<PAGE> 1
As filed with the Securities and Exchange Commission on December 23, 1997
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. 32
AND
REGISTRATION STATEMENT
UNDER
THE INVESTMENT COMPANY ACT OF 1940
AMENDMENT NO. 28
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, 1997 pursuant to paragraph (b)
|_| 60 days after filing pursuant to paragraph (a)(i)
|_| on [date] pursuant to paragraph (a)(i)
|_| 75 days after filing pursuant to paragraph (a)(ii)
|_| on [date] pursuant to paragraph (a)(ii) of rule 485.
If appropriate, check the following box:
|_| this post-effective amendment designates a new effective date for
a previously filed post-effective amendment
<PAGE> 2
MFS SERIES TRUST IV
MFS MONEY MARKET FUND
MFS GOVERNMENT MONEY MARKET FUND
MFS MUNICIPAL BOND FUND
MFS MID CAP GROWTH FUND (FORMERLY 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) Management of the Fund - *
Investment Adviser
(d) Management of the Fund - *
Administrator
(e) Management of the Fund - *
Shareholder Servicing Agent;
Back Cover Page
(f) Expense Summary; Condensed *
Financial Information;
Expenses
(g) Investment Objective and *
Policies - Portfolio Trading
(h) * *
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
(h) * *
7 (a) Front Cover Page; Management *
of the Fund - Distributor;
Back Cover Page
(b) Information Concerning Shares of *
the Fund - Purchases; Information
Concerning Shares of the Fund -
Net Asset Value
(c) Information Concerning Shares of *
the Fund - Purchases; 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 Plan;
Expense Summary; Information
Concerning Shares of the Fund -
Purchases
(f) Information Concerning Shares of *
the Fund - Distribution Plan
</TABLE>
<PAGE> 5
<TABLE>
<CAPTION>
STATEMENT OF
ITEM NUMBER ADDITIONAL
FORM N-1A, PART A PROSPECTUS CAPTION INFORMATION CAPTION
- ----------------- ------------------ -------------------
<S> <C> <C>
(g) Expense Summary; Information *
Concerning Shares of the Fund -
Purchases; Information
Concerning Shares of the Fund -
Exchanges; Information Concerning
Shares of the Fund - Redemptions
and Repurchases; Information
Concerning Shares of the Fund -
Distribution Plan; Information
Concerning Shares of the Fund -
Distributions; Information
Concerning Shares of the Fund -
Performance Information;
Shareholder Services
8 (a) Information Concerning Shares of *
the Fund - Redemptions and
Repurchases; Information
Concerning Shares of the Fund -
Purchases
(b),(c),(d) Information Concerning Shares of *
the Fund - Redemptions and
Repurchases
9 * *
</TABLE>
<PAGE> 6
<TABLE>
<CAPTION>
STATEMENT OF
ITEM NUMBER ADDITIONAL
FORM N-1A, PART A PROSPECTUS CAPTION INFORMATION CAPTION
- ----------------- ------------------ -------------------
<S> <C> <C>
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;
Trustee Compensation Table
15 (a) * *
(b),(c) * Management of the Fund -
Trustees and Officers
16 (a) Management of the Fund - Management of the Fund -
Investment Adviser Investment Adviser;
Management of the Fund -
Trustees and Officers
(b) Management of the Fund - Management of the Fund -
Investment Adviser Investment Adviser
(c) * *
(d) * Management of the Fund -
Investment Adviser;
Administrator
(e) * Portfolio Transactions and
Brokerage Commissions
(f) Information Concerning Shares Distribution Plan
of the Fund - Distribution
Plan
</TABLE>
<PAGE> 7
<TABLE>
<CAPTION>
STATEMENT OF
ITEM NUMBER ADDITIONAL
FORM N-1A, PART A 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 Plan
(c) * *
22 (a) * *
(b) * Determination of Net Asset
Value and Performance;
Appendix A
</TABLE>
<PAGE> 8
<TABLE>
<CAPTION>
STATEMENT OF
ITEM NUMBER ADDITIONAL
FORM N-1A, PART A PROSPECTUS CAPTION INFORMATION CAPTION
- ----------------- ------------------ -------------------
<S> <C> <C>
23 * Independent Auditors and
Financial Statements
</TABLE>
- ------------------------
* Not Applicable
** Contained in Annual Report
<PAGE> 9
MFS(R) MONEY MARKET FUND
MFS(R) GOVERNMENT MONEY PROSPECTUS
MARKET FUND JANUARY 1, 1998
(Members of the MFS Family of Funds(R)) SHARES OF BENEFICIAL INTEREST
- --------------------------------------------------------------------------------
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").
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.
(continued on next page)
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.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
INVESTORS SHOULD READ THIS PROSPECTUS AND RETAIN IT FOR FUTURE REFERENCE.
<PAGE> 10
(continued from previous page)
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, 1998, 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 (http://www.sec.gov) that contains the SAI, materials that
are incorporated by reference into this Prospectus and the SAI, and other
information regarding the Funds. This Prospectus is available on the Adviser's
Internet World Wide Web site at http://www.mfs.com.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
1. Expense Summary............................................. 3
2. Condensed Financial Information............................. 4
3. The Funds................................................... 8
4. Investment Objective and Policies........................... 8
5. Management of the Funds..................................... 10
6. Information Concerning Shares of the Funds.................. 11
Purchases................................................. 11
Exchanges................................................. 13
Redemptions............................................... 14
Determination of Net Asset Value.......................... 16
Distributions............................................. 17
Tax Status................................................ 17
Description of Shares, Voting Rights and Liabilities...... 18
Performance Information................................... 18
7. Shareholder Services........................................ 19
Appendix A.................................................. A-1
</TABLE>
2
<PAGE> 11
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% 0.45%
Other Expenses(2)..................... 0.32% 0.42%
--- ---
Total Operating Expenses.............. 0.80% 0.87%
</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
An investor would pay the following dollar amounts of expenses on a hypothetical
$1,000 investment in a Fund, assuming (1) a 5% annual return and (2) redemption
at the end of each of the time periods indicated:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
MFS MONEY MARKET
FUND $8 $26 $44 $ 99
MFS GOVERNMENT
MONEY MARKET FUND $9 $28 $48 $107
</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.
3
<PAGE> 12
2. 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 MONEY MARKET FUND
<TABLE>
<CAPTION>
TEN MONTHS
YEAR ENDED AUGUST 31, ENDED
------------------------------ AUGUST 31,
1997 1996 1995 1994
-------- -------- -------- ----------
<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..................... $ 0.05 $ 0.05 $ 0.05 $ 0.02
------- ------- ------- -------
Less distributions declared to shareholders
from net investment income.................. $ (0.05) $ (0.05) $ (0.05) $ (0.02)
------- ------- ------- -------
Net asset value -- end of period.............. $ 1.00 $ 1.00 $ 1.00 $ 1.00
======= ======= ======= =======
Total return.................................. 4.61% 4.86% 5.04% 2.91%+
------- ------- ------- -------
Ratios (to average net assets)/Supplemental
data:
Expenses##................................ 0.80% 0.79% 0.76% 0.78%+
------- ------- ------- -------
Net investment income..................... 4.71% 4.78% 4.92% 2.95%+
------- ------- ------- -------
Net assets at end of period (000 omitted)..... $634,240 $644,205 $410,798 $435,780
------- ------- ------- -------
</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>
4
<PAGE> 13
FINANCIAL HIGHLIGHTS
MFS MONEY MARKET FUND
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
--------------------------------------------------------------------
1993 1992 1991 1990 1989 1988 1987
-------- -------- -------- -------- -------- -------- --------
<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.............. $ 0.02 $ 0.03 $ 0.06 $ 0.07 $ 0.08 $ 0.07 $ 0.06
------- ------- ------- ------- ------- ------- -------
Less distributions
declared to shareholders
from net investment
income.................. $ (0.02) $ (0.03) $ (0.06) $ (0.07) $ (0.08) $ (0.07) $ (0.06)
------- ------- ------- ------- ------- ------- -------
Net asset value -- end of
period.................. $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
======= ======= ======= ======= ======= ======= =======
Total return.............. 2.39% 3.35% 6.07% 7.99% 8.84% 7.12% 6.06%
------- ------- ------- ------- ------- ------- -------
Ratios (to average net
assets)/Supplemental
data:
Expenses##............ 0.83% 0.87% 0.82% 0.76% 0.83% 0.83% 0.82%
------- ------- ------- ------- ------- ------- -------
Net investment
income.............. 2.39% 3.36% 5.94% 7.60% 8.45% 6.72% 5.77%
------- ------- ------- ------- ------- ------- -------
Net assets at end of
period (000 omitted).... $350,316 $448,825 $541,945 $677,164 $676,382 $664,895 $716,528
------- ------- ------- ------- ------- ------- -------
</TABLE>
- ---------------
<TABLE>
<C> <S>
## For fiscal years ending after September 1, 1995, the Fund's expenses are
calculated without reduction for fees paid indirectly.
