<PAGE> 1
As filed with the Securities and Exchange Commission on December 27, 1996
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. 30
AND
REGISTRATION STATEMENT
UNDER
THE INVESTMENT COMPANY ACT OF 1940
AMENDMENT NO. 26
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)
/ / immediately upon filing pursuant to paragraph (b)
/X/ on December 29, 1996 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, 1996 on October 29, 1996.
<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
</TABLE>
<PAGE> 3
<TABLE>
<CAPTION>
STATEMENT OF
ITEM NUMBER ADDITIONAL
FORM N-1A, PART A PROSPECTUS CAPTION INFORMATION CAPTION
- ----------------- ------------------ -------------------
<S> <C> <C>
(b) Front Cover Page; Management *
of the Fund - Investment Adviser;
Back Cover Page
(c), (d) Management of the Fund - *
Investment Adviser
(e) * *
(f) Management of the Fund - *
Shareholder Servicing Agent;
Back Cover Page
(g) Expense Summary; Condensed *
Financial Information; Expenses
(h) Investment Objective and *
Policies - Portfolio Trading
5A (a), (b), (c) ** **
6 (a) Information Concerning Shares of *
the Fund - Description of Shares,
Voting Rights and Liabilities;
Information Concerning Shares of
the Fund - Redemptions and
Repurchases; Information
Concerning Shares of the Fund -
Purchases; Information Concerning
Shares of the Fund - Exchanges
(b), (c), (d) * *
(e) Shareholder Services *
(f) Information Concerning Shares of *
the Fund - Distributions;
Shareholder Services - Distribution
Options
</TABLE>
<PAGE> 4
<TABLE>
<CAPTION>
STATEMENT OF
ITEM NUMBER ADDITIONAL
FORM N-1A, PART A PROSPECTUS CAPTION INFORMATION CAPTION
- ----------------- ------------------ -------------------
<S> <C> <C>
(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
(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 B 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
</TABLE>
<PAGE> 6
<TABLE>
<CAPTION>
STATEMENT OF
ITEM NUMBER ADDITIONAL
FORM N-1A, PART B PROSPECTUS CAPTION INFORMATION CAPTION
- ----------------- ------------------ -------------------
<S> <C> <C>
(g) * *
(h) * Management of the Fund -
Custodian; Independent
Auditors and Financial
Statements; Back Cover Page
(i) * Management of the Fund -
Shareholder Servicing Agent
17 (a), (b), (c), * Portfolio Transactions and
(d), (e) Brokerage Commissions
18 (a) Information Concerning Shares Description of Shares, 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;
Appendix B
</TABLE>
<PAGE> 7
<TABLE>
<CAPTION>
STATEMENT OF
ITEM NUMBER ADDITIONAL
FORM N-1A, PART B PROSPECTUS CAPTION INFORMATION CAPTION
- ----------------- ------------------ -------------------
<S> <C> <C>
23 * Independent Auditors and
Financial Statements
</TABLE>
- ------------------------
* Not Applicable
** Contained in Annual Report
<PAGE> 8
MFS(R) MONEY MARKET FUND PROSPECTUS
MFS(R) GOVERNMENT MONEY MARKET FUND JANUARY 1, 1997
(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................................................... 9
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 "Information Concerning Shares of the
Funds -- 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, dated January 1, 1997, as amended or supplemented from time to time
(the "SAI"), which contains more detailed information about each of the Funds.
The SAI is incorporated into this Prospectus by reference. See page 13 for a
further description of the information set forth in the SAI. A copy of the SAI
may be obtained without charge by contacting the Shareholder Servicing Agent
(see back cover for address and phone number). The SEC maintains an Internet
World Wide Web site that contains the SAI, materials that are incorporated by
reference into this Prospectus and the SAI, and other information regarding the
Funds. This Prospectus is available on the Adviser's Internet World Wide Web
site at http://www.mfs.com.
INVESTORS SHOULD READ THIS PROSPECTUS AND RETAIN IT FOR FUTURE REFERENCE.
<PAGE> 9
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)
ANNUAL OPERATING EXPENSES OF THE FUNDS (AS A PERCENTAGE OF AVERAGE NET ASSETS):
<TABLE>
<CAPTION>
MFS MONEY MFS GOVERNMENT
MARKET FUND MONEY MARKET FUND
----------- -----------------
<S> <C> <C>
Management Fees................................................ 0.48% 0.48%
Other Expenses(2).............................................. 0.31% 0.41%
--- ---
Total Operating Expenses....................................... 0.79% 0.89%
</TABLE>
- ---------------
(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).
(2) Each Fund has an expense offset arrangement which reduces the Fund's
custodian fee based upon the amount of cash maintained by the Fund with its
custodian and dividend disbursing agent, and may enter into other such
arrangements and directed brokerage arrangements (which would also have the
effect of reducing the Fund's expenses). Any such fee reductions are not
reflected under "Other Expenses."
EXAMPLE OF EXPENSES
-------------------
<TABLE>
<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 $25 $44 $ 98
annual return and (2) redemption at the
end of each of the time periods indicated: MFS GOVERNMENT
MONEY MARKET FUND $9 $28 $49 $110
</TABLE>
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.
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> 10
3. CONDENSED FINANCIAL INFORMATION
The following information has been audited for at least the latest five fiscal
years 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, given upon their authority as experts in accounting and
auditing. Each Fund's current independent auditors are Deloitte & Touche LLP.
FINANCIAL HIGHLIGHTS
MFS GOVERNMENT MONEY MARKET FUND
<TABLE>
<CAPTION>
TEN MONTHS
YEAR ENDED AUGUST 31, ENDED YEAR ENDED OCTOBER 31,
--------------------- AUGUST 31, -----------------------------------------
1996 1995 1994 1993 1992 1991 1990
---------- -------- ---------- -------- -------- -------- --------
<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 $ 0.05 $ 0.02 $ 0.02 $ 0.03 $ 0.06 $ 0.07
------- ------- ------- ------- ------- ------- -------
Less distributions declared to shareholders
from net investment income................. $ (0.05) $ (0.05) $ (0.02) $ (0.02) $ (0.03) $ (0.06) $ (0.07)
------- ------- ------- ------- ------- ------- -------
Net asset value -- end of period............ $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
======= ======= ======= ======= ======= ======= =======
Total return................................ 4.73% 4.92% 2.64%+ 2.33% 3.27% 5.68% 7.55%
------- ------- ------- ------- ------- ------- -------
Ratios (to average net assets)/Supplemental
data:
Expenses##............................... 0.89% 0.84% 1.05%+ 0.99% 0.87% 0.83% 0.80%
------- ------- ------- ------- ------- ------- -------
Net investment income.................... 4.64% 4.82% 2.64%+ 2.20% 3.28% 5.53% 7.34%
------- ------- ------- ------- ------- ------- -------
Net assets at end of period (000 omitted)... $ 42,499 $ 38,440 $ 38,347 $ 35,576 $ 47,629 $ 50,655 $ 53,701
------- ------- ------- ------- ------- ------- -------
<CAPTION>
1989 1988 1987 1986
-------- -------- -------- --------
<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.................... $ 0.08 $ 0.06 $ 0.05 $ 0.06
------- ------- ------- -------
Less distributions declared to shareholders
from net investment income................. $ (0.08) $ (0.06) $ (0.05) $ (0.06)
------- ------- ------- -------
Net asset value -- end of period............ $ 1.00 $ 1.00 $ 1.00 $ 1.00
======= ======= ======= =======
Total return................................ 8.61% 6.47% 5.73% 6.33%
------- ------- ------- -------
Ratios (to average net assets)/Supplemental
data:
Expenses##............................... 0.85% 0.74% 0.59% 0.66%
------- ------- ------- -------
Net investment income.................... 8.29% 6.29% 5.63% 6.07%
------- ------- ------- -------
Net assets at end of period (000 omitted)... $ 51,619 $ 50,343 $ 59,875 $ 63,331
------- ------- ------- -------
</TABLE>
FINANCIAL HIGHLIGHTS
MFS MONEY MARKET FUND
<TABLE>
<CAPTION>
TEN MONTHS
YEAR ENDED AUGUST 31, ENDED YEAR ENDED OCTOBER 31,
--------------------- AUGUST 31, -----------------------------------------
1996 1995 1994 1993 1992 1991 1990
---------- -------- ---------- -------- -------- -------- --------
<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 $ 0.05 $ 0.02 $ 0.02 $ 0.03 $ 0.06 $ 0.07
-------- -------- -------- -------- -------- -------- --------
Less distributions declared to shareholders
from net investment income................. $ (0.05) $ (0.05) $ (0.02) $ (0.02) $ (0.03) $ (0.06) $ (0.07)
-------- -------- -------- -------- -------- -------- --------
Net asset value -- end of period............ $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
======== ======== ======== ======== ======== ======== ========
Total return................................ 4.86% 5.04% 2.91%+ 2.39% 3.35% 6.07% 7.99%
-------- -------- -------- -------- -------- -------- --------
Ratios (to average net assets)/Supplemental
data:
Expenses##............................... 0.79% 0.76% 0.78%+ 0.83% 0.87% 0.82% 0.76%
-------- -------- -------- -------- -------- -------- --------
Net investment income.................... 4.78% 4.92% 2.95%+ 2.39% 3.36% 5.94% 7.60%
-------- -------- -------- -------- -------- -------- --------
Net assets at end of period (000 omitted)... $644,205 $410,798 $435,780 $350,316 $448,825 $541,945 $677,164
-------- -------- -------- -------- -------- -------- --------
<CAPTION>
1989 1988 1987 1986
-------- -------- -------- --------
<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.................... $ 0.08 $ 0.07 $ 0.06 $ 0.06
-------- -------- -------- --------
Less distributions declared to shareholders
from net investment income................. $ (0.08) $ (0.07) $ (0.06) $ (0.06)
-------- -------- -------- --------
Net asset value -- end of period............ $ 1.00 $ 1.00 $ 1.00 $ 1.00
======== ======== ======== ========
Total return................................ 8.84% 7.12% 6.06% 6.80%
-------- -------- -------- --------
Ratios (to average net assets)/Supplemental
data:
Expenses##............................... 0.83% 0.83% 0.82% 0.78%
-------- -------- -------- --------
Net investment income.................... 8.45% 6.72% 5.77% 6.53%
-------- -------- -------- --------
Net assets at end of period (000 omitted)... $676,382 $664,895 $716,528 $623,568
-------- -------- -------- --------
</TABLE>
- ---------------
<TABLE>
<C> <S>
+ Annualized.
## For fiscal years ending after September 1, 1995, the Fund's expenses are calculated without reduction for fees
paid indirectly.
</TABLE>
3
<PAGE> 11
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 Services ("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> 12
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 as a portfolio manager 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, 1996, MFS received fees under the Advisory Agreement of $2,374,567
and $205,023 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% of each 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(@) 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 Institutional Advisors, Inc., provide
investment advice to substantial private clients.
MFS is America's oldest mutual fund organization. MFS and its predecessor
organizations have a history of money management dating from 1924 and the
founding of the first mutual fund in the United States, Massachusetts Investors
Trust. Net assets under the management of the MFS organization were
approximately $52.3 billion on behalf of approximately 2.2 million investor
accounts as of November 30, 1996. As of such date, the MFS organization managed
approximately $20.3 billion of assets in fixed income securities and
approximately $28.1 billion of assets in equity securities. MFS is a subsidiary
of Sun Life of Canada (U.S.), which in turn is a wholly owned subsidiary of Sun
Life Assurance Company of Canada ("Sun Life"). The Directors of MFS are A. Keith
Brodkin, Jeffrey L. Shames, Arnold D. Scott, John D. McNeil and Donald A.
Stewart. Mr. Brodkin is the Chairman, Mr. Shames is the President and Mr. Scott
is the Secretary and a Senior Executive Vice President of MFS. Messrs. McNeil
and Stewart are the Chairman and 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 share their views on a variety
of investment related issues, such as the economy, securities markets, portfolio
securities and their issuers, investment recommendations, strategies and
techniques, risk analysis, trading strategies and other portfolio management
matters. MFS has access to the extensive international equity investment
expertise of Foreign & Colonial, and Foreign & Colonial has access to the
extensive U.S. equity investment expertise of MFS. MFS and Foreign & Colonial
each have investment personnel working in each other's offices in Boston and
London, respectively.
In certain instances there may be securities which are suitable for the Fund's
portfolio as well as for portfolios of other clients of MFS or clients of
Foreign & Colonial. Some simultaneous transactions are inevitable when several
clients receive investment advice from MFS and Foreign & Colonial, particularly
when the same security is suitable for more than one client. While in some cases
this arrangement could have a detrimental effect on the price or availability of
the security as far as the Fund is concerned, in other cases, 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.
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 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 or restrict any specific purchase or
exchange request. In the event that the Fund or MFD rejects an exchange request,
neither the redemption nor the purchase side of the exchange will be processed.
The Fund is not designed for professional market timing organizations or other
entities using programmed or frequent exchanges. The Fund defines a "market
timer" as an individual, or organization acting on behalf of one or more
individuals, if (i) the individual or organization makes three or more exchange
requests out of the Fund per calendar year and (ii) any one of such exchange
requests represents shares equal in value to 1/2 of 1% or more of the Fund's net
assets at the time of the request.
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Accounts under common ownership or control, including accounts administered by
market timers, will be aggregated for purposes of this definition.
As noted above, the Fund and MFD each reserves the right to reject or restrict
any specific purchase and exchange request and, in addition, may impose specific
limitations with respect to market timers, including delaying for up to seven
days the purchase side of an exchange request by market timers or specifically
rejecting or otherwise restricting purchase or exchange requests by market
timers. Other funds in the MFS Family of Funds may have different and/or more or
less restrictive policies with respect to market timers than the Fund. These
policies are disclosed in the prospectuses of these other MFS Funds.
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 previously acquired through an exchange from Class C shares or Class I
shares of a MFS Fund may be exchanged for Class C shares or Class I shares,
respectively, of any of the other MFS Funds at net asset value (if available for
sale and if the purchaser is eligible to purchase that class of shares). 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. 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
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<PAGE> 15
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.
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 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
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<PAGE> 16
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.
IN-KIND DISTRIBUTIONS: The Trust agrees to redeem shares of the Fund solely in
cash up to the lesser of $250,000 or 1% of the net asset value of the Fund
during any 90-day period for any one shareholder. Each Fund has reserved the
right to pay other redemptions, either totally or partially, by a distribution
in-kind of securities (instead of cash) from such 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.
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.
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
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<PAGE> 17
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 the dividend or distribution is 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 may
not have to pay state or local taxes on dividends derived from interest on U.S.
Government obligations. Investors should consult with their tax advisors in this
regard.
Shortly after the end of each calendar year, each shareholder will be sent a
statement setting forth the federal income tax status of all of the Fund's
dividends and distributions for that year, including the portion 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 representing interest on
U.S. Government obligations, 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
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<PAGE> 18
rate may be permitted under an applicable treaty. Each Fund is also required in
certain circumstances to apply backup withholding at the 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. Backup withholding will not, however, be applied to payments that
have been subject to 30% withholding.
Prospective investors should read the Account Application for additional
information regarding backup withholding of federal income tax and should
consult their own tax advisers as to the tax consequences of an investment in 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.
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.
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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, or the shareholder does
not respond to mailings from the Shareholder Servicing Agent with regard to
uncashed distribution checks, such shareholder's distribution option will
automatically be converted to having all dividends 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.
INVESTMENT AND WITHDRAWAL BY TELEPHONE (AUTOBUY PRIVILEGE): Shareholders of
any MFS Fund may purchase shares of any MFS Fund by telephone, a privilege known
as the "Autobuy Privilege." The Autobuy Privilege allows shareholders to call
MFS and have money transferred from a checking or savings account into their MFS
account. Once enrolled, a shareholder can initiate a transaction ($50
minimum/$100,000 maximum) by calling MFS before 4:00 (eastern time). The share
price and trade date will be effective on the same day that the Autobuy
Privilege request is received. The Autobuy Privilege is available for any class
of shares of any MFS Fund made available to the general public.
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 on any day of the month. If the
shareholder does not specify a date, the investment will automatically occur on
the first day of the month. Required forms are available from the Shareholder
Servicing Agent or investment dealers.
AUTOMATIC EXCHANGE PLAN: Shareholders having account balances of at least
$5,000 in any MFS Fund, may exchange their shares for the same class of shares
of other MFS Funds 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 six 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.
12
<PAGE> 20
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.
------------------------
The Fund's SAI, dated January 1, 1997, 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> 21
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 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> 22
[MFS LOGO]
Investment Adviser
Massachusetts Financial Services Company
500 Boylston Street
Boston, MA 02116 MFS[REGISTERED TRADEMARK] MONEY
(617) 954-5000 MARKET FUND
MFS[REGISTERED TRADEMARK]
Distributor GOVERNMENT MONEY MARKET FUND
MFS Fund Distributors, Inc.
500 Boylston Street Prospectus
Boston, MA 02116 January 1, 1997
(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
[MFS LOGO]
MFS[REGISTERED TRADEMARK] MONEY MARKET FUND
MFS[REGISTERED TRADEMARK] GOVERNMENT
MONEY MARKET FUND
500 Boylston Street
Boston, MA 02116
MCM-1-1/97 340M 22/10/310
<PAGE> 23
[MFS LOGO]
INVESTMENT MANAGEMENT
WE INVENTED THE MUTUAL FUND[SERVICEMARK]
MFS[REGISTERED TRADEMARK] MONEY MARKET FUND STATEMENT OF
MFS[REGISTERED TRADEMARK] GOVERNMENT MONEY ADDITIONAL INFORMATION
MARKET FUND
(Members of the MFS Family of
Funds[Registered Trademark]) January 1, 1997
- --------------------------------------------------------------------------------
Page
----
1. Definitions...................................................... 2
2. Investment Objective, Policies and Restrictions.................. 2
3. Management of the Funds.......................................... 3
Trustees...................................................... 3
Officers...................................................... 4
Investment Adviser............................................ 4
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
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, as amended or supplemented from time
to time (the "SAI"), sets forth information which may be of interest to
investors but which is not necessarily included in the Funds' Prospectus, dated
January 1, 1997. This SAI should be read in conjunction with the Prospectus, a
copy of which may be obtained without charge by contacting the Shareholder
Servicing Agent (see last page for address and phone number).
THIS SAI IS NOT A PROSPECTUS AND IS AUTHORIZED FOR DISTRIBUTION TO PROSPECTIVE
INVESTORS ONLY IF PRECEDED OR ACCOMPANIED BY A CURRENT PROSPECTUS.
<PAGE> 24
1. DEFINITIONS
"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,
1997, as amended or
supplemented from time to
time.
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> 25
(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 energy 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 December 1991)
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> 26
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, Senior 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 $1,120 and $380 per year plus $70 and $20 per meeting
and $50 and $20 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, 1996, all Trustees and officers as a group owned less than 1%
of the shares of the MFS Money Market Fund (not including 6,332,450 shares
representing approximately 14.29% 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 2.60% of the shares of the MFS Government Money
Market Fund (not including 2,506,722 shares representing approximately 6.96% 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, 1996, Nationwide Life Insurance Company, c/o IPO CO 51, P.O.
Box 18209, Columbus, OH 43218-0245, was the record holder of approximately
13.63% of the outstanding shares of the MFS Money Market Fund, which it held for
the benefit of its policy holders. As of November 30, 1996, Christian Community
Foundation, Inc. P.O. Box 4880, Woodland Park, CO 80866-4880, was the record
owner of approximately 10.73% of the outstanding shares of the MFS Money Market
Fund. As of November 30, 1996, MFS Defined Contribution Plan, c/o Massachusetts
Financial Services Company, 500 Boylston Street, Boston, MA 02116-3740, was the
record owner of approximately 6.15% of the outstanding shares of 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.
INVESTMENT ADVISER
MFS and its predecessor organizations have a history of money management dating
from 1924. MFS is a subsidiary of Sun Life of Canada (U.S.), which in turn is a
wholly owned subsidiary of Sun Life Assurance Company of Canada ("Sun Life").
The Prospectus contains information with respect to the management of the
Adviser and other investment companies for which MFS serves as investment
adviser.
4
<PAGE> 27
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 ten months ended August 31, 1994, the year ended August 31, 1995 and the
year ended August 31, 1996, MFS received management fees under the Funds'
Advisory Agreement of $1,621,026, $2,224,728 and $2,374,567, respectively, from
the MFS Money Market Fund, and $160,327, 193,160 and $205,023, 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, 1996, 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, 1997, and will
continue in effect thereafter only if such continuance is specifically approved
at least annually by the Board of Trustees or by vote of a majority of the
Fund's outstanding voting securities 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, 1997, 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 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.
5
<PAGE> 28
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 statisti-
cal 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 share purchases
and may be changed or discontinued at any time by a shareholder or the Fund.
INVESTMENT AND WITHDRAWAL BY TELEPHONE (AUTOBUY PRIVILEGE): Shareholders of any
MFS Fund may purchase shares of any MFS Fund by telephone, a privilege known as
the "Autobuy Privilege." The Autobuy Privilege allows shareholders to call MFS
and have money transferred from a checking or savings
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account into their MFS account. Once enrolled, a shareholder
can initiate a transaction ($50 minimum/$100,000 maximum) by calling MFS before
4:00 (eastern time). The share price and trade date will be effective on the
same day that the Autobuy Privilege request is received. The Autobuy Privilege
is available for any class of shares of any MFS Fund made available to the
general public.
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 six 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
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<PAGE> 30
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, 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
Each Fund has elected to be treated and intends to qualify 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 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 not expected that either
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, that Fund would incur a regular corporate federal income
tax upon its taxable income and Fund distributions
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<PAGE> 31
would generally be taxable as ordinary dividend income to its shareholders.
Shareholders of each Fund will normally have to pay federal income taxes, and
any state or local income taxes, on the dividends they receive from that Fund.
Dividends from ordinary income are taxable to shareholders as ordinary income
for federal income tax purposes whether the distributions are made in cash or 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. Any Fund dividend that is declared in October,
November or December of any calendar year, that is payable to shareholders of
record in such a month, and that is paid the following January will be treated
as if received by the shareholders on December 31 of the year in which the
dividend is declared. Each 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 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 not possible, however, to determine the Fund's effective
rate of foreign tax in advance since the amounts of the Fund's assets to be
invested within various countries are 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 rate may be permitted under an applicable treaty.
Any amounts overwithheld may be recovered by such persons by filing a claim for
refund with the U.S. Internal Revenue Service within the time period appropriate
to such claims. Distributions received from a Fund by Non-U.S. Persons also may
be subject to tax under the laws of their own jurisdictions. Each Fund is also
required in certain circumstances to apply backup withholding at the rate of 31%
on taxable dividends 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 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, if any, to which its distributions consist of such interest.
Shareholders are urged to consult their tax advisers regarding the possible
exclusion of such portion of their dividends for state and local income tax
purposes as well as regarding the tax consequences of an investment in the Fund.
7. DESCRIPTION OF SHARES, VOTING RIGHTS AND LIABILITIES
The 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
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on account of shareholder liability is limited to circumstances in which both
inadequate insurance existed and the Trust itself was unable to meet its
obligations.
The Declaration of Trust further provides that obligations of the Trust are not
binding upon the Trustees individually but only upon the property of the Trust
and that the Trustees will not be liable for any action or failure to act, but
nothing in the Declaration of Trust protects a Trustee against any liability to
which he would otherwise be subject by reason of willful misfeasance, bad faith,
gross negligence, or reckless disregard of the duties involved in the conduct of
his office.
8. 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
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<PAGE> 33
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, 1996 (the end of the Trust's fiscal year) was 4.62% and
the effective annualized yield of the MFS Money Market Fund for such period was
4.72%. The current annualized yield of the MFS Government Money Market Fund for
that seven-day period was 4.42% and the effective annualized yield of the MFS
Government Money Market Fund for that period was 4.51%. Current yield and
account balance 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, and similar or related matters.
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.
From time to time the Fund may also discuss or quote the views of its
distributor, its investment adviser and other financial planning, legal, tax,
accounting, insurance, estate planning and other professionals, or from surveys,
regarding individual and family financial planning. Such views may include
information regarding: retirement planning; tax management strategies; estate
planning; general investment techniques (e.g., asset allocation and disciplined
saving and investing); business succession; ideas and information provided
through the MFS Heritage Panning(SM) program, an intergenerational financial
planning assistance program; issues with respect to insurance (e.g., disability
and life insurance and Medicare supplemental insurance); issues regarding
financial and health care management for elderly family members; and other
similar or related matters.
MFS FIRSTS: MFS has a long history of innovations.
-- 1924 -- Massachusetts Investors Trust is established as the first open-end
mutual fund in America.
-- 1924 -- Massachusetts Investors Trust is the first mutual fund to make
full public disclosure of its operations in shareholder reports.
-- 1932 -- One of the first internal research departments is established to
provide in-house analytical capability for an investment management firm.
-- 1933 -- Massachusetts Investors Trust is the first mutual fund to register
under the Securities Act of 1933 ("Truth in Securities Act" or "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.
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-- 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.
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, 1996, the Statements of Assets and
Liabilities at August 31, 1996, the Statements of Operations for the year ended
August 31, 1996, the Statements of Changes in Net Assets for the years ended
August 31, 1996 and 1995, the Notes to Financial Statements and the Independent
Auditors' Report, each of which is included in the Annual Report to shareholders
of the 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.
12
<PAGE> 35
APPENDIX A
DESCRIPTION OF STANDARD & POOR'S RATINGS SERVICES ("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> 36
APPENDIX B
TRUSTEE COMPENSATION
<TABLE>
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.................................... $2,283 $ 655 8 $263,815
A. Keith Brodkin..................................... 0 0 N/A 0
Peter G. Harwood..................................... 2,733 429 5 111,366
J. Atwood Ives....................................... 2,493 682 17 101,356
Lawrence T. Perera................................... 2,553 1,356 26 102,546
William Poorvu....................................... 2,733 1,417 25 111,366
Charles W. Schmidt................................... 2,673 1,349 20 105,411
Arnold D. Scott...................................... 0 0 N/A 0
Jeffrey L. Shames.................................... 0 0 N/A 0
Elaine R. Smith...................................... 2,673 675 27 105,411
David B. Stone....................................... 2,843 1,136 12 115,521
- ---------------
<FN>
(1) For fiscal year ended August 31, 1996.
(2) Based on normal retirement age of 73.
(3) For calendar year 1995. All Trustees receiving compensation served as
Trustees of 23 funds within the MFS fund complex (having aggregate net
assets at December 31, 1995, of approximately $17.6 billion) except Mr.
Bailey, who served as Trustee of 73 funds within the MFS fund complex
(having aggregate net assets at December 31, 1995, of approximately $31.7
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>
$2,055 $308 $514 $ 719 $1,027
2,270 340 567 794 $1,135
2,484 373 621 869 $1,242
2,699 405 675 945 $1,349
2,913 437 728 1,020 $1,457
3,128 469 782 1,095 $1,564
- ---------------
<FN>
(4) Other funds in the MFS fund complex provide similar retirement benefits to
the Trustees.
</TABLE>
14
<PAGE> 37
APPENDIX B (CONT'D)
TRUSTEE COMPENSATION
<TABLE>
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.................................... $527 $ 72 $ 8 $263,815
A. Keith Brodkin..................................... 0 0 N/A 0
Peter G. Harwood..................................... 627 48 5 111,366
J. Atwood Ives....................................... 567 75 17 101,356
Lawrence T. Perera................................... 577 150 26 102,546
William Poorvu....................................... 627 159 25 111,366
Charles W. Schmidt................................... 617 148 19 105,411
Arnold D. Scott...................................... 0 0 N/A 0
Jeffrey L. Shames.................................... 0 0 N/A 0
Elaine R. Smith...................................... 617 72 27 105,411
David B. Stone....................................... 657 111 11 115,521
- ---------------
(1) For fiscal year ended August 31, 1996.
(2) Based on normal retirement age of 73.
(3) For calendar year 1995. All Trustees receiving compensation served as
Trustees of 23 funds within the MFS fund complex (having aggregate net
assets at December 31, 1995, of approximately $17.6 billion) except Mr.
Bailey, who served as Trustee of 73 funds within the MFS fund complex
(having aggregate net assets at December 31, 1995, of approximately $31.7
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>
$474 $ 71 $119 $166 $237
524 79 131 183 $262
574 86 143 201 $287
623 93 156 218 $312
673 101 168 235 $336
722 108 181 253 $361
- ---------------
<FN>
(4) Other funds in the MFS fund complex provide similar retirement benefits to
the Trustees.
</TABLE>
15
<PAGE> 38
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[REGISTERED TRADEMARK] MONEY
MARKET FUND
MFS[REGISTERED TRADEMARK] GOVERNMENT
MONEY MARKET FUND
500 BOYLSTON STREET
BOSTON, MA 02116
[MFS LOGO]
INVESTMENT MANAGEMENT
WE INVENTED THE MUTUAL FUND[SERVICEMARK]
MCM-13-1/97/500 22/10/310
<PAGE> 39
<PAGE>
[LOGO: M F S(SM) ANNUAL REPORT
INVESTMENT MANAGEMENT FOR YEAR ENDED
We invented the mutual fund(SM)] AUGUST 31, 1996
MFS(R) MONEY MARKET FUND
MFS(R) GOVERNMENT MONEY MARKET FUND
[Graphic Omitted U.S. Treasury Building]
<PAGE>
TABLE OF CONTENTS
Letter from the Chairman ................................................... 1
Fund Manager's Overview .................................................... 3
Fund Manager's Profile ..................................................... 4
Portfolio Concentration .................................................... 5
Fund Facts ................................................................. 5
Portfolio of Investments ................................................... 6
Financial Statements ....................................................... 8
Notes to Financial Statements ..............................................13
Independent Auditors' Report ...............................................15
MFS Family of Funds ........................................................16
Trustees and Officers ......................................................17
HIGHLIGHTS
* AS A RESULT OF A DECLINE IN SHORT-TERM INTEREST RATES DURING THE FIRST SIX
MONTHS OF THE FUNDS' FISCAL YEAR, THE ANNUALIZED COMPOUNDED YIELD FOR MFS
MONEY MARKET FUND FOR THE SEVEN-DAY PERIOD ENDED AUGUST 31, 1996 DECREASED
FROM 5.2% TO 4.7%. DURING THIS SAME PERIOD, THE ANNUALIZED YIELD ON AN
INVESTMENT IN MFS GOVERNMENT MONEY MARKET FUND FELL FROM 5.2% TO 4.5%.
* THE AVERAGE MATURITY OF BOTH FUNDS WAS 53 DAYS AS OF AUGUST 31, 1996,
VERSUS 41 AND 35 DAYS FOR MFS MONEY MARKET FUND AND MFS GOVERNMENT MONEY
MARKET FUND, RESPECTIVELY, ON AUGUST 31, 1995.
* ON AUGUST 31, 1996, APPROXIMATELY 42% OF MFS MONEY MARKET FUND'S NET
ASSETS WERE 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.
<PAGE>
LETTER FROM THE CHAIRMAN
[Photo of A. Keith Brodkin]
Dear Shareholders:
With over half of 1996 behind us, the U.S. economy appears to have settled into
a pattern of fairly reasonable growth and moderate inflation -- two factors that
we think can be important contributors to a favorable long-term investment
climate. During the first quarter of 1996, real (inflation-adjusted) economic
growth was 2.3% on an annualized basis, followed by a rate of 4.7% in the second
quarter. Thus, real growth in gross domestic product has exceeded our
expectations so far this year, and we now expect that growth for all of 1996
could exceed 2.5%. Although individual consumers appear to be carrying an
excessive debt load, the consumer sector itself, which represents two-thirds of
the economy, continues to be impressive as the automobile and housing markets
remain resilient. Consumer spending has also been positively impacted by
widespread job growth. At the same time, however, the economies of Europe and
Japan continue to be in the doldrums, weakening U.S. export markets while
subduing the capital spending plans of American corporations.
In the bond markets, persistent signs of economic weakness led to decreases in
short-term interest rates by the Federal Reserve Board in late 1995 and early
1996. However, should signs of economic growth and, particularly, of higher
inflation continue, we would expect the Fed to maintain its anti-inflationary
stance. In the beginning of the year, bond markets were trading in a narrow
range as investors shifted between concern about the lack of a budget resolution
in Washington and hopes that sluggish economic reports and low inflation might
lead to lower interest rates. Later, fixed-income markets began reacting to
conflicting signals regarding the strength of the economy with more volatile
trading patterns marked by an upward bias in interest rates. Interest rates may
move even higher over the coming months, but we believe the current rise in bond
yields is reaching a point where fixed-income markets are fairly valued.
Finally, as you may have noticed, this report to shareholders incorporates a
number of changes which we believe will make it more informative and useful to
you. Following the Fund Manager's Overview, you will find new information
on the Fund's holdings, including charts illustrating the portfolio's
concentration in the different types of investments that meet its criteria. If
you would like to contact MFS, refer to the telephone numbers and addresses
listed at the back of the report.
We appreciate your support and welcome any questions or comments you may have.
Respectfully,
/s/ A. Keith Brodkin
A. Keith Brodkin
Chairman and President
September 17, 1996
<PAGE>
FUND MANAGER'S OVERVIEW
[Photo of Geoffrey L. Kurinsky]
Dear Shareholders:
Short-term interest rates declined modestly during the first six months of the
Funds' fiscal year, then rebounded over the next six months. As a result, the
annualized yield on an investment in MFS MONEY MARKET FUND for the seven-day
period ended August 31, 1996 decreased from 5.2% to 4.7%. During this same
period, the annualized yield on an investment in MFS GOVERNMENT MONEY MARKET
FUND fell from 5.2% to 4.5%.
During the past 12 months, the Federal Reserve voted to ease monetary policy
by lowering the federal funds' rate (the interest rate charged by banks to other
banks in need of overnight loans) two times. The Fed lowered the rate by 25
basis points (0.25%) on December 19, 1995, and by the same amount on January 31,
1996. As a result, yields on 90-day U.S. Treasury bills and commercial paper
fell approximately 65 basis points (0.65%) by February 1996. Since then, rates
have backed up approximately 30 basis points (0.30%) as of the end of August due
to signs of a strengthening economy. With the economy showing more signs of
acceleration, we believe short-term interest rates could experience additional
moderate increases over the next few months.
At the beginning of the Funds' fiscal year, our average maturities were
lengthened to defend against slumping yields. However, as yields began to inch
higher due to evidence of economic strength, we shortened maturities in both
portfolios to take advantage of higher yields. The average maturity of both
Funds was 53 days as of August 31, 1996, versus 41 and 35 days for MFS MONEY
MARKET FUND and MFS GOVERNMENT MONEY MARKET FUND, respectively, on August 31,
1995.
The portfolio of MFS MONEY MARKET FUND continues to hold only the
highest-quality corporate, bank and government securities in an effort to
provide investors the maximum possible security against credit risk. Investments
in the Funds are neither insured nor guaranteed by the U.S. government, and
there is no assurance that the Fund will be able to maintain a stable net asset
value. On August 31, 1996, approximately 42% of this Fund's net assets were
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 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. We believe this
emphasis on quality should allow these Funds to continue to help investors
obtain current income while seeking to preserve capital and liquidity.
Respectfully,
/s/ Geoffrey L. Kurinsky
Geoffrey L. Kurinsky
Fund Manager
FUND MANAGER'S 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.
TAX FORM SUMMARY
IN JANUARY 1997, SHAREHOLDERS WILL BE MAILED A TAX FORM SUMMARY
REPORTING THE FEDERAL TAX STATUS OF ALL DISTRIBUTIONS PAID DURING THE
CALENDAR YEAR 1996.
<PAGE>
PORTFOLIO CONCENTRATION AS OF AUGUST 31, 1996
MONEY MARKET FUND
Commercial Paper 41.5%
U.S. Government & Agency Obligations 34.7%
Repurchase Agreements 23.3%
Other 0.5%
GOVERNMENT MONEY MARKET FUND
U.S. Government & Agency Obligations 80%
Repurchase Agreements 20%
FUND FACTS
STRATEGY: 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.
COMMENCEMENT OF
INVESTMENT OPERATIONS: MFS MONEY MARKET FUND - 12/19/75
MFS GOVERNMENT MONEY MARKET FUND - 2/26/82
SIZE: MFS MONEY MARKET FUND - $644.2 MILLION AS OF
AUGUST 31, 1996
MFS GOVERNMENT MONEY MARKET FUND - $42.5 MILLION
AS OF AUGUST 31, 1996
<PAGE>
PORTFOLIO OF INVESTMENTS - August 31, 1996
MFS Money Market Fund
Commercial Paper - 41.5%
- ---------------------------------------------------------------------------
Principal Amount
Issuer (000 Omitted) Value
- ---------------------------------------------------------------------------
AT&T Corp., due 12/23/96 - 12/24/96 $ 15,200 $ 14,946,912
Abbot Labs, due 9/17/96 8,600 8,579,589
Disney (Walt) Co., due 12/20/96 8,000 7,871,422
Dow Chemical Co., due 9/30/96 10,000 9,957,306
du Pont (E.I.) de Nemours & Co., due 12/19/96 12,000 11,808,160
Duke Power Co., due 9/12/96 14,800 14,776,213
Ford Motor Credit Corp., due 10/02/96
- 10/21/96 22,300 22,178,776
General Electric Capital Corp., due
2/14/96 - 2/20/97 18,900 18,426,124
General Motors Acceptance Corp.,
due 9/03/96 - 2/19/97 21,400 21,265,269
Hershey Foods Corp., due 9/20/96 10,000 9,972,239
Hewlett Packard Co., due 9/27/96 13,400 13,348,127
Kellogg Co., due 9/16/96 1,875 1,870,781
Knight Ridder, Inc., due 10/30/96 8,000 7,930,511
PepsiCo, due 9/06/96 7,300 7,294,657
Philip Morris Co., due 10/21/96 - 10/31/96 20,000 19,838,722
Raytheon Co., due 10/16/96 12,000 11,920,500
Sara Lee Corp., due 9/26/96 17,600 17,534,489
Transamerica Corp., due 9/09/96 - 9/10/96 21,300 21,273,947
Warner-Lambert Co., due 11/07/96 15,000 14,852,879
Weyerhaeuser Co., due 10/18/96 12,000 11,917,437
- ---------------------------------------------------------------------------
Total Commercial Paper, at Amortized Cost $267,564,060
- ---------------------------------------------------------------------------
U.S. Government and Agency Obligations - 34.7%
- ---------------------------------------------------------------------------
Federal Home Loan Bank, due 9/23/96 - 1/09/97 $ 41,300 $ 40,959,748
Federal Home Loan Mortgage Corp.,
due 9/12/96 - 11/29/96 97,400 96,890,088
Federal National Mortgage Assn.,
due 9/05/96 - 1/30/97 82,960 82,229,179
Student Loan Marketing Assn., due 9/25/96 3,700 3,687,001
- ---------------------------------------------------------------------------
Total U.S. Government and Agency Obligations,
at Amortized Cost $223,766,016
- ---------------------------------------------------------------------------
Repurchase Agreement - 23.3%
- ---------------------------------------------------------------------------
Goldman Sachs, dated 8/30/96, due 9/
03/96, total to be received
$150,088,000 (secured by various
U.S. Treasury and federal agency
obligations in a jointly traded
account), at Cost $150,000 $150,000,000
- ---------------------------------------------------------------------------
Total Investments, at Amortized Cost and Value $641,330,076
Other Assets, Less Liabilities - 0.5% 2,874,846
- ---------------------------------------------------------------------------
Net Assets - 100.0% $644,204,922
- ---------------------------------------------------------------------------
See notes to financial statements
<PAGE>
MFS Government Money Market Fund
U.S. Government and Agency Obligations - 80.0%
- ---------------------------------------------------------------------------
Principal Amount
Issuer (000 Omitted) Value
- ---------------------------------------------------------------------------
Federal Farm Credit Bank, due 9/04/96
- 10/07/96 $3,700 $ 3,690,290
Federal Home Loan Bank, due 9/24/96 -
2/13/97 9,600 9,499,185
Federal Home Loan Mortgage Corp.,
due 9/12/96 - 9/27/96 8,150 8,130,360
Federal National Mortgage Assn.,
due 9/06/96 - 1/14/97 7,600 7,540,366
Student Loan Marketing Assn.,
due 9/18/96 - 9/30/96 2,140 2,130,940
Tennessee Valley Authority,
due 9/03/96 - 9/12/96 3,000 2,997,832
- ---------------------------------------------------------------------------
Total U.S. Government and Agency Obligations,
at Amortized Cost $33,988,973
- ---------------------------------------------------------------------------
Repurchase Agreement - 20.6%
- ---------------------------------------------------------------------------
Goldman Sachs, dated 8/30/96, due 9/
03/96, total to be received
$8,750,130 (secured by various U.S.
Treasury and federal agency
obligations in a jointly traded
account), at Cost $8,745 $ 8,745,000
- ---------------------------------------------------------------------------
Total Investments, at Amortized Cost and Value $42,733,973
Other Assets, Less Liabilities - (0.6)% (234,526)
- ---------------------------------------------------------------------------
Net Assets - 100.0% $42,499,447
- ---------------------------------------------------------------------------
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS
Statements of Assets and Liabilities
- ------------------------------------------------------------------------------
MFS Money MFS Government
August 31, 1996 Market Fund Money Market Fund
- ------------------------------------------------------------------------------
Assets:
Investments, at amortized cost and value $491,330,076 $33,988,973
Repurchase agreements, at amortized cost
and value 150,000,000 8,745,000
------------ -----------
Total investments, at amortized cost
and value $641,330,076 $42,733,973
Cash 645,322 558
Receivable for Fund shares sold 11,998,842 8,184
Interest receivable 44,000 2,565
Other assets 4,757 604
------------ -----------
Total assets $654,022,997 $42,745,884
------------ -----------
Liabilities:
Distributions payable $ 105,993 $ 6,826
Payable for Fund shares reacquired 9,594,175 189,875
Payable to affiliates -
Management fee 13,770 984
Shareholder servicing agent fee 4,276 295
Accrued expenses and other liabilities 99,861 48,457
------------ -----------
Total liabilities $ 9,818,075 $ 246,437
------------ -----------
Net assets (represented by paid-in capital) $644,204,922 $42,499,447
============ ===========
Shares of beneficial interest outstanding 644,204,922 42,499,447
============ ===========
Net asset value, offering price and
redemption price per share
(net assets / shares of beneficial
interest outstanding) $1.00 $1.00
===== =====
See notes to financial statements
<PAGE>
Statements of Operations
- ------------------------------------------------------------------------------
Year Ended
MFS Money Market Fund August 31, 1996
- ------------------------------------------------------------------------------
Net investment income:
Interest income $27,082,077
-----------
Expenses -
Management fee $ 2,374,567
Trustees' compensation 30,813
Shareholder servicing agent fee 741,346
Custodian fee 210,923
Postage 124,193
Printing 42,684
Auditing fees 16,600
Legal fees 2,103
Miscellaneous 342,432
-----------
Total expenses $ 3,885,661
Fees paid indirectly (169,392)
-----------
Net expenses $ 3,716,269
-----------
Net investment income $23,365,808
===========
Year Ended
MFS Government Money Market Fund August 31, 1996
- ------------------------------------------------------------------------------
Net investment income:
Interest income $ 2,243,802
-----------
Expenses -
Management fee $ 205,023
Trustees' compensation 7,285
Shareholder servicing agent fee 61,507
Custodian fee 20,175
Auditing fees 16,915
Postage 6,717
Printing 3,013
Legal fees 2,051
Miscellaneous 42,681
-----------
Total expenses $ 365,367
Fees paid indirectly (17,786)
-----------
Net expenses $ 347,581
-----------
Net investment income $ 1,896,221
===========
See notes to financial statements
<PAGE>
Statements of Changes in Net Assets
- ------------------------------------------------------------------------------
Year Ended Year Ended
MFS Money Market Fund August 31, 1996 August 31, 1995
- ------------------------------------------------------------------------------
Increase (decrease) in net assets:
From operations -
Net investment income, declared as
distributions to shareholders $ 23,365,808 $ 22,705,875
-------------- --------------
Fund share (principal) transactions
at net asset value of $1.00 per share -
Net proceeds from sale of shares $5,311,229,990 $2,481,903,487
Net asset value of shares issued to
shareholders in reinvestment
of distributions 18,551,363 19,523,795
Cost of shares reacquired (5,096,374,350) (2,526,408,894)
-------------- --------------
Total increase (decrease) in net assets $ 233,407,003 $ (24,981,612)
Net assets:
At beginning of period 410,797,919 435,779,531
-------------- --------------
At end of period $ 644,204,922 $ 410,797,919
============== ==============
Year Ended Year Ended
MFS Government Money Market Fund August 31, 1996 August 31, 1995
- ------------------------------------------------------------------------------
Increase (decrease) in net assets:
From operations -
Net investment income, declared as
distributions to shareholders $ 1,896,221 $ 1,862,594
-------------- --------------
Fund share (principal) transactions
at net asset value of $1.00 per share -
Net proceeds from sale of shares $ 476,964,289 $ 130,386,802
Net asset value of shares issued to
shareholders in reinvestment
of distributions 1,585,296 1,692,388
Cost of shares reacquired (474,489,920) (131,986,405)
-------------- --------------
Total increase in net assets $ 4,059,665 $ 92,785
Net assets:
At beginning of period 38,439,782 38,346,997
-------------- --------------
At end of period $ 42,499,447 $ 38,439,782
============== ==============
See notes to financial statements
<PAGE>
<TABLE>
<CAPTION>
Financial Highlights
- --------------------------------------------------------------------------------------------------------------------
Ten
Months
Year Ended August 31, Ended Year Ended October 31,
----------------------- August 31, -------------------------
MFS Money Market Fund 1996 1995 1994 1993 1992
- --------------------------------------------------------------------------------------------------------------------
Per share data (for a share outstanding throughout each period):
<S> <C> <C> <C> <C> <C>
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 $ 0.05 $ 0.02 $ 0.02 $ 0.03
------ ------ ------ ------ ------
Less distributions declared to shareholders
from net investment income $(0.05) $(0.05) $(0.02) $(0.02) $(0.03)
------ ------ ------ ------ ------
Net asset value - end of period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
====== ====== ====== ====== ======
Total return 4.86% 5.04% 2.91%+ 2.39% 3.35%
Ratios (to average net assets)/Supplemental data:
Expenses## 0.79% 0.76% 0.78%+ 0.83% 0.87%
Net investment income 4.78% 4.92% 2.95%+ 2.39% 3.36%
Net assets at end of period (000 omitted) $644,205 $410,798 $435,780 $350,316 $448,825
<CAPTION>
Year Ended October 31,
---------------------------------------------------------------------------------------
MFS Money Market Fund 1991 1990 1989 1988 1987 1986
- ---------------------------------------------------------------------------------------------------------------------
Per share data (for a share outstanding throughout each period):
<S> <C> <C> <C> <C> <C> <C>
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 $ 0.06 $ 0.07 $ 0.08 $ 0.07 $ 0.06 $ 0.06
------ ------ ------ ------ ------ ------
Less distributions declared to
shareholders from net investment
income $(0.06) $(0.07) $(0.08) $(0.07) $(0.06) $(0.06)
------ ------ ------ ------ ------ ------
Net asset value - end of $ 1.00
period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
====== ====== ====== ====== ====== ======
Total return 6.07% 7.99% 8.84% 7.12% 6.06% 6.80%
Ratios (to average net assets)/
Supplemental data:
Expenses 0.82% 0.76% 0.83% 0.83% 0.82% 0.78%
Net investment income 5.94% 7.60% 8.45% 6.72% 5.77% 6.53%
Net assets at end of period
(000 omitted) $541,945 $677,164 $676,382 $664,895 $716,528 $623,568
<FN>
+Annualized.
