central European Media Enterprises Ltd.* 95,000 2,386,875
Showboat, Inc. 230,600 5,303,800
Starsight Telecast, Inc.* 369,200 1,661,400
Station Casinos, Inc.* 3,600 69,750
------------
$ 16,465,350
- -----------------------------------------------------------------------------
Financial Institutions
Jayhawk Acceptance Corp.* 1,500 $ 21,937
- -----------------------------------------------------------------------------
Machinery
Computational Systems, Inc.* 1,000 $ 15,500
- -----------------------------------------------------------------------------
Medical and Health Products - 11.1%
EP Technologies, Inc.* 50,000 $ 668,750
Medisense, Inc.* 280,000 6,650,000
Uromed Corp.* 167,900 1,595,050
Zoll Medical Corp.* 170,300 1,617,850
------------
$ 10,531,650
- -----------------------------------------------------------------------------
Medical and Health Technology and Services - 14.3%
American Oncology Resources* 1,400 $ 52,850
Beverly Enterprises* 126,300 1,673,475
Mariner Health Group, Inc.* 204,500 2,811,875
Mid-Atlantic Medical Services, Inc.* 212,200 3,952,225
Oxford Health Plans, Inc.* 8,300 406,700
Pacificare Health Systems, Inc., "A"* 15,000 821,250
Pacificare Health Systems, Inc., "B"* 65,000 3,721,250
United Healthcare Corp. 5,000 211,250
------------
$ 13,650,875
- -----------------------------------------------------------------------------
Metals and Minerals - 0.7%
Southern Africa Minerals Corp.* 810,000 $ 663,633
- -----------------------------------------------------------------------------
Printing and Publishing - 0.1%
American Media, Inc., Warrants 1,351,600 $ 63,256
Desktop Data, Inc.* 500 14,187
------------
$ 77,443
- -----------------------------------------------------------------------------
Restaurants and Lodging - 0.3%
Apple South, Inc. 1,300 $ 31,850
Papa John's International, Inc.* 1,600 64,000
Promus Hotel Corp.* 9,900 204,187
------------
$ 300,037
- -----------------------------------------------------------------------------
Special Products and Services - 1.2%
Sphere Drake Holdings Ltd.* 65,000 $ 1,105,000
- -----------------------------------------------------------------------------
Telecommunications - 13.4%
Chipcom Corp.* 25,000 $ 1,003,125
Cisco Systems, Inc.* 50,000 3,281,250
Lambert Communication* 33,000 1,650
Midcom Communication* 3,600 56,700
Rogers Cantel Mobile Co.* 150,000 3,600,000
Rogers Communications, Inc.* 467,200 4,784,735
Sitel Corp.* 1,100 23,650
Teltrend, Inc.* 1,300 30,550
------------
$ 12,781,660
- -----------------------------------------------------------------------------
Utilities - Telephone - 5.2%
MCI Communications Corp. 205,000 $ 4,932,812
- -----------------------------------------------------------------------------
Total Common Stocks and Warrants (Identified Cost, $88,459,928) $ 92,420,186
- -----------------------------------------------------------------------------
Short-Term Obligations - 3.8%
- -----------------------------------------------------------------------------
Principal Amount
(000 Omitted)
- -----------------------------------------------------------------------------
Federal National Mortgage Assn., 5.67s, due
9/12/95 $2,000 $ 1,995,590
Ford Motor Credit, 5.8s, due 9/01/95 1,650 1,649,734
- -----------------------------------------------------------------------------
Total Short-Term Obligations, at Amortized Cost $ 3,645,324
- -----------------------------------------------------------------------------
Total Investments (Identified Cost, $92,105,252) $ 96,065,510
Other Assets, Less Liabilities - (0.9)% (921,294)
- -----------------------------------------------------------------------------
Net Assets - 100.0% $ 95,144,216
- -----------------------------------------------------------------------------
*Non-income producing security.
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS
Statement of Assets and Liabilities
- ------------------------------------------------------------------------------
August 31, 1995
- ------------------------------------------------------------------------------
Assets:
Investments, at value (identified cost, $92,105,252) $96,065,510
Cash 1,653
Receivable for Fund shares sold 1,286,262
Interest receivable 1,219
Other assets 1,227
-----------
Total assets $97,355,871
-----------
Liabilities:
Payable for investments purchased $ 1,978,900
Payable for Fund shares reacquired 138,309
Payable to affiliates -
Management fee 1,910
Shareholder servicing agent fee 499
Distribution fee 19,299
Accrued expenses and other liabilities 72,738
-----------
Total liabilities $ 2,211,655
-----------
Net assets $95,144,216
===========
Net assets consist of:
Paid-in capital $79,907,768
Unrealized appreciation on investments 3,960,258
Accumulated undistributed net realized gain on investments
and foreign currency transactions 11,279,452
Accumulated net investment loss (3,262)
-----------
Total $95,144,216
===========
Shares of beneficial interest outstanding 9,533,726
===========
Class A shares:
Net asset value and redemption price per share
(net assets of $30,193,568 / 2,996,256 shares of
beneficial interest outstanding) $10.08
======
Offering price per share (100/94.25) $10.69
======
Class B shares:
Net asset value and offering price per share
(net assets of $61,741,683 / 6,213,651 shares of
beneficial interest outstanding) $9.94
=====
Class C shares:
Net asset value, offering price, and redemption price per
share (net assets of $3,208,965 / 323,819 shares of
beneficial interest outstanding) $9.91
=====
On sales of $50,000 or more, the offering price of Class A shares is reduced.
A contingent deferred sales charge may be imposed on redemptions of Class A
and Class B shares.
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS - continued
Statement of Operations
- ------------------------------------------------------------------------------
Year Ended August 31, 1995
- ------------------------------------------------------------------------------
Net investment income:
Income -
Dividends (including $397,265 received from affiliated
issuers) $ 509,038
Interest 173,982
-----------
Total investment income $ 683,020
-----------
Expenses -
Management fee $ 594,194
Trustees' compensation 4,475
Shareholder servicing agent fee (Class A) 38,322
Shareholder servicing agent fee (Class B) 114,682
Shareholder servicing agent fee (Class C) 2,325
Distribution and service fee (Class B) 491,201
Distribution and service fee (Class C) 15,495
Custodian fee 55,011
Printing 48,156
Auditing fees 36,350
Postage 29,678
Legal fees 8,236
Miscellaneous 121,200
-----------
Total expenses $ 1,559,325
-----------
Net investment loss $ (876,305)
-----------
Realized and unrealized gain (loss) on investments:
Realized gain (loss) (identified cost basis) -
Investment transactions (including $851,692 loss from
transactions in securities of affiliated issuers) $14,682,413
Foreign currency transactions (314)
-----------
Net realized gain on investments $14,682,099
-----------
Change in unrealized appreciation (depreciation) -
Investments $ 959,373
Translation of assets and liabilities in foreign currencies (6)
-----------
Net unrealized gain on investments $ 959,367
-----------
Net realized and unrealized gain on investments and
foreign currency $15,641,466
-----------
Increase in net assets from operations $14,765,161
===========
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS - continued
Statement of Changes in Net Assets
- ------------------------------------------------------------------------------
1995 1994*
- ------------------------------------------------------------------------------
Increase (decrease) in net assets:
From operations -
Net investment loss $ (876,305) $ (297,097)
Net realized gain on investments and foreign
currency transactions 14,682,099 144,573
Net unrealized gain on investments and
foreign currency 959,367 3,000,891
------------ -----------
Increase in net assets from operations $ 14,765,161 $ 2,848,367
------------ -----------
Distributions declared to shareholders -
From net realized gain on investments and
foreign currency transactions (Class A) $ (918,344) $ --
From net realized gain on investments and
foreign currency transactions (Class B) (1,440,882) --
From net realized gain on investments and
foreign currency transactions (Class C) (47,151) --
------------ -----------
Total distributions declared to
shareholders $ (2,406,377) $ --
------------ -----------
Fund share (principal) transactions -
Net proceeds from sale of shares $110,456,952 $74,941,646
Net asset value of shares issued to
shareholders in reinvestment of
distributions 2,174,647 --
Cost of shares reacquired (84,557,685) (23,080,495)
------------ -----------
Increase in net assets from Fund share
transactions $ 28,073,914 $51,861,151
------------ -----------
Total increase in net assets $ 40,432,698 $54,709,518
Net assets:
At beginning of period 54,711,518 2,000
------------ -----------
At end of period (including accumulated net
investment loss of $3,262 and $1,903,
respectively) $ 95,144,216 $54,711,518
============ ===========
*For the period from the commencement of investment operations, December 1,
1993 to August 31, 1994.