</TABLE>
5
<PAGE> 14
FINANCIAL HIGHLIGHTS
MFS GOVERNMENT MONEY MARKET FUND
<TABLE>
<CAPTION>
TEN MONTHS
YEAR ENDED AUGUST 31, ENDED
------------------------------- AUGUST 31,
1997 1996 1995 1994
------- ------- ------- ----------
<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...................... $ 0.05 $ 0.05 $ 0.05 $ 0.02
-------- -------- -------- --------
Less distributions declared to shareholders
from net investment income................... $ (0.05) $ (0.05) $ (0.05) $ (0.02)
-------- -------- -------- --------
Net asset value -- end of period............... $ 1.00 $ 1.00 $ 1.00 $ 1.00
======== ======== ======== ========
Total return................................... 4.81% 4.73% 4.92% 2.64%+
-------- -------- -------- --------
Ratios (to average net assets)/Supplemental
data:
Expenses##................................. 0.85% 0.89% 0.84% 1.05%+
-------- -------- -------- --------
Net investment income...................... 4.02% 4.64% 4.82% 2.64%+
-------- -------- -------- --------
Net assets at end of period (000 omitted)...... $38,387 $42,499 $38,440 $ 38,347
-------- -------- -------- --------
</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>
6
<PAGE> 15
FINANCIAL HIGHLIGHTS
MFS GOVERNMENT MONEY MARKET FUND
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
-------------------------------------------------------------------
1993 1992 1991 1990 1989 1988 1987
------- ------- ------- ------- ------- ------- -------
<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.............. $ 0.02 $ 0.03 $ 0.06 $ 0.07 $ 0.08 $ 0.06 $ 0.05
-------- -------- -------- -------- -------- -------- --------
Less distributions
declared to shareholders
from net investment
income.................. $ (0.02) $ (0.03) $ (0.06) $ (0.07) $ (0.08) $ (0.06) $ (0.05)
-------- -------- -------- -------- -------- -------- --------
Net asset value -- end of
period.................. $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
======== ======== ======== ======== ======== ======== ========
Total return.............. 2.33% 3.27% 5.68% 7.55% 8.61% 6.47% 5.73%
-------- -------- -------- -------- -------- -------- --------
Ratios (to average net
assets)/Supplemental
data:
Expenses##............ 0.99% 0.87% 0.83% 0.80% 0.85% 0.74% 0.59%
-------- -------- -------- -------- -------- -------- --------
Net investment
income.............. 2.20% 3.28% 5.53% 7.34% 8.29% 6.29% 5.63%
-------- -------- -------- -------- -------- -------- --------
Net assets at end of
period (000 omitted).... $35,576 $47,629 $50,655 $53,701 $51,619 $50,343 $59,875
-------- -------- -------- -------- -------- -------- --------
</TABLE>
- ---------------
<TABLE>
<C> <S>
## For fiscal years ending after September 1, 1995, the Fund's expenses are
calculated without reduction for fees paid indirectly.
</TABLE>
7
<PAGE> 16
3. THE FUND
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 board 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.
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
8
<PAGE> 17
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 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. Except with respect to each Fund's policy on
borrowing, each Fund'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.
9
<PAGE> 18
5. MANAGEMENT OF THE FUNDS
INVESTMENT ADVISER -- MFS manages each Fund pursuant to an Investment Advisory
Agreement dated August 1, 1993 (the "Advisory Agreement"). Under the Advisory
Agreement, the Adviser provides each Fund with overall investment advisory
services. 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, 1997, MFS received fees
under the Advisory Agreement of $2,793,401 and $188,007 from the MFS Money
Market Fund and MFS Government Money Market Fund, respectively, the total of
which is equivalent, on an annualized basis, to 0.48% and 0.45% of the MFS Money
Market Fund's and MFS Government Money Market Fund's average daily net assets,
respectively.
MFS also serves as investment adviser to the other funds in the MFS Family of
Funds (the "MFS Funds"), to MFS(R) Municipal Income Trust, MFS Multimarket
Income Trust, MFS Government Markets Income Trust, MFS Intermediate Income
Trust, MFS Charter Income Trust, MFS Special Value Trust, MFS Institutional
Trust, MFS Variable Insurance Trust, MFS/Sun Life Series Trust and seven
variable accounts, each of which is a registered investment company established
by Sun Life Assurance Company of Canada (U.S.) ("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 $69.4 billion on behalf of approximately 2.7 million investor
accounts as of November 30, 1997. As of such date, the MFS organization managed
approximately $20.1 billion of assets in fixed income securities and
approximately $44.2 billion of assets in equity securities. MFS is a subsidiary
of Sun Life of Canada (U.S.), which is a subsidiary of Sun Life of Canada (U.S.)
Holdings, Inc., 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.,
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Robert A. Dennis, Geoffrey L. Kurinsky, Ellen M. Moynihan and Mark E. Bradley,
all of whom are officers of MFS, are officers of the Trust.
In certain instances there may be securities which are suitable for the Fund's
portfolio as well as for portfolios of other clients of MFS. Some simultaneous
transactions are inevitable when several clients receive investment advice from
MFS, particularly when the same security is suitable for more than one client.
While in some cases this arrangement could have a detrimental effect on the
price or availability of the security as far as the Fund is concerned, in other
cases, it may produce increased investment opportunities for the Fund.
ADMINISTRATOR -- MFS provides each Fund with certain financial, legal,
compliance, shareholder communications and other administrative services
pursuant to a Master Administrative Services Agreement dated March 1, 1997, as
amended. Under this Agreement, each Fund pays MFS an administrative fee of up to
0.015% per annum of the Fund's average daily net assets. This fee reimburses MFS
for a portion of the costs it incurs to provide such services.
DISTRIBUTOR -- MFD, a wholly owned subsidiary of MFS, is the distributor of 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.
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Each shareholder may purchase additional shares of any MFS Fund by telephoning
the Shareholder Servicing Agent toll-free at (800) 225-2606. The minimum
purchase amount is $50 and the maximum purchase amount is $100,000. Shareholders
wishing to avail themselves of this telephone purchase privilege must so elect
on their Account Application and designate thereon a bank and account number
from which purchases will be made. If a telephone purchase request is received
by the Shareholder Servicing Agent on any business day prior to the close of
regular trading on the Exchange (generally, 4:00 p.m., Eastern time), the
purchase will occur at the closing net asset value of the shares purchased on
that day. The Shareholder Servicing Agent may be liable for any losses resulting
from unauthorized telephone transactions if it does not follow reasonable
procedures designed to verify the identity of the caller. The Shareholder
Servicing Agent will request personal or other information from the caller, and
will normally also record calls. Shareholders should verify the accuracy of
confirmation statements immediately after their receipt.
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. 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.
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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 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
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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
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<PAGE> 23
the account on the day the check clears. There is presently no charge to the
shareholder for the maintenance of this special checking account or for the
clearance of any checks, but the Trust reserves the right to impose such charges
or to modify or terminate the redemption by check privilege at any time.
B. BY MAIL -- Each shareholder has the right to redeem all or any portion of
the shares in his account by mailing or delivering to the Shareholder Servicing
Agent (see back cover for address) a stock power, together with a written
request for redemption, or a letter of instructions, all in "good order" for
transfer. "Good order" generally means that a stock power, written request for
redemption, or letter of instruction must be endorsed by the record owner(s)
exactly as the shares are registered and the signature(s) must be guaranteed in
the manner set forth below under the caption "Signature Guarantee" below. In
addition, in some cases, "good order" may require the furnishing of additional
documents.
C. BY TELEPHONE -- Each shareholder may redeem an amount from his account by
telephoning the Shareholder Servicing Agent toll-free at (800) 225-2606.
Shareholders wishing to avail themselves of this telephone redemption privilege
must so elect on their Account Application Form, designate thereon a commercial
bank and account number to receive the proceeds of such redemption, and sign the
Account Application Form with the signature(s) guaranteed in the manner set
forth below under the caption "Signature Guarantee" below. The proceeds of such
a redemption are mailed by check to the designated account, without charge. As a
special service, investors may arrange to have proceeds in excess of $1,000
wired in federal funds to the designated account. Subject to the conditions
described in this section, proceeds of a redemption are normally mailed or wired
on the next business day following the date of receipt of the order for
redemption. During times of drastic economic or market changes, a shareholder
may experience delays in reaching the above telephone number. This redemption
privilege (or any aspect of it) may be changed or discontinued without notice to
shareholders. The Shareholder Servicing Agent will not be responsible for any
losses resulting from unauthorized telephone transactions if it follows
reasonable procedures designed to verify the identity of the caller. The
Shareholder Servicing Agent will request personal or other information from the
caller, and will normally also record calls. Shareholders should verify the
accuracy of confirmation statements immediately after their receipt.