##For fiscal years ending after September 1, 1995, the Fund's expenses are calculated without reduction for fees paid indirectly.
</TABLE>
See notes to financial statements
<PAGE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
Ten
Months
Year Ended August 31, Ended Year Ended October 31,
----------------------- August 31, -------------------------
MFS Government Money Market Fund 1996 1995 1994 1993 1992
- --------------------------------------------------------------------------------------------------------------------
Per share data (for a share outstanding throughout each period):
<S> <C> <C> <C> <C> <C>
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 $ 0.05 $ 0.02 $ 0.02 $ 0.03
------ ------ ------ ------ ------
Less distributions declared to shareholders
from net investment income $(0.05) $(0.05) $(0.02) $(0.02) $(0.03)
------ ------ ------ ------ ------
Net asset value - end of period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
====== ====== ====== ====== ======
Total return 4.73% 4.92% 2.64%+ 2.33% 3.27%
Ratios (to average net assets)/Supplemental data:
Expenses## 0.89% 0.84% 1.05%+ 0.99% 0.87%
Net investment income 4.64% 4.82% 2.64%+ 2.20% 3.28%
Net assets at end of period (000 omitted) $42,499 $38,440 $38,347 $35,576 $47,629
<CAPTION>
Year Ended October 31,
---------------------------------------------------------------------------------------
MFS Government Money Market Fund 1991 1990 1989 1988 1987 1986
- ---------------------------------------------------------------------------------------------------------------------
Per share data (for a share outstanding throughout each period):
<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 $ 0.06 $ 0.07 $ 0.08 $ 0.06 $ 0.05 $ 0.06
------ ------ ------ ------ ------ ------
Less distributions declared to
shareholders from net investment
income $(0.06) $(0.07) $(0.08) $(0.06) $(0.05) $(0.06)
------ ------ ------ ------ ------ ------
Net asset value - end of
period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
====== ====== ====== ====== ====== ======
Total return 5.68% 7.55% 8.61% 6.47% 5.73% 6.33%
Ratios (to average net assets)/
Supplemental data:
Expenses 0.83% 0.80% 0.85% 0.74% 0.59% 0.66%
Net investment income 5.53% 7.34% 8.29% 6.29% 5.63% 6.07%
Net assets at end of period
(000 omitted) $50,655 $53,701 $51,619 $50,343 $59,875 $63,331
<FN>
+Annualized.
##For fiscal years ending after September 1, 1995, the Fund's expenses are calculated without reduction for fees paid indirectly.
</TABLE>
See notes to financial statements
<PAGE>
NOTES TO FINANCIAL STATEMENTS
(1) Business and Organization
MFS Money Market Fund and MFS Government Money Market Fund (the Funds) 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
General - The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
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. The
Trust, along with other affiliated entities of Massachusetts Financial Services
Company (MFS), may utilize a joint trading account for the purpose of entering
into one or more repurchase agreements.
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.
Fees Paid Indirectly - The Funds' custodian bank calculates its fee based on the
Funds' average daily net assets. The fee is reduced according to a fee
arrangement, which provides for custody fees to be reduced based on a formula
developed to measure the value of cash deposited with the custodian by the
Funds. This amount is shown as a reduction of expenses on the Statement of
Operations.
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 taxable
income, including any net realized gain on investments. 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 MFS Money Market Fund and MFS
Government Money Market Fund, respectively.
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 its independent Trustees and Mr. Bailey.
Included in Trustees' compensation for MFS Money Market Fund and MFS Government
Money Market Fund are net periodic pension expenses of $9,826 and $2,472,
respectively, for the year ended August 31, 1996.
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 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 $5,426,807,189
and $5,353,737,252, respectively.
Purchases and sales of money market investments, exclusive of securities subject
to repurchase agreements for MFS Government Money Market Fund, aggregated
$250,923,527 and $288,277,827, 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 MFS Money Market Fund and MFS
Government Money Market Fund were $5,309 and $450, respectively, for the year
ended August 31, 1996.
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Trustees of MFS Series Trust IV and 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 (two of the Series constituting MFS Series Trust IV) as of August
31, 1996, the related statements of operations for the year then ended, the
statements of changes in net assets for the years ended August 31, 1996 and
1995, and the financial highlights for the years ended August 31, 1996 and 1995,
the ten months ended August 31, 1994 and for each of the years in the eight-year
period ended October 31, 1993. 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, 1996 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 respective financial positions of MFS
Money Market Fund and MFS Government Money Market Fund at August 31, 1996, 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 4, 1996
--------------------------------------------
This report is prepared for the general information of shareholders. It is
authorized for distribution to prospective investors only when preceded or
accompanied by a current prospectus.
<PAGE>
<TABLE>
MFS(R) MONEY MARKET FUND
MFS(R) GOVERNMENT MONEY MARKET FUND
<C> <C>
TRUSTEES AUDITORS
A. Keith Brodkin* - Chairman and President Deloitte & Touche LLP
Richard B. Bailey* - Private Investor; INVESTOR INFORMATION
Former Chairman and Director (until 1991), For MFS stock and bond market outlooks,
Massachusetts Financial Services Company; call toll free: 1-800-637-4458 anytime from
Director, Cambridge Bancorp; Director, a touch-tone telephone.
Cambridge Trust Company
For information on MFS mutual funds,
Peter G. Harwood - Private Investor call your financial adviser or, for an
information kit, call toll free:
J. Atwood Ives - Chairman and Chief 1-800-637-2929 any business day from
Executive Officer, Eastern Enterprises 9 a.m. to 5 p.m. Eastern time (or leave
a message anytime).
Lawrence T. Perera - Partner,
Hemenway & Barnes INVESTOR SERVICE
MFS Service Center, Inc.
William J. Poorvu - Adjunct Professor, P.O. Box 2281
Harvard University Graduate School of Boston, MA 02107-9906
Business Administration
For general information, call toll free:
Charles W. Schmidt - Private Investor 1-800-225-2606 any business day from
8 a.m. to 8 p.m. Eastern time.
Arnold D. Scott* - Senior Executive
Vice President, Director and Secretary, For service to speech- or hearing-impaired,
Massachusetts Financial Services Company call toll free: 1-800-637-6576 any business
day from 9 a.m. to 5 p.m. Eastern time.
Jeffrey L. Shames* - President and Director, (To use this service, your phone must be equipped with
Massachusetts Financial Services Company a Telecommunications Device for the Deaf.)
Elaine R. Smith - Independent Consultant For share prices, account balances and
exchanges, call toll free: 1-800-MFS-TALK
David B. Stone - Chairman, North American (1-800-637-8255) anytime from a touch-tone telephone.
Management Corp. (investment advisers)
WEB SITE
INVESTMENT ADVISER http://www.mfs.com
Massachusetts Financial Services Company
500 Boylston Street
Boston, MA 02116-3741
DISTRIBUTOR
MFS Fund Distributors, Inc.
500 Boylston Street
Boston, MA 02116-3741 --------------------------------------------
FUND MANAGER [DALBAR For the second year in a row,
Geoffrey L. Kurinsky* LOGO] MFS earned a #1 ranking in
TOP RATED DALBAR, Inc.'s Broker/Dealer
TREASURER SERVICE Survey, Main Office Operations
W. Thomas London* Service Quality category. The
firm achieved a 3.49 overall score - on a
ASSISTANT TREASURER scale of 1 to 4 - in the 1995 survey. A total
James O. Yost* of 71 firms responded, offering input on the
quality of service they receive from 36
SECRETARY mutual fund companies nationwide. The survey
Stephen E. Cavan* contained questions about service quality in
17 categories, including "knowledge of phone
ASSISTANT SECRETARY service contacts," "accuracy of transaction
James R. Bordewick, Jr.* processing," and "overall ease of doing
business with the firm." The 1996 survey
CUSTODIAN results were not available at the time of
State Street Bank and Trust Company this printing.
*Affiliated with the Investment Adviser
</TABLE>
<PAGE>
-------------
MFS(R) MONEY [DALBAR LOGO: #1 BULK RATE
MARKET FUND TOP RATED SERVICE] U.S. POSTAGE
PAID
MFS(R) PERMIT #55638
GOVERNMENT BOSTON, MA
MONEY MARKET -------------
FUND
500 Boylston Street
Boston, MA 02116
[LOGO: M F S(SM)
INVESTMENT MANAGEMENT
We invented the mutual fund(SM)]
(C)1996 MFS Fund Distributors, Inc., 500 Boylston Street, Boston, MA 02116
MCM-2 10/96 45M 10/310/22
<PAGE> 40
<TABLE>
<S> <C>
MFS(R) MUNICIPAL PROSPECTUS
BOND FUND JANUARY 1, 1997
(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................................................... 6
5. Management of the Fund.............................................................. 10
6. Information Concerning Shares of the Fund........................................... 12
Purchases....................................................................... 12
Exchanges....................................................................... 16
Redemptions and Repurchases..................................................... 17
Distribution Plan............................................................... 19
Distributions................................................................... 20
Tax Status...................................................................... 21
Net Asset Value................................................................. 21
Description of Shares, Voting Rights and Liabilities............................ 22
Performance Information......................................................... 22
7. Shareholder Services................................................................ 23
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 "Information
Concerning Shares of the Fund -- Purchases").
The Fund's investment adviser and distributor are Massachusetts Financial
Services Company ("MFS" or the "Adviser") and MFS Fund Distributors, Inc.
("MFD"), respectively, both of which are located at 500 Boylston Street, Boston,
Massachusetts 02116.
INVESTMENT PRODUCTS ARE NOT INSURED BY THE FDIC OR ANY OTHER GOVERNMENT AGENCY,
AND ARE NOT DEPOSITS OR OTHER OBLIGATIONS OF, OR GUARANTEED BY, ANY FINANCIAL
INSTITUTION. SHARES OF MUTUAL FUNDS ARE SUBJECT TO INVESTMENT RISK, INCLUDING
POSSIBLE LOSS OF THE PRINCIPAL AMOUNT INVESTED, AND WILL FLUCTUATE IN VALUE. YOU
MAY RECEIVE MORE OR LESS THAN YOU PAID WHEN YOU REDEEM YOUR SHARES.
This Prospectus sets forth concisely the information concerning the Fund 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, dated January 1, 1997, as amended or supplemented from time to time
(the "SAI"), 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).The SEC maintains an Internet World Wide Web
site that contains the SAI, materials that are incorporated by reference into
this Prospectus and the SAI, and other information regarding the Fund. This
Prospectus is available on the Adviser's Internet World Wide Web site at
http://www.mfs.com.
INVESTORS SHOULD READ THIS PROSPECTUS AND RETAIN IT FOR FUTURE REFERENCE.
<PAGE> 41
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.................................................... 0.40% 0.40%
Rule 12b-1 Fees.................................................... 0.00% 0.84%(2)
Other Expenses(3).................................................. 0.20% 0.31%
--- ----
Total Operating Expenses........................................... 0.60% 1.55%
</TABLE>
- ---------------
(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 shares in accordance with
Rule 12b-1 under the Investment Company act of 1940, as amended (the "1940
Act") (the "Distribution Plan"), which provides that it will pay
distribution/service fees aggregating up to (but not necessarily all of)
1.00% per annum of the average daily net assets attributable to the Class B
shares (see "Information Concerning Shares of the Fund -- Distribution Plan"
below). 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 be suspended until such date as the Trustees of the
Trust may determine. 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.
(3) The Fund has an expense offset arrangement which reduces the Fund's
custodian fee based upon the amount of cash maintained by the Fund with its
custodian and dividend disbursing agent, and may enter into other such
arrangements and directed brokerage arrangements (which would also have the
effect of reducing the Fund's expenses). Any such fee reductions are not
reflected under "Other Expenses."
EXAMPLE OF EXPENSES
-------------------
An investor would pay the following dollar amounts of expenses on a $1,000
investment in the Fund, assuming (a) a 5% annual return and (b) redemption at
the end of each of the time periods indicated (unless otherwise noted):
<TABLE>
<CAPTION>
CLASS B
----------------
PERIOD CLASS A (1)
------ -------
<S> <C> <C> <C>
1 year................................................ $ 53 $ 56 $ 16
3 years............................................... 66 79 49
5 years............................................... 79 104 84
10 years............................................... 119 159(2) 159(2)
</TABLE>
- ---------------
(1) Assumes no redemption.
(2) Class B shares convert to Class A shares approximately eight years after
purchase; therefore, years nine and ten reflect Class A expenses.
The purpose of the expense table above is to assist investors in
understanding the various costs and expenses that a shareholder of the Fund will
bear directly or indirectly. More complete descriptions of the following 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.
2
<PAGE> 42
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 up to a maximum of 4.75% of the offering price (or a CDSC of 1.00%
upon redemption during the first year in the case of purchases of $1 million or
more and certain purchases by retirement plans). Class B shares are offered at
net asset value without an initial sales charge but subject to a CDSC upon
redemption (declining from 4.00% during the first year to 0% after six years)
and an annual distribution fee and a service fee up to a maximum of 1.00% per
annum; Class B shares will convert to Class A shares approximately eight years
after purchase.
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> 43
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, given upon their authority as experts in accounting and
auditing. The Fund's current independent auditors are Deloitte & Touche LLP.
FINANCIAL HIGHLIGHTS
CLASS A AND CLASS B SHARES
<TABLE>
<CAPTION>
TEN
YEAR ENDED MONTHS YEAR ENDED
AUGUST 31, ENDED OCTOBER 31
------------------- AUGUST 31, -------------------
1996 1995 1994 1993 1992
------- ------ ----------- ------- ------
CLASS A
-------
<S> <C> <C> <C> <C> <C>
Per share data (for a share outstanding throughout each
period):
Net asset value -- beginning of period................... $10.83 $10.68 $ 11.64 $ 10.73 $10.80
------ ------ ------- ------- ------
Income from investment operations# --
Net investment income................................ $ 0.59 $ 0.60 $ 0.51 $ 0.61 $ 0.66
Net realized and unrealized gain (loss) on
investments........................................ (0.09) 0.15 (0.77) 1.14 0.09
------ ------ ------- ------- ------
Total from investment operations....................... $ 0.50 $ 0.75 $ (0.26) $ 1.75 $ 0.75
------ ------ ------- ------- ------
Less distributions declared to shareholders --
From net investment income............................. $(0.58) $(0.60) $ (0.47) $ (0.66) $(0.66)
In excess of net investment income..................... -- -- (0.04) (0.03) --
From net realized gain on investments.................. -- -- (0.16) (0.15) (0.16)
In excess of net realized gain on investments.......... -- -- (0.03) -- --
------ ------ ------- ------- ------
Total distributions declared to shareholders........... $(0.58) $(0.60) $ (0.70) $ (0.84) $(0.82)
------ ------ ------- ------- ------
Net asset value -- end of period......................... $10.75 $10.83 $ 10.68 $ 11.64 $10.73
====== ====== ======= ======= ======
Total return###.......................................... 4.67% 7.31% (2.33)%++ 16.97% 7.35%
------ ------ ------- ------- ------
Ratios (to average net assets)/Supplemental data:
Expenses##........................................... 0.60% 0.61% 0.59%+ 0.59% 0.57%
------ ------ ------- ------- ------
Net investment income................................ 5.37% 5.70% 5.49%+ 5.63% 6.12%
------ ------ ------- ------- ------
Portfolio turnover....................................... 84% 90% 74% 56% 87%
------ ------ ------- ------- ------
Net assets at end of period (000,000 omitted)............ $1,798 $1,949 $ 2,031 $ 2,195 $1,878
</TABLE>
- ---------------
<TABLE>
<C> <S>
+ Annualized.
++ Not annualized.
# Per share data for the periods subsequent to October 31, 1993 is based on average shares outstanding.
## For fiscal years ending September 1, 1995, the Fund's expenses are calculated without reduction for fees
paid indirectly.
### Total returns for Class A shares do not include the applicable sales charge. If the charge had been
included, the results would have been lower.
</TABLE>
4
<PAGE> 44
FINANCIAL HIGHLIGHTS -- CONTINUED
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
----------------------------------------------------------
1991 1990 1989 1988 1987
------- ------ ------ ------ ------
CLASS A
-------
<S> <C> <C> <C> <C> <C>
Per share data (for a share outstanding throughout each
period):
Net asset value -- beginning of period..................... $ 10.11 $10.53 $10.57 $ 9.71 $ 11.00
------- ------ ------ ------- --------
Income from investment operations --
Net investment income.................................. $ 0.68 $ 0.68 $ 0.72 $ 0.73 $ 0.72
Net realized and unrealized gain (loss) on
investments.......................................... 0.69 (0.13) 0.04 0.86 (0.90)
------- ------ ------ ------- --------
Total from investment operations......................... $ 1.37 $ 0.55 $ 0.76 $ 1.59 $ (0.18)
------- ------ ------ ------- --------
Less distributions declared to shareholders --
From net investment income............................... $ (0.68) $(0.69) $(0.72) $ (0.73) $ (0.72)
In excess of net investment income....................... -- -- (0.08) -- (0.39)
From net realized gain on investments.................... -- (0.27) -- -- --
From paid-in capital..................................... -- (0.01) -- -- --
------- ------ ------ ------- --------
Total distributions declared to shareholders............. $ (0.68) $(0.97) $(0.80) $ (0.73) $ (1.11)
------- ------ ------ ------- --------
Net asset value -- end of period........................... $ 10.80 $10.11 $10.53 $ 10.57 $ 9.71
======= ====== ====== ======= ========
Total return###............................................ 13.85% 5.42% 7.54% 16.95% (1.98)%
------- ------ ------ ------- --------
Ratios (to average net assets)/Supplemental data:
Expenses............................................... 0.59% 0.60% 0.64% 0.65% 0.61%
------- ------ ------ ------- --------
Net investment income.................................. 6.47% 6.69% 6.87% 7.16% 6.96%
------- ------ ------ ------- --------
Portfolio turnover......................................... 98% 160% 199% 190% 218%
------- ------ ------ ------- --------
Net assets at end of period (000,000 omitted).............. $ 1,715 $1,409 $1,259 $ 1,003 $ 903
</TABLE>
- ---------------
<TABLE>
<C> <S>
### Total returns for Class A shares do not include the applicable sales charge. If the charge had been
included, the results would have been lower.
</TABLE>
5
<PAGE> 45
FINANCIAL HIGHLIGHTS -- CONTINUED
<TABLE>
<CAPTION>
YEAR YEAR TEN
ENDED ENDED MONTHS YEAR
OCTOBER 31, AUGUST 31, ENDED ENDED
1986 ------------------- AUGUST 31, OCTOBER 31,
------------ 1996 1995 1994 1993*
CLASS A ------ ------ ---------- ------------
------------ CLASS B
-------
<S> <C> <C> <C> <C> <C>
Per share data (for a share outstanding throughout
each period):
Net asset value -- beginning of period............. $ 10.02 $11.10 $10.67 $ 11.63 $11.68
------- ------ ------ -------- ------
Income from investment operations# --
Net investment income.......................... $ 0.78 $ 0.49 $ 0.49 $ 0.40 $ 0.07
Net realized and unrealized gain (loss) on
investments.................................. 1.27 (0.37) 0.16 (0.77) (0.05)
------- ------ ------ -------- ------
Total from investment operations................. $ 2.05 $ 0.12 $ 0.65 $ (0.37) $ 0.02
------- ------ ------ -------- ------
Less distributions declared to shareholders --
From net investment income....................... $ (0.78) $(0.48) $(0.49) $ (0.40) $(0.07)++++
In excess of net investment income............... (0.29) -- -- -- --
From net realized gain on investments............ -- -- -- (0.16) --
In excess of net realized gain on investments.... -- -- -- (0.03) --
------- ------ ------ -------- ------
Total distributions declared to shareholders..... $ (1.07) $(0.48) $(0.49) $ (0.59) $(0.07)
------- ------ ------ -------- ------
Net asset value -- end of period................... $ 11.00 $10.74 $10.83 $ 10.67 $11.63
======= ====== ====== ======== ======
Total return###.................................... 21.79% 3.69% 6.35% (3.25)%++ 1.49%+
------- ------ ------ -------- ------
Ratios (to average net assets)/Supplemental data:
Expenses##..................................... 0.64% 1.55% 1.60% 1.72%+ 1.70%+
------- ------ ------ -------- ------
Net investment income.......................... 7.45% 4.42% 4.68% 4.41%+ 3.85%+
------- ------ ------ -------- ------
Portfolio turnover................................. 164% 83% 90% 74% 56%
------- ------ ------ -------- ------
Net assets at end of period (000,000 omitted)...... $ 844 $ 71 $ 56 $ 45 $ 10
</TABLE>
- ---------------
<TABLE>
<C> <S>
* For the period from the commencement of offering of Class B shares, September 7, 1993 to October 31, 1993.
+ Annualized.
++ Not annualized.
# Per share data for the periods subsequent to October 31, 1993 is based on average shares outstanding.
## For fiscal years ending September 1, 1995, the Fund's expenses are calculated without reduction for fees
paid indirectly.
### Total returns for Class A shares do not include the applicable sales charge. If the charge had been
included, the results would have been lower.
++++ Amount includes a per share distribution in excess of net investment income of $0.002.
</TABLE>
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"). The interest income on certain
of these obligations may be subject to an alternative minimum tax, which is
considered to be tax-exempt for purposes of the 80% test described above. 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.
6
<PAGE> 46
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 Services ("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 30% 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. 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.
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
7
<PAGE> 47
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-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,
8
<PAGE> 48
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 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
9
<PAGE> 49
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.
5. MANAGEMENT OF THE FUND
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 as a portfolio manager 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:
<TABLE>
<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>
10
<PAGE> 50
For the Fund's fiscal year ended August 31, 1996, MFS received management fees
under the Fund's investment advisory agreement of $7,990,167 equivalent on an
annualized basis to 0.40% 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 Institutional Advisors, Inc., provide
investment advice to substantial private clients.
MFS is America's oldest mutual fund organization. MFS and its predecessor
organizations have a history of money management dating from 1924 and the
founding of the first mutual fund in the United States, Massachusetts Investors
Trust. Net assets under the management of the MFS organization were
approximately $52.3 billion on behalf of approximately 2.2 million accounts as
of November 30, 1996. As of such date, the MFS organization managed
approximately $6.4 billion of assets in municipal obligations and approximately
$20.3 billion of assets in fixed income funds and fixed income portfolios. MFS
is a subsidiary of Sun Life of Canada (U.S.) which in turn is a wholly owned
subsidiary of Sun Life Assurance Company of Canada ("Sun Life"). The Directors
of MFS are A. Keith Brodkin, Jeffrey L. Shames, Arnold D. Scott, John D. McNeil
and Donald A. Stewart. Mr. Brodkin is the Chairman, Mr. Shames is the President
and Mr. Scott is the Secretary and a Senior Executive Vice President of MFS.
Messrs. McNeil and Stewart are the Chairman and 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 share their views
on a variety of investment related issues, such as the economy, securities
markets, portfolio securities and their issuers, investment recommendations,
strategies and techniques, risk analysis, trading strategies and other portfolio
management matters. MFS has access to the extensive international equity
investment expertise of Foreign & Colonial, and Foreign & Colonial has access to
the extensive U.S. equity investment expertise of MFS. MFS and Foreign &
Colonial each have investment personnel working in each other's offices in
Boston and London, respectively.
In certain instances there may be securities which are suitable for the Fund's
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.
11
<PAGE> 51
6. INFORMATION CONCERNING SHARES OF THE FUND
PURCHASES
Class A and B 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.
This Prospectus offers Class A and 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.
PURCHASES SUBJECT TO INITIAL SALES CHARGE. Class A shares are offered at net
asset value plus an initial sales charge as follows:
- --------------------------------------------------------------------------------
<TABLE>
<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**
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
*Because of rounding in the calculation of offering price, actual sales charges
may be more or less than those calculated using the percentages above.
**A CDSC will apply to such purchases, as discussed below.
MFD allows discounts to dealers (which are alike for all dealers) from the
applicable public offering price as shown in the above table. In the case of the
maximum sales charge, the dealer retains 4% and MFD retains approximately 3/4 of
1% of the public offering price. The sales charge may vary depending on the
number of shares of the Fund as well as certain other MFS Funds owned or being
purchased, the existence of an agreement to purchase additional shares during a
13-month period (or 36-month period for purchases of $1 million or more) or
other special purchase programs. A description of the Right of Accumulation,
Letter of Intent and Group Purchase privileges by which the sales charge may be
reduced is set forth in the SAI.
PURCHASES SUBJECT TO A CDSC (but not an initial sales charge). In the following
four circumstances, Class A shares are offered at net asset value without an
initial sales charge, but subject to a CDSC equal to 1% of the lesser of the
value of the shares redeemed (exclusive of reinvested dividend and capital gain
distributions) or the total cost of such shares, in the event of a share
redemption within 12 months following the purchase.
(i) on investments of $1 million or more in Class A shares;
(ii) on investments in Class A shares by certain retirement plans subject to
the Employee Retirement Income Security Act of 1974, as amended ("ERISA"),
if, prior to July 1, 1996: (a) the plan had established an account with
the Shareholder Servicing Agent and (b) the sponsoring organization had
demonstrated to the satisfaction of MFD that either (i) the employer had
at least 25 employees or (ii) the aggregate purchases by the retirement
plan of Class A shares of Funds in the MFS Funds would be in an aggregate
amount of at least $250,000 within a reasonable period of time, as
determined by MFD in its sole discretion;
(iii) on investments in Class A shares by certain retirement plans subject to
ERISA, if: (a) the retirement plan and/or sponsoring organization
subscribes to the MFS FUNDamental 401(k) Program or any similar
recordkeeping system made available by the Shareholder Servicing Agent
(the "MFS Participant Recordkeeping System"); (b) the plan establishes an
account with the Shareholder Servicing Agent on or after July 1, 1996; and
(c) the aggregate purchases by the retirement
12
<PAGE> 52
plan of Class A shares of the MFS Funds will be in an aggregate amount of
at least $500,000 within a reasonable period of time, as determined by MFD
in its sole discretion; and
(iv) on investments in Class A shares by certain retirement plans subject to
ERISA, if: (a) the plan establishes an account with the Shareholder
Servicing Agent on or after July 1, 1996 and (b) the plan has, at the time
of purchase, a market value of $500,000 or more invested in shares of any
class or classes of the MFS Funds. THE RETIREMENT PLAN WILL QUALIFY UNDER
THIS CATEGORY ONLY IF THE PLAN OR ITS SPONSORING ORGANIZATION INFORMS THE
SHAREHOLDER SERVICING AGENT PRIOR TO THE PURCHASE THAT THE PLAN HAS A
MARKET VALUE OF $500,000 OR MORE INVESTED IN SHARES OF ANY CLASS OR
CLASSES OF THE MFS FUNDS. THE SHAREHOLDER SERVICING AGENT HAS NO
OBLIGATION INDEPENDENTLY TO DETERMINE WHETHER SUCH A PLAN QUALIFIES UNDER
THIS CATEGORY.
In the case of all such purchases, MFD will pay commissions to dealers on new
investments in Class A shares made through such dealers as follows:
<TABLE>
<CAPTION>
COMMISSION PAID BY MFD TO DEALERS CUMULATIVE PURCHASE AMOUNT
- ---------------------------------- -------------------------------------
<C> <S>
1.00% On the first $2,000,000, plus
0.80% Over $2,000,000 to $3,000,000, plus
0.50% Over $3,000,000 to $50,000,000, plus
0.25% Over $50,000,000
</TABLE>
For purposes of determining the level of commissions to be paid to dealers with
respect to a shareholder's new investment in Class A shares made on or after
April 1, 1996, purchases for each shareholder account (and certain other
accounts for which the shareholder is a record or beneficial holder) will be
aggregated over a 12-month period (commencing from the date of the first such
purchases).
See "Redemptions and Repurchases -- Contingent Deferred Sales Charge" in the
Prospectus for further discussion of the CDSC.
WAIVERS OF INITIAL SALES CHARGE AND CDSC. In certain circumstances, the initial
sales charged imposed upon purchases of Class A shares and the CDSC imposed upon
redemption of Class A shares is waived. These circumstances are described in
Appendix A to this Prospectus. In addition to these circumstances, the CDSC
imposed upon the redemption of Class A shares is waived with respect to shares
held by certain retirement plans qualified under Section 401(a) or 403(b) of the
Internal Revenue Code of 1986, as amended (the "Code"), and subject to ERISA,
where:
(i) the retirement plan and/or sponsoring organization does not subscribe to
the MFS Participant Recordkeeping System; and
(ii) the retirement plan and/or sponsoring organization demonstrates to the
satisfaction of, and certifies to, the Shareholder Servicing Agent that the
retirement plan has, at the time of certification or will have pursuant to
a purchase order placed with the certification, a market value of $500,000
or more invested in shares of any class or classes of the MFS Funds and
aggregate assets of at least $10 million;
provided, however, that the CDSC will not be waived (i.e., it will be imposed)
in the event that there is a change in law or regulations which results in a
material adverse change to the tax advantaged nature of the plan, or in the
event that the plan and/or sponsoring organization: (i) becomes insolvent or
bankrupt; (ii) is terminated or partially terminated under ERISA or is
liquidated or dissolved; or (iii) is acquired by, merged into, or consolidated
with, any other entity.
13
<PAGE> 53
CLASS B SHARES: Class B shares are offered at net asset value without an initial
sales charge but subject to a CDSC upon redemption as follows:
<TABLE>
<CAPTION>
YEAR OF CONTINGENT
REDEMPTION DEFERRED SALES
AFTER PURCHASE CHARGE
- ---------------------- ---------------
<S> <C>
First................................................... 4%
Second.................................................. 4%
Third................................................... 3%
Fourth.................................................. 3%
Fifth................................................... 2%
Sixth................................................... 1%
Seventh and following................................... 0%
</TABLE>
The CDSC imposed is assessed against the lesser of the value of the shares
redeemed (exclusive of reinvested dividends and capital gain distributions) or
the total cost of such shares. No CDSC is assessed against shares acquired
through the automatic reinvestment of dividends or capital gain distributions.
Except as described below, MFD will pay commissions to dealers of 3.75% of the
purchase price of Class B shares purchased through dealers. MFD will also
advance to dealers the first year service fee payable under the 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).
Class B shares purchased by a retirement plan whose sponsoring organization
subscribes to the MFS Participant Recordkeeping System and which has established
its account with the Shareholder Servicing Agent on or after July 1, 1996, will
be subject to the CDSC described above, only under limited circumstances, as
explained below under "Waivers of CDSC." With respect to such purchases, MFD
pays an amount to dealers equal to 3.00% of the amount purchased through such
dealers (rather than the 4.00% payment described above), which is comprised of a
commission of 2.75% plus the advancement of the first year service fee equal to
0.25% of the purchase price payable under the Distribution Plan. As discussed
above, such retirement plans are eligible to purchase Class A shares of the Fund
at net asset value without an initial sales charge but subject to a 1% CDSC if
the plan has, at the time of purchase, a market value of $500,000 or more
invested in shares of any class or classes of the MFS Funds. IN THIS EVENT, THE
PLAN OR ITS SPONSORING ORGANIZATION SHOULD INFORM THE SHAREHOLDER SERVICING
AGENT THAT THE PLAN IS ELIGIBLE TO PURCHASE CLASS A SHARES UNDER THIS CATEGORY;
THE SHAREHOLDER SERVICING AGENT HAS NO OBLIGATION INDEPENDENTLY TO DETERMINE
WHETHER SUCH A PLAN QUALIFIES UNDER THIS CATEGORY FOR THE PURCHASE OF CLASS A
SHARES.
See "Redemptions and Repurchases -- Contingent Deferred Sales Charge" for
further discussion of the CDSC.
WAIVERS OF CDSC. In certain circumstances, the CDSC imposed upon redemption of
Class B shares is waived. These circumstances are described in Appendix A to
this Prospectus. In addition to these circumstances, the CDSC imposed upon the
redemption of Class B shares is waived with respect to shares held by a
retirement plan whose sponsoring organization subscribes to the MFS Participant
Recordkeeping System and which has established an account with the Shareholder
Servicing Agent on or after July 1, 1996; provided, however, that the CDSC will
not be waived (i.e., it will be imposed) in the event that there is a change in
law or regulations which results in a material adverse change to the tax
advantaged nature of the plan, or in the event that the plan and/or sponsoring
organization: (i) becomes insolvent or bankrupt; (ii) is terminated or partially
terminated under ERISA or is liquidated or dissolved; or (iii) is acquired by,
merged into, or consolidated with, any other entity.
CONVERSION OF CLASS B SHARES. Class B shares of the Fund that remain outstanding
for approximately eight years will convert to Class A shares of the same Fund.
Shares purchased through the reinvestment of distributions paid in respect of
Class B shares will be treated as Class B shares for purposes of the payment of
the distribution and service fees under the Distribution Plan. See "Distribution
Plan" below. However, for purposes of conversion to Class A shares, all shares
in a shareholder's account that were
14
<PAGE> 54
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 exchange request. In the event that the
Fund or MFD rejects an exchange request, neither the redemption nor the purchase
side of the exchange will be processed.
The Fund is not designed for professional market timing organizations or other
entities using programmed or frequent exchanges. The Fund defines a "market
timer" as an individual, or organization acting on behalf of one or more
individuals, if (i) the individual or organization makes three or more exchange
requests out of the Fund per calendar year and (ii) any one of such exchange
requests represents shares equal in value to 1/2 of 1% or more of the Fund's net
assets at the time of the request. Accounts under common ownership or control,
including accounts administered by market timers, will be aggregated for
purposes of this definition.
As noted above, the Fund and MFD each reserves the right to reject or restrict
any specific purchase and exchange request and, in addition, may impose specific
limitations with respect to market timers, including delaying for up to seven
days the purchase side of an exchange request by market timers or specifically
rejecting or otherwise restricting purchase or exchange requests by market
timers. Other funds in the MFS Family of Funds may have different and/or more or
less restrictive policies with respect to market timers than the Fund. These
policies are disclosed in the prospectuses of these other MFS Funds.
DEALER CONCESSIONS. Dealers may receive different compensation with respect to
sales of Class A and Class B shares. In addition, from time to time, MFD may pay
dealers 100% of the applicable sales charge on sales of Class A shares of
certain specified MFS Funds sold by such dealer during a specified sales period.
In addition, MFD or its affiliates may, from time to time, pay dealers an
additional commission equal to 0.50% of the net asset value of all of the Class
B shares of certain specified MFS Funds sold by such dealer during a specified
sales period. In addition, from time to time, MFD, at its expense, may provide
additional commissions, compensation or promotional incentives ("concessions")
to dealers which sell 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
15
<PAGE> 55
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). Shares of one class
may not be exchanged for shares of any other class.
EXCHANGES AMONG MFS FUNDS (EXCLUDING EXCHANGES FROM MFS MONEY MARKET FUNDS): No
initial sales charges or CDSC will be imposed in connection with an exchange
from shares of an MFS Fund to shares of any other MFS Fund, except with respect
to exchanges from an MFS money market fund to another MFS Fund which is not an
MFS money market fund (discussed below). With respect to an exchange involving
shares subject to a CDSC, the CDSC will be unaffected by the exchange and the
holding period for purposes of calculating the CDSC will carry over to the
acquired shares.
EXCHANGES FROM AN MFS MONEY MARKET FUND: Special rules apply with respect to the
imposition of an initial sales charge or a CDSC for exchanges from an MFS money
market fund to another MFS Fund which is not an MFS money market fund. These
rules are described under the caption "Exchanges" in the Prospectuses of those
MFS money market funds.
EXCHANGES INVOLVING THE MFS FIXED FUND: Class A shares of any MFS Fund held by
certain qualified retirement plans may be exchanged for units of participation
of the MFS Fixed Fund (a bank collective investment fund) (the "Units"), and
Units may be exchanged for Class A shares of any MFS Fund. With respect to
exchanges between Class A shares subject to a CDSC and Units, the CDSC will
carry over to the acquired shares or Units and will be deducted from the
redemption proceeds when such shares or Units are subsequently redeemed,
assuming the CDSC is then payable (the period during which the Class A shares
and the Units were held will be aggregated for purposes of calculating the
applicable CDSC). In the event that a shareholder initially purchases Units and
then exchanges into Class A shares subject to an initial sales charge of an MFS
Fund, the initial sales charge shall be due upon such exchange, but will not be
imposed with respect to any subsequent exchanges between such Class A shares and
Units with respect to shares on which the initial sales charge has already been
paid. In the event that a shareholder initially purchases Units and then
exchanges into Class A shares subject to a CDSC of an MFS Fund, the CDSC period
will commence upon such exchange, and the applicability of the CDSC with respect
to subsequent exchanges shall be governed by the rules set forth above in this
paragraph.
16
<PAGE> 56
GENERAL: A shareholder should read the prospectus of the other MFS Fund into
which an exchange is made and consider the differences in objectives, policies
and restrictions before making any exchange. Exchanges will be made only after
instructions in writing or by telephone (an "Exchange Request") are received for
an established account by the Shareholder Servicing Agent in proper form (i.e.,
if in writing -- signed by the record owner(s) exactly as the shares are
registered; if by telephone -- proper account identification is given by the
dealer or shareholder of record) and each exchange must involve either shares
having an aggregate value of at least $1,000 ($50 in case of retirement plan
participants whose sponsoring organizations subscribe to the MFS FUNDamental
401(k) Plan or another similar 401(k) recordkeeping system made available by the
Shareholder Servicing Agent) or all the shares in the account. If an Exchange
Request is received by the Shareholder Servicing Agent on any business day prior
to the close of regular trading on the Exchange (generally, 4:00 p.m., Eastern
time), the exchange will occur on that day if all the requirements set forth
above have been complied with at that time and subject to the Fund's right to
reject purchase orders. No more than five exchanges may be made in any one
Exchange Request by telephone. Additional information concerning this exchange
privilege and prospectuses for any of the other MFS Funds may be obtained from
dealers or the Shareholder Servicing Agent. For federal and (generally) state
income tax purposes, 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.
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
17
<PAGE> 57
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.
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
(however, the CDSC on Class A shares is only imposed with respect to purchases
of $1 million or more of Class A shares or purchases by certain retirement plans
of Class A shares); or (ii) with respect to Class B shares, six years. Purchases
of Class A shares made during a calendar month, regardless of when during the
month the investment occurred, will age one month on the last day of the month
and each subsequent month. Class B shares purchased on or after January 1, 1993
will be aggregated on a calendar month basis -- all transactions made during a
calendar month, regardless of when during the month they have occurred, will age
one year at the close of business on the last day of such month in the following
calendar year and each subsequent year. For Class B shares of the Fund purchased
prior to January 1, 1993, transactions will be
18
<PAGE> 58
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. The Trust agrees to redeem shares of the Fund solely in
cash up to the lesser of $250,000 or 1% of the net asset value of the Fund
during any 90-day period for any one shareholder. The Fund has reserved the
right to pay other redemptions or repurchase price of shares of the Fund, either
totally or partially, by a distribution in-kind of securities (instead of cash)
from the Fund's portfolio. The securities distributed in such a distribution
would be valued at the same amount as that assigned to them in calculating the
net asset value for the shares being sold. If a shareholder received a
distribution in-kind, the shareholder could incur brokerage or transaction
charges when converting the securities to cash.
INVOLUNTARY REDEMPTIONS/SMALL ACCOUNTS. Due to the relatively high cost of
maintaining small accounts, the Fund reserves the right to redeem shares in any
account for their then-current value if at any time the total investment in such
account drops below $500 because of redemptions, except in the case of accounts
being established for monthly automatic investments and certain payroll savings
programs, Automatic Exchange Plan accounts and tax-deferred retirement plans,
for which there is a lower minimum investment requirement. See "Purchases --
General -- Minimum Investment." Shareholders will be notified that the value of
their account is less than the minimum investment requirement and allowed 60
days to make an additional investment before the redemption is processed.
DISTRIBUTION PLAN
The Trustees have adopted a Distribution Plan for Class B shares pursuant to
Section 12(b) of the 1940 Act and Rule 12b-1 thereunder (the "Distribution
Plan"), after having concluded that there is a reasonable likelihood that the
Distribution Plan would benefit the Fund and its Class B shareholders.
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In certain circumstances, the fees described below may not be imposed or are
being waived. These circumstances, if any, are described below under the heading
"Current Level of Distribution and Service Fees."
SERVICE 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 0.84% 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 upon the sale of Class B shares, payment of the Class B service fee
will be suspended until such date as the Trustees of the Trust may determine.
DISTRIBUTIONS
The Fund intends to declare daily and pay 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.
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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 dividends paid to shareholders from interest on Municipal
Obligations will be exempt from federal income tax because the Fund intends to
satisfy certain requirements of the Code. One such requirement is that at the
close of each quarter of its taxable year, at least 50% of the value of the
Fund's total assets consists of obligations whose interest is exempt from
federal income tax. Distributions of income from capital gains, from investments
in taxable securities, and from certain other transactions (including options
and futures transactions) will be taxable to shareholders, whether paid in cash
or in additional shares.
Interest on indebtedness incurred by shareholders to purchase or carry shares of
the Fund will not be deductible for federal income tax purposes. Exempt-interest
dividends are taken into account in calculating the amount of social security
and railroad retirement benefits that may be subject to federal income tax.
Certain distributions of exempt-interest dividends may be a tax preference item
for purposes of the federal individual and corporate alternative minimum tax.
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. 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 exempt from
federal income taxes as "exempt-interest dividends," the portion, if any, that
is a tax preference item under the federal alternative minimum tax, the portion,
if any, taxable as ordinary income, the portion, if any, taxable as long-term
capital gain, 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 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.
The Fund intends to withhold tax payments at a rate of 30% on taxable dividends
and other payments that are subject to such withholding and that are made to
persons who are neither citizens nor residents of the U.S., 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. Backup withholding will not,
however, be applied to payments that have been subject to 30% withholding.
Prospective investors 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
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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 the Distribution
Plan or on any other matter that affects solely that class of shares, but will
otherwise vote together with all other classes of shares of the series on all
other matters. The Trust does not intend to hold annual 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 -- 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 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 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 will give
effect to the imposition of any applicable CDSC assessed upon redemptions of the
Fund's Class B shares. Such total rate of return quotations may be accompanied
by quotations which do not reflect the reduction in value of the initial
investment due to the sales charge or the deduction of a CDSC, and which will
thus be higher. The Fund offers multiple classes of shares which were initially
offered for sale
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to the public on different dates. The calculation of total rate of return for a
class of shares which initially was offered for sale to the public subsequent to
another class of shares of the Fund is based both on (i) the performance of the
Fund's newer class from the date it initially was offered for sale to the public
and (ii) the performance of the Fund's oldest class from the date it initially
was offered for sale to the public up to the date that the newer class initially
was offered for sale to the public. See the SAI for further information on the
calculation of total rate of return for share classes initially offered for sale
to the public on different dates.
All performance quotations are based on historical performance and are not
intended to indicate future performance. Yield 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, or the
shareholder does not respond to mailings from the Shareholder Servicing Agent
with regard to uncashed distribution checks, such shareholder's distribution
option will automatically be converted to having all dividends and other
distributions reinvested in additional shares. Any request to change a
distribution option must be received by the Shareholder Servicing Agent by the
record date for a dividend or distribution in order to be effective for that
dividend or distribution. No interest will accrue on amounts represented by
uncashed distribution or redemption checks.
INVESTMENT AND WITHDRAWAL PROGRAMS -- For the convenience of shareholders, the
Fund makes available the following programs designed to enable shareholders to
add to their investment in an account with the Fund or withdraw from it with a
minimum of paper work. The programs involve no extra charge to shareholders
(other than a sales charge in the case of certain Class A share purchases) and
may be changed or discontinued at any time by a shareholder or the Fund.
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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.
INVESTMENT AND WITHDRAWAL BY TELEPHONE (AUTOBUY PRIVILEGE): Shareholders of
any MFS Fund may purchase shares of any MFS Fund by telephone, a privilege known
as the "Autobuy Privilege." The Autobuy Privilege allows shareholders to call
MFS and have money transferred from a checking or savings account into their MFS
account. Once enrolled, a shareholder can initiate a transaction ($50
minimum/$100,000 maximum) by calling MFS before 4:00 (eastern time). The share
price and trade date will be effective on the same day that the Autobuy
Privilege request is received. The Autobuy Privilege is available for any class
of shares of any MFS Fund made available to the general public.
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 on any day of the month. If the
shareholder does not specify a date, the investment will automatically occur on
the first day of the month. Required forms are available from the Shareholder
Servicing Agent or investment dealers.
AUTOMATIC EXCHANGE PLAN: Shareholders having account balances of at least
$5,000 in any MFS Fund may exchange their shares for the same class of shares of
the other MFS Funds 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 six different funds. A
shareholder should consider the objectives and policies of a fund and review its
prospectus before electing to exchange money into such fund through the
Automatic Exchange Plan. No transaction fee is imposed in connection with
exchange transactions under the Automatic Exchange Plan. However, exchanges of
shares of MFS Money Market Fund, MFS Government Money Market Fund or Class A
shares of MFS Cash Reserve Fund will be subject to any applicable sales charge.