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS - continued
<TABLE>
<CAPTION>
Financial Highlights
- -------------------------------------------------------------------------------------------------------------
Year Ended August 31, 1995 1994<F1> 1995 1994<F1> 1995 1994<F2>
- -------------------------------------------------------------------------------------------------------------
Class A Class B Class C
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value - beginning of period $ 8.68 $ 7.83 $ 8.59 $ 7.83 $ 8.61 $ 7.80
------ ------ ------ ------ ------ ------
Income from investment operations<F4> -
Net investment loss $(0.03) $(0.05) $(0.13) $(0.12) $(0.14) $(0.04)
Net realized and unrealized gain on
investments 1.69 0.90 1.69 0.88 1.69 0.85
------ ------ ------ ------ ------ ------
Total from investment operations $ 1.66 $ 0.85 $ 1.56 $ 0.76 $ 1.55 $ 0.81
------ ------ ------ ------ ------ ------
Less distributions declared to
shareholders from net realized gain on
investments $(0.26) $ -- $(0.21) $ -- $(0.25) $ --
------ ------ ------ ------ ------ ------
Total distributions declared to
shareholders $(0.26) $ -- $(0.21) $ -- $(0.25) $ --
------ ------ ------ ------ ------ ------
Net asset value - end of period $10.08 $ 8.68 $ 9.94 $ 8.59 $ 9.91 $ 8.61
====== ====== ====== ====== ====== ======
Total return<F5> 19.77% 10.86% 18.75% 9.71% 18.63% 10.38%
Ratios (to average net assets)/Supplemental
data<F6>:
Expenses 1.29% 1.50%<F3> 2.29% 2.57%<F3> 2.30% 2.50%<F3>
Net investment loss (0.40)% (0.87)%<F3> (1.44)% (2.02)%<F3> (1.55)% (2.22)%<F3>
Portfolio turnover 218% 82% 218% 82% 218% 82%
Net assets at end of period (000 omitted) $30,194 $17,776 $61,742 $36,849 $3,209 $ 87
<FN>
<F1> For the period from the commencement of investment operations, December 1, 1993 to August 31, 1994.
<F2> For the period from the commencement of offering of Class C shares, August 1, 1994 to August 31, 1994.
<F3> Annualized.
<F4> Per share data is based upon average shares outstanding.
<F5> 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.
<F6> The investment adviser did not impose a portion of its management fee and distribution fee, respectively, for the periods
indicated. If these fees had been incurred by the Fund, the net investment loss per share and the ratios would have been:
Net investment loss -- $(0.08) -- $(0.15) -- $(0.05)
Ratios (to average net assets):
Expenses -- 2.03%<F3> -- 3.10%<F3> -- 3.03%
Net investment loss -- (1.40)%<F3> -- (2.56)%<F3> -- (2.71)%<F3>
</TABLE>
See notes to financial statements
<PAGE>
NOTES TO FINANCIAL STATEMENTS
(1) Business and Organization
MFS OTC Fund (the Fund) is a non-diversified series of MFS Series Trust IV
(the Trust). The Trust is organized as a Massachusetts business trust and is
registered under the Investment Company Act of 1940, as amended, as an open-
end, diversified management investment company.
(2) Significant Accounting Policies
Investment Valuations - Equity securities listed on securities exchanges or
reported through the NASDAQ system are valued at last sale prices. Unlisted
equity securities or listed equity securities for which last sale prices are
not available are valued at last quoted bid prices. Short-term obligations,
which mature in 60 days or less, are valued at amortized cost, which
approximates market value. Securities for which there are no such quotations
or valuations are valued at fair value as determined in good faith by or at
the direction of the Trustees.
Foreign Currency Translation - Investment valuations, other assets, and
liabilities initially expressed in foreign currencies are converted each
business day into U.S. dollars based upon current exchange rates. Purchases
and sales of foreign investments, income and expenses are converted into U.S.
dollars based upon currency exchange rates prevailing on the respective dates
of such transactions. Gains and losses attributable to foreign currency
exchange rates on sales of securities are recorded for financial statement
purposes as net realized gains and losses on investments. Gains and losses
attributable to foreign exchange rate movements on income and expenses are
recorded for financial statement purposes as foreign currency transactions
gains and losses. That portion of both realized and unrealized gains and
losses on investments that results from fluctuations in foreign currency
exchange rates is not separately disclosed.
Investment Transactions and Income - Investment transactions are recorded on
the trade date. Interest income is recorded on the accrual basis. All premium
and original issue discount are amortized or accreted for financial statement
and tax reporting purposes as required by federal income tax regulations.
Dividend income is recorded on the ex-dividend date for dividends received in
cash. Dividend and interest payments received in additional securities are
recorded on the ex-dividend or ex-interest date in an amount equal to the
value of the security on such date.
Tax Matters and Distributions - The Fund's policy is to comply with the
provisions of the Internal Revenue Code (the Code) applicable to regulated
investment companies and to distribute to shareholders all of its net taxable
income, including any net realized gain on investments. Accordingly, no
provision for federal income or excise tax is provided. The Fund files a tax
return annually using tax accounting methods required under provisions of the
Code which may differ from generally accepted accounting principles, the basis
on which these financial statements are prepared. Accordingly, the amount of
net investment income and net realized gain reported on these financial
statements may differ from that reported on the Fund's tax return, and
consequently, the character of distributions to shareholders reported in the
financial highlights may differ from that reported to shareholders on Form
1099-DIV. Foreign taxes have been provided for on interest and dividend income
earned on foreign investments in accordance with the applicable country's tax
rates and to the extent unrecoverable are recorded as a reduction of
investment income. Distributions to shareholders are recorded on the ex-
dividend date.
The Fund distinguishes between distributions on a tax basis and a financial
reporting basis and requires that only distributions in excess of tax basis
earnings and profits are reported in the financial statements as a return of
capital. Differences in the recognition or classification of income between
the financial statements and tax earnings and profits which result in
temporary over-distributions for financial statement purposes, are classified
as distributions in excess of net investment income or accumulated net
realized gains. During the year ended August 31, 1995, $874,946 was
reclassified from accumulated net investment loss to accumulated net realized
gain on investments to offset short-term capital gains. This change had no
effect on the net assets or net asset value per share.
Multiple Classes of Shares of Beneficial Interest - The Fund offers Class A,
Class B and Class C shares. The three classes of shares differ in their
respective shareholder servicing agent, distribution and service fees. All
shareholders bear the common expenses of the Fund pro rata based on the
average daily net assets of each class, without distinction between share
classes. Dividends are declared separately for each class. No class has
preferential dividend rights; differences in per share dividend rates are
generally due to differences in separate class expenses.
(3) Transactions with Affiliates
Investment Adviser - The Fund has an investment advisory agreement with
Massachusetts Financial Services Company (MFS) to provide overall investment
advisory and administrative services, and general office facilities. The
management fee is computed daily and paid monthly at an annual rate of 0.75%
of average daily net assets. The Fund pays no compensation directly to its
Trustees who are officers of the investment adviser, or to officers of the
Fund, all of whom receive remuneration for their services to the Fund from
MFS. Certain of the officers and Trustees of the Fund are officers or
directors of MFS, MFS Fund Distributors, Inc. (MFD) and MFS Service Center,
Inc. (MFSC). The Fund has an unfunded defined benefit plan for all of its
independent Trustees and Mr. Bailey. Included in Trustees' compensation is a
net periodic pension expense of $1,185 for the year ended August 31, 1995.
Distributor - MFD, a wholly owned subsidiary of MFS, as distributor, received
$35,335 for the year ended August 31, 1994 as its portion of the sales charge
on sales of Class A shares of the Fund. The Trustees have adopted separate
distribution plans for Class A, Class B and Class C shares pursuant to Rule
12b-1 of the Investment Company Act of 1940 as follows:
The Class A distribution plan provides that the Fund will pay MFD up to 0.35%
per annum of its average daily net assets attributable to Class A shares in
order that MFD may pay expenses on behalf of the Fund related to the
distribution and servicing of its shares. These expenses include a service fee
to each securities dealer that enters into a sales agreement with MFD of up to
0.25% per annum of the Fund's average daily net assets attributable to Class A
shares which are attributable to that securities dealer, a distribution fee to
MFD of up to 0.10% per annum of the Fund's average daily net assets
attributable to Class A shares, commissions to dealers and payments to MFD
wholesalers for sales at or above a certain dollar level, and other such
distribution-related expenses that are approved by the Fund. Payments will
commence under the distribution plan on such date that the net assets of the
Fund attributable to Class A shares first equals or exceeds $40 million.
The Class B and Class C distribution plans provide that the Fund will pay MFD
a monthly distribution fee, equal to 0.75% per annum, and a service fee of up
to 0.25% per annum, of the Fund's average daily net assets attributable to
Class B and Class C shares. The service fee is not charged on Class B shares
held over one year. MFD will pay to securities dealers that enter into a sales
agreement with MFD all or a portion of the service fee attributable to Class B
and Class C shares, and will pay to such securities dealers all of the
distribution fee attributable to Class C shares. The service fee is intended
to be additional consideration for services rendered by the dealer with
respect to Class B and Class C shares. Fees incurred under the distribution
plans during the year ended August 31, 1995 were 0.94% and 1.00% of average
daily net assets attributable to Class B and Class C shares, respectively.
A contingent deferred sales charge is imposed on shareholder redemptions of
Class A shares, on purchases of $1 million or more, in the event of a
shareholder redemption within 12 months following the share purchase. A
contingent deferred sales charge is imposed on shareholder redemptions of
Class B shares in the event of a shareholder redemption within six years of
purchase. MFD receives all contingent deferred sales charges. Contingent
deferred sales charges imposed during the year ended August 31, 1995 were $41
and $132,216 for Class A and Class B shares, respectively.
Shareholder Servicing Agent - MFSC, a wholly owned subsidiary of MFS, earns a
fee for its services as shareholder servicing agent. The fee is calculated as
a percentage of the average daily net assets of each class of shares at an
effective annual rate of up to 0.15%, up to 0.22% and up to 0.15% attributable
to Class A, Class B and Class C shares, respectively.
(4) Portfolio Securities
Purchases and sales of investments, other than purchased option transactions
and short-term obligations, aggregated $197,493,525 and $173,368,376,
respectively.