D. GENERA -- 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 or exchanges,
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
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<PAGE> 24
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 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.
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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"). Because each Fund intends to distribute all of
its net investment income and net realized capital gains 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 distribution is paid in cash or reinvested 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 advisers in this
regard. Shortly after the end of each calendar year, each shareholder will be
sent a statement setting forth the federal income tax status of all 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 (as
well as the rate category or categories under which such gain is taxable), the
portion, if any, representing a return of capital (which is 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% (or any
lower rate permitted under an applicable treaty) on taxable dividends and other
payments that are subject to such withholding and that are made to persons who
are neither citizens nor residents of the U.S. 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
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<PAGE> 26
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 Funds' 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 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.
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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.
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.
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.
19
<PAGE> 28
DOLLAR COST AVERAGING PROGRAMS
AUTOMATIC INVESTMENT PLAN: Cash investments of $50 or more may be made
through a shareholder's checking account on any day of the month. If the
shareholder does not specify a date, the investment will automatically occur on
the first business day of the month. Required forms are available from the
Shareholder Servicing Agent or investment dealers.
AUTOMATIC EXCHANGE PLAN: Shareholders having account balances of at least
$5,000 in any MFS Fund, may exchange their shares for the same class of shares
of other MFS Funds 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.
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, 1998, 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.
20
<PAGE> 29
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> 30
THE MFS FAMILY OF FUNDS(R) AMERICA'S OLDEST MUTUAL FUND GROUP
The members of the MFS Family of Funds are grouped below according to the types
of securities in their portfolios. For free prospectuses containing more
complete information, including the exchange privilege and all charges and
expenses, please contact your financial adviser or call MFS at 1-800-225-2606
any business day from 8 a.m. to 8 p.m. Eastern time. This material should be
read carefully before investing or sending money.
STOCK
- --------------------------------------------------------------------------------
Massachusetts Investors Trust
Massachusetts Investors Growth Stock Fund
MFS(R) Emerging Growth Fund
MFS(R) Equity Income Fund
MFS(R) Growth Opportunities Fund
MFS(R) Large Cap Growth Fund (1)
MFS(R) Managed Sectors Fund
MFS(R) Mid Cap Growth Fund (2)
MFS(R) New Discovery Fund
MFS(R) Research Fund
MFS(R) Research Growth and Income Fund
MFS(R) Strategic Growth Fund
MFS(R) Union Standard(R) Equity 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) International Growth Fund (3)
MFS(R) International Growth and
Income Fund (4)
MFS(R) World Asset Allocation Fund sm
MFS(R) World Equity Fund
MFS(R) World Governments Fund
MFS(R) World Growth Fund
MFS(R) World Total Return Fund
NATIONAL TAX-FREE BOND
- --------------------------------------------------------------------------------
MFS(R) Municipal Bond Fund
MFS(R) Municipal High Income Fund
MFS(R) Municipal Income Fund
STATE TAX-FREE BOND
- --------------------------------------------------------------------------------
Alabama, Arkansas, California, Florida, Georgia, Maryland, Massachusetts,
Mississippi, New York, North Carolina, Pennsylvania, South Carolina,
Tennessee, Virginia, West Virginia
MONEY MARKET
- --------------------------------------------------------------------------------
MFS(R) Cash Reserve Fund
MFS(R) Government Money Market Fund
MFS(R) Money Market Fund
(1) Formerly MFS(R) Capital Growth Fund.
(2) Formerly MFS(R) OTC Fund.
(3) Formerly MFS(R)/Foreign & Colonial International Growth Fund.
(4) Formerly MFS(R)/Foreign & Colonial International Growth and Income Fund.
<PAGE> 31
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
<PAGE> 32
[MFS LOGO]
MFS(R) MONEY MARKET FUND STATEMENT OF
MFS(R) GOVERNMENT MONEY ADDITIONAL INFORMATION
MARKET FUND
(Members of the MFS Family of Funds(R))
January 1, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
1. Definitions........................................................................... 2
2. Investment Objective, Policies and Restrictions....................................... 2
3. Management of the Funds............................................................... 3
Trustees........................................................................... 3
Officers........................................................................... 4
Trustee Compensation Table......................................................... 5
Investment Adviser................................................................. 7
Administrator...................................................................... 8
Distributor........................................................................ 8
Custodian.......................................................................... 8
Shareholder Servicing Agent........................................................ 8
4. Portfolio Transactions and Brokerage Commissions...................................... 8
5. Shareholder Services.................................................................. 9
Investment and Withdrawal Programs................................................. 9
Exchange Privilege................................................................. 10
Tax-Deferred Retirement Plans...................................................... 11
6. Tax Status............................................................................ 11
7. Description of Shares, Voting Rights and Liabilities.................................. 12
8. Net Income and Distributions.......................................................... 12
9. Performance Information............................................................... 13
10. Independent Auditors and Financial Statements......................................... 14
Appendix A (Commercial Paper and Bond Ratings)........................................ A-1
</TABLE>
MFS MONEY MARKET FUND
MFS GOVERNMENT MONEY MARKET FUND
Series of MFS Series Trust IV
500 Boylston Street, Boston, Massachusetts 02116
(617) 954-5000
This Statement of Additional Information, 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, 1998. This SAI should be read in conjunction with the Prospectus, a
copy of which may be obtained without charge by contacting the Shareholder
Servicing Agent (see last page for address and phone number).
THIS SAI IS NOT A PROSPECTUS AND IS AUTHORIZED FOR DISTRIBUTION TO PROSPECTIVE
INVESTORS ONLY IF PRECEDED OR ACCOMPANIED BY A CURRENT PROSPECTUS.
<PAGE> 33
1. DEFINITIONS
<TABLE>
<S> <C> <C>
"Trust" -- MFS Series Trust IV, a
Massachusetts business
trust. The Trust was known
as Massachusetts Cash
Management Trust prior to
August 27, 1993.
"Money Market Funds" -- The MFS Money Market Fund
or "Funds" and the MFS Government
Money Market Fund, both of
which are diversified
series of the Trust.
"MFS" or the "Adviser" -- Massachusetts Financial
Services Company, a
Delaware corporation.
"Prospectus" -- The Prospectus of the
Funds, dated January 1,
1998, as amended or
supplemented from time to
time.
</TABLE>
2. INVESTMENT OBJECTIVE, POLICIES AND RESTRICTIONS
INVESTMENT OBJECTIVE. The investment objective of each Money Market Fund is to
seek as high a level of current income as is considered consistent with the
preservation of capital and liquidity. The investment objective of a Fund will
not be changed without first obtaining shareholder approval from the
shareholders of that Fund. Any investment involves risk and there can be no
assurance that either Money Market Fund will achieve its investment objective.
INVESTMENT POLICIES. The investment policies of the Funds are described in the
Prospectus. In addition, certain of the Funds' investment policies are described
in greater detail below.
REPURCHASE AGREEMENTS: Each Fund may enter into repurchase agreements with
sellers who are member firms (or a subsidiary thereof) of the New York Stock
Exchange (the "Exchange") or members of the Federal Reserve System, recognized
primary U.S. Government securities dealers or institutions which the Adviser has
determined to be of comparable creditworthiness. The securities that a Fund
purchases and holds through its agent are U.S. Government securities, the values
of which are equal to or greater than the repurchase price agreed to be paid by
the seller. The repurchase price may be higher than the purchase price, the
difference being income to the Fund, or the purchase and repurchase prices may
be the same, with interest at a standard rate due to the Fund together with the
repurchase price on repurchase. In either case, the income to the Fund is
unrelated to the interest rate on the U.S. Government securities.
The repurchase agreement provides that in the event the seller fails to pay the
price agreed upon on the agreed upon delivery date or upon demand, as the case
may be, the applicable Fund will have the right to liquidate the securities. If,
at the time the Fund is contractually entitled to exercise its right to
liquidate the securities, the seller is subject to a proceeding under the
bankruptcy laws or its assets are otherwise subject to a stay order, the series'
exercise of its right to liquidate the securities may be delayed and result in
certain losses and costs to the Fund. The Trust has adopted and follows
procedures which are intended to minimize the risk 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> 34
(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.
As a matter of non-fundamental policy, neither Fund may invest 25% or more of
the market value of its total assets in securities of issuers in any one
industry.