For federal and (generally) state income tax purposes, an exchange is treated as
a sale of the shares exchanged and, therefore, could result in a capital gain or
loss to the shareholder making the exchange. See the Statement of Additional
Information for further information concerning the Automatic Exchange Plan.
Investors should consult their
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tax advisers for information regarding the potential capital gain and loss
consequences of transactions under the Automatic Exchange Plan.
Because a dollar cost averaging program involves periodic purchases of shares
regardless of fluctuating share offering prices, a shareholder should consider
his financial ability to continue his purchases through periods of low price
levels. Maintaining a dollar cost averaging program concurrently with a
withdrawal program could be disadvantageous because of the sales charges
included in share purchases in the case of Class A shares, and because of the
assessment of the CDSC for certain share redemptions in the case of Class A
shares.
----------------------------------
The Fund's SAI, dated January 1, 1997, 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.
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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 Institutional Advisors, Inc.
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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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> 69
APPENDIX B
TAXABLE EQUIVALENT YIELD TABLE
(UNDER FEDERAL INCOME TAX LAW AND RATES FOR 1996)
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 1996. (Such yields may differ under the laws applicable to
subsequent years.) Separate calculations, showing the applicable taxable income
brackets, are provided for investors who file joint returns and for those
investors who file individual returns.
<TABLE>
<CAPTION>
SINGLE RETURN JOINT RETURN INCOME TAX-EXEMPT YIELD
- ----------------- ----------------- TAX --------------------------------------------------- FEDERAL
(TAXABLE INCOME)* BRACKET** 3% 4% 5% 6% 7% 8% RATE
- --------------------------------------- --------- ---- ---- ---- ---- ----- ----- -------
1996 1996 EQUIVALENT TAXABLE YIELD
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$ 0-$ 24,000 $ 0-$ 40,100 0.15% 3.53% 4.71% 5.88% 7.06% 8.24% 9.41% 0.15%
$ 24,000-$ 58,150 $ 40,100-$ 96,900 28.00 4.17 5.56 6.94 8.33 9.72 11.11 0.28
$ 58,150-$121,300 $ 96,900-$147,700 31.00 4.35 5.80 7.25 8.70 10.14 11.59 0.31
$121,300-$263,750 $147,700-$263,750 0.36 4.69 6.25 7.81 9.38 10.94 12.50 0.36
$263,750 & Over $263,750 & Over 0.396 4.97 6.62 8.28 9.93 11.59 13.25 0.396
</TABLE>
*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.
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> 70
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.
C-1
<PAGE> 71
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> 72
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
<PAGE> 73
Investment Adviser [MFS LOGO]
Massachusetts Financial
Services Company
500 Boylston Street
Boston, MA 02116 MFS[REGISTERED TRADEMARK] MUNICIPAL BOND FUND
(617) 954-5000
Distributor Prospectus
MFS Fund Distributors, Inc. January 1, 1997
500 Boylston Street
Boston, MA 02116
(617) 954-5000
Custodian and Dividend Disbursing Agent
State Street Bank & Trust Company
225 Franklin Street
Boston, MA 02110
Shareholder Servicing Agent
MFS Service Center, Inc.
500 Boylston Street
Boston, MA 02116
Toll-free: (800) 225-2606
Mailing Address:
P.O. Box 2281
Boston, MA 02107-9906
Independent Auditors
Deloitte & Touche LLP
125 Summer Street
Boston, MA 02110
[MFS LOGO]
MFS[REGISTERED TRADEMARK] Municipal Bond Fund
500 Boylston Street
Boston, MA 02116
MMB-1-1/97/120M 17/217
<PAGE> 74
[MFS LOGO]
INVESTMENT MANAGEMENT
WE INVENTED THE MUTUAL FUND[SERVICEMARK]
MFS[REGISTERED TRADEMARK] MUNICIPAL STATEMENT OF
BOND FUND ADDITIONAL INFORMATION
(A member of the MFS Family of
Funds[Registered Trademark]) January 1, 1997
- --------------------------------------------------------------------------------
PAGE
----
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. Distribution Plan................................................ 18
9. Description of Shares, Voting Rights and Liabilities............. 19
10. Independent Auditors and Financial Statements.................... 20
Appendix A....................................................... 21
Appendix B....................................................... 22
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, as amended or supplemented from time
to time (the "SAI"), sets forth information which may be of interest to
investors but which is not necessarily included in the Fund's Prospectus, dated
January 1, 1997. This SAI should be read in conjunction with the Prospectus, a
copy of which may be obtained without charge by contacting the Shareholder
Servicing Agent (see last page for address and phone number).
THIS SAI IS NOT A PROSPECTUS AND IS AUTHORIZED FOR DISTRIBUTION TO PROSPECTIVE
INVESTORS ONLY IF PRECEDED OR ACCOMPANIED BY A CURRENT PROSPECTUS.
<PAGE> 75
1. DEFINITIONS
"Fund" -- MFS Municipal Bond Fund, a
diversified series of
MFS[Registered Trademark]
Series Trust IV
(the "Trust"), a Massa-
chusetts business trust.
The Trust was known as
Massachusetts Cash
Management Trust prior to
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,
1997, as amended or
supplemented from time to
time.
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 issued in principal amount greater than the principal amount of
2
<PAGE> 76
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
3
<PAGE> 77
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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<PAGE> 78
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
5
<PAGE> 79
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> 80
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> 81
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 energy 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 December 1991)
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, Senior 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 $200 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> 82
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, 1996, all Trustees and officers as a group owned 1.54% of the
outstanding shares of the Fund.
As of November 30, 1996, Merrill Lynch, Pierce, Fenner & Smith Inc., 4800 Deer
Lake Drive East, Jacksonville, FL 32246 was the record holder of approximately
5.83% 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 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 excess of $16 million
$200 million 3.16% of gross income in excess of
.168% of average daily net $160 million
assets in excess of $2 billion
</TABLE>
For the Fund's fiscal years ended August 31, 1996, August 31, 1995 and August
31, 1994, MFS received management fees of $7,990,167, $8,210,290 and $7,253,533,
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, 1996, 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 facilities, and all executive and supervisory personnel
necessary
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<PAGE> 83
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, 1997, and will
continue in effect thereafter only if such continuance is specifically approved
at least annually by the Board of Trustees or by vote of a majority of the
Fund's outstanding voting securities (as defined under "Investment
Restrictions") and, in either case, by a majority of the Trustees who are not
parties to the Advisory Agreement or interested persons of any such party. The
Advisory Agreement terminates automatically if it is assigned and may be
terminated without penalty by vote of 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 the
Fund and (b) the dealer commission, is the commission
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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, 1996, MFD and certain other
financial institutions received net commissions of $289,161 and $1,953,785,
respectively (as their concession on gross commissions of $2,242,946). The Fund
received $179,674,142, representing the aggregate net asset value of such
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 commission
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 August 31, 1996
the CDSC imposed upon the redemption of Class A and Class B shares was $1,862
and $186,111, respectively. 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. During the Fund's fiscal year ended August 31, 1994,
the CDSC imposed upon the redemption of Class A and Class B shares was $26,330
and $35,635, respectively.
The Distribution Agreement will remain in effect until August 1, 1997, and will
continue in effect thereafter only if such continuance is specifically approved
at least annually by the Board of Trustees or by vote of a majority of the
Trust's shares (as defined in "Investment Restrictions") and, in either case, by
a majority of the Trustees who are not parties to the Distribution Agreement or
interested persons of any such party. The Distribution Agreement terminates
automatically if it is assigned and may be terminated without penalty by either
party on not more than 60 days' nor less than 30 days' notice.
4. PORTFOLIO TRANSACTIONS AND BROKERAGE COMMISSIONS
Specific decisions to purchase or sell securities for the Fund are made by 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 by the Adviser to be
equitable to each. It is recognized that in some cases this system could have a
detrimental effect on the
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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 $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.
INVESTMENT AND WITHDRAWAL BY TELEPHONE (AUTOBUY PRIVILEGE): Shareholders of
any MFS Fund may purchase shares of any MFS Fund by telephone, a privilege known
as the "Autobuy Privilege." The Autobuy Privilege allows shareholders to call
MFS and have money transferred from a checking or savings account into their MFS
account. Once enrolled, a shareholder can initiate a transaction ($50
minimum/$100,000 maximum) by calling MFS before 4:00 (eastern time). The share
price and trade date will be effective on the same day that the Autobuy
Privilege request is received. The Autobuy Privilege is available for any class
of shares of any MFS Fund made available to the general public.
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
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(a "SWP") must be at least $100, except in certain limited circumstances. The
aggregate withdrawals of Class B shares in any year pursuant to a SWP generally
are limited to 10% of the value of the account at the time of establishment of
the SWP. SWP payments are drawn from the proceeds of share redemptions (which
would be a return of principal and, if reflecting a gain, would be taxable).
Redemptions of Class B shares will be made in the following order: (i) any "Free
Amount"; (ii) to the extent necessary, any "Reinvested Shares"; and (iii) to the
extent necessary, the "Direct Purchase" subject to the lowest CDSC (as such
terms are defined in "Contingent Deferred Sales Charge" in the Prospectus). The
CDSC will be waived in the case of redemptions of Class B shares pursuant to a
SWP, but will not be waived in the case of SWP redemptions of Class A shares
which are subject to a CDSC. To the extent that redemptions for such periodic
withdrawals exceed dividend income reinvested in the account, such redemptions
will reduce and may eventually exhaust the number of shares in the shareholder's
account. All dividend and capital gain distributions for an account with a SWP
will be reinvested in additional, full 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 six different funds
effective on the seventh day of each month or of every third month, depending
whether monthly or quarterly exchanges are elected by the shareholder. If the
seventh day of the month is not a business day, the transaction will be
processed on the next business day. Generally, the initial exchange will occur
after receipt and processing by the Shareholder Servicing Agent of an
application in good order. Exchanges will continue to be made from a
shareholder's account in any MFS Fund, as long as the balance of the account is
sufficient to complete the 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.
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A shareholder's right to make additional investments in any of the MFS Funds, to
make exchanges of shares from one MFS Fund to another and to withdraw from an
MFS Fund, as well as a shareholder's other rights and privileges are not
affected by a shareholder's participation in the Automatic Exchange Plan.
The Automatic Exchange Plan is part of the Exchange Privilege. For additional
information regarding the Automatic Exchange Plan, including the treatment of
any CDSC, see "Exchange Privilege" below.
REINSTATEMENT PRIVILEGE: Shareholders of the Fund and shareholders of the
other MFS Funds (except MFS Money Market Fund, MFS Government Money Market Fund
and holders of Class A shares of MFS Cash Reserve Fund in the case where the
shares are acquired through direct purchase or reinvested dividends) who have
redeemed their shares have a one-time right to reinvest the redemption proceeds
in 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
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<PAGE> 88
"Code"), by meeting all applicable requirements of Subchapter M, including
requirements as to the nature of the Fund's gross income, the amount of Fund
distributions (as a percentage of both the Fund's overall income and its
tax-exempt income), and the composition 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.
The portion of the Fund's net investment income distributions that is
attributable to interest from tax-exempt securities will be designated by the
Fund as an "exempt-interest dividend" under the Code and will generally be
exempt from federal income tax in the hands of shareholders so long as at least
50% of the total value of the Fund's assets consists of tax-exempt securities at
the close of each quarter of the Fund's taxable year. Distributions of
tax-exempt interest earned from certain securities may, however, be treated as
an item of tax preference for shareholders under the federal alternative minimum
tax, and all exempt-interest dividends may increase a corporate shareholder's
alternative minimum tax. The percentage of income designated as tax-exempt will
be applied uniformly to all distributions by the Fund of net investment income
made during each fiscal year of the Fund and may differ from the percentage of
distributions consisting of tax-exempt interest in any particular month.
Shareholders are required to report exempt-interest dividends received from the
Fund on their federal income tax returns.
The Fund may also recognize some net investment income that is not tax-exempt
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; however, the Fund
does not expect that the non-tax-exempt portion of its net investment income, if
any, will be substantial. That portion of net investment income distributions
not designated as tax-exempt and any distributions from net short-term capital
gains are taxable to shareholders as ordinary income for federal income tax
purposes whether the distributions are paid in cash or in additional shares.
Because the Fund expects to earn primarily tax-exempt interest income, it is
expected that no Fund dividends will qualify for the dividends received
deduction for corporations. Distributions of net capital gains (i.e., the excess
of the net long-term capital gains over net short-term capital losses), whether
paid in cash or additional shares, are taxable as long-term capital gains
without regard to the length of time the shareholders have held their shares.
Any Fund dividend that is declared in October, November, or December of any
calendar year, that is payable to shareholders of record in such a month, and
that is paid the following January will be treated as if received by the
shareholders on December 31 of the year in which the dividend is declared. The
Fund will notify shareholders regarding the federal tax status of its
distributions after the end of each calendar year.
Any fund distribution of net capital gains or net short-term capital gains will
have the effect of reducing the per-share net asset value of shares in the Fund
by the amount of the distribution. Shareholders purchasing shares shortly before
the record date of any such distribution may thus pay the full price for the
shares and then effectively receive a portion of the purchase price back as a
taxable distribution.
Interest on indebtedness incurred by shareholders to purchase or carry shares of
the Fund will not be deductible for Federal income tax purposes. Exempt-interest
dividends are taken into account in calculating the amount of social security
and railroad retirement benefits that may be subject to federal income tax.
Entities or persons who are "substantial users" (or persons related to
"substantial users") of facilities financed by certain private activity bonds
should consult their tax advisers before purchasing shares of the Fund.
In general, any gain or loss realized upon a taxable disposition of shares of
the Fund by a shareholder that holds such shares as a capital asset will be
treated as long-term capital gain or loss if the shares have been held for more
than twelve months and otherwise as 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
disposition of shares may also be disallowed under rules relating to wash sales.
Gain may be increased (or loss reduced) upon a redemption of Class A shares of
the Fund within 90 days after their purchase followed by any purchase (including
purchases by exchange or by reinvestment) without payment of an additional sales
charge of Class A shares of the Fund or of another MFS Fund (or any other shares
of an MFS Fund generally sold subject to a sales charge).
The Fund's current dividend and accounting policies will affect the amount,
timing, and character of distributions to shareholders. Any Fund investment in
zero coupon bonds and certain securities purchased at a market discount will
cause the Fund to recognize income prior to the receipt of cash payments with
respect to 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 and Futures Contracts will be subject to
special tax rules that may affect the amount, timing, and character of Fund
income and distributions to shareholders. For example, certain positions held by
the Fund on the last business day of each taxable year will be marked to market
15
<PAGE> 89
(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 and Futures Contracts to the extent necessary to
meet the requirements of Subchapter M of the Code.
Dividends and certain other payments to persons who are not citizens or
residents of the United States or U.S. entities ("Non-U.S. Persons") are
generally subject to U.S. federal income tax withholding at a rate of 30%. The
Fund intends to withhold U.S. tax payments 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 applicable to such claims. Distributions received by the Fund by Non-U.S.
Persons also may be subject to tax under the laws of their own jurisdiction.
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 offers multiple classes of shares which were initially offered for sale
to the public on different dates. The calculation of total rate of return for a
class of shares which initially was offered for sale to the public subsequent to
another class of shares of the Fund is based both on (i) the performance of the
Fund's newer class from the date it initially was offered for sale to the public
and (ii) the performance of the Fund's oldest class from the date it initially
was offered for sale to the public up to the date that the newer class initially
was offered for sale to the public.
16
<PAGE> 90
As discussed in the Prospectus, the sales charges, expenses and expense ratios,
and therefore the performance, of the Fund's classes of shares differ. In
calculating total rate of return for a newer class of shares in accordance with
certain formulas required by the SEC, the performance will be adjusted to take
into account the fact that the newer class is subject to a different sales
charge than the oldest class (e.g., if the newer class is Class A shares, the
total rate of return quoted will reflect the deduction of the initial sales
charge applicable to Class A shares; if the newer class is Class B shares, the
total rate of return quoted will reflect the deduction of the CDSC applicable to
Class B shares). However, the performance will not be adjusted to take into
account the fact that the newer class of shares bears different class specific
expenses than the oldest class of shares (e.g., Rule 12b-1 fees). Therefore, the
total rate of return quoted for a newer class of shares will differ from the
return that would be quoted had the newer class of shares been outstanding for
the entire period over which the calculation is based (i.e., the total rate of
return quoted for the newer class will be higher than the return that would have
been quoted had the newer class of shares been outstanding for the entire period
over which the calculation is based if the class specific expenses for the newer
class are higher than the class specific expenses of the oldest class, and the
total rate of return quoted for the newer class will be lower than the return
that would be quoted had the newer class of shares been outstanding for this
entire period if the class specific expenses for the newer class are lower than
the class specific expenses of the oldest class).
Total rate of return quotations for each class are presented in Appendix B
attached hereto under the heading "Performance Quotations."
PERFORMANCE RESULTS: The performance results for Class A shares presented in
Appendix B attached hereto under the heading "Performance Results," assume an
initial investment of $10,000 in Class A shares, cover the period from January
1, 1986 to December 31, 1995. 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).
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 calculations
assume no CDSC is paid. Yield quotations for each class of shares is presented
in Appendix B attached hereto under the heading "Performance Quotations."
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. Tax equivalent yield quotations for each class of shares are
presented in Appendix B attached hereto under the heading "Performance
Quotations."
CURRENT DISTRIBUTION RATE: Yield, which is calculated according to a formula
prescribed by the Securities and Exchange Commission, is not indicative of the
amounts which were or will be paid to the Fund's shareholders. Amounts paid to
shareholders of each class are reflected in the quoted "current distribution
rate" for that class. The current distribution rate for a class is computed by
dividing the total amount of dividends per share paid by the Fund to
shareholders of that class during the past twelve months by the maximum public
offering price of that class at the end of such period. Under certain
circumstances, such as when there has been a change in the amount of dividend
payout, or a fundamental change in investment policies, it might be appropriate
to annualize the dividends paid over the period such policies were in effect,
rather than using the dividends during the past twelve months. The current
distribution rate differs from the yield computation because it may include
distributions to shareholders from sources other than dividends and interest,
such as premium income for option writing, short-term capital gains and return
of invested capital, and is calculated over a different period of time. The
Fund's current distribution rate calculation for Class A shares assumes a
maximum sales charge of 4.75%. Current distribution rate quotations for each
class of shares are presented in Appendix B attached hereto under the heading
"Performance Quotations."
From time to time the Fund may, as appropriate, quote Fund rankings or reprint
all or a portion of evaluations of fund performance and operations appearing in
various independent publications, including but not limited to the following:
Money, Fortune, U.S. News and World Report, Kiplinger's Personal Finance, The
Wall Street Journal, Barron's, Investors Business Daily, Newsweek, Financial
World, Financial Planning, Investment Advisor, USA Today, Pensions and
Investments, SmartMoney, Forbes, Global Finance, Registered Representa-
17
<PAGE> 91
tive, 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, and similar or related matters.
From time to time the Fund may also discuss or quote the views of its
distributor, its investment adviser and other financial planning, legal, tax,
accounting, insurance, estate planning and other professionals, or from surveys,
regarding individual and family financial planning. Such views may include
information regarding: retirement planning; tax management strategies; estate
planning; general investment techniques (e.g., asset allocation and disciplined
saving and investing); business succession; ideas and information provided
through the MFS Heritage Planning(sm) program, an intergenerational financial
planning assistance program; issues with respect to insurance (e.g., disability
and life insurance and Medicare supplemental insurance); issues regarding
financial and health care management for elderly family members; and other
similar or related matters.
The Fund may advertise examples of the effects of periodic investment plans,
including the principle of dollar cost averaging. In such a program, an investor
invests a fixed dollar amount in a fund at periodic intervals, thereby
purchasing fewer shares when prices are high and more shares when prices are
low. While such a strategy does not assure a profit or guard against a loss in a
declining market, the investor's average cost per share can be lower than if
fixed numbers of shares are purchased at the same intervals.
MFS FIRSTS: MFS has a long history of innovations.
-- 1924 -- Massachusetts Investors Trust is established as the first 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. 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
18
<PAGE> 92
expense ratio to the extent that the Fund's fixed costs are spread over a larger
net asset base. Also, an increase in net assets may lessen the adverse effect
that could result were the Fund required to liquidate portfolio securities to
meet redemptions. There is, however, no assurance that the net assets of the
Fund will increase or that the other benefits referred to above will be
realized.
The Distribution Plan is described in the Prospectus under the caption
"Distribution Plan," which is incorporated herein by reference. The following
information supplements this Prospectus discussion.
SERVICE FEES: Except in the case of the first year service fee, no service fees
will be paid to any securities dealer who is the holder or dealer of record for
investors who own Class B shares having an aggregate net asset value of less
than $750,000 or such other amount as may be determined by MFD from time to
time. MFD, however, may waive this minimum amount requirement from time to time.
Dealers may from time to time be required to meet certain other criteria in
order to receive service fees.
MFD or its affiliates shall be entitled to receive any service fee payable under
the Distribution Plan for which there is no dealer of record or for which
qualification standards have not been met as partial consideration for personal
services and/or account maintenance services performed by MFD or its affiliates
for shareholder accounts.
DISTRIBUTION FEES: The purpose of distribution payments to MFD under the
Distribution Plan is to compensate MFD for its distribution services to the
Fund. MFD pays commissions to dealers as well as expenses of printing
prospectuses and reports used for sales purposes, expenses with respect to the
preparation and printing of sales literature and other distribution related
expenses, including, without limitation, the cost necessary to provide
distribution-related services, or personnel, travel, office expenses and
equipment.
DISTRIBUTION AND SERVICE FEES PAID DURING THE FUND'S LAST FISCAL YEAR: During
fiscal year ended August 31, 1996, the Fund paid the following Distribution Plan
expenses:
<TABLE>
<CAPTION>
AMOUNT OF AMOUNT OF AMOUNT OF
DISTRIBUTION DISTRIBUTION DISTRIBUTION
AND SERVICE AND SERVICE AND SERVICE
FEES PAID BY FEES RETAINED FEES RECEIVED
CLASS OF SHARES FUND BY MFD BY DEALERS
- --------------- ------------ ------------- -------------
<S> <C> <C> <C>
Class B Shares.......... $541,038 $482,109 $58,929
</TABLE>
GENERAL: The Distribution Plan will remain in effect until August 1, 1997, and
will continue in effect thereafter only if such continuance is specifically
approved at least annually by vote of both the Trustees and a majority of the
Trustees who are not "interested persons" or financially interested parties of
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
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<PAGE> 93
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) 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, 1996, the Statement of Assets and
Liabilities at August 31, 1996, the Statement of Operations for the year ended
August 31, 1996, the Statement of Changes in Net Assets for the year ended
August 31, 1996, and the year ended August 31, 1995, the Notes to Financial
Statements and the Independent Auditors' Report, each of which is included in
the Annual Report to shareholders of the Fund, are incorporated by reference
into this SAI and have been so incorporated in reliance upon the report of
Deloitte & Touche LLP, independent auditors, as experts in accounting and
auditing. A copy of the Annual Report accompanies this SAI.
20
<PAGE> 94
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.................................... $7,450 $1,620 8 $263,815
A. Keith Brodkin..................................... 0 0 N/A 0
Peter G. Harwood..................................... 8,750 1,150 5 111,366
J. Atwood Ives....................................... 8,025 1,684 17 101,356
Lawrence T. Perera................................... 8,200 3,342 26 102,546
William Poorvu....................................... 8,750 3,508 25 111,366
Charles W. Schmidt................................... 8,575 3,340 20 105,411
Arnold D. Scott...................................... 0 0 N/A 0
Jeffrey L. Shames.................................... 0 0 N/A 0
Elaine R. Smith...................................... 8,575 1,670 27 105,411
David B. Stone....................................... 9,100 2,465 11 115,521
- ---------------
<FN>
(1) For fiscal year ended August 31, 1996.
(2) Based on normal retirement age of 73.
(3) For calendar year 1995. All Trustees receiving compensation served as
Trustees of 23 funds within the MFS fund complex (having aggregate net
assets at December 31, 1995, of approximately $17.6 Billion) except Mr.
Bailey, who served as Trustee of 73 funds within the MFS fund complex
(having aggregate net assets at December 31, 1995, of approximately $31.7
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>
$6,705 $1,006 $1,676 $2,347 $3,353
7,366 1,105 1,842 2,578 $3,683
8,027 1,204 2,007 2,809 $4,014
8,688 1,303 2,172 3,041 $4,344
9,349 1,402 2,337 3,272 $4,675
10,010 1,502 2,503 3,504 $5,005
- ---------------
<FN>
(4) Other funds in the MFS fund complex provide similar retirement benefits to
the Trustees.
</TABLE>
21
<PAGE> 95
APPENDIX B
PERFORMANCE RESULTS AND QUOTATIONS
The performance results and quotations below should not be considered as
representative of the performance of the Fund in the future since the net asset
value and public offering price of shares of the Fund will vary. See
"Performance Information" in the SAI.
PERFORMANCE RESULTS
<TABLE>
CLASS A SHARES
<CAPTION>
VALUE OF VALUE OF
INITIAL CAPITAL VALUE OF
$10,000 GAIN REINVESTED TOTAL
YEAR ENDED INVESTMENT DISTRIBUTIONS DIVIDENDS VALUE
---------- ---------- ------------- ---------- -------
<S> <C> <C> <C> <C>
December 31, 1986........................................ 10,094 394 773 11,261
December 31, 1987........................................ 9,582 374 1,505 11,461
December 31, 1988........................................ 9,886 483 2,428 12,797
December 31, 1989........................................ 9,867 846 3,326 14,039
December 31, 1990........................................ 9,810 841 4,271 14,922
December 31, 1991........................................ 10,227 1,128 5,484 16,839
December 31, 1992........................................ 10,379 1,398 6,642 18,419
December 31, 1993........................................ 10,930 1,605 8,407 20,942
December 31, 1994........................................ 9,658 1,418 8,505 19,581
December 31, 1995........................................ 10,371 1,575 10,677 22,983
</TABLE>
EXPLANATORY NOTES:
The results in the table assume that income dividends and capital gain
distributions were invested in additional shares. The results also assume that
the initial investment in Class A shares was reduced by the current maximum
applicable sales charge. No adjustment has been made for any income taxes, if
any, payable by shareholders.
PERFORMANCE QUOTATIONS
<TABLE>
All performance quotations are for the period ended August 31, 1996.
<CAPTION>
TAX
EQUIVALENT
30-DAY YIELD
30-DAY YIELD TAX BRACKETS: CURRENT
WITHOUT ------------- DISTRIBUTION
1 YEAR 5 YEAR 10 YEAR WAIVER 28% 31% RATE
------ ------ ------- ------------ ---- ---- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Class A with sales charge................. -0.30% 6.10% 7.06% 5.16%
Class A without sales charge.............. 4.67% 7.14% 7.58% 5.15% 7.15% 7.46%
Class B with CDSC......................... -0.28% 6.18%(1) 7.26%(1) 4.45%
Class B without CDSC...................... 3.69% 6.49%(1) 7.26%(1) 4.40% 6.11% 6.38%
- ---------------
<FN>
(1) Class B share performance includes the performance of the Fund's Class A
shares for periods prior to the commencement of offering of Class B shares
on September 7, 1993. Sales charges, expenses and expense ratios, and
therefore performance, for Class A and Class B shares differ. Class B share
performance has been adjusted to reflect that Class B shares generally are
subject to a CDSC (unless the performance quotation does not give effect to
the CDSC) whereas Class A shares generally are subject to an initial sales
charge. Class B share performance has not, however, been adjusted to reflect
differences in operating expenses (e.g., Rule 12b-1 fees), which generally
are lower for Class A shares.
</TABLE>
22
<PAGE> 96
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[REGISTERED TRADEMARK]
MUNICIPAL
BOND FUND
500 BOYLSTON STREET
BOSTON, MA 02116
[MFS LOGO] MMB-13-1/97/500 17/217
INVESTMENT MANAGEMENT
WE INVENTED THE MUTUAL FUND[SERVICEMARK]
<PAGE> 97
Table of Contents
Letter from the Chairman ..................... 1
Tax Form Summary ............................ 2
Fund Manager's Overview ..................... 3
Fund Manager's Profile ...................... 5
Fund Facts .................................. 5
Performance Summary ......................... 6
Portfolio of Investments .................... 8
Financial Statements ........................ 18
Notes to Financial Statements ............... 24
Independent Auditor Report .................. 30
It's Easy to Contact Us ..................... 31
MFS Family of Funds(R) ...................... 32
Trustees and Officers ....................... 33
- --------------------------------------------------------------------------------
Highlights
[bullet] Class A shares of the Fund provided a total return of 4.67% over the
past year, while Class B shares returned 3.69%. Both represent net
asset value returns.
[bullet] Reflecting a healthy economy and generally sound financial practices,
the fiscal condition of state and local governments is the strongest
it's been in several years.
[bullet] The yield ratio of 30-year, AAA-rated municipals has declined from 87%
to 81%, reflecting the municipal market's strong technical position.
[bullet] Casualty insurance companies have been active buyers in the market this
year, while the apparent collapse of support for extreme tax reform
proposals has also proved beneficial.
- --------------------------------------------------------------------------------
1
<PAGE>
Letter from the Chairman
[Photo of A. Keith Brodkin]
Dear Shareholders:
With over half of 1996 behind us, the U.S. economy appears to have settled
into a pattern of moderate growth and inflation -- two factors that we think
can be important contributors to a favorable long-term investment climate.
During the first quarter of 1996, real (inflation-adjusted) economic growth
was 2.3% on an annualized basis, followed by a rate of 4.7% in the second
quarter. Real growth in gross domestic product has surpassed our expectations
so far this year, and we now expect growth for all of 1996 could exceed 2.5%.
Although individual consumers appear to be carrying an excessive debt load,
the consumer sector itself, which represents two-thirds of the economy,
continues to be impressive as the automobile and housing markets remain
resilient. Consumer spending has also been positively impacted by widespread
job growth. However, the economies of Europe and Japan continue to be in the
doldrums, weakening U.S. export markets while subduing the capital spending
plans of American corporations.
In the bond market, persistent signs of economic weakness led to decreases in
short-term interest rates by the Federal Reserve Board in late 1995 and early
1996. Should signs of economic growth and, particularly, of higher inflation
continue, we would expect the Fed to maintain its anti-inflationary stance.
In the beginning of the year, bond markets traded in a narrow range as
investors shifted between concern for the lack of a budget resolution in
Washington and hope that sluggish economic reports and low inflation might
lead to lower interest rates. Later, fixed-income markets began reacting to
conflicting signals regarding the economy's strength with more volatile
trading patterns marked by an upward bias in interest rates. Interest rates
may move even higher over the coming months, but we believe the current rise
in bond yields is reaching a point where fixed-income markets are equitably
valued.
Finally, you may notice, this shareholders' report incorporates a number of
changes which we hope you will find informative and useful. Near the
1
<PAGE>
back of the report, telephone numbers and addresses are listed if you would
like to contact MFS.
We appreciate your support and welcome any questions or comments you may
have.
Respectfully,
/s/ A. Keith Brodkin
A. Keith Brodkin
Chairman and President
September 18, 1996
- --------------------------------------------------------------------------------
Tax Form Summary
Of the dividends paid from the net investment income for the fiscal year ended
August 31, 1996, 98.61% were exempt interest dividends which are tax exempt for
purposes of regular federal income tax.
- --------------------------------------------------------------------------------
2
<PAGE>
Fund Manager's Overview
[Photo: Robert A. Dennis]
Dear Shareholders:
Following trends in the fixed-income market, the municipal bond market has
been unusually volatile during the past 12 months. The last four months of
1995 were marked by declining interest rates as the economy appeared to be in
a slow-growth, low-inflation mode. However, rates have been sporadically
rising in 1996 as greater-than-expected job growth and other economic data
have raised fears about eventual inflation pressures. Since the beginning of
1996, long-term, high-grade municipal yields have increased by about 55 basis
points (0.55%), essentially offsetting the decline in rates of late 1995.
Overall yield trends have been extremely volatile each month, as major market
moves have followed unexpectedly strong employment data and have been
typically retraced through the course of each month.
Over the 12 months ended August 31, 1996, Class A shares of the Fund provided
a total return of 4.67%, while Class B shares returned 3.69%. These figures
assume the reinvestment of distributions but exclude the effects of any sales
charges. Over this period, the Fund paid tax-exempt dividends of $0.582 per
share on Class A shares, equivalent to an annualized yield of 5.37% (equal to
an SEC yield of 5.15%) based on the net asset value on August 31,1995. The
5.37% yield equates to a taxable equivalent yield of 8.89% for investors in
the maximum 39.6% individual income tax bracket and to a rate of 7.46% for
investors in the 28% marginal tax bracket.
Perhaps the most salient commentary on the municipal bond market this year
has been its significantly favorable performance compared to U.S. Treasury
bonds (principal value and interest on Treasury securities are guaranteed by
the U.S. government if held to maturity). The 55-basis point increase in
long-term, high-grade yields since January 1, 1996 compares to a rise of
about 110 basis points (1.10%) by long-term Treasuries. The yield ratio of
30-year municipals rated AAA by Standard & Poor's to comparable Treasuries
has declined from 87% to 81%. These trends reflect the market's strong
technical position. Supply remains moderate as rising rates have choked off
any possible rise in refundings, and the overall tenor of state and local
governments remains conservative relative to new spending and borrowing. On
the demand side, casualty insurance companies have been strong buyers and
retail interest has increased in response to the higher rates. The apparent
collapse of support for extreme tax reform proposals has benefited this
year's market.
3
<PAGE>
The overall strength of municipal credits contributed to the market's
relatively good performance. Reflecting a healthy economy and generally sound
financial practices, the fiscal condition of state and local governments is
the strongest it's been in several years, and most revenue bond issuers have
also posted favorable results. These trends, along with the continued
dramatic proliferation of bond insurance, have resulted in continued
historically narrow yield spreads in the market. Special values or unusual
opportunities in the investment-grade segment of the municipal market have
therefore diminished. With the insufficient inducement to buy lower-rated
credits, the Fund's overall credit quality remains high, with 70% of its
assets invested in AAA and AA credits.
While the 4.67% total return for the Fund's Class A shares lagged the 5.24%
return of the Lehman Brothers Municipal Bond Index (the Lehman Index), it was
virtually identical to the 4.68% average return for the general municipal
debt category reported by Lipper Analytical Services, Inc., an independent
firm which reports mutual fund performance. The Lehman Brothers Municipal
Bond Index is unmanaged and is comprised of 8,000 actual bonds (with no
floating or zero coupons) which have investment-grade, fixed-rate, long-term
maturities (greater than two years). It is not possible to invest in an
index. Since there have been no significant changes in trading relationships
between sectors, regions, or individual credits in the municipal bond market,
performance results are predominantly attributed to decisions affecting
portfolio duration. The Fund's performance during the final four months of
1995 was aided by its long duration and interest rate sensitivity, which
helped it achieve significant capital appreciation during that period.
However, heading into 1996, no action was taken to shorten the Fund's
duration as we did not anticipate the economic climate that led to the
market's sharp sell-off in the early part of the year. As a result, the
Fund's performance lagged the Lehman Index during the first eight months of
1996. The Fund's effective duration has been shortened in recent months to a
more neutral position. Future adjustments in its interest rate sensitivity
will be guided by our assessment of economic and political trends.
If and when we determine that the trend toward higher rates has run its
course, we believe the Fund's underlying portfolio is structured to perform
well. More than 30% of the Fund's assets are invested in long-term,
non-callable bonds and much of the balance consists of call-protected bonds
likely to benefit from a declining interest rate environment.
We are pleased to report that during the past year we made some key additions
to our staff of municipal credit analysts, and we believe the group is now
one of the strongest in the industry. The depth and experience of
4
<PAGE>
this staff will be invaluable to us as we examine important credit
developments such as the new welfare reform bill's effect on specific
municipal credits, as well as the fiscal ramifications of future efforts to
balance the federal budget; the increasingly competitive environment facing
electric utilities as a result of deregulation trends; and the effect of
continuing cost pressures in the struggling health care industry.
Respectfully,
/s/ Robert A. Dennis
Robert A. Dennis
Fund Manager
- --------------------------------------------------------------------------------
Fund Manager's 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 Senior Vice
President. He has been Fund Manager of MFS Municipal Bond Fund since 1984.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Fund Facts
Strategy: 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.
Commencement of
investment operations: December 16, 1976
Size: $1.9 billion as of August 31, 1996
- --------------------------------------------------------------------------------
5
<PAGE>
Performance Summary
The following information illustrates the historical performance of MFS
Municipal Bond Fund Class A shares in comparison to various market
indicators. Class A share results reflect the deduction of the 4.75% maximum
sales charge; benchmark comparisons are unmanaged and do not reflect any fees
or expenses. You cannot invest in an index. All results reflect the
reinvestment of all dividends and capital gains.
The performance of Class B shares will be greater than or less than the line
shown, based on the differences in loads or fees paid by shareholders
investing in the different classes.
Growth of a Hypothetical $10,000 Investment
(For the 10-Year Period Ended August 31, 1996)
- --------------------------------------------------------------------------------
[Line Chart]
Consumer
MFS Price Lehman
Municipal Index-- Brothers
Bond A U.S.[S] Municipals
------ ------- ----------
9/1/86 9525 10000 10000
12/31/86 9836 10076 10372
12/31/87 10011 10520 10527
12/30/88 11178 10982 11596
12/29/89 12263 11493 12847
12/31/90 13034 12194 13785
12/31/91 14708 12568 15459
12/31/92 16088 12929 16822
12/31/93 18292 13288 18888
12/30/94 17103 13644 17918
12/29/95 20075 13980 21038
8/30/96 19784 14333 21129
- --------------------------------------------------------------------------------
Average Annual Total Returns 1 Year 3 Years 5 Years 10 Years
- ------------------------------------- -------- --------- --------------------
MFS Municipal Bond Fund (Class A)
including 4.75% sales charge -0.30% +1.95% +6.10% +7.06%
- ------------------------------------- -------- --------- --------------------
MFS Municipal Bond Fund (Class A)
at net asset value +4.20% +3.62% +7.14% +7.58%
- ------------------------------------- -------- --------- --------------------
MFS Municipal Bond Fund (Class B)
with CDSC -0.28% +1.44% +6.02% +7.17%
- ------------------------------------- -------- --------- --------------------
MFS Municipal Bond Fund (Class B)
without CDSC +3.31% +2.33% +6.33% +7.17%
- ------------------------------------- -------- --------- --------------------
Average general municipal debt fund +4.68% +3.65% +6.93% +7.12%
- ------------------------------------- -------- --------- --------------------
Lehman Brothers Municipal Bond Index +5.24% +4.69% +7.43% +7.77%
- ------------------------------------- -------- --------- --------------------
Consumer Price Index[S] +2.86% +2.79% +2.86% +3.67%
- ------------------------------------- -------- --------- --------------------
[S]The Consumer Price Index is a popular measure of change in prices.
6
<PAGE>
Average Annual Total Returns - continued
In the preceding 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 period (228, 151, 103, and
61 funds for the 1-, 3-, 5-, and 10-year periods ended August 31, 1996,
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.
Class A SEC results include the maximum 4.75% sales charge. Class B SEC
results reflect the applicable contingent deferred sales charge (CDSC), which
declines over six years as follows: 4%, 4%, 3%, 3%, 2%, 1%, 0%. See the
prospectus for details. Class B share performance includes the performance of
the Fund's Class A shares for periods prior to the commencement of offering
of Class B shares on September 7, 1993. Sales charges and operating expenses
for Class A and Class B shares differ. The Class A share performance, which
is included within the Class B share SEC performance, has been adjusted to
reflect the CDSC generally applicable to Class B shares rather than the
initial sales charge generally applicable to Class A shares. Class B share
performance has not been adjusted, however, to reflect differences in
operating expenses (e.g., Rule 12b-1 fees), which generally are lower for
Class A shares. All results are historical and assume the reinvestment of
dividends and capital gains. Investment return and principal value will
fluctuate, and shares, when redeemed, may be worth more or less than their
original cost. Past performance is no guarantee of future results.
7
<PAGE>
Portfolio of Investments - August 31, 1996
Municipal Bonds - 98.5%
=============================================================================
S&P Principal
Bond Amount
Rating Issuer (000 Omitted) Value
- -----------------------------------------------------------------------------
General Obligation - 15.3%
AAA Chicago, IL, AMBAC, 5.5s, 2018 $10,500 $ 10,015,950
AAA Chicago, IL, Board of Education, MBIA,
6.25s, 2012 2,500 2,648,775
AAA Clark County, NV, School District,
MBIA, 7s, 2010 4,000 4,541,960
A+ Commonwealth of Massachusetts, 7s, 2007 4,590 5,016,686
A+ Commonwealth of Massachusetts, 6.5s,
2008 6,400 7,079,168
AAA Commonwealth of Massachusetts, FGIC,
7s, 2009 7,000 7,952,560
AAA Dade County, FL, School Board,
Certificate of Participation, AMBAC,
5.5s, 2025 10,500 9,867,795
BBB Detroit, MI, 6.25s, 2009 5,235 5,306,562
AA Florida Board of Education, Capital
Outlay, 9.125s, 2014 1,735 2,380,993
AAA Florida Board of Education, Capital
Outlay, FGIC, 5.5s, 2026 26,000 24,551,800
BBB+ New York City, NY, 7.5s, 2002 12,500 13,638,750
BBB+ New York City, NY, 7.75s, 2004 780 845,481
BBB+ New York City, NY, 7.5s, 2006 5,000 5,365,750
BBB+ New York City, NY, 7.65s, 2006 5,000 5,465,050
BBB+ New York City, NY, 7.5s, 2007 15,500 16,994,045
BBB+ New York City, NY, 7.5s, 2008 10,000 10,914,900
BBB+ New York City, NY, 6.75s, 2009 3,000 3,118,890
BBB+ New York City, NY, 7.7s, 2009 4,000 4,432,240
BBB+ New York City, NY, 8.25s, 2013 60 68,145
BBB+ New York City, NY, 5.75s, 2014 5,000 4,640,350
BBB+ New York City, NY, 5.75s, 2015 11,085 10,185,341
BBB+ New York City, NY, 8.25s, 2015 240 273,607
BBB+ New York City, NY, 6.6s, 2016** 4,000 3,994,600
BBB+ New York City, NY, 8s, 2018 25 28,160
BBB+ New York City, NY, 5.75s, 2019 9,000 8,197,290
A+ State of California, 5.5s, 2011 3,750 3,674,513
A+ State of California, 5.5s, 2013 5,000 4,917,800
AAA State of California, AMBAC, 5.5s, 2014 10,485 10,207,567
AAA State of California, FGIC, 5.5s, 2015 10,980 10,499,625
AA State of Florida, Broward County
Expressway Authority, 10s, 2014 4,350 6,332,512
AAA State of Illinois, FGIC, 5.125s, 2013 5,000 4,617,150
AA State of Nevada, 6.8s, 2012 85 90,884
AA State of Nevada, 5.75s, 2026 23,615 22,771,236
AAA State of Nevada, FGIC, 5.5s, 2025 6,500 6,123,390
AA State of Texas, 5s, 2014 15,450 14,200,404
AA State of Washington, 0s, 2008 1,500 769,020
AA State of Washington, 6.75s, 2010 3,880 4,298,419
AA State of Washington, 5.75s, 2012 5,000 5,029,050
AA State of Washington, 6s, 2012 4,360 4,497,122
AA State of Washington, 5s, 2017 5,000 4,470,350
AA State of Washington, 5.375s, 2021 10,000 9,269,800
AA State of Washington (Motor Vehicle Fuel
Tax), 6.125s, 2017 6,400 6,694,336
--------------
$285,988,026
8
<PAGE>
------------------------------------------------------------- --------------
State and Local Appropriation - 29.1%
A California Public Works Board, Lease
Rev. (Community College Projects),
5.625s, 2013 $12,605 $11,941,851
A California Public Works Board, Lease
Rev. (Community College Projects),
5.625s, 2018 3,750 3,503,700
A California Public Works Board, Lease
Rev. (Department of Corrections), 5.5s,
2019 5,000 4,592,300
AAA California Public Works Board, Lease
Rev. (Department of Corrections),
AMBAC, 5.25s, 2013 6,795 6,431,535
AAA California Public Works Board, Lease
Rev. (Department of Corrections), MBIA,
5.375s, 2019## 10,055 9,342,302
A California Public Works Board, Lease
Rev. (University of California
Projects), 5.25s, 2013 4,200 3,833,508
A California Public Works Board, Lease
Rev. (University of California
Projects), 5.5s, 2014 7,000 6,648,180
A California Public Works Board, Lease
Rev. (University of California
Projects), 5.5s, 2014 5,000 4,665,650
A California Public Works Board, Lease
Rev. (University of California
Projects), 5.5s, 2019 3,345 3,072,249
A California Public Works Board, Lease
Rev. (University of California
Projects), 5s, 2023 19,000 16,213,080
AAA Chicago, IL, Board of Education Lease
Certificates, MBIA, 6.25s, 2009 5,160 5,456,390
AAA Chicago, IL, Board of Education Lease
Certificates, MBIA, 6.25s, 2015 27,295 28,567,220
A+ Indiana Office Building Community
Capital Complex Rev., 6.9s, 2011 9,500 10,565,235
A+ Massachusetts Bay Transportation
Authority, 6.1s, 2013 10,200 10,673,790
A+ Massachusetts Bay Transportation
Authority, 5.875s, 2015 4,500 4,557,330
A+ Massachusetts Bay Transportation
Authority, 7s, 2021 19,185 22,016,706
A+ Massachusetts Bay Transportation
Authority, 5.75s, 2025 5,500 5,270,595
A+ Massachusetts Bay Transportation
Authority, 5.625s, 2026 46,500 43,740,690
AAA Massachusetts Bay Transportation
Authority, MBIA, 5.75s, 2018 4,000 3,922,160
A Metropolitan Government of Nashville &
Davidson Counties, TN, 7s, 2011 5,280 5,729,803
BBB Metropolitan Transportation Authority,
NY, Service Contract, 7.4s, 2001 4,075 4,445,703
BBB Metropolitan Transportation Authority,
NY, Service Contract, 7.375s, 2008 5,000 5,563,050
BBB Metropolitan Transportation Authority,
NY, Service Contract, 5.75s, 2013 5,600 5,415,368
BBB Metropolitan Transportation Authority,
NY, Service Contract, 5.5s, 2017 10,850 10,084,207
BBB New York Dormitory Authority Rev. (City
University), 5.75s, 2009 10,000 9,700,300
BBB New York Dormitory Authority Rev. (City
University), 7s, 2009 13,765 14,960,903
9
<PAGE>
State and Local Appropriation - continued
BBB New York Dormitory Authority Rev. (City
University), 7.5s, 2010 $15,650 $17,698,272
BBB New York Dormitory Authority Rev. (City
University), 5.75s, 2013 22,150 21,374,307
BBB New York Dormitory Authority Rev.