The cost and unrealized appreciation or depreciation in value of the
investments owned by the Fund, as computed on a federal income tax basis, are
as follows:
Aggregate cost $92,628,804
===========
Gross unrealized appreciation $13,592,098
Gross unrealized depreciation 10,155,392
-----------
Net unrealized appreciation $ 3,436,706
===========
(5) Shares of Beneficial Interest
The Fund's Declaration of Trust permits the Trustees to issue an unlimited
number of full and fractional shares of beneficial interest (without par
value). Transactions in Fund shares were as follows:
Class A Shares
Year Ended August 31, 1995 Period Ended August 31, 1994*
---------------------------- ----------------------------
Shares Amount Shares Amount
- -----------------------------------------------------------------------------
Shares sold 4,680,448 $ 39,610,152 3,491,940 $ 28,339,992
Shares issued to
shareholders in
reinvestment of
distributions 104,971 868,094 -- --
Shares
reacquired (3,837,263) (32,341,967) (1,443,968) (11,474,151)
----------- ------------- ----------- -------------
Net increase 948,156 $ 8,136,279 2,047,972 $ 16,865,841
=========== ============= =========== =============
*For the period from the commencement of investment operations, December 1,
1993 to August 31, 1994.
Class B Shares
Year Ended August 31, 1995 Period Ended August 31, 1994*
---------------------------- ----------------------------
Shares Amount Shares Amount
- -----------------------------------------------------------------------------
Shares sold 7,325,159 $ 62,579,527 5,765,354 $ 46,517,609
Shares issued to
shareholders in
reinvestment of
distributions 154,411 1,266,051 -- --
Shares
reacquired (5,554,198) (46,622,744) (1,477,203) (11,606,344)
----------- ------------- ----------- -------------
Net increase 1,925,372 $ 17,222,834 4,288,151 $ 34,911,265
=========== ============= =========== =============
*For the period from the commencement of investment operations, December 1,
1993 to August 31, 1994.
Class C Shares
Year Ended August 31, 1995 Period Ended August 31, 1994**
---------------------------- ----------------------------
Shares Amount Shares Amount
- -----------------------------------------------------------------------------
Shares sold 948,839 $8,267,273 10,122 $84,045
Shares issued to
shareholders in
reinvestment of
distributions 4,957 40,502 -- --
Shares
reacquired (640,099) (5,592,974) -- --
-------- ---------- ------ -------
Net increase 313,697 $2,714,801 10,122 $84,045
======== ========== ====== =======
**For the period from the commencement of offering of Class C shares, August
1, 1994 to August 31, 1994.
(6) Line of Credit
The Fund entered into an agreement which enables it to participate with other
funds managed by MFS in an unsecured line of credit with a bank which permits
borrowings up to $350 million, collectively. Borrowings may be made to
temporarily finance the repurchase of Fund shares. Interest is charged to each
fund, based on its borrowings, at a rate equal to the bank's base rate. In
addition, a commitment fee, based on the average daily unused portion of the
line of credit, is allocated among the participating funds at the end of each
quarter. The commitment fee allocated to the Fund for the year ended August
31, 1995 was $23,882.
(7) Transactions in Securities of Affiliated Issuers
Affiliated issuers, as defined under the Investment Company Act of 1940, are
those in which the Fund's holdings of an issuer represent 5% or more of the
outstanding voting securities of the issuer. A summary of the Fund's
transactions in the securities of these issuers during the year ended August
31, 1995 is set forth below.
<TABLE>
<CAPTION>
Acquisitions Dispositions Interest and
Beginning --------------------- ------------------------ Ending Realized Dividend Ending
Affiliate Shares Shares Cost Shares Cost Shares Loss Income Value
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
American Media, Inc. 93,300 157,200 $1,905,064 250,500 $2,501,179 0 $(851,692) $397,265 0
</TABLE>
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Trustees of MFS Series Trust IV and Shareholders of MFS OTC Fund:
We have audited the accompanying statement of assets and liabilities,
including the portfolio of investments, of MFS OTC Fund (one of the series
constituting MFS Series Trust IV) as of August 31, 1995, the related statement
of operations for the year then ended and the statement of changes in net
assets and the financial highlights for the year ended August 31, 1995 and the
period ended August 31, 1994. These financial statements and financial
highlights are the responsibility of the Fund's management. Our responsibility
is to express an opinion on these financial statements and financial
highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements and
financial highlights are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. Our procedures included confirmation of the
securities owned at August 31, 1995, by correspondence with the custodian and
brokers; where replies were not received from brokers, we performed other
auditing procedures. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of MFS OTC Fund at
August 31, 1995, the results of its operations, the changes in its net assets,
and its financial highlights for the respective stated periods in conformity
with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Boston, Massachusetts
October 6, 1995
---------------------------------------------
This report is prepared for the general information of shareholders. It is
authorized for distribution to prospective investors only when preceded or
accompanied by a current prospectus.
<PAGE>
MFS INVESTMENT OPPORTUNITIES
MUTUAL FUNDS
The MFS Family of Funds(R), shown on the facing page, falls into the eight
general categories below. All offer full-time professional management, a
diversified portfolio, and a wide array of shareholder services.
STOCK FUNDS seek growth of capital rather than income through investments in
stocks.
STOCK AND BOND FUNDS seek current income and growth of capital through
investments in both stocks and bonds.
BOND FUNDS seek current income through investments in debt securities.
WORLD FUNDS seek stock, balanced, and bond fund objectives through
investments in U.S. and foreign stocks and bonds.
LIMITED-MATURITY FUNDS seek current income and preservation of capital through
investments in debt securities with remaining maturities of five years or less.
NATIONAL TAX-FREE BOND FUNDS seek current income exempt from federal income
tax through investments in debt securities issued by states and
municipalities.(1)
STATE TAX-FREE BOND FUNDS seek current income exempt from federal and state
income taxes through investments in debt securities issued by a single state
and its municipalities.(1)
MONEY MARKET FUNDS seek preservation of capital and current income through
investments in short-term debt securities.(2)
To determine which MFS fund may be appropriate for you, please contact your
financial adviser, who can help you relate these investment opportunities to
your financial goals. If you prefer, you may call MFS Investor Information for
literature(3) on MFS products and services: 1- 800-637-2929, from 9 a.m. to 5
p.m. Eastern time any business day (leave a message any time).
(1) A small portion of the income may be subject to federal, state and/or
alternative minimum tax.
(2) Investments in money market funds are not issued or guaranteed by the U.S.
government and there is no assurance that the Fund will be able to maintain
a stable net asset value.
(3) Including a prospectus containing more complete information including
charges and expenses. Read the prospectus carefully before investing.
<PAGE>
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 1-800-637-2929
any business day from 9 a.m. to 5 p.m. Eastern time (or, leave a message any
time). This material should be read carefully before investing or sending money.
<TABLE>
<S> <C>
STOCK LIMITED MATURITY BOND
- ---------------------------------------------------- ----------------------------------------------------
Massachusetts Investors Trust MFS(R) Government Limited Maturity Fund
- ---------------------------------------------------- ----------------------------------------------------
Massachusetts Investors Growth Stock Fund MFS(R) Limited Maturity Fund
- ---------------------------------------------------- ----------------------------------------------------
MFS(R) Capital Growth Fund MFS(R) Municipal Limited Maturity Fund
- ---------------------------------------------------- ----------------------------------------------------
MFS(R) Emerging Growth Fund
- ---------------------------------------------------- WORLD
MFS(R) Gold & Natural Resources Fund ----------------------------------------------------
- ---------------------------------------------------- MFS(R) World Asset Allocation Fund
MFS(R) Growth Opportunities Fund ----------------------------------------------------
- ---------------------------------------------------- MFS(R) World Equity Fund
MFS(R) Managed Sectors Fund ----------------------------------------------------
- ---------------------------------------------------- MFS(R) World Governments Fund
MFS(R) OTC Fund ----------------------------------------------------
- ---------------------------------------------------- MFS(R) World Growth Fund
MFS(R) Research Fund ----------------------------------------------------
- ---------------------------------------------------- MFS(R) World Total Return Fund
MFS(R) Value Fund ----------------------------------------------------
- ----------------------------------------------------
NATIONAL TAX-FREE BOND
STOCK AND BOND ----------------------------------------------------
- ---------------------------------------------------- MFS(R) Municipal Bond Fund
MFS(R) Total Return Fund ----------------------------------------------------
- ---------------------------------------------------- MFS(R) Municipal High Income Fund
MFS(R) Utilities Fund (closed to new investors)
- ---------------------------------------------------- ----------------------------------------------------
MFS(R) Municipal Income Fund
BOND ----------------------------------------------------
- ----------------------------------------------------
MFS(R) Bond Fund STATE TAX-FREE BOND
- ---------------------------------------------------- ----------------------------------------------------
MFS(R) Government Mortgage Fund Alabama, Arkansas, California, Florida,
- ---------------------------------------------------- ----------------------------------------------------
MFS(R) Government Securities Fund Georgia, Louisiana, Maryland, Massachusetts,
- ---------------------------------------------------- ----------------------------------------------------
MFS(R) High Income Fund Mississippi, New York, North Carolina,
- ---------------------------------------------------- ----------------------------------------------------
MFS(R) Intermediate Income Fund Pennsylvania, South Carolina, Tennessee,
- ---------------------------------------------------- ----------------------------------------------------
MFS(R) Strategic Income Fund Texas, Virginia, Washington, West Virginia
(formerly MFS(R) Income & Opportunity Fund) ----------------------------------------------------
- ----------------------------------------------------
MONEY MARKET
----------------------------------------------------
MFS(R) Cash Reserve Fund
----------------------------------------------------
MFS(R) Government Money Market Fund
----------------------------------------------------
MFS(R) Money Market Fund
----------------------------------------------------
</TABLE>
<PAGE>
MFS(R) OTC FUND BULK RATE
U.S. POSTAGE
500 Boylston Street P A I D
Boston, MA 02116 PERMIT #55638
BOSTON, MA
[logo] MFS
THE FIRST NAME IN MUTUAL FUNDS
OTC-2 10/95 13M 83/283/383
<PAGE> 152
PART C
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS
FOR MFS MUNICIPAL BOND FUND
(a) FINANCIAL STATEMENTS INCLUDED IN PART A:
For the nine years ended October 31, 1993, the ten
months ended August 31, 1994 and the year ended August
31, 1995:
Financial Highlights
FINANCIAL STATEMENTS INCLUDED IN PART B:
At August 31, 1995:
Statement of Assets and Liabilities*
Portfolio of Investments*
For the year ended October 31, 1993, the ten months
ended August 31, 1994 and the year ended August 31,
1995:
Statement of Changes in Net Assets*
For the year ended August 31, 1995:
Statement of Operations*
- --------------------------
* Incorporated herein by reference to the Fund's Annual Report to Shareholders
dated August 31, 1995, filed with the SEC via EDGAR on November 6, 1995.