Except with respect to Investment Restriction (1), 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 (born 8/4/35)
Massachusetts Financial Services Company, Chairman and Director
RICHARD B. BAILEY* (born 9/14/26)
Private Investor; Massachusetts Financial Services Company, former Chairman
(prior to September 30, 1991); Cambridge Bancorp, Director; Cambridge Trust
Company, Director
PETER G. HARWOOD (born 4/3/26)
Private Investor
Address: 211 Lindsay Pond Road, Concord, Massachusetts
J. ATWOOD IVES (born 5/1/36)
Eastern Enterprises (diversified services company), Chairman and Chief Executive
Officer
Address: 9 Riverside Road, Weston, Massachusetts
LAWRENCE T. PERERA (born 6/23/35)
Hemenway & Barnes (attorneys), Partner
Address: 60 State Street, Boston, Massachusetts
WILLIAM J. POORVU (born 4/10/35)
Harvard University Graduate School of Business Administration, Adjunct
Professor; CBL & Associates Properties, Inc. (a real estate investment trust),
Director; The Baupost Fund (a registered investment company), Vice Chairman
(since November 1993), Chairman and Trustee (prior to November 1993)
Address: Harvard Business School, Soldiers Field Road, Cambridge, Massachusetts
CHARLES W. SCHMIDT (born 3/18/28)
Private Investor; OHM Corporation, Director; Mohawk Paper Company, Director
Address: 30 Colpitts Road, Weston, Massachusetts
ARNOLD D. SCOTT* (born 12/16/42)
Massachusetts Financial Services Company, Senior Executive Vice President,
Secretary and Director
3
<PAGE> 35
JEFFREY L. SHAMES* (born 6/2/55)
Massachusetts Financial Services Company, President and Director
ELAINE R. SMITH (born 4/25/46)
Independent Consultant; Brigham and Women's Hospital, Executive Vice President
and Chief Operating Officer (prior to September 1992)
Address: Weston, Massachusetts
DAVID B. STONE (born 9/2/27)
North American Management Corp. (investment adviser), Chairman and Director;
Eastern Enterprises, Trustee
Address: 10 Post Office Square, Suite 300, Boston, Massachusetts
OFFICERS
W. THOMAS LONDON,* Treasurer (born 3/1/44)
Massachusetts Financial Services Company, Senior Vice President
STEPHEN E. CAVAN,* Secretary and Clerk (born 11/6/53)
Massachusetts Financial Services Company, Senior Vice President, General Counsel
and Assistant Secretary
JAMES R. BORDEWICK, JR.,* Assistant Secretary (born 3/6/59)
Massachusetts Financial Services Company, Senior Vice President and Associate
General Counsel
ROBERT A. DENNIS,* Vice President (born 12/12/48)
Massachusetts Financial Services Company, Senior Vice President
GEOFFREY L. KURINSKY,* Vice President (born 7/7/53)
Massachusetts Financial Services Company, Senior Vice President
JAMES O. YOST,* Assistant Treasurer (born 6/12/60)
Massachusetts Financial Services Company, Vice President
MARK E. BRADLEY,* Assistant Treasurer (born 11/23/59)
Massachusetts Financial Services Company, Vice President (since March 1997);
Putnam Investments, Vice President (from September 1994 until March 1997);
Ernest & Young, Senior Tax Manager (until September 1994)
ELLEN M. MOYNIHAN,* Assistant Treasurer (born 11/13/57)
Massachusetts Financial Services Company, Vice President (since September 1996);
Deloitte & Touche LLP, Senior Manager (until September 1996)
- ---------------
*"Interested persons" (as defined in the Investment Company Act of 1940, as
amended (the "1940 Act")) of the Adviser, whose address is 500 Boylston Street,
Boston, Massachusetts 02116.
Each Trustee and officer holds comparable positions with certain MFS affiliates
or with certain other funds of which MFS or a subsidiary of MFS is the
investment adviser or distributor. 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 the compensation of non-interested Trustees and Mr. Bailey (who
currently receive a fee of $2,330 and $170 per year plus $130 and $5 per meeting
and $90 and $10 per committee meeting attended, from the MFS Money Market Fund
and the MFS Government Money Market Fund, respectively, together with such
Trustee's out-of-pocket expenses) and has adopted a retirement plan for
non-interested Trustees and Mr. Bailey. Under this plan, a Trustee will retire
upon reaching age 73 and if the Trustee has completed at least 5 years of
service, he would be entitled to annual payments during his lifetime of up to
50% of such Trustee's average annual compensation (based on the three years
prior to his retirement) depending on his length of service. A Trustee may also
retire prior to age 73 and receive reduced payments if he has completed at least
5 years of service. Under the plan, a Trustee (or his beneficiaries) will also
receive benefits for a period of time in the event the Trustee is disabled or
dies. These benefits will also be based on the Trustee's average annual
compensation and length of service. There is no retirement plan provided by the
Trust for Messrs. Brodkin, Scott and Shames. The Trust will accrue its allocable
share of compensation expenses each year to cover current years service and
amortize past service costs.
4
<PAGE> 36
TRUSTEE COMPENSATION
MFS MONEY MARKET FUND
<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.................................... $3,517 $ 717 8 $ 247,168
A. Keith Brodkin..................................... 0 0 N/A 0
Peter G. Harwood..................................... 3,657 527 5 105,995
J. Atwood Ives....................................... 3,517 748 17 98,750
Lawrence T. Perera................................... 3,877 1,216 26 98,310
William Poorvu....................................... 3,587 1,307 25 102,840
Charles W. Schmidt................................... 3,657 1,268 20 105,995
Arnold D. Scott...................................... 0 0 N/A 0
Jeffrey L. Shames.................................... 0 0 N/A 0
Elaine R. Smith...................................... 3,977 761 27 105,995
David B. Stone....................................... 3,747 1,203 12 108,710
</TABLE>
- ---------------
(1) For fiscal year ended August 31, 1997.
(2) Based on normal retirement age of 73. See the table below for the estimated
annual benefits payable upon retirement by the Fund to a Trustee based on
his or her estimated credited years of service.
(3) For calendar year 1996. All Trustees receiving compensation served as
Trustees of 23 funds within the MFS fund complex (having aggregate net
assets at December 31, 1996, of approximately $21.2 billion) except Mr.
Bailey, who served as Trustee of 81 funds within the MFS fund complex
(having aggregate net assets at December 31, 1996, of approximately $38.5
billion).
ESTIMATED ANNUAL BENEFITS PAYABLE BY FUND UPON RETIREMENT(4)
<TABLE>
<CAPTION>
YEARS OF SERVICE
AVERAGE -----------------------------------------------
TRUSTEE FEES 3 5 7 10 OR MORE
------------ ---- ------ ------ ----------
<S> <C> <C> <C> <C>
$3,165 $475 $ 791 $1,108 $1,583
3,407 511 852 1,193 $1,704
3,649 547 912 1,277 $1,825
3,891 584 973 1,362 $1,945
4,133 620 1,033 1,446 $2,066
4,375 656 1,094 1,531 $2,187
</TABLE>
- ---------------
(4) Other funds in the MFS fund complex provide similar retirement benefits to
the Trustees.
5
<PAGE> 37
TRUSTEE COMPENSATION
MFS GOVERNMENT MONEY MARKET FUND
<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.................................... $395 $121 $ 8 $ 247,168
A. Keith Brodkin..................................... 0 0 N/A 0
Peter G. Harwood..................................... 425 91 5 105,995
J. Atwood Ives....................................... 395 126 17 98,750
Lawrence T. Perera................................... 435 207 26 98,310
William Poorvu....................................... 405 224 25 102,840
Charles W. Schmidt................................... 425 220 19 105,995
Arnold D. Scott...................................... 0 0 N/A 0
Jeffrey L. Shames.................................... 0 0 N/A 0
Elaine R. Smith...................................... 470 130 27 105,995
David B. Stone....................................... 435 186 11 108,710
</TABLE>
- ---------------
(1) For fiscal year ended August 31, 1997.
(2) Based on normal retirement age of 73. See the table below for the estimated
annual benefits payable upon retirement by the Fund to a Trustee based on
his or her estimated credited years of service.
(3) For calendar year 1996. All Trustees receiving compensation served as
Trustees of 23 funds within the MFS fund complex (having aggregate net
assets at December 31, 1996, of approximately $21.2 billion) except Mr.
Bailey, who served as Trustee of 81 funds within the MFS fund complex
(having aggregate net assets at December 31, 1996, of approximately $38.5
billion.
ESTIMATED ANNUAL BENEFITS PAYABLE BY FUND UPON RETIREMENT(4)
<TABLE>
<CAPTION>
YEARS OF SERVICE
AVERAGE ------------------------------------------
TRUSTEE FEES 3 5 7 10 OR MORE
------------ --- ---- ---- ----------
<S> <C> <C> <C> <C>
$356 $53 $ 89 $124 $178
388 58 97 136 $194
420 63 105 147 $210
452 68 113 158 $226
485 73 121 170 $242
517 78 129 181 $259
</TABLE>
- ---------------
(4) Other funds in the MFS fund complex provide similar retirement benefits to
the Trustees.