(Department of Health), 5.75s, 2017 4,500 4,203,405
BBB+ New York Dormitory Authority Rev.
(Mental Health Facilities), 5.375s,
2026 5,000 4,365,300
BBB+ New York Dormitory Authority Rev.
(State University Educational
Facilities), 7.375s, 2010 16,100 18,267,382
BBB+ New York Dormitory Authority Rev.
(State University Educational
Facilities), 5.25s, 2015 8,125 7,331,513
BBB+ New York Dormitory Authority Rev.
(State University Educational
Facilities), 5.5s, 2019 5,000 4,615,150
BBB+ New York Dormitory Authority Rev.
(State University Educational
Facilities), 5.25s, 2021 7,875 6,951,184
Aaa New York Medical Care Facilities
Finance Agency, FGIC, 5.25s, 2019 48,140 43,917,903
BBB+ New York Medical Care Facilities
Finance Agency (Mental Health
Services), 8.875s, 2007 4,205 4,437,957
BBB+ New York Medical Care Facilities
Finance Agency (Mental Health
Services), 5.25s, 2019 4,100 3,571,633
BBB+ New York Medical Care Facilities
Finance Agency (Mental Health
Services), 7.875s, 2020 4,050 4,455,122
BBB New York Urban Development Corp., 5.5s,
2015 31,200 28,555,176
BBB New York Urban Development Corp.
(Correctional Facilities), 5.75s, 2013 10,530 10,030,773
BBB New York Urban Development Corp.
(Correctional Facilities), 5.5s, 2014 5,000 4,663,800
BBB New York Urban Development Corp.
(Correctional Facilities), 5.375s, 2015 10,000 9,017,200
BBB New York Urban Development Corp.
(Correctional Facilities), 5.25s, 2021 15,700 13,603,893
AAA New York Urban Development Corp.
(Correctional Facilities), MBIA, 5.5s,
2025 4,855 4,544,766
AAA New York Urban Development Corp., MBIA,
5.5s, 2019 3,500 3,317,825
BBB New York Urban Development Corp. (State
Facilities), 5.7s, 2020 3,000 2,821,890
AAA Orange County, CA, Recovery
Certificates of Participation, MBIA,
5.8s, 2016 2,000 1,967,220
AAA Orange County, CA, Recovery
Certificates of Participation, MBIA,
5.878s, 2019 2,500 2,464,150
AAA Rhode Island Convention Center
Authority Rev., MBIA, 5.25s, 2015 15,500 14,330,835
AAA Rhode Island Convention Center
Authority Rev., MBIA, 5s, 2023 31,110 26,586,295
10
<PAGE>
State and Local Appropriation - continued
A San Bernardino, CA, Joint Powers
Financing Authority Lease Rev.
(California Department of
Transportation), 5.5s, 2014 $10,000 $ 9,489,700
A San Bernardino, CA, Joint Powers
Financing Authority Lease Rev.
(California Department of
Transportation), 5.5s, 2020 4,000 3,716,680
AAA Vallejo, CA, Sanitation and Flood
Control District, Certificates of
Participation, FGIC, 5s, 2019 7,000 6,303,360
--------------
$543,516,496
------------------------------------------------------------- --------------
Refunded and Special Obligations* -
24.7%
AAA Alameda County, CA, Certificates of
Participation, BIGI, 7.25s, 2000 $20,570 $ 23,010,219
AAA Alameda County, CA, Certificates of
Participation, BIGI, 7.25s, 2000+++ 9,330 10,436,818
AAA Austin, TX, Utility Systems Rev.,
10.75s, 2000 2,615 3,138,575
AAA Austin, TX, Water, Sewer & Electric
Rev., 14.25s, 1997 1,305 1,395,776
AA Chicago, IL, Metropolitan Water
Reclamation District (Capital
Improvement), 6.8s, 2000 5,000 5,409,550
AAA Chicago, IL, Public Building Commission
Mortgage Rev., ETM, MBIA, 7.125s, 2015 6,590 7,093,410
AAA Clark County, NV, School District,
MBIA, 7s, 2001 10,050 11,069,874
A+ Commonwealth of Massachusetts, 6.875s,
2001 4,825 5,345,376
AAA Commonwealth of Massachusetts, FGIC,
7.25s, 2000 7,520 8,278,768
AAA Commonwealth of Massachusetts, FGIC,
7.25s, 2000 3,700 4,073,330
AAA Delaware County, PA, Hospital Rev.
(Keystone Health System), MBIA, 7.2s,
1999 5,440 5,948,694
AAA Detroit, MI, Water Supply System Rev.,
FGIC, 7.25s, 2000 4,575 5,068,597
A Eden Township, CA, Health Facilities
Authority (Eden Hospital), 7.8s, 1998 4,000 4,329,760
AAA Florida Board of Education
Administration, Capital Outlay, ETM,
9.125s, 2014 265 368,811
NR Indianapolis, IN, Local Public
Improvement Rev., 7.4s, 2000 3,710 4,122,626
AAA Maryland Health & Higher Education
Facilities Authority Rev. (University
of Maryland Medical System), FGIC, 7s,
2001 7,945 8,844,295
AAA Massachusetts Port Authority Rev., ETM,
13s, 2013 3,500 5,569,270
AAA Massachusetts Water Resources
Authority, 7.5s, 2000 15,850 17,605,863
AAA Massachusetts Water Resources
Authority, 7.625s, 2000 15,760 17,570,036
AAA Metropolitan Transportation Authority,
NY, Service Contract, 7.5s, 2000 4,350 4,856,993
AAA Michigan Hospital Finance Authority
Rev. (Oakwood Hospital), FGIC, 7.1s,
2000 4,000 4,410,760
AAA Michigan Hospital Finance Authority
Rev. (Oakwood Hospital), FGIC, 7.2s,
2000 18,590 20,595,861
11
<PAGE>
Refunded and Special Obligations* - continued
AAA Michigan Municipal Bond Authority Rev.
(Wayne County), FGIC, 7s, 2000 $10,000 $10,976,300
AAA Missouri Regional Convention & Sports
Complex Authority, 6.8s, 2003 8,950 9,957,054
AAA Missouri Regional Convention & Sports
Complex Authority, 6.9s, 2003 21,520 24,067,107
BBB+ New York City, NY, 7.75s, 2000 8,240 9,161,479
BBB+ New York City, NY, 8s, 2001 2,475 2,852,735
BBB+ New York City, NY, 8.25s, 2001 2,940 3,410,576
BBB New York Dormitory Authority Rev. (City
University), 7.875s, 2000 10,600 11,973,230
AAA New York Medical Care Facilities
Finance Agency Rev. (Mental Health
Services), 8.875s, 1997 3,745 3,989,249
AAA New York Medical Care Facilities
Finance Agency Rev. (Mental Health
Services), 7.875s, 2000 5,590 6,332,408
NR New York Urban Development Corp.
(Correctional Facilities), 7.625s, 2001 7,570 8,543,729
NR New York Urban Development Corp.
(Correctional Facilities), 7.375s, 2002 4,000 4,536,440
AAA North Carolina Municipal Power Agency
Rev. (Catawba Electric), AMBAC, 5.5s,
2013 8,330 8,318,838
AAA Pennsylvania Convention Center
Authority Rev., FGIC, 6.7s, 2016 51,195 57,520,654
AAA Pennsylvania Higher Educational
Facilities Authority (Hahnemann
University Project), MBIA, 7.2s, 1999 4,015 4,378,719
AAA Philadelphia, PA, Municipal Authority
Rev., FGIC, 7.8s, 1998 385 413,251
AAA Philadelphia, PA, Municipal Authority
Rev., FGIC, 7.8s, 2000 3,765 4,148,390
AAA Philadelphia, PA, Municipal Authority
Rev. (Justice Lease), FGIC, 7.1s, 2001 6,000 6,729,840
AAA Philadelphia, PA, Municipal Authority
Rev. (Justice Lease), FGIC, 7.125s,
2001 4,500 5,052,510
AAA Philadelphia, PA, School District,
MBIA, 7s, 2005 9,440 10,411,659
AAA San Diego, CA, Regional Building
Authority Lease Rev. (San Miguel),
MBIA, 7.25s, 2000 4,000 4,395,440
AAA Santa Clara County, CA, Certificates of
Participation (American Baptist Homes
West), CA-MTG-INS, 8s, 1998 5,200 5,590,208
AAA Southern California Public Power
Authority Rev., 12s, 1997 2,400 2,556,096
AA State of Florida, 7.375s, 1999 4,000 4,380,720
AAA State of Florida, Jacksonville
Transportation Authority, ETM, 9.2s,
2015 2,000 2,708,240
AAA Sullivan County, TN, Health,
Educational and Housing Facilities
Board Rev. (Holston Valley Health
Care), MBIA, 7.25s, 2000 4,000 4,399,640
12
<PAGE>
Refunded and Special Obligations* - continued
AAA Washington Public Power Supply System
Rev., Nuclear Project #2, 7.375s, 2000 $28,845 $ 32,028,334
AA Washington Public Power Supply System
Rev., Nuclear Project #2, 7.625s, 2001 10,815 12,183,530
AA Washington Public Power Supply System
Rev., Nuclear Project #3, 7.25s, 2000 20,000 21,912,200
--------------
$461,471,838
------------------------------------------------------------- --------------
Single Family Housing Revenue - 0.3%
AA Connecticut Housing Finance Authority,
5.9s, 2015 $ 5,000 $ 4,999,550
- ------ --------------------------------------- -------------- --------------
Multi-Family Housing Revenue - 0.4%
AA Colorado Housing Finance Authority,
FHA, 8.3s, 2023 $ 4,000 $ 4,176,600
AAA New York Housing Finance Agency Rev.,
FSA, 6.125s, 2020 4,000 3,962,160
--------------
$ 8,138,760
------------------------------------------------------------- --------------
Insured Health Care Revenue - 4.1%
AAA Columbus, GA, Medical Center, Hospital
Authority Rev., Anticipation
Certificates, MBIA, 8.749s, 2010*** $ 4,000 $ 4,290,520
AAA Davenport, IA, Hospital Rev. (St.
Luke's Hospital), AMBAC, 7.4s, 2020 2,715 2,957,042
AAA Illinois Health Facilities Authority
(Methodist Healthcare Center), MBIA,
9.872s, 2021*** 3,000 3,347,310
AAA Kalamazoo, MI, Hospital Finance
Authority (Bronson Methodist), MBIA,
5.875s, 2026 6,000 5,872,140
AAA Maryland Health & Higher Educational
Facilities Authority Rev. (Francis
Scott Key Medical Center), FGIC, 5s,
2013 3,200 2,928,704
AAA Massachusetts Health & Education
Facilities Authority (University
Hospital), MBIA, 7.25s, 2019 4,500 4,900,995
AAA Metropolitan Health Facilities
Development Corp., TX (Wilson N. Jones
Memorial Hospital), Connie Lee, 5.6s,
2017 4,250 4,017,525
AAA Michigan Hospital Finance Authority
Rev. (Sisters of Mercy), MBIA, 5.375s,
2014 9,000 8,574,930
AA New York Medical Care Facilities
Financing Agency Rev. (Hospital and
Nursing Home FHA Mortgage), 7.625s,
2023 3,500 3,699,080
AAA Oklahoma Industrial Authority Rev.
(Integris Baptist), AMBAC, 5s, 2014 5,000 4,463,850
AAA Peninsula Ports Authority, VA, Hospital
Facilities Rev. (Whittaker Memorial),
FHA, 8.7s, 2023 1,595 1,671,305
AAA Salt Lake City, UT, Hospital Rev.
(Intermountain Health Care Hospitals,
Inc.), AMBAC, INFLOS, 9.779s, 2020*** 2,000 2,199,960
AAA Sayre, PA, Health Care Facilities
Authority Rev. (Guthrie Healthcare
Systems), AMBAC, 7s, 2011 6,000 6,445,380
13
<PAGE>
Insured Health Care Revenue - continued
AAA Tarrant County, TX, Health Facilities
Development Corp., Hospital Rev. (Ft.
Worth Osteopathic), MBIA, 6s, 2021 $ 6,000 $ 6,148,320
AAA Tulsa, OK, Industrial Authority
Hospital Rev. (Hillcrest Medical Center
Project), Connie Lee, 6s, 2017 5,250 5,157,285
AAA Washington County, PA, Hospital
Authority Rev. (Washington Hospital),
AMBAC, 7.15s, 2017 9,000 9,728,730
--------------
$76,403,076
------------------------------------------------------------- --------------
Health Care Revenue - 1.4%
AA- Cuyahoga County, OH, Hospital Rev.
(Cleveland Clinic), 8s, 2015## $ 8,550 $ 8,955,014
AA- Maryland Health & Higher Educational
Facilities Authority Rev. (The Johns
Hopkins Hospital), 5s, 2023 7,595 6,660,359
AA Pennsylvania Higher Educational
Facilities Authority, Health Services
Rev. (University of Pennsylvania),
5.75s, 2022 10,000 9,663,200
--------------
$25,278,573
------------------------------------------------------------- --------------
Electric and Gas Utility Revenue - 7.6%
AAA Anchorage, AK, Electric Utility Rev.,
MBIA, 5.5s, 2026 $ 1,750 $ 1,618,435
AAA Austin, TX, Utility Systems Rev.,
AMBAC, 6.75s, 2012 2,500 2,612,325
AAA Georgia Municipal Electric Authority
Rev., AMBAC, 7.8s, 2020 7,000 7,334,810
AAA Georgia Municipal Electric Authority
Rev., MBIA, 6.375s, 2016 5,000 5,240,200
AA- Intermountain Power Agency, Utah Power
Supply Rev., 6.15s, 2014# 40,000 40,959,600
AAA Intermountain Power Agency, Utah Power
Supply Rev., AMBAC, 6s, 2021 5,000 4,861,150
AAA Intermountain Power Agency, Utah Power
Supply Rev., MBIA, 5.7s, 2017 14,000 13,631,520
AAA Municipal Electric Authority of
Georgia, Special Obligation, AMBAC,
6.5s, 2017 8,510 9,161,611
AAA North Carolina Power Agency Rev.
(Catawba Electric), AMBAC, 5.375s, 2020 4,000 3,711,280
AAA Northern California Transmission Agency
(Oregon Transmission), MBIA, 7s, 2013 4,000 4,605,480
AAA Piedmont, SC, Municipal Power Agency,
Electric Rev., FGIC, 6.25s, 2021 4,150 4,330,691
AAA South Carolina Public Service Authority
Rev., MBIA, 5.75s, 2022 4,000 3,890,600
AAA Southern California Public Power
Authority Rev. (San Juan Unit Power
Project), MBIA, 5.25s, 2014 14,940 13,982,944
14
<PAGE>
Electric and Gas Utility Revenue - continued
A+ Southern California Public Power
Authority Rev., Transmission Project
Rev., 0s, 2005 $11,185 $ 6,862,892
AA Washington Public Power Supply System
Rev., Nuclear Project #1, 7s, 2008 500 553,310
AAA Washington Public Power Supply System
Rev., Nuclear Project #1, FGIC, 0s,
2005 6,895 4,256,215
AA Washington Public Power Supply System
Rev., Nuclear Project #2, 7s, 2012 6,000 6,403,320
AA- Washington Public Power Supply System
Rev., Nuclear Project #3, 7.125s, 2016 5,145 5,771,610
AAA Washington Public Power Supply System
Rev., Nuclear Project #3, BIGI, 0s,
2010 5,860 2,591,409
AAA Washington Public Power Supply System
Rev., Nuclear Project #3, MBIA, 7.125s,
2016 425 483,710
--------------
$142,863,112
------------------------------------------------------------- --------------
Water and Sewer Utility Revenue - 3.7%
AAA Detroit, MI, Water Supply System, MBIA,
5.5s, 2025 $ 4,935 $ 4,630,461
AAA East Bay, CA, Municipal Utilities
District (Water Systems Rev.), MBIA,
5s, 2014 7,900 7,211,278
AAA New York City Municipal Water Finance
Authority Rev. (Water and Sewer
System), MBIA, 5.75s, 2026 56,095 54,158,601
AAA Philadelphia, PA, Water & Wastewater
Rev., FSA, 5s, 2016 4,500 4,005,585
--------------
$ 70,005,925
------------------------------------------------------------- --------------
Toll Road and Transit Revenue - 1.4%
BBB Triborough Bridge & Tunnel Authority,
NY, 7.25s, 2010 $22,905 $ 25,512,963
- ------ --------------------------------------- -------------- --------------
Airport and Port Revenue - 2.2%
AAA Chicago, IL, O'Hare International
Airport Rev., AMBAC, 5.625s, 2014 $ 6,345 $ 6,108,776
AAA Connecticut Airport Rev. (Bradley
International Airport), FGIC, 7.65s,
2012 5,000 5,687,350
AAA Denver, CO, City and County Airport
Rev., MBIA, 5.6s, 2020 31,530 30,237,585
--------------
$ 42,033,711
------------------------------------------------------------- --------------
Sales and Excise Tax Revenue - 2.1%
AAA Chico, CA, Public Financing Authority
Rev. (Southeast Chico Redevelopment
Project), FGIC, 6.625s, 2021 $ 5,000 $ 5,299,050
AAA Illinois Dedicated Tax Rev. (Civic
Center), AMBAC, 6.25s, 2011 3,640 3,829,826
AAA Illinois Sales Tax Rev., 6.5s, 2022 5,000 5,374,800
AAA Illinois Sales Tax Rev. (Public
Improvement), 0s, 2009 8,965 4,279,891
AA- Metropolitan Atlanta, GA, Rapid Transit
Authority, 6.25s, 2018 4,580 4,809,595
AAA Rhode Island Depositors Economic
Protection Corp., FSA, 5.75s, 2014 14,800 14,666,208
--------------
$ 38,259,370
15
<PAGE>
------------------------------------------------------------- --------------
Industrial Revenue (Corporate Guarantee) - 0.4%
AAA Mercer County, ND, Pollution Control
Rev. (Antelope Valley Station), AMBAC,
7.2s, 2013 $ 4,000 $ 4,619,160
AAA Michigan State Strategic Fund Limited
Obligation Rev. (Detroit Edison), MBIA,
7s, 2008 3,000 3,381,450
--------------
$ 8,000,610
------------------------------------------------------------- --------------
Universities - 3.5%
AAA Massachusetts Health and Education
Facilities Authority Rev. (Harvard
University), 6.25s, 2020 $32,200 $ 33,966,814
AAA Massachusetts Health and Education
Facilities Authority Rev. (Harvard
University), 5.625s, 2026 5,000 4,828,500
AAA Massachusetts Health and Education
Facilities Authority Rev.
(Massachusetts Institute of
Technology), 5s, 2023 3,000 2,609,010
AAA Massachusetts Industrial Finance Agency
Rev. (College of the Holy Cross), MBIA,
5.5s, 2016 5,000 4,768,750
AAA Oregon Health Sciences University Rev.,
MBIA, 5.25s, 2028 7,000 6,276,200
AA+ Texas A & M University (Permanent
University Fund), 0s, 2007 6,695 3,744,781
AA+ Texas A & M University (Permanent
University Fund), 0s, 2008 7,175 3,760,202
AAA University of Washington Rev. (Housing
and Dining), MBIA, 5s, 2021 1,000 870,640
AA Vermont Educational and Health
Buildings Finance Agency Rev.
(Middlebury College Project), 5.375s,
2026 4,750 4,326,110
--------------
$ 65,151,007
------------------------------------------------------------- --------------
Special Assessment District
AAA Culver City, CA, Redevelopment Finance
Authority, AMBAC, 7.1s, 2010 $ 560 $ 602,958
- ------ --------------------------------------- -------------- --------------
Solid Waste - 0.4%
AAA Northeast Maryland, Waste Disposal
Authority (Southwest County Resource
Recovery), MBIA, 7.2s, 2005 $ 3,000 $ 3,384,690
AA- York County, PA, Industrial Development
Rev., 8.2s, 2014 4,250 4,537,215
--------------
$ 7,921,905
------------------------------------------------------------- --------------
Miscellaneous Revenue - 1.9%
AAA Metropolitan Government of Nashville &
Davidson Counties, TN, Sports Authority
(Stadium Project), AMBAC, 5.75s, 2026 $ 5,000 $ 4,861,200
AAA San Antonio, TX, Hotel Occupancy Rev.
(Henry B. Gonzalez Convention Center
Project), FGIC, 5.7s, 2026 31,400 30,098,784
--------------
$ 34,959,984
- ------ --------------------------------------- -------------- --------------
Total Municipal Bonds
(Identified Cost, $1,730,246,565) $1,841,107,864
16
<PAGE>
- ----------------------------------------------- -------------- --------------
NR Dade County, FL, Industrial Development
Authority, due 2020 $ 435 $ 435,000
A1+ Lincoln County, WY, Pollution Control
(Exxon), due 2014 100 100,000
NR Uinta County, WY, Pollution Control
Rev. (Chevron), due 2020 10,300 10,300,000
- ------ --------------------------------------- -------------- --------------
Total Floating Rate Demand Notes
(Identified Cost, $10,835,000) $ 10,835,000
------------------------------------------------------------- --------------
Total Investments
(Identified Cost, $1,741,081,565) $1,851,942,864
Other Assets, Less Liabilities - 0.9% 16,647,917
- ----------------------------------------------- -------------- --------------
Net Assets - 100.0% $1,868,590,781
- -----------------------------------------------------------------------------
* Dates indicated are refunding dates.
** Indexed security.
*** Inverse floating rate security.
+++ Restricted security.
# SEC Rule 144A restriction.
## Security segregated as collateral for an open futures contract.
See notes to financial statements
17
<PAGE>
Financial Statements
Statement of Assets and Liabilities
=============================================================================
August 31, 1996
---------------------------------------------------------- ---------------
Assets:
Investments, at value (identified cost, $1,741,081,565) $1,851,942,864
Cash 62,428
Receivable for daily variation margin on open futures
contracts 1,881,250
Receivable for Fund shares sold 423,505
Receivable for investments sold 200,000
Interest and dividends receivable 26,679,119
Other assets 22,187
---------------
Total assets $1,881,211,353
---------------
Liabilities:
Distributions payable $ 3,547,986
Payable for Fund shares reacquired 1,157,431
Payable for investments purchased 7,388,875
Payable to affiliates -
Management fee 44,594
Shareholder servicing agent fee 12,524
Distribution fee 12,443
Accrued expenses and other liabilities 456,719
---------------
Total liabilities $ 12,620,572
---------------
Net assets $1,868,590,781
---------------
Net assets consist of:
Paid-in capital $1,758,798,334
Unrealized appreciation on investments 112,649,737
Accumulated undistributed net realized loss on investments (1,640,397)
Accumulated distributions in excess of net investment
income (1,216,893)
---------------
Total $1,868,590,781
---------------
Shares of beneficial interest outstanding 173,803,924
---------------
Class A shares:
Net asset value per share
(net assets of $1,797,674,565 / 167,203,931 shares of
beneficial interest outstanding) $10.75
---------------
Offering price per share (100/95.25) $11.26
---------------
Class B shares:
Net asset value and offering price per share
(net assets of $70,916,216 / 6,599,993 shares of
beneficial interest outstanding) $10.74
---------------
On sales of $100,000 or more, the offering price of Class
A shares is reduced. A contingent deferred sales charge
may be imposed on redemptions of Class A and Class B
shares.
See notes to financial statements
18
<PAGE>
Statement of Operations
Year Ended August 31, 1996
- ------------------------------------------------------ ----------------
Net investment income:
Interest income $117,460,624
----------------
Expenses -
Management fee $ 7,990,167
Trustees' compensation 94,800
Shareholder servicing agent fee (Class A) 2,175,476
Shareholder servicing agent fee (Class B) 141,419
Distribution and service fee (Class B) 541,038
Custodian fee 534,866
Postage 223,827
Auditing fees 39,880
Printing 22,856
Legal fees 9,760
Miscellaneous 629,323
----------------
Total expenses $ 12,403,412
Fees paid indirectly (281,761)
----------------
Net expenses $ 12,121,651
----------------
Net investment income $105,338,973
----------------
Realized and unrealized gain on investments:
Realized gain (identified cost basis) -
Investment transactions $ 23,768,430
Futures contracts 616,649
----------------
Net realized gain on investments $ 24,385,079
----------------
Change in unrealized appreciation (depreciation) -
Investments $(35,258,989)
Futures contracts 1,750,938
----------------
Net unrealized loss on investments $(33,508,051)
----------------
Net realized and unrealized loss on investments $ (9,122,972)
----------------
Increase in net assets from operations $ 96,216,001
----------------
See notes to financial statements
19
<PAGE>
Statement of Changes in Net Assets
======================================================================
Year Ended August 31, 1996 1995
------------------------------------ --------------- ----------------
Increase (decrease) in net assets:
From operations -
Net investment income $ 105,338,973 $ 111,803,151
Net realized gain (loss) on
investments 24,385,079 (16,663,804)
Net unrealized gain (loss) on
investments (33,508,051) 47,294,564
--------------- ----------------
Increase in net assets from
operations $ 96,216,001 $ 142,433,911
--------------- ----------------
Distributions declared to
shareholders -
From net investment income (Class A) $ (101,464,492) $ (109,114,422)
From net investment income (Class B) (2,800,303) (2,258,122)
--------------- ----------------
Total distributions declared to
shareholders $ (104,264,795) $ (111,372,544)
--------------- ----------------
Fund share (principal) transactions
- -
Net proceeds from sale of shares $ 1,980,944,467 $ 1,013,395,465
Net asset value of shares issued to
shareholders in reinvestment of
distributions 60,332,570 65,324,925
Cost of shares reacquired (2,169,208,109) (1,180,849,407)
--------------- ----------------
Decrease in net assets from Fund
share transactions $ (127,931,072) $ (102,129,017)
--------------- ----------------
Total decrease in net assets $ (135,979,866) $ (71,067,650)
--------------- ----------------
Net assets:
At beginning of period 2,004,570,647 2,075,638,297
--------------- ----------------
At end of period (including
accumulated distributions in
excess of net investment income of
$1,216,893 and $4,956,742,
respectively) $ 1,868,590,781 $ 2,004,570,647
--------------- ----------------
See notes to financial statements
20
<PAGE>
Financial Highlights
<TABLE>
<CAPTION>
Ten
Months
Year Ended August Ended Year Ended October
31, August 31, 31,
-------------------- ------------- ---------------------
1996 1995 1994 1993 1992
- --------------------------- --------- --------- ------------- -------------------
Class A
- --------------------------- --------- --------- ------------- -------------------
<S> <C> <C> <C> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value - beginning
of period $10.83 $10.68 $11.64 $10.73 $10.80
--------- --------- ------------- -------------------
Income from investment
operations# -
Net investment income $ 0.59 $ 0.60 $ 0.51 $ 0.61 $ 0.66
Net realized and
unrealized gain (loss)
on investments (0.09) 0.15 (0.77) 1.14 0.09
--------- --------- ------------- -------------------
Total from investment
operations
$ 0.50 $ 0.75 $(0.26) $ 1.75 $ 0.75
--------- --------- ------------- -------------------
Less distributions declared to
shareholders -
From net investment income $(0.58) $(0.60) $(0.47) $(0.66) $(0.66)
In excess of net
investment income -- -- (0.04) (0.03) --
From net realized gain on
investments -- -- (0.16) (0.15) (0.16)
In excess of net realized
gain on investments -- -- (0.03) -- --
--------- --------- ------------- -------------------
Total distributions
declared to
shareholders $(0.58) $(0.60) $(0.70) $(0.84) $(0.82)
--------- --------- ------------- -------------------
Net asset value - end of
period $10.75 $10.83 $10.68 $11.64 $10.73
--------- --------- ------------- -------------------
Total return### 4.67% 7.31% (2.33)%+++ 16.97% 7.35%
Ratios (to average net assets)/Supplemental data:
Expenses## 0.60% 0.61% 0.59%+ 0.59% 0.57%
Net investment income 5.37% 5.70% 5.49%+ 5.63% 6.12%
Portfolio turnover 84% 90% 74% 56% 87%
Net assets at end of period
(000,000 omitted) $1,798 $1,949 $2,031 $2,195 $1,878
</TABLE>
+ Annualized.
+++ Not annualized.
# Per share data for the periods subsequent to October 31, 1993 is based on
average shares outstanding.
## For fiscal years ending after September 1, 1995, the Fund's expenses are
calculated without reduction for fees paid indirectly.
### 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.
See notes to financial statements
21
<PAGE>
Financial Highlights - continued
Year Ended October 31, 1991 1990 1989 1988 1987
- --------------------------- --------- --------- --------- --------- ---------
Class A
- --------------------------- --------- ----------------------------------------
Per share data (for a share outstanding throughout each period):
Net asset value - beginning
of period $10.11 $10.53 $10.57 $ 9.71 $11.00
--------- --------- --------- --------- ---------
Income from investment
operations -
Net investment income $ 0.68 $ 0.68 $ 0.72 $ 0.73 $ 0.72
Net realized and
unrealized gain (loss)
on investments 0.69 (0.13) 0.04 0.86 (0.90)
--------- --------- --------- --------- ---------
Total from investment
operations $ 1.37 $ 0.55 $ 0.76 $ 1.59 $(0.18)
--------- --------- --------- --------- ---------
Less distributions declared to
shareholders -
From net investment income $(0.68) $(0.69) $(0.72) $(0.73) $(0.72)
In excess of net
investment income -- -- (0.08) -- (0.39)
From net realized gain on
investments -- (0.27) -- -- --
From paid-in capital -- (0.01) -- -- --
--------- --------- --------- --------- ---------
Total distributions
declared to
shareholders $(0.68) $(0.97) $(0.80) $(0.73) $(1.11)
--------- --------- --------- --------- ---------
Net asset value - end of
period $10.80 $10.11 $10.53 $10.57 $ 9.71
--------- --------- --------- --------- ---------
Total return### 13.85% 5.42% 7.54% 16.95% (1.98)%
Ratios (to average net assets)/Supplemental data:
Expenses 0.59% 0.60% 0.64% 0.65% 0.61%
Net investment income 6.47% 6.69% 6.87% 7.16% 6.96%
Portfolio turnover 98% 160% 199% 190% 218%
Net assets at end of period
(000,000 omitted) $1,715 $1,409 $1,259 $1,003 $903
### 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.
See notes to financial statements
22
<PAGE>
Financial Highlights - continued
Ten
Year Months
Ended Year Ended Year
October Ended August Ended
31, August 31, 31, October 31,
---------- --------------------------- ------------
1986 1996 1995 1994 1993*
- --------------------------------------------------------------------------------
Class A Class B
--------------------------------- ------------------------------------------
Per share data (for a share outstanding throughout each period):
Net asset value -
beginning of period $ 10.02 $11.10 $10.67 $11.63 $11.68
---------- --------- ----------------- ------------
Income from investment
operations# -
Net investment income $ 0.78 $ 0.49 $ 0.49 $ 0.40 $ 0.07
Net realized and
unrealized gain (loss)
on investments 1.27 (0.37) 0.16 (0.77) (0.05)
---------- --------- ----------------- ------------
Total from
investment operations $ 2.05 $ 0.12 $ 0.65 $(0.37) $ 0.02
---------- --------- ----------------- ------------
Less distributions declared to shareholders -
From net investment
income $ (0.78) $(0.48) $(0.49) $(0.40) $(0.07)++++
In excess of net
investment income (0.29) -- -- -- --
From net realized gain
on investments -- -- -- (0.16) --
In excess of net
realized gain on
investments -- -- -- (0.03) --
---------- --------- ----------------- ------------
Total distributions
declared to
shareholders $ (1.07) $(0.48) $(0.49) $(0.59) $(0.07)
---------- --------- ----------------- ------------
Net asset value - end
of period $ 11.00 $10.74 $10.83 $10.67 $11.63
---------- --------- ----------------- ------------
Total return### 21.79% 3.69% 6.35% (3.25)%+++ 1.49%+
Ratios (to average net assets)/Supplemental data:
Expenses## 0.64% 1.55% 1.60% 1.72%+ 1.70%+
Net investment income 7.45% 4.42% 4.68% 4.41%+ 3.85%+
Portfolio turnover 164% 83% 90% 74% 56%
Net assets at end of
period (000,000
omitted) $844 $71 $56 $45 $10
* For the period from the commencement of offering of Class B shares,
September 7, 1993 to October 31, 1993.
+ Annualized.
+++ Not annualized.
# Per share data for the periods subsequent to October 31, 1993 is based
on average shares outstanding.
## For fiscal years ending after September 1, 1995, the Fund's expenses are
calculated without reduction for fees paid indirectly.
### 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.
++++ Amount includes a per share distribution in excess of net investment
income of $0.002.
See notes to financial statements
23
<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
General - The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenue and expenses
during the reporting period. Actual results could differ from those
estimates.
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.
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 or exchange
rates or securities prices. Investments in interest rate futures for purposes
other than hedging may be made to modify the duration of the portfolio
without incurring the additional transaction costs involved in buying and
selling the underlying securities. Should interest or exchange rates or
securities prices move unexpectedly, the Fund may not achieve the anticipated
benefits of the futures contracts and may realize a loss.
24
<PAGE>
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.
Interest payments received in additional securities are recorded on the
ex-interest date in an amount equal to the value of the security on such
date.
Fees Paid Indirectly - The Fund's custodian bank calculates its fee based on
the Fund's average daily net assets. The fee is reduced according to a fee
arrangement, which provides for custody fees to be reduced based on a formula
developed to measure the value of cash deposited with the custodian by the
Fund. This amount is shown as a reduction of expenses on the Statement of
Operations.
Tax Matters and Distributions - The Fund's policy is to comply with the
provisions of the Internal Revenue Code (the Code) applicable to regulated
investment companies and to distribute to shareholders all of its 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 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, 1996, $2,665,671 was
reclassified from accumulated distributions in excess of net investment
income to accumulated net realized
25
<PAGE>
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.
Multiple Classes of Shares of Beneficial Interest - The Fund offers both
Class A and Class B shares. The two classes of shares differ in their
respective shareholder servicing agent, and distribution and service fees.
All shareholders bear the common expenses of the Fund pro rata based on
settled shares outstanding 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 0.19%
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 its independent Trustees and Mr.
Bailey. Included in Trustees' compensation is a net periodic pension expense
of $27,375 for the year ended August 31, 1996.
Distributor - MFD, a wholly owned subsidiary of MFS, as distributor, received
$289,161 for the year ended August 31, 1996, 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.
Except in the case of the 0.25% per annum Class B service fee paid by the
Fund upon the sale of Class B shares, payment of the Class B service fee will
be suspended until such date as the Trustees of the Trust may determine. 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 respect to Class B shares. MFD retains the service fee for
accounts not attributable to a securities dealer. No amounts were retained
during the year ended August 31, 1996. Fees incurred under the distribution
plan during the
26
<PAGE>
year ended August 31, 1996 were 0.84% 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 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, 1996 were
$1,862 and $186,111 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
$1,608,202,157 and $1,647,451,006, 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 $1,741,081,565
---------------
Gross unrealized appreciation $ 116,257,524
Gross unrealized depreciation (5,396,225)
---------------
Net unrealized appreciation $ 110,861,299
---------------
(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 Year Ended
August 31, 1996 August 31, 1995
--------------------------------- ---------------------------------
Shares Amount Shares Amount
- ----------------------------------- ---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Shares sold 178,715,545 $ 1,948,177,673 93,895,405 $ 988,178,343
Shares issued to shareholders in
reinvestment of distributions 5,345,853 58,555,788 6,046,921 63,804,833
Shares reacquired (196,714,962) (2,150,166,037) (110,192,105) (1,164,453,444)
---------------- ---------------- ---------------- ----------------
Net decrease (12,653,564) $ (143,432,576) (10,249,779) $ (112,470,268)
---------------- ---------------- ---------------- ----------------
</TABLE>
27
<PAGE>
<TABLE>
<CAPTION>
Class B Shares Year Ended Year Ended
August 31, 1996 August 31, 1995
------------------------------ ------------------------------
Shares Amount Shares Amount
- ----------------------------------- -------------- --------------- -------------- ---------------
<S> <C> <C> <C> <C>
Shares sold 2,997,177 $ 32,766,794 2,382,993 $ 25,217,122
Shares issued to shareholders in
reinvestment of distributions 162,309 1,776,782 143,928 1,520,092
Shares reacquired (1,734,057) (19,042,072) (1,559,038) (16,395,963)
-------------- --------------- -------------- ---------------
Net increase 1,425,429 $ 15,501,504 967,883 $ 10,341,251
-------------- --------------- -------------- ---------------
</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, 1996, was $16,111.
(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, 1996, is as follows:
Futures Contracts
Unrealized
Expiration Contracts Position Appreciation
------------------ -------------------------- ----------- ---------------
September 1996 2,100 U.S. Treasury Bonds Short $1,328,586
September 1996 400 Municipal Bonds Short 459,852
---------------
$1,788,438
---------------
At August 31, 1996, the Fund had sufficient cash and/or securities to
cover margin requirements on open futures contracts.
The Fund also invests in indexed securities whose value may be linked to
interest rates, indices, or other financial indicators. Indexed securities
are fixed-income securities whose 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.
28
<PAGE>
The following is a summary of such securities held at August 31, 1996:
Principal Unrealized
Description Index Amount Value Appreciation
- ------------------ ----------- ------------- ------------- ---------------
Coupon-Indexed
Security:
PSA
New York City, Municipal
NY, 6.6s, 2016 Swap $4,000,000 $3,994,600 $5,400
---------------
(8) Restricted Securities
The Fund may invest not more than 15% of its total assets in securities which
are subject to legal or contractual restrictions on resale. At August 31,
1996, the Fund owned the following restricted securities (constituting 0.6%
of total assets) which may not be publicly sold without registration under
the Securities Act of 1933. The Fund does not have the right to demand that
such securities be registered. The value of these securities is determined by
valuations supplied by a pricing service or brokers.
Date of Par
Description Acquisition Amount Cost Value
------------------- -------------- ------------- ------------- -------------
Alameda County, CA,
Certificates of
Participation,
BIGI, 7.25s, 2000 9/21/90 $4,560,000 $4,448,690 $ 5,100,953
Alameda County, CA,
Certificates of
Participation,
BIGI, 7.25s, 2000 9/19/90 4,770,000 4,667,397 5,335,865
-------------
$10,436,818
-------------
29
<PAGE>
Independent Auditor 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, 1996, the
related statement of operations for the year then ended, the statement of
changes in net assets for the years August 31, 1996 and 1995, and the
financial highlights for each of the years in the two-year period ended
August 31, 1996, the ten months ended August 31, 1994, and each of the years
in the eight-year period ended October 31, 1993. These financial statements
and financial highlights are the responsibility of the Fund's management. Our
responsibility is to express an opinion on these financial statements and
financial highlights based on our audit.
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, 1996 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, 1996, the results of its operations, the changes in
its net assets, and its financial highlights for the respective stated
periods in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Boston, Massachusetts
October 4, 1996
-----------------------------------------------------------------------------
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.
30
<PAGE>
It's Easy to Contact Us
[icon: phone receiver]
MFS Automated Information
Account Information:
Call 1-800-MFS-TALK (1-800-637-8255)
anytime.
Investment Outlook:
Call 1-800-637-4458 anytime for the MFS outlook
on the bond and stock markets.
[icon: question mark]
MFS Personal Service
Account Service/Literature:
Call 1-800-225-2606 any business day
from 8 a.m. to 8 p.m. Eastern time.
Product Information:
Call 1-800-637-2929 any business day
from 9 a.m. to 5 p.m. Eastern time.
Service for the Hearing-Impaired:
Call 1-800-637-6576 any business day
from 9 a.m. to 5 p.m. Eastern time (TDD required).
[icon: envelope]
MFS Addresses
MFS Service Center, Inc.
P.O. Box 2281
Boston, MA 02107-9906
Web Site
http://www.mfs.com
31
<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 anytime). 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
Limited Maturity Bond
- -------------------------------------------------------------
MFS(R) Government Limited Maturity Fund
MFS(R) Limited Maturity Fund
MFS(R) Municipal Limited Maturity Fund
- -------------------------------------------------------------
World
- ----------------------------------------------------------------
MFS(R)/Foreign & Colonial Emerging Markets Equity Fund
MFS(R)/Foreign & Colonial International Growth Fund
MFS(R)/Foreign & Colonial International Growth and Income Fund
MFS(R) World Asset Allocation Fund(SM)
MFS(R) World Equity Fund
MFS(R) World Governments Fund
MFS(R) World Growth Fund
MFS(R) World Total Return Fund
National Tax-Free Bond
- ----------------------------------------------------------------
MFS(R) Municipal Bond Fund
MFS(R) Municipal High Income Fund
MFS(R) Municipal Income Fund
State Tax-Free Bond
- ----------------------------------------------------------------
Alabama, Arkansas, California, Florida, Georgia,
Maryland, Massachusetts, Mississippi, New York, North Carolina,
Pennsylvania, South Carolina, Tennessee, Virginia,
West Virginia
Money Market
- ----------------------------------------------------------------
MFS(R) Cash Reserve Fund
MFS(R) Government Money Market Fund
MFS(R) Money Market Fund
- ----------------------------------------------------------------
32
<PAGE>
MFS(R) 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;
Director, Cambridge Bancorp; Director,
Cambridge Trust 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, Director and Secretary,
Massachusetts Financial Services Company
Jeffrey L. Shames* - President and Director,
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
Fund Manager
Robert A. Dennis*
Treasurer
W. Thomas London*
Assistant Treasurer
James O. Yost*
Secretary
Stephen E. Cavan*
Assistant Secretary
James R. Bordewick, Jr.*
Auditor
Deloitte & Touche LLP
*Affiliated with the Investment Adviser
Custodian
State Street Bank and Trust Company
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 current account service, 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.
Web Site
http://www.mfs.com
DALBAR SEAL
[Dalbar seal:] For the second year in a
- ------------------- row, MFS earned a #1
MFS Rated #1 ranking in DALBAR,
TOP-RATED SERVICE Inc.'s Broker/Dealer
- ------------------- Survey, Main Office
Operations Service
Quality category. The
Firm achieved a 3.49
overall score -- on a scale of 1 to 4 -- in the 1995
survey. A total of 71 firms responded, offering
input on the quality of service they receive from
36 mutual fund companies nationwide. The
survey contained questions about service quality
in 17 categories, including "knowledge of phone
service contacts," "accuracy of transaction
processing," and "overall ease of doing business
with the firm." The 1996 survey results were not
available at the time of this printing.
33
<PAGE>
[BACK COVER]
MFS(R) Municipal
Bond Fund
500 Boylston Street
Boston, MA 02116
[MFS logo](SM)
INVESTMENT MANAGEMENT
We invented the mutual fund(SM)
(C)1996 MFS Fund Distributors, Inc., 500 Boylston Street, Boston, MA 02116
Bulk Rate
U.S. Postage
P A I D
Permit #55638
Boston, MA
MMB-2 10/96 57M 17/217
[Dalbar seal:]
- -----------------------
DALBAR
MFS #1 MFS
TOP-RATED SERVICE
- -----------------------
<PAGE>
[FRONT COVER]
[MFS logo](SM)
INVESTMENT MANAGEMENT
We invented the mutual fund(SM)
MFS(R) Municipal Bond Fund
Annual Report
for Year Ended
August 31, 1996
[Photo: perspective of elaborate suspension bridge]
<PAGE> 98
MFS OTC FUND
SUPPLEMENT TO THE JANUARY 1, 1997 PROSPECTUS AND STATEMENT OF ADDITIONAL
INFORMATION
THE FOLLOWING INFORMATION SHOULD BE READ IN CONJUNCTION WITH THE FUND'S
PROSPECTUS AND STATEMENT OF ADDITIONAL INFORMATION ("SAI"), DATED JANUARY 1,
1997, AND CONTAINS A DESCRIPTION OF CLASS P SHARES.
CLASS P SHARES ARE AVAILABLE FOR PURCHASE ONLY BY CERTAIN RETIREMENT
PLANS ESTABLISHED FOR THE BENEFIT OF EMPLOYEES OF MASSACHUSETTS FINANCIAL
SERVICES COMPANY ("MFS"), THE FUND'S INVESTMENT ADVISER, AND EMPLOYEES OF MFS'
AFFILIATES ("MFS RETIREMENT PLANS"). CLASS P SHARES MAY NOT BE OFFERED OR SOLD
OUTSIDE OF THE COMMONWEALTH OF MASSACHUSETTS, AND THIS SUPPLEMENT DOES NOT
CONSTITUTE AN OFFER OF CLASS P SHARES TO ANY PERSON WHO RESIDES OUTSIDE OF THE
COMMONWEALTH OF MASSACHUSETTS.
EXPENSE SUMMARY
<TABLE>
<CAPTION>
CLASS P
-------
<S> <C>
SHAREHOLDER TRANSACTION EXPENSES:
Maximum Initial Sales Charge Imposed on Purchases of Fund
Shares (as a percentage of offering price) ................................ None
Maximum Contingent Deferred Sales Charge (as a percentage
of original purchase price or redemption proceeds, as applicable) ......... None
ANNUAL OPERATING EXPENSES OF THE FUND (AS A PERCENTAGE OF AVERAGE NET ASSETS):
Management Fees ............................................................. 0.75%
Rule 12b-1 Fees ............................................................. None
Other Expenses (after applicable reduction)(1) .............................. 0.44%
----
Total Operating Expenses (after applicable reduction) ....................... 1.19%
</TABLE>
- --------------
(1) Except for the shareholder servicing agent fee component, "Other Expenses"
is based on Class A expenses incurred during the fiscal year ended August
31, 1996. The shareholder servicing agent fee component of "Other Expenses"
is a predetermined percentage based upon the Fund's net assets attributable
to each class.
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 P
------ -------
<S> <C>
1 year.............. $12
3 years............. 38
</TABLE>
The purpose of the expense table above is to assist investors in
understanding the various costs and expenses that a shareholder of the Fund will
bear directly or indirectly. A more complete description of the Fund's
management fee is set forth under the caption "Management of the Fund" in the
Prospectus.