FOR MFS MONEY MARKET FUND AND MFS GOVERNMENT MONEY MARKET FUND
(a) FINANCIAL STATEMENTS INCLUDED IN PART A:
For the nine years ended October 31, 1993, the ten
months ended August 31, 1994 and the year ended August
31, 1995:
Financial Highlights
FINANCIAL STATEMENTS INCLUDED IN PART B:
At August 31, 1995:
Statement of Assets and Liabilities*
Portfolio of Investments*
For the year ended October 31, 1993, the ten months
ended August 31, 1994 and the year ended August 31,
1995:
Statement of Changes in Net Assets*
<PAGE> 153
For the year ended August 31, 1995:
Statement of Operations*
- -----------------------------
* Incorporated herein by reference to the Fund's Annual Report to Shareholders
dated August 31, 1995, filed with the SEC via EDGAR on November 6, 1995.
FOR MFS OTC FUND
(a) FINANCIAL STATEMENTS INCLUDED IN PART A:
For the period from December 1, 1993 to August 31,
1994, the period from August 1, 1994 to August 31,
1994, and the year ended August 31, 1995:
Financial Highlights
FINANCIAL STATEMENTS INCLUDED IN PART B:
At August 31, 1995:
Statement of Assets and Liabilities*
Portfolio of Investments*
For the period from commencement of investment
operations, December 1, 1993 to August 31, 1994 and the
year ended August 31, 1995:
Statement of Changes in Net Assets*
For the year ended August 31, 1995:
Statement of Operations*
- -----------------------------
* Incorporated herein by reference to the Fund's Annual Report to
Shareholders dated August 31, 1995, filed with the SEC via EDGAR on
November 6, 1995.
(b) EXHIBITS
1 Amended and Restated Declaration of Trust, dated
January 19, 1995. (1)
2 Amended and Restated By-Laws, dated December 21,
1994. (1)
3 Not Applicable.
4 Form of Share Certificate for Class A, Class B and
Class C Shares. (3)
5 (a) Investment Advisory Agreement by and between
Massachusetts Cash Management Trust on behalf of
MFS Money Market Fund and MFS Government Money
Market Fund, dated May 20, 1982 and amended and
restated August 1, 1993. (1)
(b) Investment Advisory Agreement by and between MFS
Series Trust IV, on behalf of MFS Municipal Bond
Fund, dated September 1, 1993. (1)
(c) Investment Advisory Agreement by and between MFS
Series Trust IV, on behalf of MFS OTC Fund, dated
October 20, 1993. (1)
<PAGE> 154
6 (a) Distribution Agreement between the Trust and MFS
Fund Distributors, Inc., dated January 1, 1995.
(1)
(b) Dealer Agreement between MFS Fund Distributors,
Inc. ("MFD"), and a dealer, dated December 28,
1994 and the Mutual Fund Agreement between MFD and
a bank or NASD affiliate, dated December 28, 1994.
(2)
7 Retirement Plan for Non-Interested Person
Trustees, dated January 1, 1991. (1)
8 (a) Custodian Agreement between Registrant and State
Street Bank and Trust Company, dated April 25,
1988. (6)
(b) Amendment to Custodian Contract, dated April 25,
1988. (6)
(c) Amendment to Custodian Contract, dated October 1,
1989. (6)
(d) Amendment to Custodian Contract, dated September
17, 1991. (6)
(e) Custodian Agreement between MFS Series Trust IV on
behalf of MFS OTC Fund and Investors Bank & Trust
Company dated October 20, 1993. (1)
9 (a) Shareholder Servicing Agent Agreement, dated
August 1, 1985. (1)
(b) Amendment to Shareholder Servicing Agent Agreement
dated July 20, 1994. (1)
(c) Exchange Privilege Agreement, dated September 1,
1995. (7)
(d) Loan Agreement among MFS Borrowers and The First
National Bank of Boston dated as of September 29,
1989, as amended through and including the Second
Amendment dated April 21, 1994. (4)
(e) Dividend Disbursing Agent Agreement dated February
1, 1986. (3)
10 24e-2 Consent and Opinion of Counsel; filed
herewith.
11 Consent of Deloitte & Touche; filed herewith.
12 Not Applicable.
13 Not Applicable.
14 (a) Forms for Individual Retirement Account Disclosure
Statement as currently in effect. (5)
(b) Forms 403(b) Custodial Account Agreement as
currently in effect. (5)
<PAGE> 155
(c) Forms for MFS Prototype Paired Defined
Contribution Plans as Trust Agreement as currently
in effect. (5)
15 (a) Plan of Distribution for Class B Shares of MFS
Municipal Bond Fund, dated December 21, 1994. (1)
(b) Distribution Plan for Class A Shares of MFS OTC
Fund, dated December 21, 1994. (1)
(c) Plan of Distribution for Class B Shares of MFS OTC
Fund, dated December 21, 1994. (1)
(d) Plan of Distribution for Class C Shares of MFS OTC
Fund, dated December 21, 1994. (1)
16 (a) Schedule for Computation of Performance Quotations
for MFS Money Market Fund and MFS Government Money
Market Fund - Seven-Day Yield Calculation. (1)
(b) Schedule for Computation of Performance Quotations
for MFS Municipal Bond Fund - Yield, Tax-
Equivalent Yield, Distribution Rate and Average
Annual Total Return. (1)
(c) Schedule for Computation of Performance Quotations
for MFS OTC Fund - Average Annual Total Return.
(1)
17 Financial Data Schedules for each class of each
series; filed herewith.
18 Not Applicable.
Power of Attorney, dated September 21, 1994. (1)
- -----------------------------
(1) Incorporated by reference to the Registrant's Post-Effective Amendment No.
26 filed with the SEC via EDGAR on February 28, 1995.
(2) Incorporated by reference to MFS Municipal Series Trust (File Nos. 2-92915
and 811-4096) Post-Effective Amendment No. 26 filed with the SEC via EDGAR
on February 22, 1995.
(3) 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.
(4) 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.
(5) 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.
(6) Incorporated by reference to the Registrant's Post-Effective Amendment No.
27 filed with the SEC via EDGAR on October 11, 1995.
(7) Incorporated by reference to MFS Series Trust X (File Nos. 33-1657 and
811-4492) Post-Effective Amendment No. 13 filed with the SEC via EDGAR on
November 28, 1995.
ITEM 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT
Not applicable.
<PAGE> 156
<TABLE>
<S> <C> <C>
ITEM 26. NUMBER OF HOLDERS OF SECURITIES
FOR MFS MONEY MARKET FUND
(1) (2)
TITLE OF CLASS NUMBER OF RECORD HOLDERS
Shares of Beneficial Interest 35,875
(without par value) (as of November 30, 1995)
FOR MFS GOVERNMENT MONEY MARKET FUND
(1) (2)
TITLE OF CLASS NUMBER OF RECORD HOLDERS
Shares of Beneficial Interest 2,050
(without par value) (as of November 30, 1995)
FOR MFS MUNICIPAL BOND FUND
(1) (2)
TITLE OF CLASS NUMBER OF RECORD HOLDERS
Class A Shares of Beneficial Interest 46,836
(without par value) (as of November 30, 1995)
Class B Shares of Beneficial Interest 2,173
(without par value) (as of November 30, 1995)
FOR MFS OTC FUND
(1) (2)
TITLE OF CLASS NUMBER OF RECORD HOLDERS
Class A Shares of Beneficial Interest 2,861
(without par value) (as of November 30, 1995)
Class B Shares of Beneficial Interest 6,119
(without par value) (as of November 30, 1995)
Class C Shares of Beneficial Interest 379
(without par value) (as of November 30, 1995)
</TABLE>
<PAGE> 157
ITEM 27. INDEMNIFICATION
The Trustees and officers of the Trust and the personnel of the
Trust's investment adviser and principal underwriter are insured under an errors
and omissions liability insurance policy. The Trust and its officers are also
insured under the fidelity bond required by Rule 17g-1 under the Investment
Company Act of 1940, as amended.
Reference is hereby made to (a) Article V of the Trust's
Declaration of Trust, and (b) Section 9 of the Shareholder Servicing Agent
Agreement both incorporated by reference to Post-Effective Amendment No. 26,
filed with the SEC via EDGAR on February 28, 1995.