6
<PAGE> 38
As of November 30, 1997, all Trustees and officers as a group owned less than 1%
of the shares of the MFS Money Market Fund (not including 8,282,625 shares
representing approximately 1.29% 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 3.34% of the shares of the MFS Government Money
Market Fund (not including 2,832,864 shares representing approximately 5.25% 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, 1997, Nationwide Life Insurance Company, Dept. 1748, P.O. Box
16786, Columbus, OH 43216-6786, was the record holder of approximately 6.44% of
the outstanding shares of the MFS Money Market Fund, which it held for the
benefit of its policy holders. As of November 30, 1997, Paine Webber, for the
benefit of the Glass Family Charitable Remainder Unitrust, 68 Lyman Road,
Northampton, MA 01060-4228, was the record owner of approximately 5.96% of the
outstanding shares of the MFS Government Money Market Fund. As of November 30,
1997, MFS Defined Contribution Plan, c/o Massachusetts Financial Services
Company, 500 Boylston Street, Boston, MA 02116-3740, was the record owner of
approximately 6.00% 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 is an
indirect wholly owned subsidiary of Sun Life Assurance Company of Canada ("Sun
Life"). The Prospectus contains information with respect to the management of
the Adviser and other investment companies for which MFS serves as investment
adviser.
The Adviser manages each Fund pursuant to an Amended and Restated Investment
Advisory Agreement dated August 1, 1993 (the "Advisory Agreement"). Under the
Advisory Agreement, the Adviser provides each Fund with overall investment
advisory services. 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 years ended August 31, 1997, 1996 and 1995, MFS received management fees
under the Funds' Advisory Agreement of $2,793,401, $2,374,567 and $2,224,728,
respectively, from the MFS Money Market Fund, and $188,007, $205,023 and
$193,160, respectively, from the MFS Government Money Market Fund. The Trust's
advisory fee is allocated between the MFS Money Market Fund and the MFS
Government Money Market Fund in the ratio each fund's average daily net assets
bears to the aggregate average daily net assets of the Trust.
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, 1997, 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, 1998, and will
continue in effect thereafter only if such continuance is specifically approved
at least annually by the Board of Trustees or by vote of a majority of the
Fund's outstanding voting securities and, in either case, by a majority of the
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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.
ADMINISTRATOR
MFS provides each Fund with certain financial, legal, compliance, shareholder
communications and other administrative services pursuant to a Master
Administrative Services Agreement dated March 1, 1997, as amended. Under the
Agreement, each Fund pays MFS an administrative fee up to 0.015% per annum of
the Fund's average daily net assets. This fee reimburses MFS for a portion of
the costs it incurs to provide such services. For the period from March 1, 1997
through August 31, 1997, MFS received fees under the Agreement of $45,890 and
$2,916 for MFS Money Market Fund and MFS Government Money Market Fund,
respectively.
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, 1998, 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.
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 0.13%. In addition, the Agent will be
reimbursed by the Trust for certain expenses incurred by the Agent on behalf of
the Trust. State Street Bank and Trust Company, the dividend disbursing agent of
the Trust, has contracted with the Shareholder Servicing Agent to administer and
perform certain dividend and distribution disbursing functions for the Trust.
4. PORTFOLIO TRANSACTIONS AND BROKERAGE COMMISSIONS
Specific decisions to purchase or sell securities for each Fund are made by the
Funds' portfolio manager who is an employee of the Adviser and who is appointed
and supervised by its senior officers. Changes in the Funds' investments are
reviewed by the Board of Trustees. The Funds' portfolio manager may serve other
clients of the Adviser or any subsidiary of the Adviser in a similar capacity.
The primary consideration in placing portfolio security transactions for each
series is "best execution," i.e., execution at the most favorable prices and in
the most effective manner possible. The Adviser at all times attempts to achieve
"best execution," and it has complete freedom as to the markets in and the
broker-dealers through which it seeks this result. It is expected that most
transactions will be with the issuer or with major dealers acting for their own
account and not as brokers. Subject to the requirement of seeking "best
execution," securities may be bought from or sold to broker-dealers who have
furnished research and investment services to the Adviser. Such research and
investment services are those which brokerage houses customarily provide to
institutional investors and include statistical and economic data and research
reports on particular companies and industries. In placing orders with such
broker-dealers the Adviser will, where possible, take into account the
comparative usefulness of such research and investment services. Such research
and investment services are useful to the Adviser even though their dollar value
may be indeterminable
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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 Conduct Rules 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.
For each Fund's fiscal years ended August 31, 1997, 1996 and 1995, neither Fund
paid brokerage commissions.
During the period ended August 31, 1997, the MFS Money Market Fund acquired
securities issued by Goldman Sachs & Co., Bank of America, Merrill Lynch & Co.,
Bankers Trust, Ford Motor Credit Corp., and J.P. Morgan & Co., regular
broker-dealers of the Fund, which securities had a value of $126,151,000,
$9,963,000, $20,653,000, $7,346,000, $21,952,000 and $17,891,000, respectively,
as of August 31, 1997.
During the period ended August 31, 1997, the MFS Government Money Market Fund
acquired securities issued by Goldman Sachs & Co., a regular broker-dealer of
the Fund, which had a value of $5,950,000 as of August 31, 1997.
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.
SUBSEQUENT INVESTMENT BY TELEPHONE: Each shareholder may purchase additional
shares of any MFS Fund by telephoning the Shareholder Servicing Agent toll-free
at (800) 225-2606. The minimum purchase amount is $50 and the maximum purchase
amount is $100,000. Shareholders wishing to avail themselves of this telephone
purchase privilege must so elect on their Account Application and designate
thereon a bank and account number from which purchases will be made. If a
telephone purchase request is received by the Shareholder Servicing Agent on any
business day prior to the close of regular trading on the Exchange (generally,
4:00 p.m., Eastern time), the purchase will occur at the closing net asset value
of the shares purchased on that day. The Shareholder Servicing Agent may be
liable for any losses resulting from unauthorized telephone transactions if it
does not follow reasonable procedures designed to verify the identity of the
caller. The Shareholder Servicing Agent will request personal or other
information from the caller, and will normally also record calls. Shareholders
should verify the accuracy of confirmation statements immediately after their
receipt.
DISTRIBUTION INVESTMENT PROGRAM: Distributions of dividends 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.
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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 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
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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 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 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 paid in cash or
reinvested in additional shares. Because the Funds expect to earn primarily
interest income, it is expected that no Fund dividends will qualify for the
dividends received deduction for corporations. 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.
Each Fund's current dividend and accounting policies will affect the amount,
timing and character of distributions to shareholders. 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
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income tax payments at the rate of 30% (or any lower rate permitted under an
applicable treaty) on taxable dividends and other payments to Non-U.S. Persons
that are subject to such withholding. Any amounts overwithheld may be recovered
by such persons by filing a claim for refund with the U.S. Internal Revenue
Service within the time period appropriate to such claims. Distributions
received from 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. The Trustees have authorized the issuance of
one class of shares for each of the Funds, Class A and Class B shares of a third
series, and Class A, Class B, Class C and Class I shares of a fourth series of
the Trust. Each share of a series represents an equal proportionate interest in
that series with each other share of that series. The shares of each series
participate equally in the earnings, dividends and assets of the particular
portfolio. Shares have no pre-emptive or conversion rights. Shares when issued
are fully paid and non-assessable. Shareholders are entitled to one vote for
each share held. Shares of each series vote separately to approve investment
advisory agreements or changes in investment objective or restrictions, but
shares of all series vote together in the election of Trustees and the selection
of accountants. Although Trustees are not elected annually by the shareholders,
shareholders have under certain circumstances the right to remove one or more
Trustees. Shareholders of each series would be entitled to share pro rata in the
net assets of their respective portfolio available for distribution to
shareholders upon liquidation of the Trust or that series.
The Trust may merge or consolidate with another organization or sell all or
substantially all its assets, if approved by the vote of the holders of
two-thirds of the outstanding shares of the Trust, except that if the Trustees
recommend such merger, consolidation or sale, the approval by vote of the
holders of a majority of the Trust's outstanding shares will be sufficient. The
Trust may be terminated upon liquidation and distribution of the assets of the
Trust, if approved by the vote of the holders of two-thirds of the outstanding
shares of the Trust. If not so terminated, the Trust will continue indefinitely.
The Trust is an entity of the type commonly known as a "Massachusetts business
trust." Under Massachusetts law, shareholders of such a trust may, under certain
circumstances, be held personally liable as partners for its obligations.