THE "EXAMPLE" SET FORTH ABOVE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST
OR FUTURE EXPENSES OF THE FUND; ACTUAL EXPENSES MAY BE GREATER OR LESS THAN
THOSE SHOWN.
- 1 -
<PAGE> 99
THE FUND
Four classes of shares of the Fund currently are offered for sale,
Class A shares, Class B shares, Class C shares and Class P shares. Class P
shares are available for purchase only by the MFS Retirement Plans and are
described in this Supplement. Class A shares, Class B shares and Class C shares
are described in the Fund's Prospectus and are available for purchase by the
general public.
Class A shares are offered at net asset value plus an initial sales
charge up to a maximum of 5.75% of the offering price (or a contingent deferred
sales charge (a "CDSC") upon redemption of 1.00% during the first year in the
case of purchases of $1 million or more and certain purchases by retirement
plans), and are subject to an annual distribution fee and service fee up to a
maximum of 0.35% per annum. Class B shares are offered at net asset value
without an initial sales charge but are subject to a CDSC upon redemption
(declining from 4.00% during the first year to 0% after six years) and an annual
distribution fee and service fee up to a maximum of 1.00% per annum; Class B
shares will convert to Class A shares approximately eight years after purchase.
Class C shares are offered at net asset value without an initial sales charge
but are subject to a CDSC upon redemption of 1.00% during the first year and an
annual distribution fee and service fee up to a maximum of 1.00% per annum.
Class P shares are offered at net asset value without an initial sales charge or
CDSC and are not subject to a distribution or service fee. Class C and Class P
shares do not convert to any other class of shares of the Fund.
INFORMATION CONCERNING CLASS P SHARES OF THE FUND
As noted above, Class P shares are offered at net asset value without
an initial sales charge or a CDSC and are not subject to a distribution fee or
service fee. Class P shares are offered only to MFS Retirement Plans.
MFS Retirement Plans may exchange Class P shares of the Fund for Class
P shares of any other Fund available for purchase by such Plans at their net
asset value (if available for sale), and may redeem Class P shares of the Fund
at net asset value. Distributions paid by the Fund with respect to Class P
shares generally will be greater than those paid with respect to Class A, Class
B and Class C shares because expenses attributable to Class A, Class B and Class
C shares generally will be higher.
MFS has agreed to bear, for an indefinite period, expenses of Class P
shares of the Fund such that the aggregate expenses of the Fund's Class P shares
do not exceed 1.25% of the Fund's average daily net assets attributable to Class
P shares on an annualized basis. This arrangement may be terminated or revised
by MFS at any time.
THE DATE OF THIS SUPPLEMENT IS JANUARY 1, 1997
- 2 -
<PAGE> 100
<TABLE>
<S> <C>
PROSPECTUS
JANUARY 1, 1997
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................................................... 7
5. Investment Techniques............................................................... 7
6. Risk Factors........................................................................ 11
7. Management of the Fund.............................................................. 14
8. Information Concerning Shares of the Fund........................................... 15
Purchases........................................................................ 15
Exchanges........................................................................ 20
Redemptions and Repurchases...................................................... 21
Distribution Plan................................................................ 23
Distributions.................................................................... 25
Tax Status....................................................................... 25
Net Asset Value.................................................................. 26
Description of Shares, Voting Rights and Liabilities............................. 26
Performance Information.......................................................... 27
Expenses......................................................................... 27
9. Shareholder Services................................................................ 28
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 market
conditions, 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 "Information Concerning Shares of the Fund -- Purchases").
The Fund's investment adviser and distributor are Massachusetts Financial
Services Company ("MFS" or the "Adviser") and MFS Fund Distributors, Inc.
("MFD"), respectively, both of which are located at 500 Boylston Street, Boston,
Massachusetts 02116.
INVESTMENT PRODUCTS ARE NOT INSURED BY THE FDIC OR ANY OTHER GOVERNMENT AGENCY,
AND ARE NOT DEPOSITS OR OTHER OBLIGATIONS OF, OR GUARANTEED BY, ANY FINANCIAL
INSTITUTION. SHARES OF MUTUAL FUNDS ARE SUBJECT TO INVESTMENT RISK, INCLUDING
POSSIBLE LOSS OF THE PRINCIPAL AMOUNT INVESTED, AND WILL FLUCTUATE IN VALUE. YOU
MAY RECEIVE MORE OR LESS THAN YOU PAID WHEN YOU REDEEM YOUR SHARES.
This Prospectus sets forth concisely the information concerning the Fund 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, dated January 1, 1997, as amended or supplemented from time to time
(the "SAI"), which contains more detailed information about the Fund. The SAI is
incorporated into this Prospectus by reference. See page 29 for a further
description of the information set forth in the SAI. A copy of the SAI may be
obtained without charge by contacting the Shareholder Servicing Agent (see back
cover for address and phone number). The SEC maintains an Internet World Wide
Web site that contains the SAI, materials that are incorporated by reference
into this Prospectus and the SAI, and other information regarding the Fund. This
Prospectus is available on the Adviser's Internet World Wide Web site at
http://www.mfs.com.
INVESTORS SHOULD READ THIS PROSPECTUS AND RETAIN IT FOR FUTURE REFERENCE.
<PAGE> 101
1. EXPENSE SUMMARY
<TABLE>
<CAPTION>
SHAREHOLDER TRANSACTION EXPENSES: CLASS A CLASS B CLASS C
---------- ------- -------
<S> <C> <C> <C>
Maximum Initial Sales Charge Imposed on Purchases of
Fund Shares (as a percentage of offering price)... 5.75% 0.00% 0.00%
Maximum Contingent Deferred Sales Charge (as a
percentage of original purchase price or
redemption proceeds, as applicable)............... See Below(1) 4.00% 1.00%
ANNUAL OPERATING EXPENSES (AS A PERCENTAGE OF AVERAGE NET
ASSETS):
Management Fees..................................... 0.75% 0.75% 0.75%
Rule 12b-1 Fees..................................... 0.25%(2) 1.00%(3) 1.00%(3)
Other Expenses(4)................................... 0.44% 0.38% 0.42%
---- ---- ----
Total Operating Expenses............................ 1.44% 2.13% 2.17%
</TABLE>
- ---------------
(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 shares in accordance with
Rule 12b-1 under the Investment Company Act of 1940, as amended (the "1940
Act") (the "Distribution Plan"), which provides that it will pay
distribution/service fees aggregating up to (but not necessarily all of)
0.35% per annum of the average daily net assets attributable to the Class A
shares. Payment of the 0.10% per annum Class A distribution fee will
commence on such date as the Trustees of the Trust may determine.
Distribution expenses paid under this Plan, together with the initial sales
charge, may cause long-term shareholders to pay more than the maximum sales
charge that would have been permissible if imposed entirely as an initial
sales charge. See "Information Concerning Shares of the Fund -- Distribution
Plan" below.
(3) The Fund's Distribution Plan provides that it will pay distribution/service
fees aggregating up to (but not necessarily all of) 1.00% per annum of the
average daily net assets attributable to Class B shares and Class C shares,
respectively. Distribution expenses paid under the Distribution Plan with
respect to Class B and Class C shares, 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. See "Information Concerning Shares of
the Fund -- Distribution Plan" below.
(4) The Fund has an expense offset arrangement which reduces the Fund's
custodian fee based upon the amount of cash maintained by the Fund with its
custodian and dividend disbursing agent, and may enter into other such
arrangements and directed brokerage arrangements (which would also have the
effect of reducing the Fund's expenses). Any such reductions are not
reflected under "Other Expenses."
2
<PAGE> 102
EXAMPLE OF EXPENSES
An investor would pay the following dollar amounts of expenses on a $1,000
investment in the Fund, assuming (a) a 5% annual return and (b) redemption at
the end of each of the time periods indicated (unless otherwise noted):
<TABLE>
<CAPTION>
PERIOD CLASS A CLASS B CLASS C
----------------------------------- ------- ------------- -------------------
<S> <C> <C> <C> <C> <C>
(1) (1)
1 year............................ $ 71 $ 62 $ 22 $ 32(3) $ 22
3 years........................... 100 97 67 68 68
5 years........................... 132 134 114 116 116
10 years........................... 220 228(2) 228(2) 250 250
</TABLE>
- ---------------
(1) Assumes no redemption.
(2) Class B shares convert to Class A shares approximately eight years after
purchase; therefore, years nine and ten reflect Class A expenses.
(3) Purchases subsequent to April 1, 1996 which are redeemed within 12 months of
purchase are subject to a 1% CDSC fee.
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 Plan."
THE "EXAMPLE" SET FORTH ABOVE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST
OR FUTURE EXPENSES OF THE FUND; ACTUAL EXPENSES MAY BE GREATER OR LESS THAN
THOSE SHOWN.
2. THE FUND
The Fund is a non-diversified series of the Trust, an open-end management
investment company which was organized 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 up to a
maximum of 5.75% of the offering price (or a CDSC of 1.00% upon redemption
during the first year in the case of purchases of $1 million or more and certain
purchase by retirement plans) and subject to an annual distribution fee and
service fee up to a maximum of 0.35% per annum. Class B shares are offered at
net asset value without an initial sales charge but are subject to a CDSC upon
redemption (declining from 4% during the first year to 0% after six years) and
an annual distribution fee and a service fee up to a maximum of 1.00% per annum;
Class B shares will convert to Class A shares approximately eight years after
purchase. Class C shares are offered at net asset value without an initial sales
charge but are subject to a CDSC of 1.00% upon redemption during the first year
and an annual distribution fee and service fee of 1.00% per annum. Class C
shares do not convert to any other class of shares of the Fund. In addition, the
Fund offers an additional class of shares, Class I shares, exclusively to
certain institutional investors. Class I shares are made available by means of a
separate Prospectus supplement provided to institutional investors eligible to
purchase Class I shares and are offered at net asset value without an annual
distribution and service fee.
The Trust's Board of Trustees provides broad supervision over the affairs of the
Fund. The Adviser is responsible for the management of the Fund's assets and the
officers of the Trust are responsible for the Fund's operations. The Adviser
manages the portfolio 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> 103
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, given
upon their authority as experts in accounting and auditing. The Fund's current
independent auditors are Deloitte & Touche LLP.
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
----------------------------------------
1996 1995 1994*
-------- ------- -------
CLASS A
--------
<S> <C> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value -- beginning of period.................................. $ 10.08 $ 8.68 $ 7.83
------- ------- -------
Income from investment operations# --
Net investment income (loss)........................................ $ 0.10 $ (0.03) $ (0.05)
------- ------- -------
Net realized and unrealized gain on investments and foreign currency
transactions...................................................... 0.76 1.69 0.90
------- ------- -------
Total from investment operations........................................ $ 0.86 $ 1.66 $ 0.85
------- ------- -------
Less distributions declared to shareholders from net realized gain on
investments and foreign currency transactions......................... $ (1.88) $ (0.26) $ --
------- ------- -------
Total distributions declared to shareholders............................ $ (1.88) $ (0.26) $ --
------- ------- -------
Net asset value -- end of period........................................ $ 9.06 $ 10.08 $ 8.68
======= ======= =======
Total return[double dagger]............................................. 10.55% 19.77% 10.86%++
Ratios (to average net assets)/Supplemental data[section]:
Expenses##.......................................................... 1.28% 1.29% 1.50%+
------- ------- -------
Net investment loss................................................. (1.08)% (0.40)% (0.87)%+
------- ------- -------
Portfolio turnover...................................................... 157% 218% 82%
Average commission rate###.............................................. $ 0.0422 -- --
------- ------- -------
Net assets at end of period (000 omitted)............................... $ 35,098 $30,194 $17,776
------- ------- -------
</TABLE>
- ---------------
<TABLE>
<C> <S>
* For the period from the commencement of investment operations, December 1, 1993 to August 31, 1994.
+ Annualized.
++ Not annualized.
[double dagger] 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.
# Per share data is based upon average shares outstanding.
## For fiscal years ending after September 1, 1995, the Fund's expenses are calculated without reduction for
fees paid indirectly.
### Average commission rate is calculated for funds with fiscal years beginning on or after September 1, 1995.
[section] The investment adviser did not impose a portion of its management fee for the periods indicated. If this fee
had been incurred by the Fund, the net investment loss per share and the ratios would have been:
Net investment loss..................................... -- -- $(0.08)
Ratios (to average net assets):
Expenses.............................................. -- -- 2.03%+
Net investment loss................................... -- -- (1.40)%+
</TABLE>
4
<PAGE> 104
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
---------------------------------------
1996 1995 1994*
------- ------- -------
CLASS B
-------
<S> <C> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value -- beginning of period................................... $ 9.94 $ 8.59 $ 7.83
------- ------- -------
Income from investment operations# --
Net investment income (loss)......................................... $ 0.17 $ (0.13) $ (0.12)
------- ------- -------
Net realized and unrealized gain on investments and foreign currency
transactions....................................................... 0.61 1.69 0.88
------- ------- -------
Total from investment operations......................................... $ 0.78 $ 1.56 $ 0.76
------- ------- -------
Less distributions declared to shareholders from net realized gain on
investments and foreign currency transactions.......................... $ (1.79) $ (0.21) $ --
------- ------- -------
Total distributions declared to shareholders............................. $ (1.79) $ (0.21) $ --
------- ------- -------
Net asset value -- end of period......................................... $ 8.93 $ 9.94 $ 8.59
======= ======= =======
Total return[double dagger].............................................. 9.67% 18.75% 9.71%++
Ratios (to average net assets)/Supplemental data[section]:
Expenses##........................................................... 2.13% 2.29% 2.57%+
------- ------- -------
Net investment loss.................................................. (1.81)% (1.44)% (2.02)%+
------- ------- -------
Portfolio turnover....................................................... 157% 218% 82%
Average commission rate###............................................... $0.0422 -- --
------- ------- -------
Net assets at end of period (000 omitted)................................ 67,043 $61,742 $36,849
------- ------- -------
</TABLE>
- ---------------
<TABLE>
<C> <S>
* For the period from the commencement of investment operations, December 1, 1993 to August 31, 1994.
+ Annualized.
++ Not annualized.
# Per share data is based upon average shares outstanding.
## For fiscal years ending after September 1, 1995, the Fund's expenses are calculated without reduction for
fees paid indirectly.
### Average commission rate is calculated for funds with fiscal years beginning on or after September 1, 1995.
[section] The investment adviser did not impose a portion of its management fee for the periods indicated. If this fee
had been incurred by the Fund, the net investment loss per share and the ratios would have been:
Net investment loss.......................................... -- -- $(0.15)
Ratios (to average net assets):
Expenses................................................... -- -- 3.10%
Net investment loss......................................... -- -- (2.56)%
</TABLE>
5
<PAGE> 105
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
---------------------------------------
1996 1995 1994*
------- ------- -------
CLASS C
-------
<S> <C> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value -- beginning of period................................... $ 9.91 $ 8.61 $ 7.80
------- ------- -------
Income from investment operations# --
Net investment income (loss)......................................... $ 0.17 $ (0.14) $ (0.04)
------- ------- -------
Net realized and unrealized gain on investments and foreign currency
transactions....................................................... 0.60 1.69 0.85
------- ------- -------
Total from investment operations......................................... $ 0.77 $ 1.55 $ 0.81
------- ------- -------
Less distributions declared to shareholders from net realized gain on
investments and foreign currency transactions.......................... $(1.83) $ (0.25) $ --
------- ------- -------
Total distributions declared to shareholders............................. $(1.83) $ (0.25) $ --
------- ------- -------
Net asset value -- end of period......................................... $ 8.85 $ 9.91 $ 8.61
======= ======= =======
Total return[double dagger].............................................. 9.60% 18.63% 10.38%
Ratios (to average net assets)/Supplemental data[section]:
Expenses##........................................................... 2.17% 2.30% 2.50%+
------- ------- -------
Net investment loss.................................................. (1.90)% (1.55)% (2.22)%+
------- ------- -------
Portfolio turnover....................................................... 157% 218% 82%
Average commission rate###............................................... $0.0422 -- --
------- ------- -------
Net assets at end of period (000 omitted)................................ $ 6,860 $ 3,209 $ 87
------- ------- -------
</TABLE>
- ---------------
<TABLE>
<C> <S>
* For the period from the commencement of offering of Class C shares, August 1, 1994 to August 31, 1994.
+ Annualized.
++ Not annualized.
# Per share data is based upon average shares outstanding.
## For fiscal years ending after September 1, 1995, the Fund's expenses are calculated without reduction for
fees paid indirectly.
### Average commission rate is calculated for funds with fiscal years beginning on or after September 1, 1995.
[section] The investment adviser did not impose a portion of its management fee for the periods indicated. If this fee
had been incurred by the Fund, the net investment loss per share and the ratios would have been:
Net investment loss........................................... -- -- $(0.05)
Ratios (to average net assets):
Expenses.................................................... -- -- 3.03%+
Net investment loss......................................... -- -- (2.71)%+
</TABLE>
6
<PAGE> 106
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 depository 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 Rated 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 objective and policies,
the Fund may invest in securities of issuers whose principal activities are
located in emerging market countries. Emerging market countries include any
country determined by the Adviser to have an emerging market economy, taking
into account a number of factors, including whether the country has a low- to
middle-income economy according to the International Bank for Reconstruction and
Development, the country's foreign currency debt rating, its political and
economic stability and the development of its financial and capital markets. The
Adviser determines whether an issuer's principal activities are located in an
emerging market country by considering such factors as its country of
organization, the principal trading market for its securities and the source of
its revenues and assets. The issuer's principal activities generally are deemed
to be located in a particular country if: (a) the security is issued or
guaranteed by the government of that country or any of its agencies, authorities
or instrumentalities; (b) the issuer is organized under the laws of, and
maintains a principal office in, that country; (c) the issuer has its principal
securities trading market in that country; (d) the
7
<PAGE> 107
issuer derives 50% or more of its total revenues from goods sold or services
performed in that country; or (e) the issuer has 50% or more of its assets in
that country.
BRADY BONDS: The Fund may invest in Brady Bonds, which are securities created
through the exchange of existing commercial bank loans to public and private
entities in certain emerging markets for new bonds in connection with debt
restructurings under a debt restructuring plan introduced by former U.S.
Secretary of the Treasury, Nicholas F. Brady (the "Brady Plan"). Brady Plan debt
restructurings have been implemented to date in Argentina, Brazil, Bulgaria,
Costa Rica, the Dominican Republic, Ecuador, Jordan, Mexico, Nigeria, Panama,
the Philippines, Poland, Uruguay and Venezuela. Brady Bonds have been issued
only recently, and for that reason do not have a long payment history. Brady
Bonds may be collateralized or uncollateralized, are issued in various
currencies (but primarily the U.S. dollar) and are actively traded in
over-the-counter secondary markets. U.S. dollar-denominated, collateralized
Brady Bonds, which may be fixed-rate bonds or floating-rate bonds, are generally
collateralized in full as to principal by U.S. Treasury zero coupon bonds having
the same maturity as the bonds. Brady Bonds are often viewed as having three or
four valuation components: the collateralized repayment of principal at final
maturity; the collateralized interest payments; the uncollateralized interest
payments; and any uncollateralized repayment of principal at maturity (these
uncollateralized amounts constituting the "residual risk"). In light of the
residual risk of Brady Bonds and the history of defaults of countries issuing
Brady Bonds with respect to commercial bank loans by public and private
entities, investments in Brady Bonds may be viewed as speculative.
AMERICAN DEPOSITARY RECEIPTS: The Fund may invest in American Depositary
Receipts ("ADRs") which are certificates issued by a U.S. depository (usually a
bank) and represent a specified quantity of shares of an underlying non-U.S.
stock on deposit with a custodian bank as collateral. Because ADRs trade on
United States securities exchanges, the Adviser does not treat them as foreign
securities. However, they are subject to many of the risks of foreign securities
such as changes in exchange rates and more limited information about foreign
issuers.
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 or a letter of credit).
"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 (i.e., principal value) or
interest rates rise or fall according to the change in one or more specified
underlying instruments. Indexed securities may be positively or negatively
indexed (i.e., their principal value or interest rates may increase or decrease
if the underlying instrument appreciates), and may have return characteristics
similar to direct investments
8
<PAGE> 108
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.
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.
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<PAGE> 109
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 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, Policies and
Restrictions -- 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.
10
<PAGE> 110
OPTIONS ON FUTURES CONTRACTS: The Fund may purchase and write options on
Futures Contracts ("Options on Futures Contracts") in order to protect against
declines in the values of portfolio securities or against increases in the cost
of securities to be acquired. Purchases of Options on Futures Contracts may
present less risk in hedging the Fund's portfolio than the purchase or sale of
the underlying Futures Contracts 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 into which it has entered. 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 Exchanges. 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.
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<PAGE> 111
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 & Poor's Ratings Services ("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
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<PAGE> 112
governments, present the risk of nationalization of businesses, restrictions on
foreign ownership, or prohibitions of repatriation of assets, and may have less
protection of property rights than more developed countries. The economies of
countries with emerging markets may be predominantly based on only a few
industries, may be highly vulnerable to changes in local or global trade
conditions, and may suffer from extreme and volatile debt burdens or inflation
rates. Local securities markets may trade a small number of securities and may
be unable to respond effectively to increases in trading volume, potentially
making prompt liquidation of substantial holdings difficult or impossible at
times. Securities of issuers located in countries with emerging markets may have
limited marketability and may be subject to more abrupt or erratic price
movements.
Certain emerging markets may require governmental approval for the repatriation
of investment income, capital or the proceeds of sales of securities by foreign
investors. In addition, if a deterioration occurs in an emerging market's
balance of payments or for other reasons, a country could impose temporary
restrictions on foreign capital remittances. The Fund could be adversely
affected by delays in, or a refusal to grant, any required governmental approval
for repatriation of capital, as well as by the application to the Fund of any
restrictions on investments.
Investment in certain foreign emerging market debt obligations may be restricted
or controlled to varying degrees. These restrictions or controls may at times
preclude investment in certain foreign emerging market debt obligations and
increase the expenses of the Fund. 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
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<PAGE> 113
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.
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, 1996, 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 employed as a portfolio manager by 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, 1996, management fees paid to MFS under the
Advisory Agreement were $755,233, 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[Registered Trademark]/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 Institutional Advisors,
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 $52.3 billion on behalf of approximately 2.2 million investor
accounts as of November 30, 1996. As of such date, the MFS organization managed
approximately $28.1 billion in assets in equity securities and $20.3 billion of
assets in fixed income securities. Approximately $4.1 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 subsidiary of Sun
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<PAGE> 114
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, James D. McNeil, Donald A. Stewart and Arnold D.
Scott. Mr. Brodkin is the Chairman, Mr. Shames is the President and Mr. Scott is
the Secretary and a Senior Executive Vice President of MFS. Messrs. McNeil and
Stewart are the Chairman and the President, respectively, of Sun Life. Sun Life,
a mutual life insurance company, is one of the largest international life
insurance companies and has been operating in the 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 share their views
on a variety of investment related issues, such as the economy, securities
markets, portfolio securities and their issuers, investment recommendations,
strategies and techniques, risk analysis, trading strategies and other portfolio
management matters. MFS has access to the extensive international equity
investment expertise of Foreign & Colonial, and Foreign & Colonial has access to
the extensive U.S. equity investment expertise of MFS. MFS and Foreign &
Colonial each have investment personnel working in each other's offices in
Boston and London, respectively.
In certain instances there may be securities which are suitable for the Fund's
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
Class A, B and C shares of the Fund may be purchased at the public offering
price through any dealer and other financial institutions ("dealers") having a
selling agreement with MFD. Dealers may also charge their customers fees
relating to investment in the Fund.
This Prospectus offers 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.
15
<PAGE> 115
PURCHASES SUBJECT TO INITIAL SALES CHARGE. Class A shares are offered at net
asset value plus an initial sales charge as follows:
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SALES CHARGE* AS PERCENTAGE 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**
- -------------------------------------------------------------------------------------------------------
</TABLE>
*Because of rounding in the calculation of offering price, actual sales charges
may be more or less than those calculated using the percentages above.
**A CDSC will apply to such purchases, as discussed below.
MFD allows discounts to dealers (which are alike for all dealers) from the
applicable public offering price as shown in the above table. In the case of the
maximum sales charge, the dealer retains 5% and MFD retains approximately 3/4 of
1% of the public offering price. The sales charge may vary depending on the
number of shares of the Fund as well as certain other MFS Funds owned or being
purchased, the existence of an agreement to purchase additional shares during a
13-month period (or 36-month period for purchases of $1 million or more) or
other special purchase programs. A description of the Right of Accumulation,
Letter of Intent and Group Purchase privileges by which the sales charge may be
reduced is set forth in the SAI.
PURCHASES SUBJECT TO A CDSC (but not an initial sales charge). In the following
four circumstances, Class A shares are offered at net asset value without an
initial sales charge, but subject to a CDSC equal to 1% of the lesser of the
value of the shares redeemed (exclusive of reinvested dividend and capital gain
distributions) or the total cost of such shares, in the event of a share
redemption within 12 months following the purchase:
(i) on investments of $1 million or more in Class A shares:
(ii) on investments in Class A shares by certain retirement plans subject to
the Employee Retirement Income Security Act of 1974, as amended ("ERISA"),
if, prior to July 1, 1996: (a) the plan had established an account with
the Shareholder Servicing Agent and (b) the sponsoring organization had
demonstrated to the satisfaction of MFD that either (i) the employer had
at least 25 employees or (ii) the aggregate purchases by the retirement
plan of Class A shares of Funds in the MFS Funds would be in an aggregate
amount of at least $250,000 within a reasonable period of time, as
determined by MFD in its sole discretion;
(iii) on investments in Class A shares by certain retirement plans subject to
ERISA, if: (a) the retirement plan and/or sponsoring organization
subscribes to the MFS FUNDamental 401(k) Program or any similar
recordkeeping system made available by the Shareholder Servicing Agent
(the "MFS Participant Recordkeeping System"); (b) the plan establishes an
account with the Shareholder Servicing Agent on or after July 1, 1996; and
(c) the aggregate purchases by the retirement plan of Class A shares of
the MFS Funds will be in an aggregate amount of at least $500,000 within a
reasonable period of time, as determined by MFD in its sole discretion;
and
(iv) on investments in Class A shares by certain retirement plans subject to
ERISA, if: (a) the plan establishes an account with the Shareholder
Servicing Agent on or after July 1, 1996 and (b) the plan has, at the time
of purchase, a market value of $500,000 or more invested in shares of any
class or classes of the MFS Funds. THE RETIREMENT PLAN WILL QUALIFY UNDER
THIS CATEGORY ONLY IF THE PLAN OR ITS SPONSORING ORGANIZATION INFORMS THE
SHAREHOLDER SERVICING AGENT PRIOR TO THE PURCHASE THAT THE PLAN HAS A
MARKET VALUE OF $500,000 OR MORE INVESTED IN SHARES OF ANY CLASS OR
CLASSES OF THE MFS FUNDS. THE
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<PAGE> 116
SHAREHOLDER SERVICING AGENT HAS NO OBLIGATION INDEPENDENTLY TO DETERMINE
WHETHER SUCH A PLAN QUALIFIES UNDER THIS CATEGORY.
In the case of all such purchases, MFD will pay commissions to dealers on new
investments in Class A shares made through such dealers as follows:
<TABLE>
<CAPTION>
COMMISSION PAID BY MFD TO DEALERS CUMULATIVE PURCHASE AMOUNT
- --------------------------------- -------------------------------
<C> <S>
1.00% On the first $2,000,000, plus
Over $2,000,000 to $3,000,000,
0.80% plus
Over $3,000,000 to $50,000,000,
0.50% plus
0.25% Over $50,000,000
</TABLE>
For purposes of determining the level of commissions to be paid to dealers with
respect to a shareholder's new investment in Class A shares made on or after
April 1, 1996, purchases for each shareholder account (and certain other
accounts for which the shareholder is a record or beneficial holder) will be
aggregated over a 12-month period (commencing from the date of the first such
purchases).
See "Redemptions and Repurchases -- Contingent Deferred Sales Charge" in the
Prospectus for further discussion of the CDSC.
WAIVERS OF INITIAL SALES CHARGE AND CDSC. In certain circumstances, the initial
sales charge imposed upon purchases of Class A shares and the CDSC imposed upon
redemption of Class A shares is waived. These circumstances are described in
Appendix A to this Prospectus. In addition to these circumstances, the CDSC
imposed upon the redemption of Class A shares is waived with respect to shares
held by certain retirement plans qualified under Section 401(a) or 403(b) of the
Code, and subject to ERISA, where:
(i) the retirement plan and/or sponsoring organization does not subscribe to
the MFS Participant Recordkeeping System; and
(ii) the retirement plan and/or sponsoring organization demonstrates to the
satisfaction of, and certifies to, the Shareholder Servicing Agent that the
retirement plan has, at the time of certification or will have pursuant to
a purchase order placed with the certification, a market value of $500,000
or more invested in shares of any class or classes of the MFS Funds and
aggregate assets of at least $10 million;
provided, however, that the CDSC will not be waived (i.e., it will be imposed)
in the event that there is a change in law or regulations which results in a
material adverse change to the tax advantaged nature of the plan, or in the
event that the plan and/or sponsoring organization: (i) becomes insolvent or
bankrupt; (ii) is terminated or partially terminated under ERISA or is
liquidated or dissolved; or (iii) is acquired by, merged into, or consolidated
with, any other entity.
CLASS B SHARES: Class B shares are offered at net asset value without an initial
sales charge but subject to a CDSC upon redemption as follows:
<TABLE>
<CAPTION>
YEAR OF CONTINGENT
REDEMPTION DEFERRED SALES
AFTER PURCHASE CHARGE
---------------------------------------------------- ---------------
<S> <C>
First............................................... 4%
Second.............................................. 4%
Third............................................... 3%
Fourth.............................................. 3%
Fifth............................................... 2%
Sixth............................................... 1%
Seventh and following............................... 0%
</TABLE>
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<PAGE> 117
The CDSC imposed is assessed against the lesser of the value of the shares
redeemed (exclusive of reinvested dividends and capital gain distributions) or
the total cost of such shares. No CDSC is assessed against shares acquired
through the automatic reinvestment of dividends or capital gain distributions.
Except as described below, MFD will pay commissions to dealers of 3.75% of the
purchase price of Class B shares purchased through dealers. MFD will also
advance to dealers the first year service fee payable under the Fund's
Distribution Plan (see "Distribution Plan" below) at a rate equal to 0.25% of
the purchase price of such shares. Therefore, the total amount paid to a dealer
upon the sale of Class B shares is 4% of the purchase price of the shares
(commission rate of 3.75% plus a service fee equal to 0.25% of the purchase
price).
Class B shares purchased by a retirement plan whose sponsoring organization
subscribes to the MFS Participant Recordkeeping System and which has established
its account with the Shareholder Servicing Agent on or after July 1, 1996, will
be subject to the CDSC described above, only under limited circumstances, as
explained below under "Waivers of CDSC." With respect to such purchases, MFD
pays an amount to dealers equal to 3.00% of the amount purchased through such
dealers (rather than the 4.00% payment described above), which is comprised of a
commission of 2.75% plus the advancement of the first year service fee equal to
0.25% of the purchase price payable under the Fund's Distribution Plan. As
discussed above, such retirement plans are eligible to purchase Class A shares
of the Fund at net asset value without an initial sales charge but subject to a
1% CDSC if the plan has, at the time of purchase, a market value of $500,000 or
more invested in shares of any class or classes of the MFS Funds. IN THIS EVENT,
THE PLAN OR ITS SPONSORING ORGANIZATION SHOULD INFORM THE SHAREHOLDER SERVICING
AGENT THAT THE PLAN IS ELIGIBLE TO PURCHASE CLASS A SHARES UNDER THIS CATEGORY;
THE SHAREHOLDER SERVICING AGENT HAS NO OBLIGATION INDEPENDENTLY TO DETERMINE
WHETHER SUCH A PLAN QUALIFIES UNDER THIS CATEGORY FOR THE PURCHASE OF CLASS A
SHARES.
See "Redemptions and Repurchases -- Contingent Deferred Sales Charge" for
further discussion of the CDSC.
WAIVERS OF CDSC. In certain circumstances, the CDSC imposed upon redemption of
Class B shares is waived. These circumstances are described in Appendix A to
this Prospectus. In addition to these circumstances, the CDSC imposed upon the
redemption of Class B shares is waived with respect to shares held by a
retirement plan whose sponsoring organization subscribes to the MFS Participant
Recordkeeping System and which has established an account with the Shareholder
Servicing Agent on or after July 1, 1996; provided, however, that the CDSC will
not be waived (i.e., it will be imposed) in the event that there is a change in
law or regulations which results in a material adverse change to the tax
advantaged nature of the plan, or in the event that the plan and/or sponsoring
organization: (i) becomes insolvent or bankrupt; (ii) is terminated or partially
terminated under ERISA or is liquidated or dissolved; or (iii) is acquired by,
merged into, or consolidated with, any other entity.
CONVERSION OF CLASS B SHARES. Class B shares of the Fund that remain outstanding
for approximately eight years will convert to Class A shares of the same Fund.
Shares purchased through the reinvestment of distributions paid in respect of
Class B shares will be treated as Class B shares for purposes of the payment of
the distribution and service fees under the Fund's Distribution Plan. See
"Distribution Plan" below. However, for purposes of conversion to Class A
shares, all shares in a shareholder's account that were purchased through the
reinvestment of dividends and distributions paid in respect of Class B shares
(and which have not converted to Class A shares as provided in the following
sentence) will be held in a separate sub-account. Each time any Class B shares
in the shareholder's account (other than those in the sub-account) convert to
Class A shares, a portion of the Class B shares then in the sub-account will
also convert to Class A shares. The portion will be determined by the ratio that
the shareholder's Class B shares not acquired through reinvestment of dividends
and distributions that are converting to Class A shares 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.
18
<PAGE> 118
CLASS C SHARES: Class C shares are offered at net asset value without an
initial sales charge but are subject to a CDSC upon redemption of 1.00% during
the first year. Class C shares do not convert to any other class of the Fund.
The maximum investment in Class C shares that may be made is up to $5,000,000
per transaction.
The CDSC imposed is assessed against the lesser of the value of the shares
redeemed (exclusive of reinvested dividend and capital gain distributions) or
the total cost of such shares. No CDSC is assessed against shares acquired
through the automatic reinvestment of dividend or capital gain distributions.
See "Redemptions and Repurchases -- Contingent Deferred Sales Charge" below for
further discussion of the CDSC.
MFD will pay dealers 1.00% of the purchase price of Class C shares purchased
through dealers and, as compensation therefor, MFD will retain the 1.00% per
annum distribution and service fee paid under the Fund's Distribution Plan to
MFD for the first year after purchase (see "Distribution Plan" below).
Class C shares are not currently available for purchase by any retirement plan
qualified under Sections 401(a) or 403(b) of the Code if the retirement plan
and/or the sponsoring organization subscribe to the MFS FUNDamental 401(k) Plan
or another similar recordkeeping program made available by the Shareholder
Servicing Agent.
WAIVERS OF CDSC. In certain circumstances, the CDSC imposed upon redemption of
Class C shares is waived. These circumstances are described in Appendix A to
this Prospectus.
GENERAL: The following information applies to purchases of all classes of the
Fund's shares.
MINIMUM INVESTMENT. Except as described below, the minimum initial investment is
$1,000 per account and the minimum additional investment is $50 per account.
Accounts being established for monthly automatic investments and under payroll
savings programs and tax-deferred retirement programs (other than 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 reserves the right to
reject or restrict any specific purchase or exchange request. In the event that
the Fund or MFD rejects an exchange request, neither the redemption nor the
purchase side of the exchange will be processed.
The Fund is not designed for professional market timing organizations or other
entities using programmed or frequent exchanges. The Fund defines a "market
timer" as an individual, or organization acting on behalf of one or more
individuals, if (i) the individual or organization makes three or more exchange
requests out of the Fund per calendar year and (ii) any one of such exchange
requests represents shares equal in value to 1/2 or 1% or more of the Fund's net
assets at the time of the request. Accounts under common ownership or control,
including accounts administered by market timers, will be aggregated for
purposes of this definition.
As noted above, the Fund and MFD each reserves the right to reject or restrict
any specific purchase and exchange request, and, in addition, may impose
specific limitations with respect to market timers, including delaying for up to
seven days the purchase side of an exchange request by market timers or
specifically rejecting or otherwise restricting purchase and exchange requests
by market timers. In the event that any individual or entity is determined
either by the Fund or MFD, in its sole discretion, to be a market timer with
respect to any calendar year, the Fund and/or MFD will reject all exchange
requests into the Fund during the remainder of that calendar year. Other funds
in the MFS Funds may have different and/or more restrictive policies with
respect to market timers than the Fund. These policies are disclosed in the
prospectuses of these other MFS Funds.
19
<PAGE> 119
DEALER CONCESSIONS. Dealers may receive different compensation with respect to
sales of Class A, Class B and Class C shares. In addition, from time to time,
MFD may pay dealers 100% of the applicable sales charge on sales of Class A
shares of certain specified MFS Funds sold by such dealer during a specified
sales period. In addition, MFD or its affiliates may, from time to time, pay
dealers an additional commission equal to 0.50% of the net asset value of all of
the Class B and/or Class C shares of certain specified MFS Funds sold by such
dealer during a specified sales period. In addition, from time to time, MFD, at
its expense, may provide additional commissions, compensation or promotional
incentives ("concessions") to dealers which sell shares of the Fund. Such
concessions provided by MFD may include financial assistance to dealers in
connection with preapproved conferences or seminars, sales or training programs
for invited registered representatives, payment for travel expenses, including
lodging, incurred by registered representatives for such seminars or training
programs, seminars for the public, advertising and sales campaigns regarding one
or more MFS 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.
RESTRICTIONS ON ACTIVITIES OF NATIONAL BANKS. The Glass-Steagall Act prohibits
national banks from engaging in the business of underwriting, selling or
distributing securities. Although the scope of the prohibition has not been
clearly defined, MFD believes that such Act should not preclude banks from
entering into agency agreements with MFD. If, however, a bank were prohibited
from so acting, the Trustees would consider what actions, if any, would be
necessary to continue to provide efficient and effective shareholder services in
respect of shareholders who invested in the Fund through a national bank. It is
not expected that shareholders would suffer any adverse financial consequence as
a result of these occurrences. In addition, state securities laws on this issue
may differ from the interpretation of federal law expressed herein and banks and
financial institutions may be required to register as broker-dealers pursuant to
state law.
------------------------
A shareholder whose shares are held in the name of, or controlled by, a dealer
might not receive many of the privileges and services from the Fund (such as
Right of Accumulation, Letter of Intent and certain recordkeeping services) that
the Fund ordinarily provides.
EXCHANGES
Subject to the requirements set forth below, some or all of the shares in an
account with the Fund for which payment has been received by the Fund (i.e., an
established account) may be exchanged for shares of the same class of any of the
other MFS Funds at net asset value (if available for sale). Shares of one class
may not be exchanged for shares of any other class.
EXCHANGES AMONG MFS FUNDS (EXCLUDING EXCHANGES FROM MFS MONEY MARKET FUNDS): No
initial sales charges or CDSC will be imposed in connection with an exchange
from shares of an MFS Fund to shares of any other MFS Fund, except with respect
to exchanges from an MFS money market fund to another MFS Fund which is not an
MFS money market fund (discussed below). With respect to an exchange involving
shares subject to a CDSC, the CDSC will be unaffected by the exchange and the
holding period for purposes of calculating the CDSC will carry over to the
acquired shares.
EXCHANGES FROM AN MFS MONEY MARKET FUND: Special rules apply with respect to the
imposition of an initial sales charge or a CDSC for exchanges from an MFS money
market fund to another MFS Fund which is not an MFS money market fund. These
rules are described under the caption "Exchanges" in the Prospectuses of those
MFS money market funds.
20
<PAGE> 120
EXCHANGES INVOLVING THE MFS FIXED FUND: Class A shares of any MFS Fund held by
certain qualified retirement plans may be exchanged for units of participation
of the MFS Fixed Fund (a bank collective investment fund) (the "Units"), and
Units may be exchanged for Class A shares of any MFS Fund. With respect to
exchanges between Class A shares subject to a CDSC and Units, the CDSC will
carry over to the acquired shares or Units and will be deducted from the
redemption proceeds when such shares or Units are subsequently redeemed,
assuming the CDSC is then payable (the period during which the Class A shares
and the Units were held will be aggregated for purposes of calculating the
applicable CDSC). In the event that a shareholder initially purchases Units and
then exchanges into Class A shares subject to an initial sales charge of an MFS
Fund, the initial sales charge shall be due upon such exchange, but will not be
imposed with respect to any subsequent exchanges between such Class A shares and
Units with respect to shares on which the initial sales charge has already been
paid. In the event that a shareholder initially purchases Units and then
exchanges into Class A shares subject to a CDSC of an MFS Fund, the CDSC period
will commence upon such exchange, and the applicability of the CDSC with respect
to subsequent exchanges shall be governed by the rules set forth above in this
paragraph.
GENERAL: A shareholder should read the prospectus of the other MFS Fund into
which an exchange is made and consider the differences in objectives, policies
and restrictions before making any exchange. Exchanges will be made only after
instructions in writing or by telephone (an "Exchange Request") are received for
an established account by the Shareholder Servicing Agent in proper form (i.e.,
if in writing -- signed by the record owner(s) exactly as the shares are
registered; if by telephone -- proper account identification is given by the
dealer or shareholder of record) and each exchange must involve either shares
having an aggregate value of at least $1,000 ($50 in case of retirement plan
participants whose sponsoring organizations subscribe to the MFS FUNDamental
401(k) Plan or another similar 401(k) recordkeeping system made available by the
Shareholder Servicing Agent) or all the shares in the account. If an Exchange
Request is received by the Shareholder Servicing Agent on any business day prior
to the close of regular trading on the Exchange (generally, 4:00 p.m., Eastern
time), the exchange will occur on that day if all the requirements set forth
above have been complied with at that time and subject to the Fund's right to
reject purchase orders. No more than five exchanges may be made in any one
Exchange Request by telephone. Additional information concerning this exchange
privilege and prospectuses for any of the other MFS Funds may be obtained from
dealers or the Shareholder Servicing Agent. For federal and (generally) state
income tax purposes, an exchange is treated as a sale of the shares exchanged
and, therefore, an exchange could result in a gain or loss to the shareholder
making the exchange. Exchanges by telephone are automatically available to most
non-retirement plan accounts and certain retirement plan accounts. For further
information regarding exchanges by telephone, see "Redemptions by Telephone."
The exchange privilege (or any aspect of it) may be changed or discontinued and
is subject to certain limitations, including certain restrictions on purchases
by market timers.
REDEMPTIONS AND REPURCHASES
A shareholder may withdraw all or any portion of the value of his account on any
date on which the Fund is open for business by redeeming shares at their net
asset value (a redemption ) or by selling such shares to the Fund through a
dealer (a repurchase). Certain redemptions and repurchases are, however, subject
to a CDSC. See "Contingent Deferred Sales Charge" below. Because the net asset
value of shares of the account fluctuates, redemptions or repurchases, which are
taxable transactions, are likely to result in gains or losses to the
shareholder. When a shareholder withdraws an amount from his account, the
shareholder is deemed to have tendered for redemption a sufficient number of
full and fractional shares in his account to cover the amount 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
21
<PAGE> 121
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 business
day, shares will be redeemed at the closing net asset value of the Fund on that
day. Subject to the conditions described in this section, proceeds of a
redemption are normally mailed or wired on the next business day following the
date of receipt of the order for redemption. The Shareholder Servicing Agent may
be liable for any losses resulting from unauthorized telephone transactions if
it does not follow reasonable procedures designed to verify the identity of the
caller. The Shareholder Servicing Agent will request personal or other
information from the caller, and will normally also record calls. Shareholders
should verify the accuracy of confirmation statements immediately after their
receipt.
REPURCHASE THROUGH A DEALER: If a shareholder desires to sell his shares through
his dealer (a repurchase), the shareholder can place a repurchase order with his
dealer, who may charge the shareholder a fee. IF THE DEALER RECEIVES THE
SHAREHOLDER'S ORDER PRIOR TO THE CLOSE OF REGULAR TRADING ON THE EXCHANGE AND
COMMUNICATES IT TO MFD BEFORE THE CLOSE OF BUSINESS ON THE SAME DAY, THE
SHAREHOLDER WILL RECEIVE THE NET ASSET VALUE CALCULATED ON THAT DAY, REDUCED BY
THE AMOUNT OF ANY APPLICABLE CDSC AND THE AMOUNT OF ANY INCOME TAX REQUIRED TO
BE WITHHELD.
CONTINGENT DEFERRED SALES CHARGE: Investments in Class A, Class B and Class C
shares ("Direct Purchases") will be subject to a CDSC for a period of: (i) with
respect to Class A and Class C shares, 12 months (however, the CDSC on Class A
shares is only imposed with respect to purchases of $1 million or more of Class
A shares or purchases by certain retirement plans of Class A shares); or (ii)
with respect to Class B shares, six years. Purchases of Class A shares made
during a calendar month, regardless of when during the month the investment
occurred, will age one month on the last day of the month and each subsequent
month. Class C shares and Class B shares purchased on or after January 1, 1993
will be aggregated on a calendar month basis -- all transactions made during a
calendar month, regardless of when during the month they have occurred, will age
one year at the close of business on the last day of such month in the following
calendar year and each subsequent year. For Class B shares of the Fund purchased
prior to January 1, 1993, transactions will be aggregated on a calendar year
basis -- all transactions made during a calendar year, regardless of when during
the year they have occurred, will age one year at the close of business on
December 31 of that year and each subsequent year. Prior to April 1, 1996, Class
C shares of the MFS Funds were not subject to a CDSC upon redemption. In no
event will Class C shares of the MFS Funds purchased prior to this date be
subject to a CDSC. For the purpose of calculating the CDSC upon redemption of
shares acquired in an exchange on or after April 1, 1996, 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 (if such original purchase occurred
prior to April 1, 1996, then no CDSC would be imposed upon such a redemption).