ITEM 28. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER
MFS serves as investment adviser to the following open-end
Funds comprising the MFS Family of Funds: Massachusetts Investors Trust,
Massachusetts Investors Growth Stock Fund, MFS Growth Opportunities Fund, MFS
Government Securities Fund, MFS Government Limited Maturity Fund, MFS Series
Trust I (which has eight series: MFS Managed Sectors Fund, MFS Cash Reserve
Fund, MFS World Asset Allocation Fund, MFS Aggressive Growth Fund, MFS Research
Growth and Income Fund, MFS Core Growth Fund, MFS Equity Income Fund and MFS
Special Opportunities Fund), MFS Series Trust II (which has four series: MFS
Emerging Growth Fund, MFS Capital Growth Fund, MFS Intermediate Income Fund and
MFS Gold & Natural Resources Fund), MFS Series Trust III (which has two series:
MFS High Income Fund and MFS Municipal High Income Fund), MFS Series Trust IV
(which has four series: MFS Money Market Fund, MFS Government Money Market Fund,
MFS Municipal Bond Fund and MFS OTC Fund), MFS Series Trust V (which has two
series: MFS Total Return Fund and MFS Research Fund), MFS Series Trust VI (which
has three series: MFS World Total Return Fund, MFS Utilities Fund and MFS World
Equity Fund), MFS Series Trust VII (which has two series: MFS World Governments
Fund and MFS Value Fund), MFS Series Trust VIII (which has two series: MFS
Strategic Income Fund and MFS World Growth Fund), MFS Series Trust IX (which has
three series: MFS Bond Fund, MFS Limited Maturity Fund and MFS Municipal Limited
Maturity Fund), MFS Series Trust X (which has four series: MFS Government
Mortgage Fund, MFS/Foreign & Colonial Emerging Markets Equity Fund, MFS/Foreign
& Colonial International Growth Fund and MFS/Foreign & Colonial International
Growth and Income Fund), and MFS Municipal Series Trust (which has 19 series:
MFS Alabama Municipal Bond Fund, MFS Arkansas Municipal Bond Fund, MFS
California Municipal Bond Fund, MFS Florida Municipal Bond Fund, MFS Georgia
Municipal Bond Fund, MFS Louisiana Municipal Bond Fund, MFS Maryland Municipal
Bond Fund, MFS Massachusetts Municipal Bond Fund, MFS Mississippi Municipal Bond
Fund, MFS New York Municipal Bond Fund, MFS North Carolina Municipal Bond Fund,
MFS Pennsylvania Municipal Bond Fund, MFS South Carolina Municipal Bond Fund,
MFS Tennessee Municipal Bond Fund, MFS Texas Municipal Bond Fund, MFS Virginia
Municipal Bond Fund, MFS Washington Municipal Bond Fund, MFS West Virginia
Municipal Bond Fund and MFS Municipal Income Fund) (the "MFS Funds"). The
principal business address of each of the aforementioned Funds is 500 Boylston
Street, Boston, Massachusetts 02116.
MFS also serves as investment adviser of the following no-load,
open-end Funds: MFS Institutional Trust ("MFSIT") (which has seven series), MFS
Variable Insurance Trust ("MVI") (which has twelve series) and MFS Union
Standard Trust ("UST") (which has two series). The principal business address
of each of the aforementioned Funds is 500 Boylston Street, Boston,
Massachusetts 02116.
In addition, MFS serves as investment adviser to the following
closed-end Funds: MFS Municipal Income Trust, MFS Multimarket Income Trust, MFS
Government Markets Income Trust, MFS
<PAGE> 158
Intermediate Income Trust, MFS Charter Income Trust and MFS Special Value Trust
(the "MFS Closed-End Funds"). The principal business address of each of the
aforementioned Funds is 500 Boylston Street, Boston, Massachusetts 02116.
Lastly, MFS serves as investment adviser to MFS/Sun Life Series
Trust ("MFS/SL"), Sun Growth Variable Annuity Funds, Inc. ("SGVAF"), Money
Market Variable Account, High Yield Variable Account, Capital Appreciation
Variable Account, Government Securities Variable Account, World Governments
Variable Account, Total Return Variable Account and Managed Sectors Variable
Account. The principal business address of each is One Sun Life Executive Park,
Wellesley Hills, Massachusetts 02181.
MFS International Ltd. ("MIL"), a limited liability company
organized under the laws of the Republic of Ireland and a subsidiary of MFS,
whose principal business address is 41-45 St. Stephen's Green, Dublin 2,
Ireland, serves as investment adviser to and distributor for MFS International
Fund (which has four portfolios: MFS International Funds-U.S. Equity Fund, MFS
International Funds-U.S. Emerging Growth Fund, MFS International Funds-Global
Governments Fund and MFS International Funds-Charter Income Fund) (the "MIL
Funds"). The MIL Funds are organized in Luxembourg and qualify as an
undertaking for collective investments in transferable securities (UCITS). The
principal business address of the MIL Funds is 47, Boulevard Royal, L-2449
Luxembourg.
MIL also serves as investment adviser to and distributor for
MFS Meridian U.S. Government Bond Fund, MFS Meridian Charter Income Fund, MFS
Meridian Global Government Fund, MFS Meridian U.S. Emerging Growth Fund, MFS
Meridian Global Equity Fund, MFS Meridian Limited Maturity Fund, MFS Meridian
World Growth Fund, MFS Meridian Money Market Fund, MFS Meridian World Total
Return Fund and MFS Meridian U.S. Equity Fund (collectively the "MFS Meridian
Funds"). Each of the MFS Meridian Funds is organized as an exempt company under
the laws of the Cayman Islands. The principal business address of each of the
MFS Meridian Funds is P.O. Box 309, Grand Cayman, Cayman Islands, British West
Indies.
MFS International (U.K.) Ltd. ("MIL-UK"), a private limited
company registered with the Registrar of Companies for England and Wales whose
current address is 4 John Carpenter Street, London, England ED4Y 0NH, is
involved primarily in marketing and investment research activities with respect
to private clients and the MIL Funds and the MFS Meridian Funds.
MFS Fund Distributors, Inc. ("MFD"), a wholly owned subsidiary
of MFS, serves as distributor for the MFS Funds, MVI, UST and MFSIT.
Clarendon Insurance Agency, Inc. ("CIAI"), a wholly owned
subsidiary of MFS, serves as distributor for certain life insurance and annuity
contracts issued by Sun Life Assurance Company of Canada (U.S.).
MFS Service Center, Inc. ("MFSC"), a wholly owned subsidiary of
MFS, serves as shareholder servicing agent to the MFS Funds, the MFS Closed-End
Funds, MFSIT, MVI and UST.
MFS Asset Management, Inc. ("AMI"), a wholly owned subsidiary
of MFS, provides investment advice to substantial private clients.
MFS Retirement Services, Inc. ("RSI"), a wholly owned
subsidiary of MFS, markets MFS products to retirement plans and provides
administrative and record keeping services for retirement plans.
<PAGE> 159
MFS
The Directors of MFS are A. Keith Brodkin, Jeffrey L. Shames,
Arnold D. Scott, John R. Gardner and John D. McNeil. Mr. Brodkin is the
Chairman, Mr. Shames is the President, Mr. Scott is a Senior Executive Vice
President and Secretary, Bruce C. Avery, William S. Harris, William W. Scott,
Jr., and Patricia A. Zlotin are Executive Vice Presidents, James E. Russell is
a Senior Vice President and the Treasurer, Stephen E. Cavan is a Senior Vice
President, General Counsel and an Assistant Secretary, Joseph W. Dello Russo
is a Senior Vice President and Chief Financial Officer, Robert T. Burns is a
Vice President and an Assistant Secretary of MFS, and Mary Kay Doherty is a
Vice President and Assistant Treasurer.
MASSACHUSETTS INVESTORS TRUST
MASSACHUSETTS INVESTORS GROWTH STOCK FUND
MFS GROWTH OPPORTUNITIES FUND
MFS GOVERNMENT SECURITIES FUND
MFS SERIES TRUST I
MFS SERIES TRUST V
MFS SERIES TRUST VI
MFS SERIES TRUST X
MFS GOVERNMENT LIMITED MATURITY FUND
A. Keith Brodkin is the Chairman and President, Stephen E.
Cavan is the Secretary, W. Thomas London is the Treasurer, James O. Yost, Vice
President of MFS, is the Assistant Treasurer, James R. Bordewick, Jr., Vice
President and Associate General Counsel of MFS, is the Assistant Secretary.
MFS SERIES TRUST II
A. Keith Brodkin is the Chairman and President, Leslie J.
Nanberg, Senior Vice President of MFS, is a Vice President, Stephen E. Cavan is
the Secretary, W. Thomas London is the Treasurer, James O. Yost is the
Assistant Treasurer, and James R. Bordewick, Jr., is the Assistant Secretary.
MFS GOVERNMENT MARKETS INCOME TRUST
MFS INTERMEDIATE INCOME TRUST
A. Keith Brodkin is the Chairman and President, Patricia A.
Zlotin, Executive Vice President of MFS and Leslie J. Nanberg, Senior Vice
President of MFS, are Vice Presidents, Stephen E. Cavan is the Secretary, W.
Thomas London is the Treasurer, James O. Yost is the Assistant Treasurer, and
James R. Bordewick, Jr., is the Assistant Secretary.
MFS SERIES TRUST III
A. Keith Brodkin is the Chairman and President, James T.
Swanson, Robert J. Manning, Cynthia M. Brown and Joan S. Batchelder, Senior
Vice Presidents of MFS, Bernard Scozzafava, Vice President of MFS, and Matthew
Fontaine, Assistant Vice President of MFS, are Vice Presidents, Sheila
Burns-Magnan and Daniel E. McManus, Assistant Vice Presidents of MFS, are
Assistant Vice Presidents, Stephen E. Cavan is the Secretary, W. Thomas London
is the Treasurer, James O. Yost is the Assistant Treasurer, and James R.