However, the Declaration of Trust contains an express disclaimer of shareholder
liability for acts or obligations of the Trust and provides for indemnification
and reimbursement of expenses out of the Trust property for any shareholder held
personally liable for the obligations of the Trust. The Declaration of Trust
also provides that the Trust shall maintain appropriate insurance (for example,
fidelity bonding and errors and omissions insurance) for the protection of the
Trust, its shareholders, Trustees, officers, employees and agents covering
possible tort and other liabilities. Thus, the risk of a shareholder incurring
financial loss on account of shareholder liability is limited to circumstances
in which both inadequate insurance existed and the Trust itself was unable to
meet its obligations.
The Declaration of Trust further provides that obligations of the Trust are not
binding upon the Trustees individually but only upon the property of the Trust
and that the Trustees will not be liable for any action or failure to act, but
nothing in the Declaration of Trust protects a Trustee against any liability to
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, Martin Luther King, Jr., Day, Presidents' Day, Good
Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and
Christmas Day.) This determination is made once during each 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
12
<PAGE> 44
during the month, all dividends declared on that Fund during the month through
the date of redemption will be paid to him at the same time as the proceeds from
the redemption of his shares.
For this purpose the Net Income of either Fund (from the time of the immediately
preceding determination thereof) shall consist of (i) all interest income
accrued on the portfolio assets of that Fund, (ii) less all actual and accrued
expenses of that Fund determined in accordance with generally accepted
accounting principles, and (iii) plus or minus net realized gains and losses and
net unrealized appreciation or depreciation on the assets of that Fund. Interest
income shall include discount earned (including both original issue and market
discount) on discount paper accrued ratably to the date of maturity. Securities
are valued at amortized cost, which the Trustees have determined in good faith
constitutes fair value for the purposes of complying with the 1940 Act. This
valuation method will continue to be used until such time as the Trustees
determine that it does not constitute fair value for such purposes. The Trust
will limit the portfolio investments of each Fund to those U.S.
dollar-denominated instruments which the Board of Trustees or its delegate
determines present minimal credit risks, and which are of high quality as
determined by the 1940 Act and the rules thereunder. The Trust has also agreed
to maintain a dollar weighted average maturity for each series of 90 days or
less and to invest only in securities maturing in 13 months or less. The Board
of Trustees has also established procedures designed to stabilize the net asset
value per share of each series, as computed for the purposes of sales and
redemptions, at $1.00 per share. If the Trustees determine that a deviation from
the $1.00 per share price may exist which may result in a material dilution or
other unfair result to investors or existing shareholders, they will take such
corrective action as they regard as necessary and appropriate, which action
could include the sale of instruments prior to maturity (to realize capital
gains or losses); shortening average portfolio maturity; withholding dividends;
or using market quotations for valuation purposes.
Since the Net Income of each Fund is declared as a dividend each time the Net
Income of that Fund is determined, the net asset value per share of that Fund
(i.e., the value of the net assets of that Fund divided by the number of shares
of that Fund outstanding) remains at $1.00 per share immediately after each such
determination and dividend declaration. Any increase in the value of a
shareholder's investment in either Fund, representing the reinvestment of
dividend income, is reflected by an increase in the number of shares of that
Fund in his account.
It is expected that each Fund will have a positive Net Income at the time of
each determination thereof. If for any reason the Net Income of either Fund
determined at any time is a negative amount, which could occur, for instance,
upon default by an issuer of a portfolio security, that Fund would first offset
the negative amount with respect to each shareholder account in that Fund from
the dividends declared during the month with respect to each such account. If
and to the extent that such negative amount exceeds such declared dividends at
the end of the month (or during the month in the case of an account liquidated
in its entirety), that Fund could reduce the number of its outstanding shares by
treating each shareholder of that Fund as having contributed to its capital that
number of full and fractional shares of that Fund in the account of such
shareholder which represents his proportion of such excess. Each shareholder of
that Fund will be deemed to have agreed to such contribution in these
circumstances by his investment in that Fund. This procedure would permit the
net asset value per share of each Fund to be maintained at a constant $1.00 per
share.
9. PERFORMANCE INFORMATION
YIELD INFORMATION. Each Fund will provide current annualized and effective
annualized yield quotations based on the daily dividends of the particular Fund.
These quotations may from time to time be used in advertisements, shareholder
reports or other communications to shareholders. However, these yield quotations
should not be considered as representative of the yield of either Fund in the
future since the yield of each Fund will vary based on the type, quality and
maturities of the securities held in the portfolio of the particular Fund,
fluctuations in short-term interest rates and changes in the Fund's expenses.
The current annualized yield of the MFS Money Market Fund for the seven-day
period ended August 31, 1997 (the end of the Trust's fiscal year) was 5.11% and
the effective annualized yield of the MFS Money Market Fund for such period was
5.24%. The current annualized yield of the MFS Government Money Market Fund for
that seven-day period was 4.68% and the effective annualized yield of the MFS
Government Money Market Fund for that period was 4.79%. 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:
13
<PAGE> 45
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.
-- 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, 1997, the Statements of Assets and
Liabilities at August 31, 1997, the Statements of Operations for the year ended
August 31, 1997, the Statements of Changes in Net Assets for the years ended
August 31, 1997 and 1996, the Notes to Financial Statements
14
<PAGE> 46
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.
15
<PAGE> 47
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.
A-1
<PAGE> 48
INVESTMENT ADVISER
Massachusetts Financial Services Company
500 Boylston Street, Boston, MA 02116
(617) 954-5000
DISTRIBUTOR
MFS Fund Distributors, Inc.
500 Boylston Street, Boston, MA 02116
(617) 954-5000
CUSTODIAN AND DIVIDEND DISBURSING AGENT
State Street Bank and Trust Company
225 Franklin Street, Boston, MA 02110
SHAREHOLDER SERVICING AGENT
MFS Service Center, Inc.
500 Boylston Street, Boston, MA 02116
Toll free: (800) 225-2606
Mailing Address:
P.O. Box 2281, Boston, MA 02107
INDEPENDENT AUDITORS
Deloitte & Touche LLP
125 Summer Street, Boston, MA 02110
MFS(R) MONEY
MARKET FUND
MFS(R) GOVERNMENT
MONEY MARKET FUND
500 BOYLSTON STREET
BOSTON, MA 02116
[MFS LOGO]
MCM-13-1/97/500 22/10/310
<PAGE> 49
<PAGE>
[LOGO] M F S(SM) Annual Report
INVESTMENT MANAGEMENT August 31, 1997
MFS(R) MONEY MARKET FUND
MFS(R) GOVERNMENT MONEY MARKET FUND
[Graphic Omitted]
<PAGE>
TABLE OF CONTENTS
Letter from the Chairman .................................................. 1
Portfolio Manager's Overview .............................................. 2
Portfolio Manager's Profile ............................................... 3
Tax Form Summary .......................................................... 3
Fund Facts ................................................................ 4
Portfolio Concentration ................................................... 4
Portfolio of Investments .................................................. 6
Financial Statements ...................................................... 8
Notes to Financial Statements ............................................. 13
Independent Auditors' Report .............................................. 16
Trustees and Officers ..................................................... 17
- --------------------------------------------------------------------------------
HIGHLIGHTS
o THE ANNUALIZED YIELD ON AN INVESTMENT IN MFS() R MONEY MARKET FUND FOR
THE SEVEN-DAY PERIOD ENDED AUGUST 31, 1997, WAS 4.95%, VERSUS 4.72% AT
THE END OF AUGUST 1996. DURING THE SAME PERIOD, THE ANNUALIZED YIELD ON
AN INVESTMENT IN MFS() R GOVERNMENT MONEY MARKET FUND ROSE TO 4.87% FROM
4.51%.
o ON MARCH 25, 1997, THE FEDERAL RESERVE BOARD RAISED THE FEDERAL FUNDS
RATE 0.25%, FROM 5.25% TO 5.50%. AS A RESULT, YIELDS ON 90-DAY COMMERCIAL
PAPER HAVE RISEN APPROXIMATELY 20 BASIS POINTS (0.20%) OVER THE PAST
YEAR.
o THE FUNDS' AVERAGE MATURITIES HAVE BEEN RELATIVELY NEUTRAL TO SHORT OVER
THE PAST 12 MONTHS TO TRY TO TAKE ADVANTAGE OF THE HIGHER YIELDS THAT
WILL RESULT IF THE ECONOMY BEGINS TO ACCELERATE.