At the time of a redemption, the amount by which the value of a shareholder's
account for a particular class of shares represented by Direct Purchases exceeds
the sum of the six calendar year aggregations (12 months in the case of
purchases of Class C
22
<PAGE> 122
shares and of purchases of $1 million or more of Class A shares or purchases by
certain retirement plans of Class A shares) of Direct Purchases may be redeemed
without charge ("Free Amount"). Moreover, no CDSC is ever assessed on additional
shares acquired through the automatic reinvestment of dividends or capital gain
distributions ("Reinvested Shares"). Therefore, at the time of redemption of a
particular class, (i) any Free Amount is not subject to the CDSC, and (ii) the
amount of redemption equal to the then-current value of Reinvested Shares is not
subject to the CDSC, but (iii) any amount of the redemption in excess of the
aggregate of the then-current value of Reinvested Shares and the Free Amount is
subject to a CDSC. The CDSC will first be applied against the amount of Direct
Purchases which will result in any such charge being imposed at the lowest
possible rate. The CDSC to be imposed upon redemptions will be calculated as set
forth in "Purchases" above.
The applicability of a CDSC will be unaffected by exchanges or transfers of
registration, except as described in Appendix A hereto.
GENERAL: The following information applies to redemptions and repurchases of all
classes of the Fund's shares.
SIGNATURE GUARANTEE. In order to protect shareholders against fraud, the Fund
requires, in certain instances as indicated above, that the shareholder's
signature be guaranteed. In these cases the shareholder's signature must be
guaranteed by an eligible bank, broker, dealer, credit union, national
securities exchange, registered securities association, clearing agency or
savings association. Signature guarantees shall be accepted in accordance with
policies established by the Shareholder Servicing Agent.
REINSTATEMENT PRIVILEGE. Shareholders of the Fund who have redeemed their shares
have a one-time right to reinvest the redemption proceeds in the same class of
shares of any of the MFS Funds (if shares of such Fund are available for sale)
at net asset value (with a credit for any CDSC paid) within 90 days of the
redemption pursuant to the Reinstatement Privilege. If the shares credited for
any CDSC paid are then redeemed within six years of the initial purchase in the
case of Class B shares or within 12 months of the initial purchase for Class C
shares and certain Class A share purchases, a CDSC will be imposed upon
redemption. Such purchases under the Reinstatement Privilege are subject to all
limitations in the SAI regarding this privilege.
IN-KIND DISTRIBUTIONS. The Trust agrees to redeem shares of the Fund solely in
cash up to the lesser of $250,000 or 1% of the net asset value of the Fund
during any 90-day period for any one shareholder. The Fund has reserved the
right to pay other redemptions, either totally or partially, by a distribution
in-kind of securities (instead of cash) from the Fund's portfolio. The
securities distributed in such a distribution would be valued at the same amount
as that assigned to them in calculating the net asset value for the shares being
sold. If a shareholder received a distribution in-kind, the shareholder could
incur brokerage or transaction charges when converting the securities to cash.
INVOLUNTARY REDEMPTIONS/SMALL ACCOUNTS. Due to the relatively high cost of
maintaining small accounts, the Fund reserves the right to redeem shares in any
account for their then-current value if at any time the total investment in such
account drops below $500 because of redemptions, except in the case of accounts
being established for monthly automatic investments and certain payroll savings
programs, Automatic Exchange Plan accounts and tax-deferred retirement plans,
for which there is a lower minimum investment requirement. See "Purchases --
General -- Minimum Investment." Shareholders will be notified that the value of
their account is less than the minimum investment requirement and allowed 60
days to make an additional investment before the redemption is processed.
DISTRIBUTION PLAN
The Trustees have adopted a Distribution Plan for Class A, Class B and Class C
shares pursuant to Section 12(b) of the 1940 Act and Rule 12b-1 thereunder (the
"Distribution Plan"), after having concluded that there is a reasonable
likelihood that the Plan would benefit the Fund and its shareholders.
In certain circumstances, the fees described below may not be imposed or are
being waived. These circumstances, if any, are described below under the heading
"Current Level of Distribution and Service Fees."
FEATURES COMMON TO EACH CLASS OF SHARES: These are features of the Distribution
Plan that are common to each class of shares, as described below.
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SERVICE FEES. The Distribution Plan provides that the Fund may pay MFD a service
fee of up to 0.25% of the average daily net assets attributable to the class of
shares to which the Distribution Plan relates (i.e., Class A shares, Class B
shares or Class C shares, as appropriate) (the "Designated Class") annually in
order that MFD may pay expenses on behalf of the Fund relating to the servicing
of shares of the Designated Class. The service fee is used by MFD to compensate
dealers which enter into a sales agreement with MFD in consideration for all
personal services and/or account maintenance services rendered by the dealer
with respect to shares of the Designated Class owned by investors for whom such
dealer is the dealer or holder of record. MFD may from time to time reduce the
amount of the service fees paid for shares sold prior to a certain date. Service
fees may be reduced for a dealer that is the holder or dealer of record for an
investor who owns shares of the Fund having an aggregate net asset value at or
above a certain dollar level. Dealers may from time to time be required to meet
certain criteria in order to receive service fees. MFD or its affiliates are
entitled to retain all service fees payable under the Distribution Plan for
which there is no dealer of record or for which qualification standards have not
been met as partial consideration for personal services and/or account
maintenance services performed by MFD or its affiliates to shareholder accounts.
DISTRIBUTION FEES. The Distribution Plan provides that the Fund may pay MFD a
distribution fee based on the average daily net assets attributable to the
Designated Class as partial consideration for distribution services performed
and expenses incurred in the performance of MFD's obligations under its
distribution agreement with the Fund. See "Management of the Fund --
Distributor" in the SAI. The amount of the distribution fee paid by the Fund
with respect to each class differs under the Distribution Plan, as does the use
of MFD of such distribution fees. Such amounts and uses are described below in
the discussion of the provisions of the Distribution Plan relating to each class
of shares. While the amount of compensation received by MFD in the form of
distribution fees during any year may be more or less than the expense incurred
by MFD under its distribution agreement with the Fund, the Fund is not liable to
MFD for any losses MFD may incur in performing services under its distribution
agreement with the Fund.
OTHER COMMON FEATURES. Fees payable under the Distribution Plan are charged to,
and therefore reduce, income allocated to shares of the Designated Class. The
provisions of the Distribution Plan relating to operating policies as well as
initial approval, renewal, amendment and termination are substantially identical
as they relate to each class of shares covered by the Distribution Plan.
FEATURES UNIQUE TO EACH CLASS OF SHARES: There are certain features of the
Distribution Plan that are unique to each class of shares, as described below.
CLASS A 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 Distribution Plan is equal, on an
annual basis, to 0.10% of the Fund's average daily net assets attributable to
Class A shares. As noted above, MFD may use the distribution fee to cover
distribution-related expenses incurred by it under its distribution agreement
with the Fund, including commissions to dealers and payments to wholesalers
employed by MFD (e.g., MFD pays commission to dealers with respect to purchases
of $1 million or more and purchases by certain retirement plans of Class A
shares which are sold at net asset value but which are subject to a 1% CDSC for
one year after purchase). See "Purchases -- Class A Shares" above. In addition,
to the extent that the aggregate service and distribution fees paid under the
Distribution Plan do not exceed 0.35% per annum of the average daily net assets
of the Fund attributable to Class A shares, the Fund is permitted to pay such
distribution-related expenses or other distribution-related expenses.
CLASS B SHARES. Class B shares are offered at net asset value without an initial
sales charge but subject to a CDSC. See "Purchases -- Class B Shares" above. MFD
will advance to dealers the first year service fee described above at a rate
equal to 0.25% of the purchase price of such shares and, as compensation
therefor, MFD may retain the service fee paid by the Fund with
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respect to such shares for the first year after purchase. Dealers will become
eligible to receive the ongoing 0.25% per annum service fee with respect to such
shares commencing in the thirteenth month following purchase.
Under the Distribution Plan, the Fund pays MFD a distribution fee equal, on an
annual basis, to 0.75% of the Fund's average daily net assets attributable to
Class B shares. As noted above, this distribution fee may be used by MFD to
cover its distribution-related expenses under its distribution agreement with
the Fund (including the 3.75% commission it pays to dealers upon purchase of
Class B shares, as described under "Purchases -- Class B Shares" above).
CLASS C SHARES. Class C shares are offered at net asset value without an initial
sales charge but subject to a CDSC. See "Purchases -- Class C Shares" above. MFD
will pay a commission to dealers of 1.00% of the purchase price of Class C
shares purchased through dealers at the time of purchase. In compensation for
this 1.00% commission paid by MFD to dealers, MFD will retain the 1.00% per
annum Class C distribution and service fees paid by the Fund with respect to
such shares for the first year after purchase, and dealers will become eligible
to receive from MFD the ongoing 1.00% per annum distribution and service fees
paid by the Fund to MFD with respect to such shares commencing in the thirteenth
month following purchase.
This ongoing 1% fee is comprised of the 0.25% per annum service fee paid to MFD
under the Distribution Plan (which MFD in turn pays to dealers), as discussed
above, and a distribution fee paid to MFD (which MFD also in turn pays to
dealers) under the Distribution Plan equal, on an annual basis, to 0.75% of the
Fund's average daily net assets attributable to Class C shares.
CURRENT LEVEL OF DISTRIBUTION AND SERVICE FEES. The Fund's Class A, Class B and
Class C distribution and service fees for its current fiscal year are 0.25%,
1.00% and 1.00% per annum of the Fund's net assets, respectively. Payment of the
0.10% per annum Class A distribution fee will commence on such date as the
Trustees of the Trust may determine.
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. The Fund has elected and intends to qualify each
year as a "regulated investment company" under Subchapter M of the Code. Because
the Fund intends to distribute all of its net investment income and net realized
capital gains to its shareholders in accordance with the timing requirements
imposed by the Code, it is not expected that the Fund will be required to pay
any federal income or excise taxes, although the Fund's foreign-source income
may be subject to foreign withholding taxes.
Shareholders of the Fund normally will have to pay federal income taxes (and any
state or local taxes) on the dividends and capital gain distributions they
receive from the Fund, whether the distribution is in cash or in additional
shares. A portion of the dividends received from the Fund (but none of the
Fund's capital gain distributions) may qualify for the dividends received
deduction for corporations.
Shortly after the end of each calendar year, each shareholder will be sent a
statement setting forth the federal income tax status of all dividends and
distributions for that year, including the portion taxable as ordinary income,
the portion taxable as long-term capital gain, the portion, if any, representing
a return of capital (which is free of current taxes but results in a basis
reduction), and the amount, if any, of federal income tax withheld.
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Fund distributions will reduce the Fund's net asset value per share.
Shareholders who buy shares shortly before the Fund makes a distribution may
thus pay the full price for the shares and then effectively receive a portion of
the purchase price back as a taxable distribution.
The Fund intends to withhold U.S. federal income tax at the rate of 30% on
dividends and other payments that are subject to such withholding and that are
made to persons who are neither citizens nor residents of the U.S., regardless
of whether a lower rate may be permitted under an applicable treaty. The Fund is
also required in certain circumstances to apply backup withholding at a rate of
31% on taxable dividends and 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. Backup withholding will not,
however, be applied to payments that have been subject to 30% withholding.
Prospective investors should read the Fund's Account Application for additional
information regarding backup withholding of federal income tax and should
consult their own tax advisers as to the tax consequences to them of an
investment in the Fund.
NET ASSET VALUE
The net asset value per share of each class of shares of the Fund is determined
each day during which the Exchange is open for trading. This determination is
made once each day as of the close of regular trading on the Exchange by
deducting the amount of liabilities attributable to the class from the value of
the Fund's assets attributable to the class and dividing the difference by the
number of shares of the class outstanding. Assets in the Fund's portfolio are
valued on the basis of their market values as described in the SAI. The net
asset value of each class of shares is effective for orders received by the
dealer prior to its calculation and received by MFD prior to the close of that
business day.
DESCRIPTION OF SHARES, VOTING RIGHTS AND LIABILITIES
The Fund, one of four series of the Trust, has three classes of shares which it
offers to the general public, entitled Class A, Class B and Class C Shares of
Beneficial Interest (without par value). The Fund also has a class of shares
which it offers exclusively to certain institutional investors, entitled Class I
shares. The Trust has reserved the right to create and issue additional classes
and series of shares, in which case each class of shares of a series would
participate equally in the earnings, dividends and assets attributable to that
class of that particular series. Shareholders are entitled to one vote for each
share held and shares of each series would be entitled to vote separately to
approve investment advisory agreements or changes in investment restrictions,
but shares of all series would vote together in the election of Trustees and
selection of accountants. Additionally, each class of shares of a series will
vote separately on any material increases in the fees under the Distribution
Plan or on any other matter that affects solely that class of shares, but will
otherwise vote together with all other classes of shares of the series on all
other matters. The Trust does not intend to hold annual shareholder meetings.
The Declaration of Trust provides that a Trustee may be removed from office in
certain instances (see "Description of Shares, Voting Rights and Liabilities" in
the SAI).
Each share of a class of the Fund represents an equal proportionate interest in
the Fund with each other class share, subject to the liabilities of that class.
Shares have no pre-emptive or conversion rights (except as set forth above in
"Purchases -- Conversion of Class B Shares"). Shares are fully paid and
non-assessable. Should the Fund be liquidated, shareholders of each class are
entitled to share pro rata in the net assets attributable to that class
available for distribution to shareholders. Shares will remain on deposit with
the Shareholder Servicing Agent and certificates will not be issued except in
connection with pledges and 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.
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PERFORMANCE INFORMATION
From time to time, the Fund will provide total rate of return quotations for
each class of shares and may also quote fund rankings in the relevant fund
category from various sources, such as the Lipper Analytical Services, Inc. and
Wiesenberger Investment Companies Service. Total rate of return quotations will
reflect the average annual percentage change over stated periods in the value of
an investment in each class of shares of the Fund made at the maximum public
offering price of the shares of that class with all distributions reinvested and
which will give effect to the imposition of any applicable CDSC assessed upon
redemptions of the Fund's Class B and Class C shares. Such total rate of return
quotations may be accompanied by quotations which do not reflect the reduction
in value of the initial investment due to the sales charge or the deduction of a
CDSC, and which will thus be higher. The Fund offers multiple classes of shares
which were initially offered for sale to the public on different dates. The
calculation of total rate of return for a class of shares which initially was
offered for sale to the public subsequent to another class of shares of the Fund
is based both on (i) the performance of the Fund's newer class from the date it
initially was offered for sale to the public and (ii) the performance of the
Fund's oldest class from the date it initially was offered for sale to the
public up to the date that the newer class initially was offered for sale to the
public. See the SAI for further information on the calculation of total rate of
return for share classes initially offered for sale to the public on different
dates.
The Fund's total rate of return quotations are based on historical performance
and are not intended to indicate future performance. Total rate of return
reflects all components of investment return over a stated period of time. The
Fund's quotations may from time to time be used in advertisements, shareholder
reports or other communications to shareholders. For a discussion of the manner
in which the Fund will calculate its total rate of return, see the SAI. For
further information about the Fund's performance for the fiscal year ended,
August 31, 1996, please see the Fund's Annual Report. A copy of the Annual
Report may be obtained without charge by contacting the Shareholder Servicing
Agent (see back cover for address and phone number). In addition to information
provided in shareholder reports, the Fund may, in its discretion, from time to
time, make a list of all or a portion of its holdings available to investors
upon request.
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.
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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, or the shareholder does not respond to
mailings from the Shareholder Servicing Agent with regard to uncashed
distribution checks, such shareholder's distribution option will automatically
be converted to having all dividends and other distributions reinvested in
additional shares. Any request to change a distribution option must be received
by the Shareholder Servicing Agent by the record date for a dividend or
distribution in order to be effective for that dividend or distribution. No
interest will accrue on amounts represented by uncashed distribution or
redemption checks.
INVESTMENT AND WITHDRAWAL PROGRAMS -- For the convenience of shareholders, the
Fund makes available the following programs designed to enable shareholders to
add to their investment in an account with the Fund or withdraw from it with a
minimum of paper work. The programs involve no extra charge to shareholders
(other than a sales charge in the case of certain Class A share purchases) and
may be changed or discontinued at any time by a shareholder or the Fund.
LETTER OF INTENT -- If a shareholder (other than a group purchaser as
described in the SAI) anticipates purchasing $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.
INVESTMENT AND WITHDRAWAL BY TELEPHONE (AUTOBUY PRIVILEGE) -- Shareholders
of any MFS Fund may purchase shares of any MFS Fund by telephone, a privilege
known as the "Autobuy Privilege." The Autobuy Privilege allows shareholders to
call MFS and have money transferred from a checking or savings account into
their MFS account. Once enrolled, a shareholder can initiate a transaction ($50
minimum/$100,000 maximum) by calling MFS before 4:00 (eastern time). The share
price and trade date will be effective on the same day that the Autobuy
Privilege request is received. The Autobuy Privilege is available for any class
of shares of any MFS Fund made available to the general public.
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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 and Class C shares in any year pursuant to
a SWP will not be subject to a CDSC and are generally limited to 10% of the
value of the account at the time of the establishment of the SWP. The CDSC will
not be waived in the case of SWP redemptions of Class A shares which are subject
to a CDSC.
DOLLAR COST AVERAGING PROGRAMS --
AUTOMATIC INVESTMENT PLAN: Cash investments of $50 or more may be made
through a shareholder's checking account on any day of the month. If the
shareholder does not specify a date, the investment will automatically occur on
the first day of the month. Required forms are available from the Shareholder
Servicing Agent or investment dealers.
AUTOMATIC EXCHANGE PLAN: Shareholders having account balances of at least
$5,000 in any MFS Fund may exchange their shares for the same class of shares of
the other MFS Funds (and, in the case of Class C shares, for shares of 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 six different funds. A shareholder should consider the objectives and
policies of a fund and review its prospectus before electing to exchange money
into such fund through the Automatic Exchange Plan. No transaction fee is
imposed in connection with exchange transactions under the Automatic Exchange
Plan. However, exchanges of shares of MFS Money Market Fund, MFS Government
Money Market Fund or Class A shares of MFS Cash Reserve Fund will be subject to
any applicable sales charge. For federal and (generally) state income tax
purposes, an exchange is treated as a sale of the shares exchanged and,
therefore, could result in a capital gain or loss to the shareholder making the
exchange. See the SAI for further information concerning the Automatic Exchange
Plan. Investors should consult their tax advisers for information regarding the
potential capital gain and loss consequences of transactions under the Automatic
Exchange Plan.
Because a dollar cost averaging program involves periodic purchases of shares
regardless of fluctuating share offering prices, a shareholder should consider
his financial ability to continue his purchases through periods of low price
levels. Maintaining a dollar cost averaging program concurrently with a
withdrawal program could be disadvantageous because of the sales 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, 1997, 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)
the Distribution Plan, (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 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 Funds pursuant to the Distribution
Investment Program.
2. CERTAIN ACQUISITIONS/LIQUIDATIONS
- Shares acquired on account of the acquisition or liquidation of assets of
other investment companies or personal holding companies.
3. AFFILIATES OF AN MFS FUND/CERTAIN DEALERS. SHARES ACQUIRED BY:
- Officers, eligible directors, employees (including retired employees) and
agents of MFS, Sun Life or any of their subsidiary companies;
- Trustees and retired trustees of any investment company for which MFD serves
as distributor;
- Employees, directors, partners, officers and trustees of any sub-adviser to
any MFS Fund;
- Employees or registered representatives of dealers and other financial
institutions ("dealers") which have a sales agreement with MFD;
- Certain family members of any such individual and their spouses identified
above and certain trusts, pension, profit-sharing or other retirement plans
for the sole benefit of such persons, provided the shares are not resold
except to the MFS Fund which issued the shares; and
- Institutional Clients of MFS or MFS Institutional Advisors, Inc.
4. INVOLUNTARY REDEMPTIONS (CDSC WAIVER ONLY)
- Shares redeemed at an MFS Fund's direction due to the small size of a
shareholder's account. See "Redemptions and Repurchases -- General --
Involuntary Redemptions/Small Accounts" in the Prospectus.
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<PAGE> 130
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> 131
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> 132
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> 133
[MFS LOGO]
Investment Adviser
Massachusetts Financial Services Company
500 Boylston Street
Boston, MA 02116 MFS[REGISTERED TRADEMARK] OTC FUND
(617) 954-5000
Prospectus
Distributor January 1, 1997
MFS Fund Distributors, Inc.
500 Boylston Street
Boston, MA 02116
(617) 954-5000
Custodian
Investors Bank & Trust Company
89 South Street
Boston, MA 02111
Dividend Disbursing Agent
State Street Bank and Trust Company
225 Franklin Street
Boston, MA 02110
Shareholder Servicing Agent
MFS Service Center, Inc.
500 Boylston Street
Boston, MA 02116
Toll-free: (800) 225-2606
Mailing Address:
P.O. Box 2281
Boston, MA 02107-9906
Independent Auditors
Deloitte & Touche LLP
125 Summer Street
Boston, MA 02110
[MFS LOGO]
MFS[REGISTERED TRADEMARK] OTC FUND
500 Boylston Street
Boston, MA 02116
OTC-1-1/97/100M 83/283/383
<PAGE> 134
STATEMENT OF
ADDITIONAL INFORMATION
January 1, 1997
[MFS LOGO]
MFS[Registered Trademark] OTC FUND
(A Member of the MFS Family of Funds[Registered Trademark])
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Page
-----
<C> <S> <C>
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 Plan..................................................................... 24
9. Description of Shares, Voting Rights and Liabilities.................................. 25
10. Independent Auditors and Financial Statements......................................... 25
Appendix A............................................................................ 27
Appendix B............................................................................ 28
</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, as amended or supplemented from time
to time (the "SAI"), sets forth information which may be of interest to
investors but which is not necessarily included in the Fund's Prospectus, dated
January 1, 1997. This SAI should be read in conjunction with the Prospectus, a
copy of which may be obtained without charge by contacting the Shareholder
Servicing Agent (see last page for address and phone number).
THIS SAI IS NOT A PROSPECTUS AND IS AUTHORIZED FOR DISTRIBUTION TO PROSPECTIVE
INVESTORS ONLY IF PRECEDED OR ACCOMPANIED BY A CURRENT PROSPECTUS.
<PAGE> 135
1. DEFINITIONS
<TABLE>
<S> <C> <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, 1997, 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.
INVESTMENT POLICIES. 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.
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 or a fee. The Fund would
not, however, have the right to vote any securities having voting rights during
the existence of the loan, but would call the loan in anticipation of an
important vote to be taken among holders of the securities or of the giving or
withholding of their consent on a material matter affecting the investment. As
with other extensions of credit, there are risks of delay in recovery or even
loss of rights in the collateral should the borrower of the securities fail
financially. However, the loans would be made only to firms deemed by the
Adviser to be of good standing, and when, in the judgment of the Adviser, the
consideration which could be earned currently from securities loans of this type
justifies the attendant risk. If the Adviser determines to 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 together with the repurchase price
on repurchase. In either case,
2
<PAGE> 136
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 (i.e., principal value) or coupon rate is determined by reference to a
specific instrument or statistic. Gold-indexed securities, for example,
typically provide for a maturity value that depends on the price of gold,
resulting in a security whose price tends to rise and fall together with gold
prices. Currency-indexed securities typically are short-term to
intermediate-term debt securities whose maturity values or interest rates are
determined by reference to the values of one or more specified foreign
currencies, and may offer higher yields than U.S. dollar-denominated securities
of equivalent issuers. Currency-indexed securities may be positively or
negatively indexed; that is, their maturity value may increase when the
specified currency value increases, resulting in a security that performs
similarly to a foreign-denominated instrument, or their maturity value may
decline when foreign currencies increase, resulting in a security whose price
characteristics are similar to a put on the underlying currency.
Currency-indexed securities may also have prices that depend on the values of a
number of different foreign currencies relative to each other.
The performance of indexed securities depends to a great extent on the
performance of the security, currency, or other instrument to which they are
indexed, and may also be influenced by interest rate changes in the U.S. and
abroad. At the same time, indexed securities are subject to the credit risks
associated with the issuer of the security, and their values may decline
substantially if the issuer's creditworthiness deteriorates. Recent issuers of
indexed securities have included banks, corporations, and certain U.S.
government agencies.
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.
3
<PAGE> 137
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 Services ("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,
4
<PAGE> 138
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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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.
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 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
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<PAGE> 140
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
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.
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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<PAGE> 141
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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<PAGE> 142
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 energy company), Chairman and Chief Executive
Officer; The Neiman Marcus Group, Inc., Vice Chairman and Chief Financial
Officer (prior to December 1991)
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 (prior 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, Senior 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, 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 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)
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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, 1996, the Trustees and officers, as a group owned .78% of the
Fund's shares outstanding (not including 203,962 representing approximately
1.66% of the outstanding shares of the Fund owned of record by an employee
benefit plan of MFS of which Mr. Brodkin is a Trustee).
As of November 30, 1996, MFS Defined Contribution Plan, c/o Massachusetts
Financial Services Company, 500 Boylston Street, Boston, MA 02116-3740, was the
record owner of approximately 5.06% of the outstanding Class A shares of the
Fund. As of November 30, 1996, Merrill Lynch, Pierce, Fenner & Smith Inc., 4800
Deer Lake Drive East, Jacksonville, FL 32246, was the record owner of
approximately 7.72% of the outstanding Class B 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 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 years ended August 31, 1996, August 31, 1995, and
for the period from commencement of the Fund's investment operations on December
31, 1993 to the Fund's fiscal year ended August 31, 1994, the Adviser received
investment advisory fees of $755,233, $594,194, and $141,370, 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.
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, 1997, and will
continue in effect thereafter only if such continuance is specifically approved
at least annually by the Board of Trustees or by vote of a majority of the
Fund's outstanding voting securities (as defined under "Investment
Restrictions") and, in either case, by a majority of the Trustees who are not
parties to the Advisory Agreement or interested persons of any such party. The
Advisory Agreement terminates automatically if it is assigned and may be
terminated without penalty by vote of 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 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
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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 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, CLASS C SHARES AND CLASS I SHARES: MFD acts as agent in selling
Class B, Class C and Class I shares of the Fund to dealers. The public offering
price of Class B, Class C and Class I shares is their net asset value next
computed after the sale (see "Purchases" in the Prospectus and the Prospectus
Supplement pursuant to which Class I Shares are offered).
GENERAL: Neither MFD nor dealers are permitted to delay the placement of orders
to benefit themselves by a price change. On occasion, MFD may obtain brokers
loans from various banks, including the Custodian for the MFS Funds, to
facilitate the settlement of sales of shares of the Fund to dealers. MFD may
benefit from its temporary holding of funds paid to it by investment dealers for
the purchase of Fund shares.
During the Fund's fiscal year ended August 31, 1996, MFD and certain other
financial institutions received net commissions of $23,992 and $135,667,
respectively (as their concession on gross commissions of $159,659) for selling
Class A shares of the Fund. The Fund received $10,258,374, representing the
aggregate net asset value of such 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
sales charges of $263,109) for selling Class A shares of the Fund; the Fund
received $14,267,289 representing the aggregate net asset
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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
$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, 1996, the CDSC imposed on redemption of Class A,
Class B and Class C shares was $1,116, $106,267 and $346, respectively. 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 A and
Class B shares was $211 and $14,776, respectively.
The Distribution Agreement will remain in effect until August 1, 1997, and will
continue in effect thereafter only if such continuance is specifically approved
at least annually by the Board of Trustees or by vote of a majority of the
Trust's shares (as defined in "Investment Restrictions") and, in either case, by
a majority of the Trustees who are not parties to the Distribution Agreement or
interested persons of any such party. The Distribution Agreement terminates
automatically if it is assigned and may be terminated without penalty by either
party on not more than 60 days' nor less than 30 days' notice.
4. PORTFOLIO TRANSACTIONS AND BROKERAGE
COMMISSIONS
Specific decisions to purchase or sell securities for the Fund are made by
person'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 $39,100 of commission business from the MFS Funds
to the Pershing Division of Donaldson, Lufkin & Jenrette as consideration for
the annual renewal of certain publications provided by Lipper Analytical
Securities Corporation (which provides information useful to the Trustees in
reviewing the relationship between the Fund and the Adviser).
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
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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 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, 1996, the Fund paid brokerage
commissions of $266,365 on total transactions of $118,653,749. For the Fund's
fiscal year ended August 31, 1995, the Fund paid brokerage commissions of
$409,767 on total transactions of $370,861,901. 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 by the Adviser to be
equitable to each. It is recognized that in some cases this system could have a
detrimental effect on the price or volume of the security as far as the Fund is
concerned. In other cases, however, the Fund believes that its ability to
participate in volume transactions will produce better executions for the Fund.
5. SHAREHOLDER SERVICES
INVESTMENT AND WITHDRAWAL PROGRAMS -- The Fund makes available the following
programs designed to enable shareholders to add to their investment or withdraw
from it with a minimum of paper work. These are described below and, in certain
cases, in the Prospectus. The programs involve no extra charge to shareholders
(other than a sales charge in the case of certain Class A share purchases) and
may be changed or discontinued at any time by a shareholder or the Fund.
LETTER OF INTENT: If a shareholder (other than a group purchaser described
below) anticipates purchasing $50,000 or more of Class A shares of the Fund
alone or in combination with 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.
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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 $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.
INVESTMENT AND WITHDRAWAL BY TELEPHONE (AUTOBUY PRIVILEGE): Shareholders of any
MFS Fund may purchase shares of any MFS Fund by telephone, a privilege known as
the "Autobuy Privilege." The Autobuy Privilege allows shareholders to call MFS
and have money transferred from a checking or savings account into their MFS
account. Once enrolled, a shareholder can initiate a transaction ($50
minimum/$100,000 maximum) by calling MFS before 4:00 (eastern time). The share
price and trade date will be effective on the same day that the Autobuy
Privilege request is received. The Autobuy Privilege is available for any class
of shares of any MFS Fund made available to the general public.
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 and Class C shares will be made in the following order:
(i) any "Free Amount"; (ii) to the extent necessary, any "Reinvested Shares";
and (iii) to the extent necessary, the "Direct Purchase" subject to the lowest
CDSC (as such terms are defined in "Contingent Deferred Sales Charge" in the
Prospectus). The CDSC will be waived in the case of redemptions of Class B and
Class C shares pursuant to a SWP, but will not be waived in the case of SWP
redemptions of Class A shares which are subject to a CDSC. To the extent that
redemptions for such periodic withdrawals exceed dividend income reinvested in
the account, such redemptions will reduce and may eventually exhaust the number
of shares in the shareholder's account. All dividend and capital gain
distributions for an account with a SWP will be reinvested in full and
fractional shares of the Fund at the net asset value in effect at the close of
business on the record date for such distributions. To initiate this service,
shares having an aggregate value of at least $5,000 either must be held on
deposit by, or certificates for such shares must be deposited with, the
Shareholder Servicing Agent. 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
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available for sale) 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
six different funds effective on the seventh day of each month or of every third
month, depending whether monthly or quarterly exchanges are elected by the
shareholder. If the seventh day of the month is not a business day, the
transaction will be processed on the next business day. Generally, the initial
exchange will occur after receipt and processing by the Shareholder Servicing
Agent of an application in good order. Exchanges will continue to be made from a
shareholder's account in any MFS Fund, as long as the balance of the account is
sufficient to complete the exchanges. Additional payments made to a
shareholder's account 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
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 Class C shares and certain Class A shares, a
CDSC will be imposed upon redemption. Although redemptions and repurchases of
shares are taxable events, a reinvestment within a certain period of time in the
same fund may be considered a "wash sale" and may result in the inability to
recognize currently any loss realized on the original redemption for federal
income tax purposes. Please see your tax adviser for further information.
EXCHANGE PRIVILEGE -- Subject to the requirements set forth below, some or all
of the shares for which payment has been received by the Fund (i.e., an
established account) may be exchanged for shares of the same class of any of the
other MFS Funds (if available for sale and if the purchaser is eligible to
purchase the class of shares) at 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
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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 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 are taxable to shareholders as ordinary income for
federal income tax purposes, whether the distributions are made in cash or in
additional shares. A portion of the Fund's ordinary income dividends is normally
eligible for the dividends received deduction for corporations if the recipient
otherwise qualifies for that deduction with respect to its holding of Fund
shares. Availability of the deduction for particular 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 made in cash or in additional shares, are taxable to
shareholders as long-term capital gains without regard to the length of time the
shareholders have held their shares. Any Fund dividend that is declared in
October, November or December, of any calendar year, that is payable to
shareholders of record in such a month and that is paid the following January,
will be treated as if received by the shareholders on December 31 of
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the year in which the dividend is 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 a long-term capital gain or loss if the shares have been held for
more than twelve months and otherwise as a short-term capital gain or loss.
However, any loss realized upon a disposition of shares in the Fund held for six
months or less will be treated as a long-term capital loss to the extent of any
distributions of net capital gain made with respect to those shares. Any loss
realized upon a disposition of shares may also be disallowed under rules
relating to wash sales. Gain may be increased (or loss reduced) upon a
redemption of Class A shares of the Fund within ninety days after their purchase
followed by any purchase (including purchases by exchange or by reinvestment)
without payment of an additional sales charge of Class A shares of the Fund or
of another MFS Fund.
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 recognize
income prior to the receipt of cash payments with respect to those securities.
In order to distribute this income and avoid a tax on the Fund, the Fund may be
required to liquidate portfolio securities that it might otherwise have
continued to hold, potentially resulting in additional taxable gain or loss to
the Fund.
The Fund's transactions in options, Futures Contracts, and Forward Contracts
will be subject to special tax rules that may affect the amount, timing, and
character of Fund income and distributions to shareholders. For example, certain
positions held by the Fund on the last business day of each taxable year will be
marked to market (i.e., treated as if closed out) on that day, and any gain or
loss associated with the positions will be treated as 60% long-term and 40%
short-term capital gain or loss. Certain positions held by the Fund that
substantially diminish its risk of loss with respect to other positions in its
portfolio may constitute "straddles," and may be subject to special tax rules
that would cause deferral of Fund losses, adjustments in the holding periods of
Fund securities, and conversion of short-term into long-term capital losses.
Certain tax elections exist for straddles that may alter the effects of these
rules. The Fund will limit its activities in options, Futures Contracts, and
Forward Contracts to the extent necessary to meet the requirements of Subchapter
M of the Code.
Special tax considerations apply with respect to foreign investments of the
Fund. Foreign exchange gains and losses realized by the Fund will generally be
treated as ordinary income and losses. Use of foreign currencies for non-hedging
purposes and investment by the Fund in certain "passive foreign investment
companies" may be limited in order to avoid 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 not possible, however, to determine the Fund's effective
rate of foreign tax in advance since the amounts 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. Distributions received from the Fund by Non-U.S. Persons may
also be subject to tax under the laws of their own jurisdiction. 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 any Massachusetts income or excise taxes.
7. DETERMINATION OF NET ASSET VALUE AND
PERFORMANCE
NET ASSET VALUE
The net asset value per share of each class of the Fund is determined each day
during which the Exchange is open for trading. (As of the date of this SAI, the
Exchange is open for trading every weekday except for the following holidays or
the 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
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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
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 1% maximum for Class C
shares purchased after April 1, 1996) 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 offers multiple classes of shares which were initially offered for sale
to the public on different dates. The calculation of total rate of return for a
class of shares which initially was offered for sale to the public subsequent to
another class of shares of the Fund is based both on (i) the performance of the
Fund's newer class from the date it initially was offered for sale to the public
and (ii) the performance of the Fund's oldest class from the date it initially
was offered for sale to the public up to the date that the newer class initially
was offered for sale to the public.
As discussed in the Prospectus, the sales charges, expenses and expense ratios,
and therefore the performance, of the Fund's classes of shares differ. In
calculating total rate of return for a newer class of shares in accordance with
certain formulas required by the SEC, the performance will be adjusted to take
into account the fact that the newer class is subject to a different sales
charge than the oldest class (e.g., if the newer class is Class A shares, the
total rate of return quoted will reflect the deduction of the initial sales
charge applicable to Class A shares; if the newer class is Class B shares, the
total rate of return quoted will reflect the deduction of the CDSC applicable to
Class B shares). However, the performance will not be adjusted to take into
account the fact that the newer class of shares bears different class specific
expenses than the oldest class of shares (e.g., Rule 12b-1 fees). Therefore, the
total rate of return quoted for a newer class of shares will differ from the
return that would be quoted had the newer class of shares been outstanding for
the entire period over which the calculation is based (i.e., the total rate of
return quoted for the newer class will be higher than the return that would have
been quoted had the newer class of shares been outstanding for the entire period
over which the calculation is based if the class specific expenses for the newer
class are higher than the class specific expenses of the oldest class, and the
total rate of return quoted for the newer class will be lower than the return
that would be quoted had the newer class of shares been outstanding for this
entire period if the
22
<PAGE> 156
class specific expenses for the newer class are lower than the class specific
expenses of the oldest class).
Total rate of return quotations for each class are presented in Appendix B
attached hereto under the heading "Performance Quotations."
PERFORMANCE RESULTS: The performance results for Class A shares presented in
Appendix B attached hereto under the heading "Performance Results" assume an
initial investment of $10,000 in Class A shares, cover the period from December
1, 1993 to December 31, 1995. 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).
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.
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, and similar or related matters.
From time to time the Fund may also discuss or quote the views of its
distributor, its investment adviser and other financial planning, legal, tax,
accounting, insurance, estate planning and other professionals, or from surveys,
regarding individual and family financial planning. Such views may include
information regarding: retirement planning; tax management strategies; estate
planning; general investment techniques (e.g., asset allocation and disciplined
saving and investing); business succession; ideas and information provided
through the MFS Heritage Planning(sm) program, an intergenerational financial
planning assistance program; issues with respect to insurance (e.g., disability
and life insurance and Medicare supplemental insurance); issues regarding
financial and health care management for elderly family members; and other
similar or related matters.
The Fund may advertise examples of the effects of periodic investment plans,
including the principle of dollar cost averaging. In such a program, an investor
invests a fixed dollar amount in a fund at periodic intervals, thereby
purchasing fewer shares when prices are high and more shares when prices are
low. While such a strategy does not assure a profit or guard against a loss in a
declining market, the investor's average cost per share can be lower than if
fixed numbers of shares are purchased at the same intervals.
MFS FIRSTS: MFS has a long history of innovations.
-- 1924 -- Massachusetts Investors Trust is established as the first open-end
mutual fund in America.
-- 1924 -- Massachusetts Investors Trust is the first mutual fund to make full
public disclosure of its operations in shareholder reports.
-- 1932 -- One of the first internal research departments is established to
provide in-house analytical capability for an investment management firm.
-- 1933 -- Massachusetts Investors Trust is the first mutual fund to register
under the Securities Act of 1933 ("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.
23
<PAGE> 157
-- 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 PLAN
The Trustees have adopted a Distribution Plan for Class A, Class B and Class C
shares (the "Distribution Plan") pursuant to Section 12(b) of the 1940 Act and
Rule 12b-1 thereunder (the "Rule") after having concluded that there is a
reasonable likelihood that the Distribution Plan would benefit the Fund and each
respective class of shareholders. The provisions of the Distribution Plan are
severable with respect to each class of shares offered by the Fund. The
Distribution Plan is designed to promote sales, thereby increasing the net
assets of the Fund. Such an increase may reduce the Fund's expense ratio to the
extent that the Fund's fixed costs are spread over a larger net asset base.
Also, an increase in net assets may lessen the adverse effect that could result
were the Fund required to liquidate portfolio securities to meet redemptions.
There is, however, no assurance that the net assets of the Fund will increase or
that the other benefits referred to above will be realized.
The Distribution Plan is described in the Prospectus under the caption
"Distribution Plan," which is incorporated herein by reference. The following
information supplements this Prospectus discussion.
SERVICE FEES. With respect to Class A shares, no service fees will be paid: (i)
to any dealer who is the holder or dealer of record for investors who own Class
A shares having an aggregate net asset value less than $750,000, or such other
amount as may be determined from time to time by MFD (MFD, however, may waive
this minimum amount requirement from time to time); or (ii) to any insurance
company which has entered into an agreement with the Fund and MFD that permits
such insurance company to purchase Class A shares from the Fund at their net
asset value in connection with annuity agreements issued in connection with the
insurance company's separate accounts. Dealers may from time to time be required
to meet certain other criteria in order to receive service fees.
With respect to Class B shares, except in the case of the first year service
fee, no service fees will be paid to any securities dealer who is the holder or
dealer of record for investors who own Class B shares having an aggregate net
asset value of less than $750,000 or such other amount as may be determined by
MFD from time to time. MFD, however, may waive this minimum amount requirement
from time to time. Dealers may from time to time be required to meet certain
other criteria in order to receive service fees.
MFD or its affiliates shall be entitled to receive any service fee payable under
the Distribution Plan for which there is no dealer of record or for which
qualification standards have not been met as partial consideration for personal
services and/or account maintenance services performed by MFD or its affiliates
for shareholder accounts.
DISTRIBUTION FEES: The purpose of distribution payments to MFD under the
Distribution Plan is to compensate MFD for its distribution services to the
Fund. MFD pays commissions to dealers as well as expenses of printing
prospectuses and reports used for sales purposes, expenses with respect to the
preparation and printing of sales literature and other distribution related
expenses, including, without limitation, the cost necessary to provide
distribution-related services, or personnel, travel, office expenses and
equipment.
DISTRIBUTION AND SERVICE FEES PAID DURING THE FUND'S LAST FISCAL YEAR: During
the fiscal year ended August 31, 1996, the Fund paid the following Distribution
Plan expenses:
<TABLE>
<CAPTION>
AMOUNT OF AMOUNT OF AMOUNT OF
DISTRIBUTION DISTRIBUTION DISTRIBUTION
AND SERVICE AND SERVICE AND SERVICE
FEES PAID BY FEES RETAINED FEES RECEIVED
DISTRIBUTION PLANS FUND BY MFD BY DEALERS
- -------------------------- ------------ ------------- -------------
<S> <C> <C> <C>
Class A Shares $28,237 $3,356 $24,881
Class B Shares $539,460 $470,875 $68,585
Class C Shares $49,574 $457 $49,117
</TABLE>
GENERAL: The Distribution Plan will remain in effect until August 1, 1997, and
will continue in effect thereafter only if such continuance is specifically
approved at least annually by vote of both the Trustees and a majority of the
Trustees who are not "interested persons" or financially interested parties of
such Plan ("Distribution Plan Qualified Trustees"). The Distribution Plan also
requires that the Fund and MFD each shall provide the Trustees, and the Trustees
shall review, at least quarterly, a written report of the amounts expended (and
purposes therefor) under such Plan. The Distribution Plan may be terminated
24
<PAGE> 158
at any time by vote of a majority of the Distribution Plan Qualified Trustees or
by vote of the holders of a majority of the respective class of the Fund's
shares (as defined in "Investment Restrictions"). All agreements relating to the
Distribution Plan entered into between the Fund or MFD and other organizations
must be approved by the Board of Trustees, including a majority of the
Distribution Plan Qualified Trustees. Agreements under the Distribution Plan
must be in writing, will be terminated automatically if assigned, and may be
terminated at any time without payment of any penalty, by vote of a majority of
the Distribution Plan Qualified Trustees or by vote of the holders of a majority
of the respective class of the Fund's shares. The Distribution Plan may not be
amended to increase materially the amount of permitted distribution expenses
without the approval of a majority of the respective class of the Fund's shares
(as defined in "Investment Restrictions") or may not be materially amended in
any case without a vote of the Trustees and a majority of the Distribution Plan
Qualified Trustees. The selection and nomination of Distribution Plan Qualified
Trustees shall be committed to the discretion of the non-interested Trustees
then in office. No Trustee who is not an "interested person" has any financial
interest in the Distribution Plan or in any related agreement.
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
one class of shares for each of the Trust's two money market series, and Class A
and Class B shares of one other of the Trust's four series. In addition, the
Trustees have authorized the issuance of Class A shares, Class B shares, Class C
shares and Class I shares for the Fund. Each share of a class of the Fund
represents an equal proportionate interest in the assets of the Fund allocable
to that class. Upon liquidation of the Fund, shareholders of each class of the
Fund are entitled to share pro rata in the Fund's net assets allocable to such
class available for distribution to shareholders. The Trust reserves the right
to create and issue additional series or classes of shares, in which case the
shares of each class of a series would participate equally in the earnings,
dividends and assets allocable to that class of the particular series.
Shareholders are entitled to one vote for each share held and may vote in the
election of Trustees and on other matters submitted to meetings of shareholders.
Although Trustees are not elected annually by the shareholders, shareholders
have, under certain circumstances, the right to remove one or more Trustees in
accordance with the provisions of section 16(c) of the 1940 Act. No material
amendment may be made to the Declaration of Trust without the affirmative vote
of a majority of the Trust shares (as defined in "Investment Restrictions") or
by an instrument in writing without a meeting, signed by a majority of Trustees
and consented to by the holders of not less than a majority of the shares
outstanding and entitled to vote. Shares have no pre-emptive or conversion
rights (except as described in the Prospectus under "Purchases -- Conversion of
Class B Shares"). Shares are fully paid and non-assessable. The Trust may enter
into a merger or consolidation, or sell all or substantially all of its assets
(or all or substantially all of the assets belonging to any series of the
Trust), if approved by the vote of the holders of two-thirds of the Trust's
outstanding shares voting as a single class, or of the affected series of the
Trust, as the case may be, except that if the Trustees of the Trust recommend
such merger, consolidation or sale, the approval by vote of the holders of a
majority of the Trust's or the affected series' outstanding shares (as defined
in "Investment Restrictions") will be sufficient. The Trust or any series of the
Trust may also be terminated (i) upon liquidation and distribution of its
assets, if approved by the vote of the holders of two-thirds of its outstanding
shares, or (ii) by the Trustees by written notice to the shareholders of the
Trust or the affected series. If not so terminated the Trust will continue
indefinitely.
The Trust is an entity of the type commonly known as a "Massachusetts business
trust." Under Massachusetts law, shareholders of such a trust may, under certain
circumstances, be held personally liable as partners for its obligations.
However, the Declaration of Trust contains an express disclaimer of shareholder
liability for acts, obligations or affairs of the Trust and provides for
indemnification and reimbursement of expenses out of 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
25
<PAGE> 159
and consultation with respect to the preparation of filings with the SEC.
The Portfolio of Investments at August 31, 1996, the Statement of Assets and
Liabilities at August 31, 1996, the Statement of Operations for the year ended
August 31, 1996, the Statement of Changes in Net Assets for the year ended
August 31, 1996 and the year ended August 31, 1995, the Notes to Financial
Statements and the Independent Auditors' Report, each of which is included in
the Annual Report to Shareholders of the Fund, are incorporated by reference
into this SAI and have been so incorporated in reliance upon the report of
Deloitte & Touche LLP, independent auditors, as experts in accounting and
auditing. A copy of the Annual Report accompanies this SAI.