Bordewick, Jr., is the Assistant Secretary.
<PAGE> 160
MFS SERIES TRUST IV
MFS SERIES TRUST IX
A. Keith Brodkin is the Chairman and President, Robert A.
Dennis and Geoffrey L. Kurinsky, Senior Vice Presidents of MFS, are Vice
Presidents, Stephen E. Cavan is the Secretary, W. Thomas London is the
Treasurer, James O. Yost is the Assistant Treasurer and James R. Bordewick,
Jr., is the Assistant Secretary.
MFS SERIES TRUST VII
A. Keith Brodkin is the Chairman and President, Leslie J.
Nanberg and Stephen C. Bryant, Senior Vice Presidents of MFS, are Vice
Presidents, Stephen E. Cavan is the Secretary, W. Thomas London is the
Treasurer, James O. Yost is the Assistant Treasurer and James R. Bordewick,
Jr., is the Assistant Secretary.
MFS SERIES TRUST VIII
A. Keith Brodkin is the Chairman and President, Jeffrey L.
Shames, Leslie J. Nanberg, Patricia A. Zlotin, James T. Swanson and John D.
Laupheimer, Jr., Vice President of MFS, are Vice Presidents, Stephen E. Cavan
is the Secretary, W. Thomas London is the Treasurer, James O. Yost is the
Assistant Treasurer and James R. Bordewick, Jr., is the Assistant Secretary.
MFS MUNICIPAL SERIES TRUST
A. Keith Brodkin is the Chairman and President, Cynthia M.
Brown and Robert A. Dennis are Vice Presidents, David B. Smith, Geoffrey L.
Schechter and David R. King, Vice Presidents of MFS, are Vice Presidents,
Daniel E. McManus, Assistant Vice President of MFS, is an Assistant Vice
President, Stephen E. Cavan is the Secretary, W. Thomas London is the
Treasurer, James O. Yost is the Assistant Treasurer and James R. Bordewick,
Jr., is the Assistant Secretary.
MFS VARIABLE INSURANCE TRUST
MFS UNION STANDARD TRUST
MFS INSTITUTIONAL TRUST
A. Keith Brodkin is the Chairman and President, Stephen E.
Cavan is the Secretary, W. Thomas London is the Treasurer, James O. Yost is the
Assistant Treasurer and James R. Bordewick, Jr., is the Assistant Secretary.
MFS MUNICIPAL INCOME TRUST
A. Keith Brodkin is the Chairman and President, Cynthia M.
Brown and Robert J. Manning are Vice Presidents, Stephen E. Cavan is the
Secretary, W. Thomas London is the Treasurer, James O. Yost, is the Assistant
Treasurer and James R. Bordewick, Jr., is the Assistant Secretary.
MFS MULTIMARKET INCOME TRUST
MFS CHARTER INCOME TRUST
A. Keith Brodkin is the Chairman and President, Patricia A.
Zlotin, Leslie J. Nanberg and James T. Swanson are Vice Presidents, Stephen E.
Cavan is the Secretary, W. Thomas London is the
<PAGE> 161
Treasurer, James O. Yost, Vice President of MFS, is the Assistant Treasurer and
James R. Bordewick, Jr., is the Assistant Secretary.
MFS SPECIAL VALUE TRUST
A. Keith Brodkin is the Chairman and President, Jeffrey L.
Shames, Patricia A. Zlotin and Robert J. Manning are Vice Presidents, Stephen
E. Cavan is the Secretary, W. Thomas London is the Treasurer, and James O.
Yost, is the Assistant Treasurer and James R. Bordewick, Jr., is the Assistant
Secretary.
SGVAF
W. Thomas London is the Treasurer.
MIL
A. Keith Brodkin is a Director and the Chairman, Arnold D.
Scott and Jeffrey L. Shames are Directors, Ziad Malek, Senior Vice President of
MFS, is the President, Thomas J. Cashman, Jr., a Senior Vice President of MFS,
is a Senior Vice President, Stephen E. Cavan is a Director, Senior Vice
President and the Clerk, James R. Bordewick, Jr. is a Director, Vice President
and an Assistant Clerk, Robert T. Burns is an Assistant Clerk, Joseph W. Dello
Russo is the Treasurer and James E. Russell is the Assistant Treasurer.
MIL-UK
A. Keith Brodkin is a Director and the Chairman, Arnold D.
Scott, Jeffrey L. Shames, and James R. Bordewick, Jr., are Directors, Stephen
E. Cavan is a Director and the Secretary, Ziad Malek is the President, Joseph
W. Dello Russo is the Treasurer, and Robert T. Burns is the Assistant
Secretary.
MIL FUNDS
A. Keith Brodkin is the Chairman, President and a Director,
Richard B. Bailey, John A. Brindle and Richard W. S. Baker are Directors,
Stephen E. Cavan is the Secretary, W. Thomas London is the Treasurer, James O.
Yost is the Assistant Treasurer and James R. Bordewick, Jr., is the Assistant
Secretary, and Ziad Malek is a Senior Vice President.
MFS MERIDIAN FUNDS
A. Keith Brodkin is the Chairman, President and a Director,
Richard B. Bailey, John A. Brindle, Richard W. S. Baker, Arnold D. Scott and
Jeffrey L. Shames are Directors, Stephen E. Cavan is the Secretary, W. Thomas
London is the Treasurer, James R. Bordewick, Jr., is the Assistant Secretary,
James O. Yost is the Assistant Treasurer, and Ziad Malek is a Senior Vice
President.
MFD
A. Keith Brodkin is the Chairman and a Director, Arnold D.
Scott and Jeffrey L. Shames are Directors, William W. Scott, Jr., an Executive
Vice President of MFS, is the President, Stephen E. Cavan is the Secretary,
Robert T. Burns is the Assistant Secretary, Joseph W. Dello Russo is the
Treasurer, and James E. Russell is the Assistant Treasurer.
<PAGE> 162
CIAI
A. Keith Brodkin is the Chairman and a Director, Arnold D.
Scott and Jeffrey L. Shames are Directors, Cynthia Orcott is President, Bruce
C. Avery is the Vice President, Joseph W. Dello Russo is the Treasurer, James
E. Russell is the Assistant Treasurer, Stephen E. Cavan is the Secretary, and
Robert T. Burns is the Assistant Secretary.
MFSC
A. Keith Brodkin is the Chairman and a Director, Arnold D.
Scott and Jeffrey L. Shames are Directors, Joseph A. Recomendes, a Senior Vice
President of MFS, is Vice Chairman and a Director, Janet A. Clifford is the
Executive Vice President, Joseph W. Dello Russo is the Treasurer, James E.
Russell is the Assistant Treasurer, Stephen E. Cavan is the Secretary, and
Robert T. Burns is the Assistant Secretary.
AMI
A. Keith Brodkin is the Chairman and a Director, Jeffrey L.
Shames, and Arnold D. Scott are Directors, Thomas J. Cashman, Jr., is the
President and a Director, Leslie J. Nanberg is a Senior Vice President, a
Managing Director and a Director, George F. Bennett, Carol A. Corley, John A.
Gee, Brianne Grady and Kevin R. Parke are Senior Vice Presidents and Managing
Directors, Joseph W. Dello Russo is the Treasurer, James E. Russell is the
Assistant Treasurer and Robert T. Burns is the Secretary.
RSI
William W. Scott, Jr., Joseph A. Recomendes and Bruce C. Avery
are Directors, Arnold D. Scott is the Chairman and a Director, Douglas C. Grip,
a Senior Vice President of MFS, is the President, Joseph W. Dello Russo is the
Treasurer, James E. Russell is the Assistant Treasurer, Stephen E. Cavan is
the Secretary, Robert T. Burns is the Assistant Secretary and Sharon A.
Brovelli is a Senior Vice President.
In addition, the following persons, Directors or officers of
MFS, have the affiliations indicated:
A. Keith Brodkin Director, Sun Life Assurance Company of Canada
(U.S.), One Sun Life Executive Park, Wellesley
Hills, Massachusetts
Director, Sun Life Insurance and Annuity Company of
New York, 67 Broad Street, New York, New York
John R. Gardner President and a Director, Sun Life Assurance
Company of Canada, Sun Life Centre, 150 King
Street West, Toronto, Ontario, Canada (Mr.
Gardner is also an officer and/or Director of
various subsidiaries and affiliates of Sun Life)
John D. McNeil Chairman, Sun Life Assurance Company of Canada, Sun
Life Centre, 150 King Street West, Toronto,
Ontario, Canada (Mr. McNeil is also an officer
<PAGE> 163
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:
<TABLE>
<CAPTION>
NAME ADDRESS
---- -------
<S> <C>
Massachusetts Financial Services 500 Boylston Street
Company (investment adviser) Boston, MA 02116
MFS Fund Distributors, Inc. 500 Boylston Street
(principal underwriter) Boston, MA 02116
State Street Bank and State Street South
Trust Company (custodian) 5 - West
North Quincy, MA 02171
MFS Service Center, Inc. 500 Boylston Street
(transfer agent) Boston, MA 02116
</TABLE>
ITEM 31. MANAGEMENT SERVICES
Not applicable.
ITEM 32. UNDERTAKINGS
(a) Not applicable.
(b) Not applicable.
(c) Registrant undertakes to furnish each person to whom a
prospectus is delivered with a copy of its latest annual report to shareholders
upon request and without charge.
<PAGE> 164
(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> 165
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 29th day of December, 1995.
MFS SERIES TRUST IV
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 December 29, 1995.