- --------------------------------------------------------------------------------
<PAGE>
LETTER FROM THE CHAIRMAN
[Photo of A. Keith Brodkin]
Dear Shareholders:
An unprecedented combination of generally positive factors has helped the U.S.
economy enjoy a sustained period of relative stability and moderate growth in
which thousands of new jobs have been created every month, inflation remains
under control, and the investment climate -- at least until now -- has been
favorable. For example, the increased use of technology and other productivity
enhancements, as well as corporate restructuring and global competition, is
improving companies' balance sheets and helping control inflation. Meanwhile,
borrowing by corporations and governments continues to decline, while consumer
confidence is increasing, although consumer debt levels are still uncomfortably
high. While some lenders are beginning to tighten standards to address this
problem, consumer debt and personal bankruptcies continue to rise. The rapid
pace of growth seen in the first quarter slowed slightly in the second quarter,
to an annual rate of 3.3%. While real (inflation-adjusted) growth could moderate
further in the third quarter, we believe economic momentum will carry well into
the first quarter of 1998. The money supply is increasing at a rapid rate, the
housing and automobile markets are strengthening, and it now appears that
Christmas sales could be quite good. Because economic growth continues to be
impressive, markets are likely to begin focusing on the Federal Reserve Board's
(the Fed's) willingness to raise interest rates.
In the fixed-income markets, we have been encouraged by the Fed's decision at
its July meeting not to raise short-term interest rates. But we cannot rule out
the possibility of future monetary tightening in the second half of the year if,
as we now expect, the economy strengthens during the balance of 1997. Therefore,
our risk/reward outlook for the fixed-income markets is neutral, and we believe
that fixed-income investors should think in terms of earning the coupon income
from their investments rather than seeking possible gains from price
appreciation.
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 15, 1997
<PAGE>
PORTFOLIO MANAGER'S OVERVIEW
[Photo of Geoffrey L. Kurinsky]
Geoffrey L. Kurinsky
Dear Shareholders:
Since August 31, 1996, short-term interest rates have moved modestly higher. As
a result, the annualized yield on an investment in MFS MONEY MARKET FUND for the
seven-day period ended August 31, 1997, was 4.95%, versus 4.72% at the end of
August 1996. During the same period, the annualized yield on an investment in
MFS GOVERNMENT MONEY MARKET FUND rose to 4.87% from 4.51%.
On March 25, 1997, the Federal Reserve Board raised the federal funds rate (the
interest rate charged by banks to other banks in need of overnight loans) 25
basis points (0.25%), from 5.25% to 5.50%. As a result, yields on 90-day
commercial paper have risen approximately 20 basis points (0.20%) over the past
year. In the next few months, we expect short-term rates to remain stable, with
a possible tightening by year-end if the economy shows signs of inflationary
pressures.
The Funds' average maturities have been relatively neutral to short over the
past 12 months. The average maturities for MFS MONEY MARKET FUND and MFS
GOVERNMENT MONEY MARKET FUND on August 31, 1997, were 39 and 41 days,
respectively, versus 42 and 35 days on August 31, 1996. The Funds are positioned
to try to take advantage of the higher yields that will result if the economy
begins to accelerate.
The portfolio of MFS MONEY MARKET FUND continues to include only the highest-
quality corporate, bank, and government securities in order to provide investors
with maximum security against credit risk. On August 31, 1997, approximately 49%
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. The large position in
government-guaranteed paper is due to the 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 the Funds to continue to help investors
obtain current income and, at the same time, preserve capital and liquidity.
Respectfully,
/s/ Geoffrey L. Kurinsky
Geoffrey L. Kurinsky
Portfolio Manager
- --------------------------------------------------------------------------------
PORTFOLIO MANAGER'S PROFILE
GEOFFREY L. KURINSKY BEGAN HIS CAREER AT MFS IN 1987 IN THE FIXED INCOME
DEPARTMENT. A GRADUATE OF THE UNIVERSITY OF MASSACHUSETTS AND THE BOSTON
UNIVERSITY 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 1998, SHAREHOLDERS WILL BE MAILED A TAX FORM SUMMARY
REPORTING THE FEDERAL TAX STATUS OF ALL DISTRIBUTIONS PAID DURING THE
CALENDAR YEAR 1997.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
FUND FACTS
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. MONEY MARKET FUNDS SEEK TO MAINTAIN A
CONSISTENT NET ASSET VALUE, ALTHOUGH THIS IS NOT
GUARANTEED.
COMMENCEMENT OF
INVESTMENT OPERATIONS: MFS MONEY MARKET FUND - DECEMBER 19, 1975
MFS GOVERNMENT MONEY MARKET FUND - FEBRUARY 26, 1982
SIZE: MFS MONEY MARKET FUND - $634.2 MILLION NET ASSETS AS
OF AUGUST 31, 1997
MFS GOVERNMENT MONEY MARKET FUND - $38.4 MILLION NET
ASSETS AS OF AUGUST 31, 1997
- --------------------------------------------------------------------------------
PORTFOLIO CONCENTRATION AS OF AUGUST 31, 1997
MFS MONEY MARKET FUND
[GRAPHIC OMITTED]
Commercial Paper 48.1%
U.S. Government & Agency Obligations 35.4%
Repurchase Agreements 16.5%
For a more complete breakdown, refer to the Portfolio of Investments.
MFS GOVERNMENT MONEY MARKET FUND
[GRAPHIC OMITTED]
U.S. Government & Agency Obligations 84.5%
Repurchase Agreements 15.5%
For a more complete breakdown, refer to the Portfolio of Investments.
<PAGE>
PORTFOLIO OF INVESTMENTS - August 31, 1997
MFS Money Market Fund
Commercial Paper - 48.9%
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
PRINCIPAL AMOUNT
ISSUER (000 OMITTED) VALUE
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C>
Abbott Laboratories, due 9/09/97 $ 10,000 $ 9,987,889
American Express Credit Corp., due 9/19/97 - 10/08/97 19,100 19,021,190
American Telephone & Telegraph Co., due 9/23/97 12,000 11,959,887
Associates Corp. of North America, due 9/29/97 - 10/17/97 20,750 20,636,601
Bank America National Trust & Savings Assn., due 10/10/97 10,000 10,000,000
Bank of America Federal Savings Bank, due 9/25/97 10,000 9,963,400
Bankers Trust New York Corp., due 1/12/98 7,500 7,345,942
Beneficial Corp., due 9/22/97 - 10/20/97 19,800 19,682,283
Carolina Power & Light Co., due 9/03/97 15,000 14,995,375
du Pont (E.I.) de Nemours & Co., due 9/24/97 - 12/05/97 25,000 24,822,822
Ford Motor Credit Corp., due 9/09/97 - 9/18/97 22,000 21,952,063
General Electric Capital Corp., due 10/06/97 - 11/21/97 16,000 15,843,358
General Mills, Inc., due 9/19/97 7,200 7,180,380
Goldman Sachs Group LP, due 9/10/97 - 10/07/97 21,600 21,521,049
GTE Funding, Inc., due 9/12/97 6,000 5,989,917
Merrill Lynch & Co., Inc., due 9/02/97 - 12/02/97 20,800 20,653,185
Morgan (J.P.) & Co., Inc., due 9/16/97 - 11/10/97 18,000 17,891,164
Pacific Gas & Electric Co., due 9/16/97 - 10/22/97 17,095 17,018,355
Pfizer, Inc., due 10/09/97 10,000 9,942,155
Procter & Gamble Co., due 10/02/97 - 12/19/97 20,000 19,787,450
Transamerica Co., due 9/22/97 4,000 3,987,167
- ---------------------------------------------------------------------------------------------------------
Total Commercial Paper, at Amortized Cost $310,181,632
- ---------------------------------------------------------------------------------------------------------
U.S. Government and Agency Obligations - 35.4%
- ---------------------------------------------------------------------------------------------------------
Federal Farm Credit Bank, due 9/15/97 - 2/23/98 $ 24,600 $ 24,338,167
Federal Home Loan Bank, due 9/17/97 - 2/20/98 34,500 34,128,082
Federal Home Loan Mortgage Corp., due 9/11/97 - 12/01/97 71,053 70,613,711
Federal National Mortgage Assn., due 9/04/97 - 1/05/98 96,250 95,549,596
- ---------------------------------------------------------------------------------------------------------
Total U.S. Government and Agency Obligations, at
Amortized Cost $224,629,556
- ---------------------------------------------------------------------------------------------------------
Repurchase Agreement - 16.5%
- ---------------------------------------------------------------------------------------------------------
Goldman Sachs, dated 8/29/97, due 9/02/97 total to be received
$104,694,522 (secured by various U.S. Treasury and federal
agency obligations in jointly traded accounts), at Cost $104,630 $ 104,630,000
- ---------------------------------------------------------------------------------------------------------
Total Investments, at Amortized Cost and Value $ 639,441,188
Other Assets, Less Liabilities - (0.8)% (5,201,257)
- ---------------------------------------------------------------------------------------------------------
Net Assets - 100.0% $ 634,239,931
- ---------------------------------------------------------------------------------------------------------
</TABLE>
See notes to financial statements
<PAGE>
PORTFOLIO OF INVESTMENTS - August 31, 1997
MFS Government Money Market Fund
U.S. Government and Agency Obligations - 104.9%
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
PRINCIPAL AMOUNT
ISSUER (000 OMITTED) VALUE