26
<PAGE> 160
APPENDIX A
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.................................... $1,015 $119 6 $263,815
A. Keith Brodkin..................................... 0 0 N/A 0
Peter G. Harwood..................................... 1,240 139 5 111,366
J. Atwood Ives....................................... 1,115 131 15 101,356
Lawrence T. Perera................................... 1,145 123 14 111,366
William Poorvu....................................... 1,240 139 14 111,366
Charles W. Schmidt................................... 1,210 127 7 105,411
Arnold D. Scott...................................... 0 0 N/A 0
Jeffrey L. Shames.................................... 0 0 N/A 0
Elaine R. Smith...................................... 1,210 127 25 105,411
David B. Stone....................................... 1,300 141 7 115,521
</TABLE>
- ---------------
(1) For fiscal year ended August 31, 1996.
(2) Based on normal retirement age of 73.
(3) For calendar year 1995. All Trustees receiving compensation served as
Trustees of 23 funds within the MFS fund complex (having aggregate net
assets at December 31, 1995, of approximately $17.6 Billion) except Mr.
Bailey, who served as Trustee of 73 funds within the MFS fund complex
(having aggregate net assets at December 31, 1995, of approximately $31.7
Billion.
ESTIMATED ANNUAL BENEFITS PAYABLE BY FUND UPON RETIREMENT(4)
<TABLE>
<CAPTION>
YEARS OF SERVICE
-------------------------------------
AVERAGE 10
TRUSTEE OR
FEES 3 5 7 MORE
------ ---- ---- ---- ----
<S> <C> <C> <C> <C>
$ $914 $137 $228 $320 $457
1,017 153 254 356 $508
1,120 168 280 392 $560
1,223 184 306 428 $612
1,327 199 332 464 $663
1,430 215 358 501 $715
</TABLE>
- ---------------
(4) Other funds in the MFS fund complex provide similar retirement benefits to
the Trustees.
27
<PAGE> 161
APPENDIX B
PERFORMANCE INFORMATION
The performance results and quotations below should not be considered as
representative of the performance of the Fund in the future since the net asset
value and public offering price of shares of the Fund will vary. See
"Performance Information" in the SAI.
PERFORMANCE RESULTS -- CLASS A SHARES
<TABLE>
<CAPTION>
CLASS A SHARES
-------------------------------------------------------------
VALUE OF VALUE OF
INITIAL CAPITAL VALUE OF
$10,000 GAIN REINVESTED TOTAL
YEAR ENDED INVESTMENT DISTRIBUTIONS DIVIDENDS VALUE
- --------------------------------------------------------- ---------- ------------- ---------- -------
<S> <C> <C> <C> <C>
December 31, 1993(1)..................................... 9,879 0 0 9,879
December 31, 1994........................................ 9,999 0 314 10,313
December 31, 1995........................................ 9,939 0 2,668 12,607
</TABLE>
- ---------------
(1) Based on initial investment made on December 1, 1993, the commencement of
investment operations of Class A shares.
EXPLANATORY NOTES:
The results in the table assume that income dividends and capital gain
distributions were invested in additional shares. The results also assume that
the initial investment in Class A shares was reduced by the current maximum
applicable sales charge. No adjustment has been made for any income taxes, if
any, payable by shareholders.
PERFORMANCE QUOTATIONS
All performance quotations are for the period ended August 31, 1996.
<TABLE>
<CAPTION>
LIFE OF
1 YEAR FUND
------ -------
<S> <C> <C>
Class A with sales charge................................................................ 4.24% 12.51%(1)
Class A without sales charge............................................................. 10.55% 14.97%(1)
Class B with CDSC........................................................................ 6.08% 12.98%(1)
Class B without CDSC..................................................................... 9.67% 13.85%(1)
Class C with CDSC........................................................................ 8.70% 13.88%(2)
Class C without CDSC..................................................................... 9.60% 13.88%(2)
</TABLE>
- ---------------
(1) From the initial public offering date of Class A and B shares on December 1,
1993 (the commencement of investment operations).
(2) Class C share performance includes the performance of the Fund's Class A
shares for periods prior to the commencement of offering of Class C shares
on August 1, 1994. Sales charges, expenses and expense ratios, and therefore
performance, for Class A and Class C shares differ. Class C share
performance has been adjusted to reflect that Class C shares generally are
subject to CDSC (unless the performance quotation does not give effect to
the CDSC), whereas Class A shares generally are subject to an initial sales
charge. Class C share performance has not, however, been adjusted to reflect
differences in operating expenses (e.g., Rule 12b-1 fees), which generally
are lower for Class A shares.
28
<PAGE> 162
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[Registered Trademark] OTC FUND
500 BOYLSTON STREET
BOSTON, MA 02116
[MFS LOGO] OTC-13-1/97/500 83/283/383
<PAGE> 163
<PAGE>
[LOGO: M F S(SM) ANNUAL REPORT
INVESTMENT MANAGEMENT FOR YEAR ENDED
We invented the mutual fund(SM)] AUGUST 31, 1996
MFS(R) OTC FUND
[Graphic Omitted: Floppy Disks]
<PAGE>
TABLE OF CONTENTS
Letter from the Chairman ................................................... 1
A Discussion with the Fund Manager ......................................... 3
Fund Manager's Profile ..................................................... 5
Fund Facts ................................................................. 6
Performance ................................................................ 6
Portfolio Concentration .................................................... 9
Portfolio of Investments ...................................................10
Financial Statements .......................................................14
Notes to Financial Statements ..............................................20
Independent Auditors' Report ...............................................25
It's Easy to Contact Us ....................................................26
MFS Investment Opportunities ...............................................27
The MFS Family of Funds(R) .................................................28
Trustees and Officers ......................................................29
HIGHLIGHTS
* FOR THE 12 MONTHS ENDED AUGUST 31, 1996, CLASS A SHARES OF THE FUND
PROVIDED A TOTAL RETURN OF 10.55%, CLASS B SHARES 9.67%, AND CLASS C
SHARES 9.60%. ALL OF THESE RETURNS ARE AT NET ASSET VALUE.
* PERFORMANCE WAS HINDERED BY THE HEALTH CARE SECTOR. HEALTH MAINTENANCE
ORGANIZATIONS PERFORMED POORLY AS THE INCREASES IN INSURANCE PREMIUMS
LAGGED THE COST OF PROVIDING SERVICES TO PATIENTS, ALTHOUGH SEVERAL
MEDICAL-DEVICE COMPANIES PERFORMED EXCEPTIONALLY WELL.
* THE FUND'S LARGEST CONCENTRATIONS ARE IN TECHNOLOGY, WHICH REPRESENTS
33% OF THE PORTFOLIO; HEALTH CARE, WHICH ACCOUNTS FOR 24%; AND LEISURE,
AT 14%.
* THE BIGGEST CHANGES TO THE PORTFOLIO HAVE RESULTED FROM TAKEOVERS, AS
SEVERAL MAJOR HOLDINGS WERE BENEFICIARIES OF BUYOUT OFFERS AT
SIGNIFICANT PREMIUMS OVER THE MARKET PRICE.
<PAGE>
LETTER FROM THE CHAIRMAN
[Photo of A. Keith Brodkin]
Dear Shareholders:
The U.S. economy in 1996 appears to have settled into a pattern of fairly
reasonable growth and moderate inflation -- two factors that we think can be
important contributors to a favorable long-term investment climate. During the
first quarter of 1996, real (inflation-adjusted) economic growth was 2.3% on
an annualized basis, followed by a rate of 4.7% in the second quarter. Thus,
real growth in gross domestic product has exceeded our expectations so far
this year, and we now expect that growth for all of 1996 could exceed 2.5%.
Although individual consumers appear to be carrying an excessive debt load,
the consumer sector itself, which represents two-thirds of the economy,
continues to be impressive as the automobile and housing markets remain
resilient. Consumer spending has also been positively impacted by widespread
job growth. At the same time, however, the economies of Europe and Japan
continue to be in the doldrums, weakening U.S. export markets while subduing
the capital spending plans of American corporations.
While we do not expect the U.S. stock market to match 1995's extraordinary
performance, we continue to be positive about the equity market this year.
Although we believe the equity market represents fair value at current levels,
the expected slowdown in corporate earnings growth and the increases in
interest rates experienced so far this year have raised some near-term
concerns, as was seen in July's stock market correction. Further increases in
interest rates, and an acceleration of inflation coupled with an additional
slowdown in corporate earnings growth, could have a negative effect on the
stock market. However, to the extent that some earnings disappointments are
taken as a sign that the economy is not overheating, this may prove beneficial
for the equity market's longer-term health. We continue to believe that many
of the technology-driven productivity gains that U.S. companies have made in
recent years will continue to enhance corporate America's competitiveness and
profitability. Therefore, while we have some near-term concerns, we remain
quite constructive on the long-term viability of the equity market.
Finally, as you may have noticed, this report to shareholders incorporates a
number of changes which we believe will make it more informative and useful to
you. Following the discussion with the Fund Manager, you will find new
information on the Fund's holdings, including charts illustrating the
portfolio's concentration in the different types of investments that meet its
criteria. Near the back of the report, you will find a list of telephone
numbers and addresses in case you need to contact MFS.
We appreciate your support and welcome any questions or comments you may
have.
Respectfully,
/s/ A. Keith Brodkin
A. Keith Brodkin
Chairman and President
September 17, 1996
<PAGE>
A DISCUSSION WITH THE FUND MANAGER
[Photo of Mark Regan]
The Fund's performance has been in line with the general OTC market, as
measured by the Russell 2000 Total Return Index (the Russell Index), although
it underperformed the Standard & Poor's 500 Composite Index (the S&P 500). For
the 12 months ended August 31, 1996, Class A shares of the Fund provided a
total return of 10.55%, Class B shares 9.67%, and Class C shares 9.60%. These
returns compare to a 10.82% return for the Russell Index, an unmanaged index
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; and
to an 18.72% return for the S&P 500, a popular, unmanaged index of common
stock performance. All of the Fund's returns include the reinvestment of
distributions but exclude the effects of any sales charges.
Q. WHAT DO YOU THINK WERE SOME OF THE THINGS THAT AFFECTED PERFORMANCE OVER
THE PAST YEAR, MARK?
A. Performance was most severely impacted by the health care sector. Health
maintenance organizations, or HMOs, performed very poorly in the past 12
months, as the increases in insurance premiums lagged the cost of providing
services to patients.
On the positive side, several medical-device companies, including Medisense
and Zoll Medical, performed exceptionally well over this period.
Q. HOW WOULD YOU DESCRIBE THE BUSINESS AND ECONOMIC ENVIRONMENT YOU FACED OVER
THE PAST 12 MONTHS, PARTICULARLY AS IT RELATES TO THIS FUND?
A. We've seen a gradual increase in interest rates as the economy has moved
toward lower unemployment levels. We've also observed that price increases
have been very difficult for companies to get; in fact, for most technology
and health care companies, continuous price declines have become an ongoing
business reality.
At the same time, technology companies have seen increased volatility based
on a number of events. For example, semiconductor companies, especially those
that make memory chips, suffered huge price declines, while the sales growth
of personal computers slowed and digital communications began to replace
analog communications in the wireless area. These events created significant
disruption, but also opportunity, in the technology area.
Q. ARE THERE ANY PARTICULAR SEGMENTS OF THE MARKET YOU'VE BEEN CONCENTRATING
ON RECENTLY?
A. The Fund's largest concentrations are in technology, which represents 33%
of the portfolio; health care, which accounts for 24%; and leisure, at 14%. We
decreased the Fund's holdings in the technology sector while increasing them
in the health care sector, as we have found new opportunities in that market.
Q. HAVE ANY SIGNIFICANT CHANGES BEEN MADE IN YOUR HOLDINGS THIS YEAR?
A. The biggest changes have resulted from takeovers. Several major holdings
were beneficiaries of buyout offers, at significant premiums over the market
price, over the last year. Medisense, which was the Fund's largest holding at
mid-year, was purchased by Abbott Labs. Meanwhile, Sierra On-Line and Davidson
& Associates were purchased by CUC International.
Q. CAN YOU NAME SOME STOCKS THAT PERFORMED AS WELL AS OR BETTER THAN YOU
EXPECTED?
A. A number of important holdings performed well over the past year. In
addition to the buyout companies, others included Starsight Telecast, a
provider of electronic program guides and services to the television market;
Gymboree, a retailer of clothing for infants; and Oracle Software, the leading
provider of database and application software for the client server market.
Q. NOW, HOW ABOUT SOME STOCKS THAT DIDN'T DO AS WELL AS YOU EXPECTED?
A. Most of these companies have been in the HMO group, which suffered from
rising medical costs and did not have the ability to change short-term
pricing. However, we believe this problem will correct itself in 1997 with
tighter control of medical costs and more aggressive price increases. Several
gaming companies, including Harrah's, Argosy, and Showboat, also hurt the
Fund's performance as projects were delayed and as competitors entered
previously non-competitive markets.
Q. LOOKING AHEAD, WHAT CHANGES DO YOU SEE IN THE OVERALL MARKET ENVIRONMENT AS
IT RELATES TO YOUR FUND?
A. It looks like it will be hard for companies to raise prices for their
products, except as a pass-through of raw material increases. We do not see
many inflationary pressures in the economy and, in fact, see continued price
declines in many of the major industry groups. We believe advances in the
price performance of technology products and the increasing efficacy of new
drugs and medical devices will continue to provide opportunities for growth in
the technology and health care industries.
Q. AND HOW ARE YOU POSITIONING THE FUND TO TRY AND TAKE ADVANTAGE OF THOSE
CHANGES?
A. We'll continue to look for companies and technologies in the OTC market
that we believe offer the best prospects for sustained growth with reasonable
valuations.
Respectfully,
/s/ Mark Regan
Mark Regan
Fund Manager
FUND MANAGER'S 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 OF
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.
<PAGE>
FUND FACTS
STRATEGY: THE FUND'S PRIMARY INVESTMENT OBJECTIVE IS TO
PROVIDE LONG-TERM GROWTH OF CAPITAL BY INVESTING
AT LEAST 65% OF ITS ASSETS, UNDER NORMAL
CIRCUMSTANCES, IN SECURITIES PRINCIPALLY TRADED ON
THE OVER-THE-COUNTER (OTC) SECURITIES MARKET.
COMMENCEMENT OF
INVESTMENT OPERATIONS: DECEMBER 1, 1993
SIZE: $109.0 MILLION AS OF AUGUST 31, 1996
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.
The performance of Class C shares will be greater than or less than the line
shown, based on the differences in loads or fees paid by shareholders
investing in the different classes.
<PAGE>
GROWTH OF A HYPOTHETICAL $10,000 INVESTMENT
(For the period from December 1, 1993* to August 31, 1996)
MFS Consumer S&P MFS
OTC Price Russell 500 OTC
Fund-A Index-US 2000 Composite Fund-B
------ -------- ------- --------- ------
12/1/93 $ 9,425 $10,000 $10,000 $10,000 $10,000
12/31/93 9,882 10,000 10,342 10,124 10,485
12/31/94 10,316 10,268 10,153 10,251 10,799
12/31/95 12,611 10,521 13,041 14,091 13,088
8/31/96 13,833 10,787 13,897 15,134 14,288
<TABLE>
AVERAGE ANNUAL TOTAL RETURNS
<CAPTION>
12/01/93 *-
1 Year 8/31/96
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
MFS OTC Fund (Class A) including 5.75% sales charge + 4.24% +12.51%
- ---------------------------------------------------------------------------------------------------------------------------
MFS OTC Fund (Class A) at net asset value +10.55% +14.97%
- ---------------------------------------------------------------------------------------------------------------------------
MFS OTC Fund (Class B) with CDSC + 6.08% +12.98%
- ---------------------------------------------------------------------------------------------------------------------------
MFS OTC Fund (Class B) without CDSC + 9.67% +13.85%
- ---------------------------------------------------------------------------------------------------------------------------
MFS OTC Fund (Class C) + 9.60% +13.88%
- ---------------------------------------------------------------------------------------------------------------------------
Average small company growth fund +15.30% +11.53%
- ---------------------------------------------------------------------------------------------------------------------------
Russell 2000 Index +10.82% +12.72%
- ---------------------------------------------------------------------------------------------------------------------------
Standard & Poor's 500 Composite Index +18.72% +16.28%
- ---------------------------------------------------------------------------------------------------------------------------
Consumer Price Index(S) + 2.86% + 2.79%
- ---------------------------------------------------------------------------------------------------------------------------
*Commencement of investment operations.
(S)The Consumer Price Index is a popular measure of change in prices.
</TABLE>
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. 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.
Class A SEC results include the maximum 5.75% sales charge. Class B SEC
results reflect the applicable contingent deferred sales charge (CDSC), which
declines over six years as follows: 4%, 4%, 3%, 3%, 2%, 1%, 0%. Class C shares
have no initial sales charge but, along with Class B shares, have higher
annual fees and expenses than Class A shares. Class C share purchases made on
or after April 1, 1996 will be subject to a 1% CDSC if redeemed within 12
months of purchase. See the prospectus for details. Class C share performance
includes the performance of the Fund's Class A shares for periods prior to the
commencement of offering of Class C shares on August 1, 1994. Sales charges
and operating expenses for Class A and Class C shares differ. The Class A
share performance, which is included within the Class C share SEC performance,
has been adjusted to reflect the CDSC generally applicable to Class C shares
rather than the initial sales charge generally applicable to Class A shares.
Class C share performance has not been adjusted, however, to reflect
differences in operating expenses (e.g., Rule 12b-1 fees), which generally are
lower for Class A shares.
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. Performance results
reflect any applicable expense subsidies and waivers, without which the
performance results would have been less favorable. Subsidies and waivers may
be rescinded at any time. See prospectus for details.
TAX FORM SUMMARY
IN JANUARY 1997, SHAREHOLDERS WILL BE MAILED A TAX FORM SUMMARY
REPORTING THE FEDERAL TAX STATUS OF ALL DISTRIBUTIONS PAID DURING THE
CALENDAR YEAR 1996.
<PAGE>
PORTFOLIO CONCENTRATION AS OF AUGUST 31, 1996
<TABLE>
TOP TEN HOLDINGS
<C> <C>
STARSIGHT TELECAST, INC. MCI COMMUNICATIONS CORP.
Developer of interactive television guide Telecommunications company
and VCR services
GYMBOREE CORP.
ROGERS CANTEL MOBILE CO. Manufacturer of children's apparel
Canadian cellular telephone operator
ZOLL MEDICAL CORP.
UROMED CORP. Medical products company
Medical products company
ARGOSY GAMING CORP.
VENTRITEX, INC. Operates casino vessel on Mississippi River
Medical products company
SHOWBOAT, INC.
PACIFICARE HEALTH SYSTEMS, INC. Las Vegas and Atlantic City casino operator
Manufacturer of managed health care
products
</TABLE>
LARGEST SECTORS
Technology 32.8%
Health Care 24.0%
Leisure 14.3%
Utilities & Communications 10.2%
Financial Services 5.9%
Other 12.8%
<PAGE>
PORTFOLIO OF INVESTMENTS - August 31, 1996
Common Stocks and Warrants - 99.7%
- ---------------------------------------------------------------------------
Issuer Shares Value
- ---------------------------------------------------------------------------
U.S. Stocks and Warrants - 95.6%
Advertising
Lamar Advertising Co., "A"* 1,100 $ 30,800
- ---------------------------------------------------------------------------
Airlines - 0.3%
Greenwich Air Services, Inc., "B"* 18,700 $ 359,975
- ---------------------------------------------------------------------------
Banks and Credit Companies - 0.6%
Corestates Financial Corp. 14,700 $ 608,212
- ---------------------------------------------------------------------------
Biotechnology - 0.6%
Oncogene Science, Inc.* 80,800 $ 707,000
- ---------------------------------------------------------------------------
Business Machines - 1.8%
Digital Equipment Corp.* 49,900 $ 1,927,387
- ---------------------------------------------------------------------------
Business Services - 0.8%
DST Systems, Inc.* 26,800 $ 824,100
ICT Group, Inc.* 400 6,500
------------
$ 830,600
- ---------------------------------------------------------------------------
Cellular Telephones - 1.6%
AirTouch Communications, Inc.* 22,700 $ 624,250
Telephone & Data Systems, Inc. 26,900 1,146,612
------------
$ 1,770,862
- ---------------------------------------------------------------------------
Computer Software - Personal Computers - 7.9%
Activision, Inc.* 50,600 $ 607,200
Autodesk, Inc. 48,100 1,106,300
Electronic Arts, Inc.* 94,600 2,920,775
Intuit, Inc.* 5,400 197,100
Maxis, Inc.* 23,400 269,100
Microsoft Corp.* 10,000 1,225,000
Spectrum Holobyte Industries* 445,500 2,283,187
------------
$ 8,608,662
- ---------------------------------------------------------------------------
Computer Software - Systems - 12.6%
Adobe Systems, Inc. 78,200 $ 2,727,225
BMC Software, Inc.* 26,700 1,989,150
Cadence Design Systems, Inc.* 24,700 731,737
E Trade Group, Inc.* 1,800 18,900
Informix Corp.* 129,200 2,907,000
Oracle Systems Corp.* 64,800 2,284,200
Sybase, Inc.* 53,800 866,680
Synopsys, Inc.* 58,500 2,223,000
------------
$ 13,747,892
- ---------------------------------------------------------------------------
Electronics - 4.6%
Altera Corp.* 10,200 $ 448,800
Intel Corp. 26,400 2,107,050
Intel Corp., Warrants* 18,800 788,050
LSI Logic Corp.* 48,100 1,052,187
Xilinx, Inc.* 17,300 605,500
------------
$ 5,001,587
- ---------------------------------------------------------------------------
Entertainment - 12.4%
Argosy Gaming Corp.* 481,400 $ 3,129,100
Harrah's Entertainment, Inc.* 55,600 1,056,400
Showboat, Inc. 150,000 2,981,250
Starsight Telecast, Inc.* 711,500 6,403,500
------------
$ 13,570,250
- ---------------------------------------------------------------------------
Financial Institutions - 4.7%
Advanta Corp., "B" 15,000 $ 667,500
Countrywide Credit Industries, Inc. 42,000 1,013,250
Credit Acceptance Corp.* 42,900 954,525
Green Tree Financial 17,400 604,650
Medallion Financial Corp. 42,900 552,337
National Auto Credit, Inc.* 114,530 1,317,095
------------
$ 5,109,357
- ---------------------------------------------------------------------------
Medical and Health Products - 12.0%
St. Jude Medical, Inc. 51,400 $ 1,843,975
Uromed Corp.* 403,100 4,182,162
Ventritex, Inc.* 282,800 3,853,150
Zoll Medical Corp.* 206,700 3,152,175
------------
$ 13,031,462
- ---------------------------------------------------------------------------
Medical and Health Technology and Services - 10.9%
Affymetrix, Inc.* 400 $ 5,650
Coventry Corp.* 156,800 2,067,800
Foundation Health Corp.* 22,500 675,000
Healthsource, Inc.* 120,500 1,807,500
Owen Healthcare, Inc.* 59,400 712,800
Pacificare Health Systems, Inc., "A"* 48,100 3,667,625
Riscorp, Inc., "A"* 49,700 683,375
Safeguard Health Enterprises* 18,800 347,800
United Healthcare Corp.* 50,979 1,969,083
------------
$ 11,936,633
- ---------------------------------------------------------------------------
Oils - 2.1%
Carbo Ceramics, Inc. 104,100 $ 1,951,875
Newfield Exploration Co.* 8,000 357,000
------------
$ 2,308,875
- ---------------------------------------------------------------------------
Railroads - 1.5%
Kansas City Southern Industries, Inc. 9,200 $ 372,600
Wisconsin Central Transportation Corp.* 36,200 1,276,050
------------
$ 1,648,650
- ---------------------------------------------------------------------------
Restaurants and Lodging - 1.1%
Applebee's International, Inc. 28,400 $ 823,600
Promus Hotel Corp.* 13,150 396,145
------------
$ 1,219,745
- ---------------------------------------------------------------------------
Special Products and Services - 0.4%
YES! Entertainment Corp.* 39,400 $ 487,575
- ---------------------------------------------------------------------------
Stores - 4.9%
General Nutrition Cos., Inc.* 106,600 $ 1,572,350
Gymboree Corp.* 110,700 3,196,463
Men's Warehouse, Inc.* 16,200 352,350
Travis Boats & Motors* 19,700 186,533
-----------
$ 5,307,696
- ---------------------------------------------------------------------------
Telecommunications - 11.6%
American Media, Inc.* 1,351,600 $ 21,085
American Portable Telecom, Inc.* 2,700 24,300
Cable Design Technology* 50,100 1,778,550
Cabletron Systems, Inc.* 35,000 2,135,000
Cisco Systems, Inc.* 8,800 464,200
Echostar Communications, "A"* 14,000 355,032
Glenayre Technologies, Inc.* 40,800 1,499,400
Lambert Communication, Inc.* 33,000 330
Paging Network, Inc.* 26,200 461,775
Rogers Cantel Mobile Co.* 247,100 5,065,550
U.S. Robotics Corp.* 15,300 803,250
------------
$ 12,608,472
- ---------------------------------------------------------------------------
Utilities - Telephone - 3.2%
MCI Communications Corp. 137,600 $ 3,457,200
- ---------------------------------------------------------------------------
Total U.S. Stocks and Warrants $104,278,892
- ---------------------------------------------------------------------------
Foreign Stocks - 4.1%
Canada - 0.8%
Southern Africa Minerals Corp.* 810,000 $ 858,600
- ---------------------------------------------------------------------------
Germany - 1.0%
SAP AG, Preferred 4,600 $ 754,705
Sap Aktiengesellscha, ADR*## 6,700 361,800
------------
$ 1,116,505
- ---------------------------------------------------------------------------
Hong Kong - 1.1%
Giordano Holdings Ltd. 1,384,000 $ 1,145,539
- ---------------------------------------------------------------------------
Philippines - 0.2%
Pilipino Telephone Corp. 199,800 $ 263,496
- ---------------------------------------------------------------------------
Sweden - 1.0%
Nobel Biocare AB 56,500 $ 1,074,969
- ---------------------------------------------------------------------------
Total Foreign Stocks $ 4,459,109
- ---------------------------------------------------------------------------
Total Common Stocks and Warrants (Identified
Cost, $116,962,150) $108,738,001
- ---------------------------------------------------------------------------
Convertible Bond
- ---------------------------------------------------------------------------
Principal Amount
Issuer (000 Omitted) Value
- ---------------------------------------------------------------------------
Ventritex, Inc., 5.75s, due 2001
(Identified Cost, $40,000) $ 40 $ 40,100
- ---------------------------------------------------------------------------
Short-Term Obligation - 3.2%
- ---------------------------------------------------------------------------
Federal Home Loan Mortgage Corp., 5.215s,
due 9/03/96, at Amortized Cost $3,490 $ 3,487,991
- ---------------------------------------------------------------------------
Total Investments (Identified Cost, $120,490,141) $112,266,092
Other Assets, Less Liabilities - (2.9)% (3,264,817)
- ---------------------------------------------------------------------------
Net Assets - 100.0% $109,001,275
- ---------------------------------------------------------------------------
*Non-income producing security.
##SEC Rule 144A restriction.
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS
Statement of Assets and Liabilities
- ------------------------------------------------------------------------------
August 31, 1996
- ------------------------------------------------------------------------------
Assets:
Investments, at value (identified cost, $120,490,141) $112,266,092
Cash 6,834
Receivable for Fund shares sold 271,690
Interest and dividends receivable 12,031
Other assets 969
------------
Total assets $112,557,616
------------
Liabilities:
Payable for Fund shares reacquired $ 298,807
Payable for investments purchased 3,117,352
Payable to affiliates -
Management fee 4,500
Shareholder servicing agent fee 1,157
Distribution fee 43,668
Accrued expenses and other liabilities 90,857
------------
Total liabilities $ 3,556,341
------------
Net assets $109,001,275
============
Net assets consist of:
Paid-in capital $103,263,475
Unrealized depreciation on investments and translation of
assets and liabilities in foreign currencies (8,224,049)
Accumulated undistributed net realized gain on investments
and foreign currency transactions 13,967,507
Accumulated net investment loss (5,658)
------------
Total $109,001,275
============
Shares of beneficial interest outstanding 12,156,108
============
Class A shares:
Net asset value per share
(net assets of $35,098,281 / 3,875,873 shares of beneficial
interest outstanding) $9.06
=====
Offering price per share (100/94.25) $9.61
=====
Class B shares:
Net asset value and offering price per share
(net assets of $67,043,466 / 7,505,225 shares of beneficial
interest outstanding) $8.93
=====
Class C shares:
Net asset value and offering price per share
(net assets of $6,859,528 / 775,010 shares of beneficial
interest outstanding) $8.85
=====
On sales of $50,000 or more, the offering price of Class A shares is reduced.
A contingent deferred sales charge may be imposed on redemptions of Class A,
Class B and Class C shares.
See notes to financial statements
<PAGE>
Statement of Operations
- ------------------------------------------------------------------------------
Year Ended August 31, 1996
- ------------------------------------------------------------------------------
Net investment income:
Income -
Interest $ 155,559
Dividends 116,493
Foreign taxes withheld (864)
------------
Total investment income $ 271,188
------------
Expenses -
Management fee $ 755,233
Trustees' compensation 11,639
Shareholder servicing agent fee (Class A) 49,906
Shareholder servicing agent fee (Class B) 137,168
Shareholder servicing agent fee (Class C) 7,616
Distribution and service fee (Class A) 28,237
Distribution and service fee (Class B) 539,460
Distribution and service fee (Class C) 49,574
Custodian fee 49,803
Printing 30,416
Postage 29,634
Auditing fees 22,645
Legal fees 4,152
Miscellaneous 144,515
------------
Total expenses $ 1,859,998
Fees paid indirectly (3,115)
------------
Net expenses $ 1,856,883
------------
Net investment loss $ (1,585,695)
------------
Realized and unrealized gain (loss) on investments:
Realized gain (identified cost basis) -
Investment transactions $ 20,722,770
Foreign currency transactions (407)
------------
Net realized gain on investments and foreign currency
transactions $ 20,722,363
------------
Change in unrealized appreciation (depreciation) -
Net unrealized loss on investments $(12,184,307)
------------
Net realized and unrealized gain on investments and
foreign currency $ 8,538,056
------------
Increase in net assets from operations $ 6,952,361
============
See notes to financial statements
<PAGE>
<TABLE>
<CAPTION>
Statement of Changes in Net Assets
- ---------------------------------------------------------------------------------------------------
Year Ended August 31, 1996 1995
- ---------------------------------------------------------------------------------------------------
<S> <C> <C>
Increase (decrease) in net assets:
From operations -
Net investment loss $ (1,585,695) $ (876,305)
Net realized gain on investments and foreign currency
transactions 20,722,363 14,682,099
Net unrealized gain (loss) on investments and foreign currency
translation (12,184,307) 959,367
------------ ------------
Increase in net assets from operations $ 6,952,361 $ 14,765,161
------------ ------------
Distributions declared to shareholders -
From net realized gain on investments and foreign currency
transactions (Class A) $ (5,350,459) $ (918,344)
From net realized gain on investments and foreign currency
transactions (Class B) (10,344,167) (1,440,882)
From net realized gain on investments and foreign currency
transactions (Class C) (756,617) (47,151)
------------ ------------
Total distributions declared to shareholders $(16,451,243) $ (2,406,377)
------------ ------------
Fund share (principal) transactions -
Net proceeds from sale of shares $ 80,419,295 $110,456,952
Net asset value of shares issued to shareholders in
reinvestment
of distributions 14,791,845 2,174,647
Cost of shares reacquired (71,855,199) (84,557,685)
------------ ------------
Increase in net assets from Fund share transactions $ 23,355,941 $ 28,073,914
------------ ------------
Total increase in net assets $ 13,857,059 $ 40,432,698
Net assets:
At beginning of period 95,144,216 54,711,518
------------ ------------
At end of period (including accumulated net investment loss
of $1,588,957 and $3,262, respectively) $109,001,275 $ 95,144,216
============ ============
</TABLE>
See notes to financial statements
<PAGE>
<TABLE>
<CAPTION>
Financial Highlights
- -------------------------------------------------------------------------------------------------------
Year Ended August 31, 1996 1995 1994*
- -------------------------------------------------------------------------------------------------------
Class A
- -------------------------------------------------------------------------------------------------------
Per share data (for a share outstanding throughout each period):
<S> <C> <C> <C>
Net asset value - beginning of period $10.08 $ 8.68 $ 7.83
------ ------ ------
Income from investment operations# -
Net investment income (loss) $ 0.10 $(0.03) $(0.05)
Net realized and unrealized gain on investments and
foreign currency transactions 0.76 1.69 0.90
------ ------ ------
Total from investment operations $ 0.86 $ 1.66 $ 0.85
------ ------ ------
Less distributions declared to shareholders from net
realized gain on investments and foreign currency
transactions $(1.88) $(0.26) $ --
------ ------ ------
Total distributions declared to shareholders $(1.88) $(0.26) $ --
------ ------ ------
Net asset value - end of period $ 9.06 $10.08 $ 8.68
====== ====== ======
Total return(+) 10.55% 19.77% 10.86%++
Ratios (to average net assets)/Supplemental data(S):
Expenses## 1.28% 1.29% 1.50%+
Net investment loss (1.08)% (0.40)% (0.87)%+
Portfolio turnover 157% 218% 82%
Average commission rate### $0.0422 -- --
Net assets at end of period (000 omitted) $35,098 $30,194 $17,776
<FN>
*For the period from the commencement of investment operations, December 1, 1993 to August 31, 1994.
+Annualized.
++Not annualized.
(+)Total returns for Class A shares do not include the applicable sales charge. If the charge had been included,
the results would have been lower.
#Per share data is based upon average shares outstanding.
##For fiscal years ending after September 1, 1995, the Fund's expenses are calculated without reduction for fees
paid indirectly.
###Average commission rate is calculated for funds with fiscal years beginning on or after September 1, 1995.
(S)The investment adviser did not impose a portion of its management fee for the periods indicated. If this fee
had been incurred by the Fund, the net investment loss per share and the ratios would have been:
Net investment loss -- -- $(0.08)
Ratios (to average net assets):
Expenses -- -- 2.03%+
Net investment loss -- -- (1.40)%+
</FN>
</TABLE>
See notes to financial statements
<PAGE>
<TABLE>
<CAPTION>
Financial Highlights - continued
- -------------------------------------------------------------------------------------------------------
Year Ended August 31, 1996 1995 1994*
- -------------------------------------------------------------------------------------------------------
Class B
- -------------------------------------------------------------------------------------------------------
Per share data (for a share outstanding throughout each period):
<S> <C> <C> <C>
Net asset value - beginning of period $ 9.94 $ 8.59 $ 7.83
------ ------ ------
Income from investment operations# -
Net investment income (loss) $ 0.17 $(0.13) $(0.12)
Net realized and unrealized gain on investments and
foreign currency transactions 0.61 1.69 0.88
------ ------ ------
Total from investment operations $ 0.78 $ 1.56 $ 0.76
------ ------ ------
Less distributions declared to shareholders from net
realized gain on investments and foreign currency
transactions $(1.79) $(0.21) $ --
------ ------ ------
Total distributions declared to shareholders $(1.79) $(0.21) $ --
------ ------ ------
Net asset value - end of period $ 8.93 $ 9.94 $ 8.59
====== ====== ======
Total return 9.67% 18.75% 9.71%++
Ratios (to average net assets)/Supplemental data(S):
Expenses## 2.13% 2.29% 2.57%+
Net investment loss (1.81)% (1.44)% (2.02)%+
Portfolio turnover 157% 218% 82%
Average commission rate### $0.0422 -- --
Net assets at end of period (000 omitted) $67,043 $61,742 $36,849
<FN>
*For the period from the commencement of investment operations, December 1, 1993 to August 31, 1994.
+Annualized.
++Not annualized.
#Per share data is based upon average shares outstanding.
##For fiscal years ending after September 1, 1995, the Fund's expenses are calculated without reduction for fees
paid indirectly.
###Average commission rate is calculated for funds with fiscal years beginning on or after September 1, 1995.
(S)The investment adviser did not impose a portion of its management fee for the periods indicated. If this
fee had been incurred by the Fund, the net investment loss per share and the ratios would have been:
Net investment loss -- -- $(0.15)
Ratios (to average net assets):
Expenses -- -- 3.10%
Net investment loss -- -- (2.56)%
</FN>
</TABLE>
See notes to financial statements
<PAGE>
<TABLE>
<CAPTION>
Financial Highlights - continued
- -------------------------------------------------------------------------------------------------------
Year Ended August 31, 1996 1995 1994**
- -------------------------------------------------------------------------------------------------------
Class C
- -------------------------------------------------------------------------------------------------------
Per share data (for a share outstanding throughout each period):
<S> <C> <C> <C>
Net asset value - beginning of period $ 9.91 $ 8.61 $ 7.80
------ ------ ------
Income from investment operations# -
Net investment income (loss) $ 0.17 $(0.14) $(0.04)
Net realized and unrealized gain on investments and
foreign currency transactions 0.60 1.69 0.85
------ ------ ------
Total from investment operations $ 0.77 $ 1.55 $ 0.81
------ ------ ------
Less distributions declared to shareholders from net
realized gain on investments and foreign currency
transactions $(1.83) $(0.25) $ --
------ ------ ------
Total distributions declared to shareholders $(1.83) $(0.25) $ --
------ ------ ------
Net asset value - end of period $ 8.85 $ 9.91 $ 8.61
====== ====== ======
Total return 9.60% 18.63% 10.38%++
Ratios (to average net assets)/Supplemental data(S):
Expenses## 2.17% 2.30% 2.50%+
Net investment loss (1.90)% (1.55)% (2.22)%+
Portfolio turnover 157% 218% 82%
Average commission rate### $0.0422 -- --
Net assets at end of period (000 omitted) $6,860 $3,209 $87
<FN>
**For the period from the commencement of offering of Class C shares, August 1, 1994 to August 31, 1994.
+Annualized.
++Not annualized.
#Per share data is based upon average shares outstanding.
##For fiscal years ending after September 1, 1995, the Fund's expenses are calculated without reduction for fees
paid indirectly.
###Average commission rate is calculated for funds with fiscal years beginning on or after September 1, 1995.
(S)The investment adviser did not impose a portion of its management fee for the periods indicated. If this fee
had been incurred by the Fund, the net investment loss per share and the ratios would have been:
Net investment loss -- -- $(0.05)
Ratios (to average net assets):
Expenses -- -- 3.03%+
Net investment loss -- -- (2.71)%+
</FN>
</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
management investment company.
(2) Significant Accounting Policies
General - The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Investment Valuations - Equity securities listed on securities exchanges or
reported through the NASDAQ system are valued at last sale prices. Unlisted
equity securities or listed equity securities for which last sale prices are not
available are valued at last quoted bid prices. Debt securities (other than
short-term obligations which mature in 60 days or less), including listed issues
and forward contracts, are valued on the basis of valuations furnished by
dealers or by a pricing service with consideration to factors such as
institutional-size trading in similar groups of securities, yield, quality,
coupon rate, maturity, type of issue, trading characteristics and other market
data, without exclusive reliance upon exchange or over-the-counter prices.
Short-term obligations, which mature in 60 days or less, are valued at amortized
cost, which approximates market value. Securities for which there are no such
quotations or valuations are valued at fair value as determined in good faith by
or at the direction of the Trustees.
Foreign Currency Translation - Investment valuations, other assets, and
liabilities initially expressed in foreign currencies are converted each
business day into U.S. dollars based upon current exchange rates. Purchases and
sales of foreign investments, income and expenses are converted into U.S.
dollars based upon currency exchange rates prevailing on the respective dates of
such transactions. Gains and losses attributable to foreign currency exchange
rates on sales of securities are recorded for financial statement purposes as
net realized gains and losses on investments. Gains and losses attributable to
foreign exchange rate movements on income and expenses are recorded for
financial statement purposes as foreign currency transaction gains and losses.
That portion of both realized and unrealized gains and losses on investments
that results from fluctuations in foreign currency exchange rates is not
separately disclosed.
Forward Foreign Currency Exchange Contracts - The Fund may enter into forward
foreign currency exchange contracts for the purchase or sale of a specific
foreign currency at a fixed price on a future date. Risks may arise upon
entering into these contracts from the potential inability of counterparties to
meet the terms of their contracts and from unanticipated movements in the value
of a foreign currency relative to the U.S. dollar. The Fund will enter into
forward contracts for hedging purposes as well as for non-hedging purposes. For
hedging purposes, the Fund may enter into contracts to deliver or receive
foreign currency it will receive from or require for its normal investment
activities. It may also use contracts in a manner intended to protect foreign
currency-denominated securities from declines in value due to unfavorable
exchange rate movements. For non-hedging purposes, the Fund may enter into
contracts with the intent of changing the relative exposure of the Fund's
portfolio of securities to different currencies to take advantage of anticipated
changes. The forward foreign currency exchange contracts are adjusted by the
daily exchange rate of the underlying currency and any gains or losses are
recorded for financial statement purposes as unrealized until the contract
settlement date.
Investment Transactions and Income - Investment transactions are recorded on the
trade date. Interest income is recorded on the accrual basis. All premium and
original issue discount are amortized or accreted for financial statement and
tax reporting purposes as required by federal income tax regulations. Dividend
income is recorded on the ex-dividend date for dividends received in cash.
Dividend payments received in additional securities are recorded on the
ex-dividend date in an amount equal to the value of the security on such date.
Fees Paid Indirectly - The Fund's custodian bank calculates its fee based on the
Fund's average daily net assets. This fee is reduced according to an expense
offset arrangement with State Street Bank, the dividend disbursing agent, which
provides for partial reimbursement of custody fees based on a formula developed
to measure the value of cash deposited by the Fund with the custodian and with
the dividend disbursing agent. This amount is shown as a reduction of expenses
on the Statement of Operations.
Tax Matters and Distributions - The Fund's policy is to comply with the
provisions of the Internal Revenue Code (the Code) applicable to regulated
investment companies and to distribute to shareholders all of its 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 tax return of
capital. Differences in the recognition or classification of income between the
financial statements and tax earnings and profits which result in temporary
over-distributions for financial statement purposes, are classified as
distributions in excess of net investment income or accumulated net realized
gains. During the year ended August 31, 1996, $1,583,299 was reclassified from
accumulated net realized gain on investments and paid-in capital to accumulated
net investment loss 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 its independent Trustees and Mr. Bailey.
Included in Trustees' compensation is a net periodic pension expense of $2,164
for the year ended August 31, 1996.
Distributor - MFD, a wholly owned subsidiary of MFS, as distributor, received
$23,992 for the year ended August 31, 1996, as its portion of the sales charge
on sales of Class A shares of the Fund. The Trustees have adopted separate
distribution plans for Class A, Class B and Class C shares pursuant to Rule
12b-1 of the Investment Company Act of 1940 as follows:
The Class A distribution plan provides that the Fund will pay MFD up to 0.35%
per annum of its average daily net assets attributable to Class A shares in
order that MFD may pay expenses on behalf of the Fund related to the
distribution and servicing of its shares. These expenses include a service fee
to each securities dealer that enters into a sales agreement with MFD of up to
0.25% per annum of the Fund's average daily net assets attributable to Class A
shares which are attributable to that securities dealer, a distribution fee to
MFD of up to 0.10% per annum of the Fund's average daily net assets attributable
to Class A shares, commissions to dealers and payments to MFD wholesalers for
sales at or above a certain dollar level, and other such distribution-related
expenses that are approved by the Fund. Payment of the 0.10% per annum Class A
distribution fee will commence on such date as the Trustees of the Trust may
determine. MFD retains the service fee for accounts not attributable to a
securities dealer which amounted to $3,356 for the year ended August 31, 1996.
Fees incurred under the distribution plan during the year ended August 31, 1996
were 0.09% of average daily net assets attributable to Class A shares on an
annualized basis.
The Class B and Class C distribution plans provide that the Fund will pay MFD a
distribution fee of 0.75% per annum, and a service fee of up to 0.25% per annum,
of the Fund's average daily net assets attributable to Class B and Class C
shares. MFD will pay to securities dealers that enter into a sales agreement
with MFD all or a portion of the service fee attributable to Class B and Class C
shares, and will pay to such securities dealers all of the distribution fee
attributable to Class C shares. The service fee is intended to be additional
consideration for services rendered by the dealer with respect to Class B and
Class C shares. MFD retains the service fee for accounts not attributable to a
securities dealer, which amounted to $3,254 and $457 for Class B and Class C
shares, respectively, for the year ended August 31, 1996. Fees incurred under
the distribution plans during the year ended August 31, 1996 were 0.87% and
1.00% of average daily net assets attributable to Class B and Class C shares,
respectively.
Purchases over $1 million of Class A shares are subject to a contingent deferred
sales charge in the event of a shareholder redemption within 12 months following
such purchase. A contingent deferred sales charge is imposed on shareholder
redemptions of Class B shares in the event of a shareholder redemption within
six years of purchase. A contingent deferred sales charge is imposed on
shareholder redemptions of Class C shares in the event of a shareholder
redemption within 12 months of purchases made on or after April 1, 1996. MFD
receives all contingent deferred sales charges. Contingent deferred sales
charges imposed during the year ended August 31, 1996 were $1,116, $106,267 and
$346 for Class A, Class B and Class C shares, respectively.
Shareholder Servicing Agent - MFSC, a wholly owned subsidiary of MFS, earns a
fee for its services as shareholder servicing agent. The fee is calculated as a
percentage of the average daily net assets of each class of shares at an
effective annual rate of up to 0.15%, up to 0.22% and up to 0.15% attributable
to Class A, Class B and Class C shares, respectively.