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<S> <C>
A. KEITH BRODKIN* Chairman, President (Principal Executive
- ------------------------- Officer) and Trustee
A. Keith Brodkin
W. THOMAS LONDON* Treasurer (Principal Financial Officer
- ------------------------- and Principal Accounting Officer)
W. Thomas London
RICHARD B. BAILEY* Trustee
- -------------------------
Richard B. Bailey
PETER G. HARWOOD* Trustee
- -------------------------
Peter G. Harwood
J. ATWOOD IVES* Trustee
- -------------------------
J. Atwood Ives
</TABLE>
<PAGE> 166
<TABLE>
<S> <C>
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
</TABLE>
*By: JAMES R. BORDEWICK, JR.
Name: James R. Bordewick, Jr.
as Attorney-in-fact
Executed by James R. Bordewick, Jr. on
behalf of those indicated pursuant
to a Power of Attorney dated
September 21, 1994.
<PAGE> 167
INDEX TO EXHIBITS
-----------------
EXHIBIT NO. DESCRIPTION OF EXHIBIT
- ----------- ----------------------
10 24e-2 Consent and Opinion of Counsel.
11 Consent of Deloitte & Touche.
27 Financial Data Schedules for each class of each series.
<PAGE> 1
EXHIBIT NO. 99.10
December 29, 1995
MFS Series Trust IV
500 Boylston Street
Boston, MA 02116
Re: POST-EFFECTIVE AMENDMENT NO. 28 TO REGISTRATION STATEMENT ON FORM N-1A
(FILE NO. 2-54607) (THE "REGISTRATION STATEMENT") FOR MFS SERIES TRUST
IV (THE "TRUST")
Gentlemen:
I am Vice President and Associate General Counsel of Massachusetts
Financial Services Company, which serves as investment adviser to 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 September 8, 1975, and executed and delivered in
Boston, Massachusetts, as amended and restated January 19, 1995 (the
"Declaration of Trust"). The beneficial interest thereunder is represented by
transferable shares without par value. The Trustees have the powers set forth
in the Declaration of Trust, subject to the terms, provisions and conditions
therein provided.
I am of the opinion that the legal requirements have been complied with
in the creation of the Trust, and that said Declaration of Trust is legal and
valid.
Under Article III, Section 3.4 and Article VI, Section 6.4 of the
Declaration of Trust, the Trustees are empowered, in their discretion, from
time to time to issue shares of the Trust for such amount and type of
consideration, at such time or times and on such terms as the Trustees may deem
best. Under Article VI, Section 6.1, it is provided that the number of Shares of
Beneficial Interest (without par value) ("Shares") authorized to be issued under
the Declaration of Trust is unlimited.
By vote adopted on January 18, 1995, the Trustees of the Trust determined
to sell to the public the authorized but unissued shares of beneficial interest
of the Trust for cash at a price which will net the Trust (before taxes) not
less than the net asset value thereof, as defined in the Trust's By-Laws,
determined next after the sale is made or at some later time after such sale.
<PAGE> 2
MFS Series Trust IV
December 29, 1995
Page Two
The Trust is about to register under the Securities Act of 1933, as
amended, 58,684,132 shares of beneficial interest by Post-Effective Amendment
No. 28 to the Trust's Registration Statement. W. Thomas London, Treasurer of the
Trust, has certified that the Trust received cash consideration for the issuance
of each of the Shares of the Trust sold during the Trust's fiscal year ended
August 31, 1995, including the 2,721,523,133 Shares which were sold in reliance
upon Rule 24f-2 of the General Rules and Regulations under the Investment
Company Act of 1940, as amended, at a price which netted the Trust (before
taxes) not less than the net asset value per share, as defined in the Trust's
Declaration of Trust, determined next after the sale was made.
I am of the opinion that all necessary Trust action precedent to the
issue of the Shares of the Trust, comprising the shares covered by
Post-Effective Amendment No. 28 to the Registration Statement has been duly
taken, and that all such shares may legally and validly be issued for cash, and
when sold will be fully paid and nonassessable by the Trust upon receipt by the
Trust or its agent of consideration thereof in accordance with the terms
described in the Registration Statement, subject to compliance with the
Securities Act of 1933, the Investment Company Act of 1940 and applicable state
laws regulating the sale of securities.
I consent to your filing this opinion with the Securities and Exchange
Commission as an exhibit to Post-Effective Amendment No. 28 to the Registration
Statement.
Very truly yours,
JAMES R. BORDEWICK, JR.
James R. Bordewick, Jr.
JRB/bjn
<PAGE> 1
EXHIBIT NO. 99.11
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in this Post-Effective
Amendment No. 28 to Registration Statement No. 2-54607 of MFS Series Trust IV of
our reports each dated October 6, 1995 appearing in the annual reports to
shareholders for the year ended August 31, 1995 of MFS Municipal Bond Fund, MFS
OTC Fund, MFS Money Market Fund and MFS Government Money Market Fund, each a
series of MFS Series Trust IV and to the references to us under the headings
"Condensed Financial Information" in each 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
Boston, Massachusetts
December 27, 1995
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF MFS MONEY MARKET FUND AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<SERIES>
<NUMBER> 01
<NAME> MFS MONEY MARKET FUND
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> AUG-31-1995
<PERIOD-END> AUG-31-1995
<INVESTMENTS-AT-COST> 415,623,186
<INVESTMENTS-AT-VALUE> 415,623,186
<RECEIVABLES> 948,218
<ASSETS-OTHER> 7,013
<OTHER-ITEMS-ASSETS> 46,471
<TOTAL-ASSETS> 416,624,888
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 5,826,969
<TOTAL-LIABILITIES> 5,826,969
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 410,797,919
<SHARES-COMMON-STOCK> 410,797,919
<SHARES-COMMON-PRIOR> 435,779,531
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 0
<NET-ASSETS> 410,797,919
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 26,215,863
<OTHER-INCOME> 0
<EXPENSES-NET> 3,509,988
<NET-INVESTMENT-INCOME> 22,705,875
<REALIZED-GAINS-CURRENT> 0
<APPREC-INCREASE-CURRENT> 0
<NET-CHANGE-FROM-OPS> 22,705,875
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 22,705,875
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 2,481,903,487
<NUMBER-OF-SHARES-REDEEMED> 2,526,408,894
<SHARES-REINVESTED> 19,523,795
<NET-CHANGE-IN-ASSETS> (24,981,612)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 2,224,748
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 3,509,988
<AVERAGE-NET-ASSETS> 461,055,129
<PER-SHARE-NAV-BEGIN> 1.00
<PER-SHARE-NII> 0.05
<PER-SHARE-GAIN-APPREC> 0.00
<PER-SHARE-DIVIDEND> 0.05
<PER-SHARE-DISTRIBUTIONS> 0.00
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 1.00
<EXPENSE-RATIO> 0.76
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF MFS GOVERNMENT MONEY MARKET FUND AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<SERIES>
<NUMBER> 02
<NAME> MFS GOVERNMENT MONEY MARKET FUND
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> AUG-31-1995
<PERIOD-END> AUG-31-1995
<INVESTMENTS-AT-COST> 37,421,315
<INVESTMENTS-AT-VALUE> 37,421,315
<RECEIVABLES> 1,090,756
<ASSETS-OTHER> 535
<OTHER-ITEMS-ASSETS> 19,293
<TOTAL-ASSETS> 38,531,899
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 92,117
<TOTAL-LIABILITIES> 92,117
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 38,439,782
<SHARES-COMMON-STOCK> 38,439,782
<SHARES-COMMON-PRIOR> 38,346,997
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 0
<NET-ASSETS> 0
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 2,188,724
<OTHER-INCOME> 0
<EXPENSES-NET> 326,130
<NET-INVESTMENT-INCOME> 1,862,594
<REALIZED-GAINS-CURRENT> 0
<APPREC-INCREASE-CURRENT> 0
<NET-CHANGE-FROM-OPS> 1,862,594
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 1,862,594
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 130,386,802
<NUMBER-OF-SHARES-REDEEMED> 131,986,405
<SHARES-REINVESTED> 1,692,388
<NET-CHANGE-IN-ASSETS> 92,785
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 193,160
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 326,130
<AVERAGE-NET-ASSETS> 38,626,559
<PER-SHARE-NAV-BEGIN> 1.00
<PER-SHARE-NII> 0.05
<PER-SHARE-GAIN-APPREC> 0.00
<PER-SHARE-DIVIDEND> 0.05
<PER-SHARE-DISTRIBUTIONS> 0.00
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 1.00
<EXPENSE-RATIO> 0.84
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF MFS OTC FUND CLASS A AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<SERIES>
<NUMBER> 041
<NAME> MFS OTC FUND CLASS A
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> AUG-31-1995
<PERIOD-END> AUG-31-1995
<INVESTMENTS-AT-COST> 92,105,252
<INVESTMENTS-AT-VALUE> 96,065,510
<RECEIVABLES> 1,287,481
<ASSETS-OTHER> 1,227
<OTHER-ITEMS-ASSETS> 1,653
<TOTAL-ASSETS> 97,355,871
<PAYABLE-FOR-SECURITIES> 1,978,900
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 232,755
<TOTAL-LIABILITIES> 2,211,655
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 79,907,769
<SHARES-COMMON-STOCK> 2,996,256
<SHARES-COMMON-PRIOR> 2,048,100
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 3,263
<ACCUMULATED-NET-GAINS> 11,279,452
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 3,960,258
<NET-ASSETS> 95,144,216
<DIVIDEND-INCOME> 509,038
<INTEREST-INCOME> 173,982
<OTHER-INCOME> 0
<EXPENSES-NET> 1,559,325
<NET-INVESTMENT-INCOME> (876,305)
<REALIZED-GAINS-CURRENT> 14,682,099
<APPREC-INCREASE-CURRENT> 959,367
<NET-CHANGE-FROM-OPS> 14,765,161
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 918,344
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 4,680,448
<NUMBER-OF-SHARES-REDEEMED> 3,837,263
<SHARES-REINVESTED> 104,971
<NET-CHANGE-IN-ASSETS> 40,432,698
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 1,903
<OVERDIST-NET-GAINS-PRIOR> 121,324
<GROSS-ADVISORY-FEES> 594,194
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1,559,325
<AVERAGE-NET-ASSETS> 79,156,526
<PER-SHARE-NAV-BEGIN> 8.68
<PER-SHARE-NII> (0.03)
<PER-SHARE-GAIN-APPREC> 1.69
<PER-SHARE-DIVIDEND> 0.00
<PER-SHARE-DISTRIBUTIONS> 0.26
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 10.08
<EXPENSE-RATIO> 1.29
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF MFS OTC FUND CLASS B AND IS QUALIFIED IN ITS ENTIRETY BE
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<SERIES>
<NUMBER> 042
<NAME> MFS OTC FUND CLASS B
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> AUG-31-1995
<PERIOD-END> AUG-31-1995
<INVESTMENTS-AT-COST> 92,105,252
<INVESTMENTS-AT-VALUE> 96,065,510
<RECEIVABLES> 1,287,481
<ASSETS-OTHER> 1,227
<OTHER-ITEMS-ASSETS> 1,653
<TOTAL-ASSETS> 97,355,871
<PAYABLE-FOR-SECURITIES> 1,978,900
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 232,755
<TOTAL-LIABILITIES> 2,211,655
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 79,907,769
<SHARES-COMMON-STOCK> 6,213,651
<SHARES-COMMON-PRIOR> 4,288,279
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 3,263
<ACCUMULATED-NET-GAINS> 11,279,452
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 3,960,258
<NET-ASSETS> 95,144,216
<DIVIDEND-INCOME> 509,038
<INTEREST-INCOME> 173,982
<OTHER-INCOME> 0
<EXPENSES-NET> 1,559,325
<NET-INVESTMENT-INCOME> (876,305)
<REALIZED-GAINS-CURRENT> 14,682,099
<APPREC-INCREASE-CURRENT> 959,367
<NET-CHANGE-FROM-OPS> 14,765,161
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 1,440,882
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 7,325,159
<NUMBER-OF-SHARES-REDEEMED> 5,554,198
<SHARES-REINVESTED> 154,411
<NET-CHANGE-IN-ASSETS> 40,432,698
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 1,903
<OVERDIST-NET-GAINS-PRIOR> 121,324
<GROSS-ADVISORY-FEES> 594,194
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1,559,325
<AVERAGE-NET-ASSETS> 79,156,526
<PER-SHARE-NAV-BEGIN> 8.59
<PER-SHARE-NII> (0.13)
<PER-SHARE-GAIN-APPREC> 1.69
<PER-SHARE-DIVIDEND> 0.00
<PER-SHARE-DISTRIBUTIONS> 0.21
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 9.94
<EXPENSE-RATIO> 2.29
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF MFS OTC FUND CLASS C AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<SERIES>
<NUMBER> 043
<NAME> MFS OTC FUND CLASS C
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> AUG-31-1995
<PERIOD-END> AUG-31-1995
<INVESTMENTS-AT-COST> 92,105,252
<INVESTMENTS-AT-VALUE> 96,065,510
<RECEIVABLES> 1,287,481
<ASSETS-OTHER> 1,227
<OTHER-ITEMS-ASSETS> 1,653
<TOTAL-ASSETS> 97,355,871
<PAYABLE-FOR-SECURITIES> 1,978,900
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 232,755
<TOTAL-LIABILITIES> 2,211,655
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 79,907,769
<SHARES-COMMON-STOCK> 323,819
<SHARES-COMMON-PRIOR> 10,122
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 3,263
<ACCUMULATED-NET-GAINS> 11,279,452
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 3,960,258
<NET-ASSETS> 95,144,216
<DIVIDEND-INCOME> 509,038
<INTEREST-INCOME> 173,982
<OTHER-INCOME> 0
<EXPENSES-NET> 1,559,325
<NET-INVESTMENT-INCOME> (876,305)
<REALIZED-GAINS-CURRENT> 14,682,099
<APPREC-INCREASE-CURRENT> 959,367
<NET-CHANGE-FROM-OPS> 14,765,161
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 47,151
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 948,839
<NUMBER-OF-SHARES-REDEEMED> 640,099
<SHARES-REINVESTED> 4,957
<NET-CHANGE-IN-ASSETS> 40,432,698
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 1,903
<OVERDIST-NET-GAINS-PRIOR> 121,324
<GROSS-ADVISORY-FEES> 594,194
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1,559,325
<AVERAGE-NET-ASSETS> 79,156,526
<PER-SHARE-NAV-BEGIN> 8.61
<PER-SHARE-NII> (0.14)
<PER-SHARE-GAIN-APPREC> 1.69
<PER-SHARE-DIVIDEND> 0.00
<PER-SHARE-DISTRIBUTIONS> 0.25
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 9.91
<EXPENSE-RATIO> 2.30
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF MFS MUNICIPAL BOND FUND CLASS A AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<SERIES>
<NUMBER> 031
<NAME> MFS MUNICIPAL BOND FUND CLASS A
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> AUG-31-1995
<PERIOD-END> AUG-31-1995
<INVESTMENTS-AT-COST> 1,793,240,495
<INVESTMENTS-AT-VALUE> 1,939,360,784
<RECEIVABLES> 32,967,864
<ASSETS-OTHER> 26,627
<OTHER-ITEMS-ASSETS> 44,051,251
<TOTAL-ASSETS> 2,016,406,526
<PAYABLE-FOR-SECURITIES> 5,435,255
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 6,400,624
<TOTAL-LIABILITIES> 11,835,879
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 1,886,722,749
<SHARES-COMMON-STOCK> 179,857,494
<SHARES-COMMON-PRIOR> 190,107,273
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 4,956,742
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 23,353,148
<ACCUM-APPREC-OR-DEPREC> 146,157,788
<NET-ASSETS> 2,004,570,647
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 124,252,599
<OTHER-INCOME> 0
<EXPENSES-NET> 12,449,448
<NET-INVESTMENT-INCOME> 111,803,151
<REALIZED-GAINS-CURRENT> 16,663,804
<APPREC-INCREASE-CURRENT> 47,294,564
<NET-CHANGE-FROM-OPS> 142,433,911
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 109,114,422
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 93,895,405
<NUMBER-OF-SHARES-REDEEMED> 110,192,105
<SHARES-REINVESTED> 6,046,921
<NET-CHANGE-IN-ASSETS> (71,067,650)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 6,722,584
<OVERDIST-NET-GAINS-PRIOR> 5,354,109
<GROSS-ADVISORY-FEES> 8,210,290
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 12,449,448
<AVERAGE-NET-ASSETS> 1,970,332,025
<PER-SHARE-NAV-BEGIN> 10.68
<PER-SHARE-NII> 0.60
<PER-SHARE-GAIN-APPREC> 0.15
<PER-SHARE-DIVIDEND> 0.00
<PER-SHARE-DISTRIBUTIONS> 0.60
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 10.83
<EXPENSE-RATIO> 0.61
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF MFS MUNICIPAL BOND FUND CLASS B AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<SERIES>
<NUMBER> 032
<NAME> MFS MUNICIPAL BOND FUND CLASS B
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> AUG-31-1995
<PERIOD-END> AUG-31-1995
<INVESTMENTS-AT-COST> 1,793,240,495
<INVESTMENTS-AT-VALUE> 1,939,360,784
<RECEIVABLES> 32,967,864
<ASSETS-OTHER> 26,627
<OTHER-ITEMS-ASSETS> 44,051,251
<TOTAL-ASSETS> 2,016,406,526
<PAYABLE-FOR-SECURITIES> 5,435,255
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 6,400,624
<TOTAL-LIABILITIES> 11,835,879
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 1,886,722,749
<SHARES-COMMON-STOCK> 0
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 4,956,742
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 23,353,148
<ACCUM-APPREC-OR-DEPREC> 146,157,788
<NET-ASSETS> 2,004,570,647
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 124,252,599
<OTHER-INCOME> 0
<EXPENSES-NET> 12,449,448
<NET-INVESTMENT-INCOME> 111,803,151
<REALIZED-GAINS-CURRENT> 16,663,804
<APPREC-INCREASE-CURRENT> 47,294,564
<NET-CHANGE-FROM-OPS> 142,433,911
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 2,258,122
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 2,382,993
<NUMBER-OF-SHARES-REDEEMED> 1,559,038
<SHARES-REINVESTED> 143,928
<NET-CHANGE-IN-ASSETS> (71,067,650)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 6,722,584
<OVERDIST-NET-GAINS-PRIOR> 5,354,109
<GROSS-ADVISORY-FEES> 8,210,290
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 12,449,448
<AVERAGE-NET-ASSETS> 1,970,332,025
<PER-SHARE-NAV-BEGIN> 10.67
<PER-SHARE-NII> 0.49
<PER-SHARE-GAIN-APPREC> 0.16
<PER-SHARE-DIVIDEND> 0.00
<PER-SHARE-DISTRIBUTIONS> 0.49
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 10.83
<EXPENSE-RATIO> 1.60
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