(4) Portfolio Securities
Purchases and sales of investments, other than U.S. government securities,
purchased option transactions and short-term obligations, aggregated
$161,860,736 and $154,123,283, 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 $120,490,141
============
Gross unrealized depreciation $(15,667,148)
Gross unrealized appreciation 7,443,099
------------
Net unrealized depreciation $ (8,224,049)
============
(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 August 31, 1996 Year Ended August 31, 1995
--------------------------- ----------------------------
Shares Amount Shares Amount
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Shares sold 2,953,255 $ 28,054,414 4,680,448 $ 39,610,152
Shares issued to shareholders in
reinvestment of distributions 609,434 4,991,266 104,971 868,094
Shares reacquired (2,683,072) (24,825,437) (3,837,263) (32,341,967)
---------- ------------ ---------- ------------
Net increase 879,617 $ 8,220,243 948,156 $ 8,136,279
========== ============ ========== ============
<CAPTION>
Class B Shares
Year Ended August 31, 1996 Year Ended August 31, 1995
--------------------------- ----------------------------
Shares Amount Shares Amount
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Shares sold 3,674,349 $ 33,978,577 7,325,159 $ 62,579,527
Shares issued to shareholders in
reinvestment of distributions 1,119,205 9,076,592 154,411 1,266,051
Shares reacquired (3,501,980) (31,963,123) (5,554,198) (46,622,744)
---------- ------------ ---------- ------------
Net increase 1,291,574 $ 11,092,046 1,925,372 $ 17,222,834
========== ============ ========== ============
<CAPTION>
Class C Shares
Year Ended August 31, 1996 Year Ended August 31, 1995
--------------------------- ----------------------------
Shares Amount Shares Amount
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Shares sold 2,005,344 $ 18,386,304 948,839 $ 8,267,273
Shares issued to shareholders in
reinvestment of distributions 89,936 723,987 4,957 40,502
Shares reacquired (1,644,089) (15,066,639) (640,099) (5,592,974)
---------- ------------ ---------- ------------
Net increase 451,191 $ 4,043,652 313,697 $ 2,714,801
========== ============ ========== ============
</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, 1996 was $1,189.
<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, 1996, the related statement
of operations for the year then ended, the statement of changes in net assets
for the years ended August 31, 1996 and 1995, and the financial highlights for
each of the years in the three-year period ended August 31, 1996. These
financial statements and financial highlights are the responsibility of the
Fund's management. Our responsibility is to express an opinion on these
financial statements and financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements and
financial highlights are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. Our procedures included confirmation of the
securities owned at August 31, 1996 by correspondence with the custodian and
brokers; where replies were not received from brokers, we performed other
auditing procedures. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of MFS OTC Fund at
August 31, 1996, the results of its operations, the changes in its net assets,
and its financial highlights for the respective stated periods in conformity
with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Boston, Massachusetts
October 4, 1996
--------------------------------------------
This report is prepared for the general information of shareholders. It is
authorized for distribution to prospective investors only when preceded or
accompanied by a current prospectus.
<PAGE>
<TABLE>
<CAPTION>
MFS(R) OTC FUND
<C> <C>
TRUSTEES AUDITORS
A. Keith Brodkin* - Chairman and President Deloitte & Touche LLP
Richard B. Bailey* - Private Investor; INVESTOR INFORMATION
Former Chairman and Director (until 1991), For MFS stock and bond market outlooks,
Massachusetts Financial Services Company; call toll free: 1-800-637-4458 anytime from
Director, Cambridge Bancorp; Director, a touch-tone telephone.
Cambridge Trust Company
For information on MFS mutual funds,
Peter G. Harwood - Private Investor call your financial adviser or, for an
information kit, call toll free:
J. Atwood Ives - Chairman and Chief Executive 1-800-637-2929 any business day from
Officer, Eastern Enterprises 9 a.m. to 5 p.m. Eastern time (or leave
a message anytime).
Lawrence T. Perera - Partner,
Hemenway & Barnes INVESTOR SERVICE
MFS Service Center, Inc.
William J. Poorvu - Adjunct Professor, P.O. Box 2281
Harvard University Graduate School of Boston, MA 02107-9906
Business Administration
For general information, call toll free:
Charles W. Schmidt - Private Investor 1-800-225-2606 any business day from
8 a.m. to 8 p.m. Eastern time.
Arnold D. Scott* - Senior Executive
Vice President, Director and Secretary, For service to speech- or hearing-impaired,
Massachusetts Financial Services Company call toll free: 1-800-637-6576 any business
day from 9 a.m. to 5 p.m. Eastern time.
Jeffrey L. Shames* - President and Director, (To use this service, your phone must be equipped
Massachusetts Financial Services Company with a Telecommunications Device for the Deaf.)
Elaine R. Smith - Independent Consultant For share prices, account balances and
exchanges, call toll free: 1-800-MFS-TALK
David B. Stone - Chairman, North American (1-800-637-8255) anytime from a touch-tone telephone.
Management Corp. (investment advisers)
WEB SITE
INVESTMENT ADVISER http://www.mfs.com
Massachusetts Financial Services Company
500 Boylston Street
Boston, MA 02116-3741
DISTRIBUTOR
MFS Fund Distributors, Inc. --------------------------------------------
500 Boylston Street
Boston, MA 02116-3741 TOP RATED SERVICE
For the second year in a row,
FUND MANAGER [DALBAR MFS earned a #1 ranking in
Mark Regan* LOGO] DALBAR, Inc.'s Broker/Dealer
Survey, Main Office Operations
TREASURER Service Quality category. The
W. Thomas London* firm achieved a 3.49 overall score - on a
scale of 1 to 4 - in the 1995 survey. A total
ASSISTANT TREASURER of 71 firms responded, offering input on the
James O. Yost* quality of service they receive from 36
mutual fund companies nationwide. The survey
SECRETARY contained questions about service quality in
Stephen E. Cavan* 17 categories, including "knowledge of phone
service contacts," "accuracy of transaction
ASSISTANT SECRETARY processing," and "overall ease of doing
James R. Bordewick, Jr.* business with the firm." The 1996 survey
results were not available at the time of
CUSTODIAN this printing.
Investors Bank & Trust Company
* Affiliated with the Investment Adviser
</TABLE>
<PAGE>
-------------
MFS(R) OTC FUND [DALBAR LOGO: #1 BULK RATE
TOP RATED SERVICE] U.S. POSTAGE
500 Boylston Street PAID
Boston, MA 02116 PERMIT #55638
BOSTON, MA
-------------
[LOGO: M F S(SM)
INVESTMENT MANAGEMENT
We invented the mutual fund(SM)]
(C)1996 MFS Fund Distributors, Inc., 500 Boylston Street, Boston, MA 02116
OTC-2 10/96 19M 83/283/383
<PAGE> 164
PART C
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS
FOR MFS MUNICIPAL BOND FUND
(a) FINANCIAL STATEMENTS INCLUDED IN PART A:
For the eight years ended October 31, 1993, the ten months
ended August 31, 1994 and for the two years in the period
ended August 31, 1996:
Financial Highlights
FINANCIAL STATEMENTS INCLUDED IN PART B:
At August 31, 1996:
Statement of Assets and Liabilities*
Portfolio of Investments*
For the two years in the period ended August 31, 1996:
Statement of Changes in Net Assets*
For the year ended August 31, 1996:
Statement of Operations*
- --------------------------
* Incorporated herein by reference to the Fund's Annual Report to Shareholders
dated August 31, 1996, filed with the SEC via EDGAR on November 7, 1996.
FOR MFS MONEY MARKET FUND AND MFS GOVERNMENT MONEY MARKET FUND
(a) FINANCIAL STATEMENTS INCLUDED IN PART A:
For the eight years ended October 31, 1993, the ten months
ended August 31, 1994 and for the two years in the period
ended August 31, 1996:
Financial Highlights
FINANCIAL STATEMENTS INCLUDED IN PART B:
At August 31, 1996:
Statement of Assets and Liabilities*
Portfolio of Investments*
<PAGE> 165
For the two years in the period ended August 31, 1996:
Statement of Changes in Net Assets*
For the year ended August 31, 1996:
Statement of Operations*
- -----------------------------
* Incorporated herein by reference to the Fund's Annual Report to Shareholders
dated August 31, 1996, filed with the SEC via EDGAR on October 31, 1996.
FOR MFS OTC FUND
(a) FINANCIAL STATEMENTS INCLUDED IN PART A:
For the period from December 1, 1993 to August 31, 1994 and
for the two years in the period ended August 31, 1996:
Financial Highlights
FINANCIAL STATEMENTS INCLUDED IN PART B:
At August 31, 1996:
Statement of Assets and Liabilities*
Portfolio of Investments*
For the two years in the period ended ended August 31,
1996:
Statement of Changes in Net Assets*
For the year ended August 31, 1996:
Statement of Operations*
- -----------------------------
* Incorporated herein by reference to the Fund's Annual Report to Shareholders
dated August 31, 1996, filed with the SEC via EDGAR on November 7, 1996.
(b) EXHIBITS
1 (a) Amended and Restated Declaration of Trust, dated
January 19, 1995. (1)
(b) Amendment to Declaration of Trust, dated June 20,
1996. (9)
2 Amended and Restated By-Laws, dated December 21, 1994.(1)
<PAGE> 166
3 Not Applicable.
4 Form of Share Certificate for Classes of Shares. (8)
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)
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)
<PAGE> 167
(b) Amendment to Exhibit B of the Shareholder Servicing
Agent Agreement, dated September 3, 1996; filed
herewith.
(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 February 21,
1995 . (4)
(f) Dividend Disbursing Agent Agreement, dated February 1,
1986. (3)
10 Consent and Opinion of Counsel filed with
Registrant's 24f-2 Notice for the fiscal year ended
August 31, 1996 on October __, 1996.
11 Consent of Deloitte & Touche, LLP; 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)
(c) Forms for MFS Prototype Paired Defined Contribution
Plans as Trust Agreement, as currently in effect. (5)
15 Master Distribution Plan Pursuant to Rule 12b-1 Under
the Investment Company Act of 1940, effective January
1, 1997.
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)
<PAGE> 168
(c) Schedule for Computation of Performance Quotations for
MFS OTC Fund - Average Annual Total Return. (1)
18 Plan pursuant to Rule 18f-3(d) under the Investment
Company Act of 1940. (8)
27 Financial Data Schedules for each class of each
series; filed herewith.
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. (8) Incorporated by reference to MFS Series Trust I (File
Nos. 33-7638 and 811-4777) Post-Effective Amendment No. 25 filed with the
SEC via EDGAR on August 28, 1996.
(9) Incorporated by reference to Registrant's Post-Effective Amendment No. 29
filed with the SEC on August 28, 1996.
ITEM 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT
Not applicable.
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 43,663
(without par value) (as of November 30, 1996)
<PAGE> 169
FOR MFS GOVERNMENT MONEY MARKET FUND
(1) (2)
TITLE OF CLASS NUMBER OF RECORD HOLDERS
Shares of Beneficial Interest 2,618
(without par value) (as of November 30, 1996)
FOR MFS MUNICIPAL BOND FUND
(1) (2)
TITLE OF CLASS NUMBER OF RECORD HOLDERS
Class A Shares of Beneficial Interest 43,347
(without par value) (as of November 30, 1996)
Class B Shares of Beneficial Interest 2,317
(without par value) (as of November 30, 1996)
FOR MFS OTC FUND
(1) (2)
TITLE OF CLASS NUMBER OF RECORD HOLDERS
Class A Shares of Beneficial Interest 3,571
(without par value) (as of November 30, 1996)
Class B Shares of Beneficial Interest 7,257
(without par value) (as of November 30, 1996)
Class C Shares of Beneficial Interest 687
(without par value) (as of November 30, 1996)
Class P Shares of Beneficial Interest 0
(without par value) (as of November 30, 1996)
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.
<PAGE> 170
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 16 series:
MFS Alabama Municipal Bond Fund, MFS Arkansas Municipal Bond Fund, MFS
California Municipal Bond Fund, MFS Florida Municipal Bond Fund, MFS Georgia
Municipal Bond Fund, MFS Maryland Municipal Bond Fund, MFS Massachusetts
Municipal Bond Fund, MFS Mississippi Municipal Bond Fund, MFS New York Municipal
Bond Fund, MFS North Carolina Municipal Bond Fund, MFS Pennsylvania Municipal
Bond Fund, MFS South Carolina Municipal Bond Fund, MFS Tennessee Municipal Bond
Fund, MFS Virginia Municipal Bond Fund, MFS West Virginia Municipal Bond Fund
and MFS Municipal Income Fund) (the "MFS Funds"). The principal business address
of each of the 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 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.
<PAGE> 171
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 Bermuda and a subsidiary of MFS, whose principal
business address is Cedar House, 41 Cedar Avenue, Hamilton HM12 Bermuda, serves
as investment adviser to and distributor for MFS American Fund (which has five
portfolios: MFS American Funds-U.S. Equity Fund, MFS American Funds-U.S.
Emerging Growth Fund, MFS American Funds-Global Governments Fund, MFS American
Funds - U.S. Dollar Reserve Fund and MFS American 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, MFS Meridian U.S. Equity Fund, MFS Meridian Research Fund and MFS
Emerging Markets Debt Fund (collectively the "MFS Meridian Funds"). Each of the
MFS Meridian Funds is organized as an exempt company under the laws of the
Cayman Islands. The principal business address of each of the MFS Meridian Funds
is P.O. Box 309, Grand Cayman, Cayman Islands, British West Indies.
MFS International (U.K.) Ltd. ("MIL-UK"), a private limited company
registered with the Registrar of Companies for England and Wales whose current
address is 4 John Carpenter Street, London, England ED4Y 0NH, is involved
primarily in marketing and investment research activities with respect to
private clients and the MIL Funds and the MFS Meridian Funds.
MFS Fund Distributors, Inc. ("MFD"), a wholly owned subsidiary of
MFS, serves as distributor for the MFS Funds, MVI, UST and MFSIT.
Clarendon Insurance Agency, Inc. ("CIAI"), a wholly owned subsidiary
of MFS, serves as distributor for certain life insurance and annuity contracts
issued by Sun Life Assurance Company of Canada (U.S.).
MFS Service Center, Inc. ("MFSC"), a wholly owned subsidiary of MFS,
serves as shareholder servicing agent to the MFS Funds, the MFS Closed-End
Funds, MFSIT, MVI and UST.
<PAGE> 172
MFS Institutional Advisors, Inc. ("MIA"), a wholly owned subsidiary
of MFS, provides investment advice to substantial private clients.
MFS Retirement Services, Inc. ("RSI"), a wholly owned subsidiary of
MFS, markets MFS products to retirement plans and provides administrative and
record keeping services for retirement plans.
MFS
The Directors of MFS are A. Keith Brodkin, Jeffrey L. Shames, Arnold
D. Scott, Donald A. Stewart and John D. McNeil. Mr. Brodkin is the Chairman, Mr.
Shames is the President, Mr. Scott is a Senior Executive Vice President and
Secretary, Bruce C. Avery, William S. Harris, William W. Scott, Jr., and
Patricia A. Zlotin are Executive Vice Presidents, Stephen E. Cavan is a Senior
Vice President, General Counsel and an Assistant Secretary, Joseph W. Dello
Russo is a Senior Vice President, Chief Financial Officer and Treasurer, Robert
T. Burns is a Vice President, Associate General Counsel and an Assistant
Secretary of MFS, and Thomas B. Hastings is a Vice President and Assistant
Treasurer of MFS.
MASSACHUSETTS INVESTORS TRUST
MASSACHUSETTS INVESTORS GROWTH STOCK FUND
MFS GROWTH OPPORTUNITIES FUND
MFS GOVERNMENT SECURITIES FUND
MFS SERIES TRUST I
MFS SERIES TRUST V
MFS SERIES TRUST VI
MFS SERIES TRUST X
MFS GOVERNMENT LIMITED MATURITY FUND
A. Keith Brodkin is the Chairman and President, Stephen E. Cavan is
the Secretary, W. Thomas London is the Treasurer, James O. Yost, Vice President
of MFS, is the Assistant Treasurer, James R. Bordewick, Jr., 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.
<PAGE> 173
MFS GOVERNMENT MARKETS INCOME TRUST
MFS INTERMEDIATE INCOME TRUST
A. Keith Brodkin is the Chairman and President, Leslie J. Nanberg,
Senior Vice President of MFS, is a Vice President, Stephen E. Cavan is the
Secretary, W. Thomas London is the Treasurer, James O. Yost is the Assistant
Treasurer, and James R. Bordewick, Jr., is the Assistant Secretary.
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.
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
<PAGE> 174
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, Leslie J. Nanberg
and James T. Swanson are Vice Presidents, Stephen E. Cavan is the Secretary, W.
Thomas London is the Treasurer, James O. Yost, Vice President of MFS, is the
Assistant Treasurer and James R. Bordewick, Jr., is the Assistant Secretary.
MFS SPECIAL VALUE TRUST
A. Keith Brodkin is the Chairman and President, Jeffrey L. Shames
and Robert J. Manning are Vice Presidents, Stephen E. Cavan is the Secretary, W.
Thomas London is the Treasurer, 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
<PAGE> 175
President and an Assistant Clerk, Robert T. Burns is an Assistant Clerk, Joseph
W. Dello Russo is the Treasurer and Thomas B. Hastings is the Assistant
Treasurer.
MIL-UK
A. Keith Brodkin is a Director and the Chairman, Arnold D. Scott,
Jeffrey L. Shames, and James R. Bordewick, Jr., are Directors, Stephen E. Cavan
is a Director and the Secretary, Ziad Malek is the President, James E. Russell
is the Treasurer, and Robert T. Burns is the Assistant Secretary.
MIL FUNDS
A. Keith Brodkin is the Chairman, President and a Director, Richard
B. Bailey, John A. Brindle, Richard W. S. Baker and William F. Waters are
Directors, Stephen E. Cavan is the Secretary, W. Thomas London is the Treasurer,
James O. Yost is the Assistant Treasurer and James R. Bordewick, Jr., is the
Assistant Secretary, and Ziad Malek is a Senior Vice President.
MFS MERIDIAN FUNDS
A. Keith Brodkin is the Chairman, President and a Director, Richard
B. Bailey, John A. Brindle, Richard W. S. Baker, Arnold D. Scott, Jeffrey L.
Shames and William F. Waters are Directors, Stephen E. Cavan is the Secretary,
W. Thomas London is the Treasurer, James R. Bordewick, Jr., is the Assistant
Secretary, James O. Yost is the Assistant Treasurer, and Ziad Malek is a Senior
Vice President.
MFD
A. Keith Brodkin is the Chairman and a Director, Arnold D. Scott and
Jeffrey L. Shames are Directors, William W. Scott, Jr., an Executive Vice
President of MFS, is the President, Stephen E. Cavan is the Secretary, Robert T.
Burns is the Assistant Secretary, Joseph W. Dello Russo is the Treasurer, and
Thomas B. Hastings is the Assistant Treasurer.
CIAI
A. Keith Brodkin is the Chairman and a Director, Arnold D. Scott and
Jeffrey L. Shames are Directors, Cynthia Orcott is President, Bruce C. Avery is
the Vice President, Joseph W. Dello Russo is the Treasurer, Thomas B. Hastings
is the Assistant Treasurer, Stephen E. Cavan is the Secretary, and Robert T.
Burns is the Assistant Secretary.
<PAGE> 176
MFSC
A. Keith Brodkin is the Chairman and a Director, Arnold D. Scott and
Jeffrey L. Shames are Directors, Joseph A. Recomendes, a Senior Vice President
of MFS, is Vice Chairman and a Director, Janet A. Clifford is the Executive Vice
President, Joseph W. Dello Russo is the Treasurer, Thomas B. Hastings is the
Assistant Treasurer, Stephen E. Cavan is the Secretary, and Robert T. Burns is
the Assistant Secretary.
MIA
A. Keith Brodkin is the Chairman and a Director, Jeffrey L. Shames,
and Arnold D. Scott are Directors, Thomas J. Cashman, Jr., is the President and
a Director, Leslie J. Nanberg is a Senior Vice President, a Managing Director
and a Director, George F. Bennett, Carol A. Corley, John A. Gee, Brianne Grady
and Kevin R. Parke are Senior Vice Presidents and Managing Directors, Joseph W.
Dello Russo is the Treasurer, Thomas B. Hastings is the Assistant Treasurer and
Robert T. Burns is the Secretary.
RSI
William W. Scott, Jr. and Bruce C. Avery are Directors, Arnold D.
Scott is the Chairman and a Director, Joseph W. Dello Russo is the Treasurer,
Thomas B. Hastings is the Assistant Treasurer, Stephen E. Cavan is the
Secretary, Robert T. Burns is the Assistant Secretary and Sharon A. Brovelli and
Martin E. Beaulieu are Senior Vice Presidents.
In addition, the following persons, Directors or officers of MFS,
have the affiliations indicated:
A. Keith Brodkin Director, Sun Life Assurance Company of
Canada (U.S.), One Sun Life Executive Park,
Wellesley Hills, Massachusetts
Director, Sun Life Insurance and Annuity
Company of New York, 67 Broad Street, New
York, New York
Donald A. Stewart President and a Director, Sun
Life Assurance Company of Canada, Sun
Life Centre, 150 King Street West,
Toronto, Ontario, Canada (Mr. Stewart is
also an officer and/or Director of
various subsidiaries and affiliates of
Sun Life)
<PAGE> 177
John D. McNeil Chairman, Sun Life Assurance Company of
Canada, Sun Life Centre, 150 King Street
West, Toronto, Ontario, Canada (Mr. McNeil is
also an officer and/or Director of various
subsidiaries and affiliates of Sun Life)
Joseph W. Dello Russo Director of Mutual Fund Operations, The Boston
Company, Exchange Place, Boston,
Massachusetts (until August, 1994)
ITEM 29. DISTRIBUTORS
(a) Reference is hereby made to Item 28 above.
(b) Reference is hereby made to Item 28 above; the principal
business address of each of these persons is 500 Boylston Street, Boston,
Massachusetts 02116.
(c) Not applicable.
ITEM 32. UNDERTAKINGS
(c/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> 178
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 23rd day of December, 1996.
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 23, 1996.
SIGNATURE TITLE
--------- -----
A. KEITH BRODKIN* Chairman, President (Principal Executive
- ------------------------- Officer) and Trustee
A. Keith Brodkin
W. THOMAS LONDON* Treasurer (Principal Financial Officer
- ------------------------- and Principal Accounting Officer)
W. Thomas London
RICHARD B. BAILEY* Trustee
- -------------------------
Richard B. Bailey
PETER G. HARWOOD* Trustee
- -------------------------
Peter G. Harwood
J. ATWOOD IVES* Trustee
- -------------------------
J. Atwood Ives
<PAGE> 179
LAWRENCE T. PERERA* Trustee
- -------------------------
Lawrence T. Perera
WILLIAM J. POORVU* Trustee
- -------------------------
William J. Poorvu
CHARLES W. SCHMIDT* Trustee
- -------------------------
Charles W. Schmidt
ARNOLD D. SCOTT* Trustee
- -------------------------
Arnold D. Scott
JEFFREY L. SHAMES* Trustee
- -------------------------
Jeffrey L. Shames
ELAINE R. SMITH* Trustee
- -------------------------
Elaine R. Smith
DAVID B. STONE* Trustee
- -------------------------
David B. Stone
*By: JAMES R. BORDEWICK, JR.
------------------------------
Name: James R. Bordewick, Jr.
as Attorney-in-fact
Executed by James R. Bordewick, Jr. on
behalf of those indicated pursuant
to a Power of Attorney dated
September 21, 1994.
<PAGE> 180
INDEX TO EXHIBITS
EXHIBIT NO. DESCRIPTION OF EXHIBIT PAGE NO.
- ----------- ---------------------- --------
9 (b) Amendment to Exhibit B of the Shareholder
Servicing Agent Agreement, dated
September 3, 1996.
11 Consent of Deloitte & Touche LLP.
15 Master Distribution Plan Pursuant to Rule 12b-1
Under the Investment Company Act of 1940,
effective January 1, 1997.
27 Financial Data Schedules for each class of each
series.
<PAGE> 1
EXHIBIT 99.9(b)
MFS SERIES TRUST IV
500 BOYLSTON STREET - BOSTON - MASSACHUSETTS - 02116
(617) - 954-5000
September 3, 1996
MFS Service Center, Inc.
500 Boylston Street
Boston, MA 02116
Dear Sir/Madam:
This will confirm our understanding that Exhibit B to the Shareholder
Servicing Agent Agreement between us, dated August 1, 1985, as amended, is
hereby amended, effective immediately, to read in its entirety as set forth on
Attachment 1 hereto.
Please indicate your acceptance of the foregoing by signing below.
Sincerely,
MFS SERIES TRUST IV
By: W. THOMAS LONDON
-----------------------
W. Thomas London
Treasurer
Accepted and Agreed:
MFS SERVICE CENTER, INC.
By: JOSEPH W. DELLO RUSSO
---------------------
Joseph W. Dello Russo
Treasurer
<PAGE> 2
ATTACHMENT 1
September 3, 1996
EXHIBIT B TO THE SHAREHOLDER
SERVICING AGENT AGREEMENT BETWEEN
MFS SERVICE CENTER, INC. ("MFSC")
AND MFS SERIES TRUST IV (THE "FUND")
1. The fees to be paid by the Fund on behalf of its series with respect to Class
A shares of each series of the Fund to MFSC, for MFSC's services as shareholder
servicing agent, shall be:
0.15% of the first $500 million of the assets of the series
attributable to such class;
0.12% of the second $500 million of the assets of the series
attributable to such class;
0.09% over $1 billion of the assets of the series
attributable to such class.
2. The fees to be paid by the Fund on behalf of its series with respect to Class
B shares of each series of the Fund to MFSC, for MFSC's services as shareholder
servicing agent, shall be:
0.22% of the first $500 million of the assets of the series
attributable to such class;
0.18% of the second $500 million of the assets of the series
attributable to such class;
0.13% over $1 billion of the assets of the series
attributable to such class.
3. The fees to be paid by the Fund on behalf of its series with respect to Class
C shares of each series of the Fund to MFSC, for MFSC's services as shareholder
servicing agent, shall be:
0.15% of the first $500 million of the assets of the series
attributable to such class;
0.12% of the second $500 million of the assets of the series
attributable to such class;
0.09% over $1 billion of the assets of the series
attributable to such class.
4. The fees to be paid by the Fund on behalf of its series with respect to Class
P shares of each series of the Fund to MFSC, for MFSC's services as shareholder
servicing agent, shall be:
0.15% of the first $500 million of the assets of the series
attributable to such class;
0.12% of the second $500 million of the assets of the series
attributable to such class;
0.09% over $1 billion of the assets of the series
attributable to such class.
<PAGE> 1
EXHIBIT 99.11
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in this Post-Effective Amendment
No. 30 to Registration Statement No. 2-54607 of MFS Series Trust IV, of our
reports each dated October 4, 1996, appearing in the annual reports to
shareholders for the year ended August 31, 1996, of MFS Money Market Fund and
MFS Government Money Market Fund, MFS Municipal Bond Fund and MFS OTC 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 each Statement of Additional Information, which are
part of such Registration Statement.
DELOITTE & TOUCHE LLP
Boston, Massachusetts
December 24, 1996
<PAGE> 1
EXHIBIT 99.15
MFS FUNDS
MASTER DISTRIBUTION PLAN PURSUANT TO RULE 12B-1 UNDER THE
INVESTMENT COMPANY ACT OF 1940
Effective January 1, 1997
This Distribution Plan (the "Plan") has been adopted by each of the
registered investment companies identified from time to time on Exhibit A hereto
(the "Trust" or "Trusts"), severally and not jointly, pursuant to Rule 12b-1
under the Investment Company Act of 1940, as amended (the "1940 Act"), and sets
forth the material aspects of the financing of the distribution of the classes
of shares representing interests in the same portfolio issued by the Trusts.
WITNESSETH:
WHEREAS, each Trust is engaged in business as an open-end management investment
company and is registered under the 1940 Act, some consisting of multiple
investment portfolios or series, each of which has separate investment
objectives and policies and segregated assets (the "Fund" or "Funds"); and
WHEREAS, each Fund intends to distribute its Shares of Beneficial Interest
(without par value) ("Shares") in accordance with Rule 12b-1 under the 1940 Act,
and desires to adopt this Distribution Plan as a plan of distribution pursuant
to such Rule; and
WHEREAS, each Fund presently offers multiple classes of Shares, some Funds
presently offering only certain classes of Shares to investors;
WHEREAS, each Trust has entered into a distribution agreement (the "Distribution
Agreement") in a form approved by the Board of Trustees of each Trust (the
"Board of Trustees") in the manner specified in Rule 12b-1, with MFS Fund
Distributors, Inc., a Delaware corporation, as distributor (the "Distributor"),
whereby the Distributor provides facilities and personnel and renders services
to each Fund in connection with the offering and distribution of Shares; and
WHEREAS, each Trust recognizes and agrees that the Distributor may retain the
services of firms or individuals to act as dealers (the "Dealers") of the Shares
in connection with the offering of Shares; and
WHEREAS, the Distribution Agreement provides that: (a) a sales charge may be
paid by investors who purchase Shares designated "Class A" and that the
Distributor and Dealers will receive such sales charge as partial compensation
for their services in connection with the sale of Class A Shares, and (b) the
Distributor may (but is not required to) impose certain deferred sales charges
in connection with the repurchase of Shares and the
<PAGE> 2
Distributor may retain or receive from a fund, as the case may be, all such
deferred sales charges; and
WHEREAS, the Board of Trustees of each Trust, in considering whether each Fund
should adopt and implement this Plan, has evaluated such information as it
deemed necessary to an informed determination as to whether this Plan should be
adopted and implemented and has considered such pertinent factors as it deemed
necessary to form the basis for a decision to use assets of a Fund for such
purposes, and has determined that there is a reasonable likelihood that the
adoption and implementation of this Plan will benefit the Fund and its
shareholders; and
NOW THEREFORE, the Board of Trustees of each Trust hereby adopts this Plan for
each Fund as a plan of distribution in accordance with Rule 12b-1, relating to
the classes of Shares each Fund from time to time offers, on the following terms
and conditions:
1. SERVICES PROVIDED AND EXPENSES BORNE BY DISTRIBUTOR.
1.1. As specified in the Distribution Agreement, the Distributor
shall provide facilities, personnel and a program with respect
to the offering and sale of Shares. Among other things, the
Distributor shall be responsible for any commissions payable
to Dealers (including any ongoing maintenance commissions),
all expenses of printing (excluding typesetting) and
distributing prospectuses to prospective shareholders and
providing such other related services as are reasonably
necessary in connection therewith.
1.2. The Distributor shall bear all distribution-related expenses
to the extent specified in the Distribution Agreement in
providing the services described in Section 1.1, including,
without limitation, the compensation of personnel necessary to
provide such services and all costs of travel, office expenses
(including rent and overhead), equipment, printing, delivery
and mailing costs.
2. DISTRIBUTION FEES AND SERVICE FEES.
2.1 Distribution and Service Fees Common to Each Class of Shares.
2.1.1. Service Fees. As partial consideration for the personal
services and/or account maintenance services performed by each
Dealer in the performance of its obligations under its dealer
agreement with the Distributor, each Fund shall pay each
Dealer a service fee periodically at a rate not to exceed
0.25% per annum of the portion of the average daily net assets
of the Fund that is represented by the Class of Shares that
are owned by investors for whom such Dealer is the holder or
dealer of record. That portion of the Fund's average daily net
assets on which the fees payable under this Section 2.1.1.
hereof are calculated may be subject to certain minimum amount
requirements as may be determined, and additional or
- 2 -
<PAGE> 3
different dealer qualification standards that may be
established, from time to time, by the Distributor. The
Distributor shall be entitled to be paid any fees payable
under this Section 2.1.1. hereof with respect to Shares for
which no Dealer of record exists or qualification standards
have not been met as partial consideration for personal
services and/or account maintenance services provided by the
Distributor to those Shares. The service fee payable pursuant
to this Section 2.1.1. may from time to time be paid by a Fund
to the Distributor and the Distributor will then pay these
fees to Dealers on behalf of the Fund or retain them in
accordance with this paragraph.
2.1.2. Distribution Fees. As partial consideration for the
services performed as specified in the Distribution Agreement
and expenses incurred in the performance of its obligations
under the Distribution Agreement, a Fund shall pay the
Distributor a distribution fee periodically at a rate based on
the average daily net assets of a Fund attributable to the
designated Class of Shares. The amount of the distribution fee
paid by the Fund differs with respect to each Class of Shares,
as does the use by the Distributor of such distribution fees.
2.2. Distribution Fees Relating to Class A Shares
2.2.1. It is understood that the Distributor may impose
certain deferred sales charges in connection with the
repurchase of Class A Shares by a Fund and the Distributor may
retain (or receive from the Fund, as the case may be) all such
deferred sales charges. Each Fund listed on Exhibit B hereto
shall pay the Distributor a distribution fee periodically at a
rate of 0.10% per annum of average daily net assets of the
Fund attributable to Class A Shares. Each Fund listed on
Exhibit C hereto shall pay the Distributor a distribution fee
periodically at a rate not to exceed 0.25% per annum of
average daily net assets of the Fund attributable to Class A
Shares. Such payments shall commence following shareholder
approval of the Plan but only upon notification by the
Distributor to the Fund of the commencement of the Plan (the
"Commencement Date").
2.2.2. The aggregate amount of fees and expenses paid pursuant
to Sections 2.1. and 2.2. hereof shall not exceed 0.35% per
annum and 0.50% per annum of the average daily net assets
attributable to Class A Shares of each Fund listed on Exhibit
B hereto and Exhibit C, hereto, respectively. No fees shall be
paid pursuant to Section 2.2.1. hereof or this Section 2.2.2.
to any insurance company which has entered into an agreement
with the Trust on behalf of a Fund and the Distributor that
permits such insurance company to purchase Class A Shares from
a Fund at their net asset value in connection with annuity
agreements issued in connection with the insurance company's
separate accounts.
- 3 -
<PAGE> 4
2.3. Distribution Fees Relating to Class B Shares
2.3.1. It is understood that the Distributor may impose
certain deferred sales charges in connection with the
repurchase of Class B Shares by a Fund and the Distributor may
retain (or receive from the Fund, as the case may be) all such
deferred sales charges. As additional consideration for all
services performed and expenses incurred in the performance of
its obligations under the Distribution Agreement relating to
Class B Shares, a Fund shall pay the Distributor a
distribution fee periodically at a rate not to exceed 0.75%
per annum of the Fund's average daily net assets attributable
to Class B Shares.
2.3.2. Each Fund understands that agreements between the
Distributor and the Dealers may provide for payment of
commissions to Dealers in connection with the sale of Class B
Shares and may provide for a portion (which may be all or
substantially all) of the fees payable by a Fund to the
Distributor under the Distribution Agreement to be paid by the
Distributor to the Dealers in consideration of the Dealer's
services as a dealer of the Class B Shares. Except as
described in Section 2.1., nothing in this Plan shall be
construed as requiring a Fund to make any payment to any
Dealer or to have any obligations to any Dealer in connection
with services as a dealer of Class B Shares. The Distributor
shall agree and undertake that any agreement entered into
between the Distributor and any Dealer shall provide that,
except as provided in Section 2.1., such Dealer shall look
solely to the Distributor for compensation for its services
thereunder and that in no event shall such Dealer seek any
payment from the Fund.
2.4. Distribution Fees Relating to Class C Shares
2.4.1. It is understood that the Distributor may (but is not
required to) impose certain deferred sales charges in
connection with the repurchase of Class C Shares by a Fund and
the Distributor may retain (or receive from the Fund, as the
case may be) all such deferred sales charges. As additional
consideration for all services performed and expenses incurred
in the performance of its obligations under the Distribution
Agreement relating to Class C Shares, a Fund shall pay the
Distributor a distribution fee periodically at a rate not to
exceed 0.75% per annum of the Fund's average daily net assets
attributable to Class C Shares.
2.4.2. Each Fund understands that agreements between the
Distributor and the Dealers may provide for payment of
commissions to Dealers in connection with the sales of Class C
Shares and may provide for a portion (which may be all or
substantially all) of the fees payable by a Fund to the
Distributor under the Distribution Agreement to be paid to the
Dealers in consideration of the Dealer's services as a dealer
of the Class C Shares. Except as described in Section 2.1.,
nothing in this Plan shall be construed
- 4 -
<PAGE> 5
as requiring a Fund to make any payment to any Dealer or to
have any obligations to any Dealer in connection with services
as a dealer of Class C Shares. The Distributor shall agree and
undertake that any agreement entered into between the
Distributor and any Dealer shall provide that, except as
provided in Section 2.1., such Dealer shall look solely to the
Distributor for compensation for its services thereunder and
that in no event shall such Dealer seek any payment from the
Fund.
3. EXPENSES BORNE BY FUND. Each Fund shall pay all fees and expenses of
any independent auditor, legal counsel, investment adviser,
administrator, transfer agent, custodian, shareholder servicing agent,
registrar or dividend disbursing agent of the Fund; expenses of
distributing and redeeming Shares and servicing shareholder accounts;
expenses of preparing, printing and mailing prospectuses, shareholder
reports, notices, proxy statements and reports to governmental officers
and commissions and to shareholders of a Fund, except that the
Distributor shall be responsible for the distribution-related expenses
as provided in Section 1 hereof.
4. ACTION TAKEN BY THE TRUST. Nothing herein contained shall be deemed to
require a Trust to take any action contrary to its Declaration of Trust
or By-laws or any applicable statutory or regulatory requirement to
which it is subject or by which it is bound, or to relieve or deprive
the Board of Trustees of the responsibility for and control of the
conduct of the affairs of a Fund.
5. EFFECTIVENESS OF PLAN. This Plan shall become effective upon (a)
approval by a vote of at least a "majority of the outstanding voting
securities" of each particular class of Shares (unless previously so
approved), and (b) approval by a vote of the Board of Trustees and a
vote of a majority of the Trustees who are not "interested persons" of
the Trust and who have no direct or indirect financial interest in the
operation of the Plan or in any agreement related to the Plan (the
"Qualified Trustees"), such votes to be cast in person at a meeting
called for the purpose of voting on this Plan.
6. DURATION OF PLAN. This Plan shall continue in effect indefinitely;
provided however, that such continuance is "specifically approved at
least annually" by vote of both a majority of the Trustees of the Trust
and a majority of the Qualified Trustees, such votes to be cast in
person at a meeting called for the purpose of voting on the continuance
of this Plan. If such annual approval is not obtained, this Plan, with
respect to the classes of Shares with respect to which such approval
was not obtained, shall expire 12 months after the effective date of
the last approval.
7. AMENDMENTS OF PLAN. This Plan may be amended at any time by the Board
of Trustees; provided that this Plan may not be amended to increase
materially the amount of permitted expenses hereunder without the
approval of holders of a "majority of the outstanding voting
securities" of the affected Class of Shares and
- 5 -
<PAGE> 6
may not be materially amended in any case without a vote of a majority
of both the Trustees and the Qualified Trustees. This Plan may be
terminated at any time by a vote of a majority of the Qualified
Trustees or by a vote of the holders of a "majority of the outstanding
voting securities" of Shares.
8. REVIEW BY BOARD OF TRUSTEES. Each Fund and the Distributor shall
provide the Board of Trustees, and the Board of Trustees shall review,
at least quarterly, a written report of the amounts expended under this
Plan and the purposes for which such expenditures were made.
9. SELECTION AND NOMINATION OF QUALIFIED TRUSTEES. While this Plan is in
effect, the selection and nomination of Qualified Trustees shall be
committed to the discretion of the Trustees who are not "interested
persons" of the Trust.
10. DEFINITIONS; COMPUTATION OF FEES. For the purposes of this Plan, the
terms "interested persons", "majority of the outstanding voting
securities" and "specifically approved at least annually" are used as
defined in the 1940 Act or the rules and regulations adopted
thereunder. All references herein to "Fund" shall be deemed to refer to
a Trust where such Trust does not have multiple portfolios or series.
In addition, for purposes of determining the fees payable to the
Distributor hereunder, (i) the value of a Fund's net assets shall be
computed in the manner specified in each Fund's then-current prospectus
and statement of additional information for computation of the net
asset value of Shares of the Fund and (ii) the net asset value per
Share of a particular class shall reflect any plan adopted under Rule
18f-3 under the 1940 Act.
11. RETENTION OF PLAN RECORDS. Each Trust shall preserve copies of this
Plan, and each agreement related hereto and each report referred to in
Section 8.1 hereof (collectively, the "Records") for a period of six
years from the end of the fiscal year in which such Record was made and
each such record shall be kept in an easily accessible place for the
first two years of said record-keeping.
12. APPLICABLE LAW. This Plan shall be construed in accordance with the
laws of The Commonwealth of Massachusetts and the applicable provisions
of the 1940 Act.
13. SEVERABILITY OF PLAN. If any provision of this Plan shall be held or
made invalid by a court decision, statute, rule or otherwise, the
remainder of the Plan shall not be affected thereby. The provisions of
this Plan are severable with respect to each Class of Shares offered by
a Fund and with respect to each Fund.
14. SCOPE OF TRUST'S OBLIGATION. A copy of the Declaration of Trust of each
Trust is on file with the Secretary of State of The Commonwealth of
Massachusetts. It is acknowledged that the obligations of or arising
out of this Plan are not binding upon any of the Trust's trustees,
officers, employees, agents or shareholders individually, but are
binding solely upon the assets and property
- 6 -
<PAGE> 7
of the Trust in accordance with its proportionate interest hereunder.
If this Plan is adopted by the Trust on behalf of one or more series of
the Trust, it is further acknowledged that the assets and liabilities
of each series of the Trust are separate and distinct and that the
obligations of or arising out of this Plan are binding solely upon the
assets or property of the series on whose behalf the Trust has adopted
this Plan. If the Trust has adopted this Plan on behalf of more than
one series of the Trust, it is also acknowledged that the obligations
of each series hereunder shall be several and not joint, in accordance
with its proportionate interest hereunder, and no series shall be
responsible for the obligations of another series.
- 7 -
<PAGE> 8
EXHIBIT A
DATED: JANUARY 1, 1997
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------
CLASSES OF
SHARES
COVERED BY
RULE 12B-1 DATE RULE 12B-1
FUND PLAN ADOPTED PLAN
- -------------------------------------------------------------------------------------------------
<S> <C> <C>
MFS High Income Fund A,B,C January 1, 1997
- -------------------------------------------------------------------------------------------------
MFS Municipal High Income Fund B January 1, 1997
- -------------------------------------------------------------------------------------------------
MFS Municipal Bond Fund B January 1, 1997
- -------------------------------------------------------------------------------------------------
MFS OTC Fund A,B,C January 1, 1997
- -------------------------------------------------------------------------------------------------
MFS Total Return Fund A,B,C January 1, 1997
- -------------------------------------------------------------------------------------------------
MFS Research Fund A,B,C January 1, 1997
- -------------------------------------------------------------------------------------------------
MFS World Governments Fund A,B,C January 1, 1997
- -------------------------------------------------------------------------------------------------
MFS Value Fund A,B,C January 1, 1997
- -------------------------------------------------------------------------------------------------
MFS Bond Fund A,B,C January 1, 1997
- -------------------------------------------------------------------------------------------------
MFS Limited Maturity Fund A,B,C January 1, 1997
- -------------------------------------------------------------------------------------------------
MFS Municipal Limited Maturity Fund A,B,C January 1, 1997
- -------------------------------------------------------------------------------------------------
MFS Government Mortgage Fund A,B January 1, 1997
- -------------------------------------------------------------------------------------------------
MFS/Foreign & Colonial Emerging Markets Equity Fund A,B,C January 1, 1997
- -------------------------------------------------------------------------------------------------
MFS/Foreign & Colonial International Growth Fund A,B,C January 1, 1997
- -------------------------------------------------------------------------------------------------
MFS/Foreign & Colonial International Growth and A,B,C January 1, 1997
Income Fund
- -------------------------------------------------------------------------------------------------
MFS Municipal Income Fund A,B,C January 1, 1997
- -------------------------------------------------------------------------------------------------
Massachusetts Investors Trust A,B,C January 1, 1997
- -------------------------------------------------------------------------------------------------
Massachusetts Investors Growth Stock Fund A,B January 1, 1997
- -------------------------------------------------------------------------------------------------
MFS Growth Opportunities Fund A,B January 1, 1997
- -------------------------------------------------------------------------------------------------
MFS Government Securities Fund A,B,C January 1, 1997
- -------------------------------------------------------------------------------------------------
</TABLE>
- 8 -
<PAGE> 9
EXHIBIT B
DATED: JANUARY 1, 1997
MFS High Income Fund
MFS OTC Fund
MFS Total Return Fund
MFS Research Fund
MFS World Governments Fund
MFS Value Fund
MFS Bond Fund
MFS Limited Maturity Fund
MFS Municipal Limited Maturity Fund
MFS Government Mortgage Fund
MFS Municipal Income Fund
Massachusetts Investors Growth Stock Fund
MFS Growth Opportunities Fund
MFS Government Securities Fund
- 9 -
<PAGE> 10
EXHIBIT C
DATED: JANUARY 1, 1997
MFS/Foreign & Colonial Emerging Markets Equity Fund
MFS/Foreign & Colonial International Growth Fund
MFS/Foreign & Colonial International Growth & Income Fund
- 10 -
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<NET-INVESTMENT-INCOME> 23365808
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<INTEREST-INCOME> 2243802
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<EXPENSES-NET> (347581)
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<NUMBER-OF-SHARES-SOLD> 476964289
<NUMBER-OF-SHARES-REDEEMED> (474489920)
<SHARES-REINVESTED> 1585296
<NET-CHANGE-IN-ASSETS> 4059665
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<GROSS-EXPENSE> 365367
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<PER-SHARE-NAV-BEGIN> 1.00
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<OVERDIST-NET-GAINS-PRIOR> (23353148)
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<GROSS-EXPENSE> 12403412
<AVERAGE-NET-ASSETS> 1974659960
<PER-SHARE-NAV-BEGIN> 10.83
<PER-SHARE-NII> 0.59
<PER-SHARE-GAIN-APPREC> (0.09)
<PER-SHARE-DIVIDEND> (0.58)
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<PER-SHARE-NAV-END> 10.75
<EXPENSE-RATIO> 0.60
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<INVESTMENTS-AT-VALUE> 1851942864
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<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 1758798334
<SHARES-COMMON-STOCK> 6599993
<SHARES-COMMON-PRIOR> 5174564
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> (1216893)
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> (1640397)
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<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 117460624
<OTHER-INCOME> 0
<EXPENSES-NET> (12121651)
<NET-INVESTMENT-INCOME> 105338973
<REALIZED-GAINS-CURRENT> 24385079
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<NAME> MFS SERIES TRUST IV
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<NAME> MFS SERIES TRUST IV
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<NAME> MFS SERIES TRUST IV
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