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C>
Federal Farm Credit Bank, due 9/15/97 - 1/06/98 $ 6,910 $ 6,841,670
Federal Home Loan Bank, due 9/12/97 - 10/03/97 5,330 5,313,831
Federal Home Loan Mortgage Corp., due 9/05/97 - 10/14/97 8,680 8,647,804
Federal National Mortgage Assn., due 9/04/97 - 11/24/97 11,000 10,914,751
Student Loan Marketing Assn., due 9/19/97 - 12/31/97 5,225 5,178,499
Tennessee Valley Authority, due 9/08/97 - 10/22/97 3,400 3,384,586
- ---------------------------------------------------------------------------------------------------------
Total U.S. Government and Agency Obligations, at
Amortized Cost $ 40,281,141
- ---------------------------------------------------------------------------------------------------------
Repurchase Agreement - 15.5%
- ---------------------------------------------------------------------------------------------------------
Goldman Sachs, dated 8/29/97, due 9/02/97, total to be
received $5,953,669 (secured by various U.S. Treasury
and federal agency obligations in jointly traded
accounts), at Cost $ 5,950 $ 5,950,000
- ---------------------------------------------------------------------------------------------------------
Total Investments, at Amortized Cost and Value $ 46,231,141
Other Assets, Less Liabilities - (20.4)% (7,844,624)
- ---------------------------------------------------------------------------------------------------------
Net Assets - 100.0% $ 38,386,517
- ---------------------------------------------------------------------------------------------------------
</TABLE>
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Statements of Assets and Liabilities
- -----------------------------------------------------------------------------------------------
MFS MONEY MFS GOVERNMENT
AUGUST 31, 1997 MARKET FUND MONEY MARKET FUND
- -----------------------------------------------------------------------------------------------
Assets:
<S> <C> <C>
Investments, at amortized cost and value $534,811,188 $40,281,141
Repurchase agreements, at cost and value 104,630,000 5,950,000
------------ -----------
Total investments, at amortized cost and value $639,441,188 $46,231,141
Cash 428,933 24,368
Receivable for Fund shares sold 57,241,669 71,279
Interest receivable 130,688 2,752
Other assets 4,392 318
------------ -----------
Total assets $697,246,870 $46,329,858
------------ -----------
Liabilities:
Distributions payable $ 132,399 $ 10,341
Payable for Fund shares reacquired 62,626,140 7,908,418
Payable to affiliates -
Management fee 22,803 1,731
Administrative fee 719 52
Shareholder servicing agent fee 6,231 450
Accrued expenses and other liabilities 218,647 22,349
------------ -----------
Total liabilities $ 63,006,939 $ 7,943,341
------------ -----------
Net assets (represented by paid-in capital) $634,239,931 $38,386,517
============ ===========
Shares of beneficial interest outstanding 634,239,931 38,386,517
============ ===========
Net asset value, offering price and redemption price
per share (net assets / shares of beneficial
interest outstanding) $1.00 $1.00
===== =====
</TABLE>
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS - continued
Statements of Operations
MFS Money Market Fund
- ------------------------------------------------------------------------------
YEAR ENDED AUGUST 31, 1997
- ------------------------------------------------------------------------------
Net investment income:
Interest $32,078,081
-----------
Expenses -
Management fee $ 2,793,401
Trustees' compensation 39,566
Shareholder servicing agent fee 799,586
Administrative fee 45,890
Custodian fee 258,075
Transfer agent fee 253,010
Postage 145,626
Printing 113,857
Auditing fees 27,200
Legal fees 6,000
Miscellaneous 224,665
-----------
Total expenses $ 4,706,876
Fees paid indirectly (215,447)
-----------
Net expenses $ 4,491,429
-----------
Net investment income $27,586,652
===========
MFS Government Money Market Fund
- ------------------------------------------------------------------------------
YEAR ENDED AUGUST 31, 1997
- ------------------------------------------------------------------------------
Net investment income:
Interest $2,034,085
----------
Expenses -
Management fee $ 188,007
Trustees' compensation 5,479
Shareholder servicing agent fee 51,333
Administrative fee 2,916
Auditing fees 26,152
Custodian fee 21,574
Postage 6,811
Printing 4,250
Legal fees 3,230
Registration fee 46,503
----------
Total expenses $ 356,255
Fees paid indirectly (14,715)
----------
Net expenses $ 341,540
----------
Net investment income $1,692,545
==========
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS - continued
<TABLE>
<CAPTION>
Statements of Changes in Net Assets
MFS Money Market Fund
- ------------------------------------------------------------------------------------------------------
YEAR ENDED AUGUST 31, 1997 1996
- ------------------------------------------------------------------------------------------------------
<S> <C> <C>
Increase in net assets:
From operations -
Net investment income, declared as distributions to
shareholders $ 27,586,652 $ 23,365,808
-------------- --------------
Fund share (principal) transactions at net asset value of
$1.00 per share -
Net proceeds from sale of shares $8,979,377,073 $5,311,229,990
Net asset value of shares issued to shareholders in
reinvestment of distributions 21,300,694 18,551,363
Cost of shares reacquired (9,010,642,758) (5,096,374,350)
-------------- --------------
Increase (decrease) in net assets from Fund share
transactions $ (9,964,991) $ 233,407,003
Net assets:
At beginning of period 644,204,922 410,797,919
-------------- --------------
At end of period $ 634,239,931 $ 644,204,922
============== ==============
<CAPTION>
MFS Government Money Market Fund
- ------------------------------------------------------------------------------------------------------
YEAR ENDED AUGUST 31, 1997 1996
- ------------------------------------------------------------------------------------------------------
<S> <C> <C>
Increase in net assets:
From operations -
Net investment income, declared as distributions to
shareholders $ 1,692,545 $ 1,896,221
-------------- --------------
Fund share (principal) transactions at net asset value
of
$1.00 per share -
Net proceeds from sale of shares $ 118,706,075 $ 476,964,289
Net asset value of shares issued to shareholders in
reinvestment of distributions 1,548,739 1,585,296
Cost of shares reacquired (124,367,744) (474,489,920)
-------------- --------------
Total increase (decrease) in net assets from Fund
share
transactions $ (4,112,930) $ 4,059,665
Net assets:
At beginning of period 42,499,447 38,439,782
-------------- --------------
At end of period $ 38,386,517 $ 42,499,447
============== ==============
</TABLE>
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS - continued
<TABLE>
<CAPTION>
Financial Highlights
MFS Money Market Fund
- ------------------------------------------------------------------------------------------------------------------------------
TEN MONTHS YEAR ENDED
YEAR ENDED AUGUST 31, ENDED OCTOBER 31,
-------------------------------------------- AUGUST 31, -------------------------
1997 1996 1995 1994 1993 1992
- ------------------------------------------------------------------------------------------------------------------------------
<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 $ 0.05 $ 0.05 $ 0.05 $ 0.02 $ 0.02 $ 0.03
Less distributions declared to
shareholders from net
investment income $(0.05) $(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 $ 1.00
====== ====== ====== ====== ====== ======
Total return 4.61% 4.86% 5.04% 2.91%+ 2.39% 3.35%
Ratios (to average net assets)/
Supplemental data:
Expenses## 0.80% 0.79% 0.76% 0.78%+ 0.83% 0.87%
Net investment income 4.71% 4.78% 4.92% 2.95%+ 2.39% 3.36%
Net assets at end of period
(000 omitted) $634,240 $644,205 $410,798 $435,780 $350,316 $448,825
+ Annualized.
## For fiscal years ending after September 1, 1995, the Fund's expenses are calculated without reduction for fees paid indirectly.
<CAPTION>
MFS Money Market Fund
- -----------------------------------------------------------------------------------------------------------------------------
YEAR ENDED OCTOBER 31, 1991 1990 1989 1988 1987
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value - beginning of period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
------ ------ ------ ------ ------
Income from investment operations -
Net investment income $ 0.06 $ 0.07 $ 0.08 $ 0.07 $ 0.06
Less distributions declared to shareholders
from net investment income $(0.06) $(0.07) $(0.08) $(0.07) $(0.06)
------ ------ ------ ------ ------
Net asset value - end of period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
====== ====== ====== ====== ======
Total return 6.07% 7.99% 8.84% 7.12% 6.06%
Ratios (to average net assets)/Supplemental data:
Expenses 0.82% 0.76% 0.83% 0.83% 0.82%
Net investment income 5.94% 7.60% 8.45% 6.72% 5.77%
Net assets at end of period (000 omitted) $541,945 $677,164 $676,382 $664,895 $716,528
</TABLE>
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS - continued
Financial Highlights - continued
<TABLE>
<CAPTION>
MFS Government Money Market Fund
- ------------------------------------------------------------------------------------------------------------------------------
TEN MONTHS YEAR ENDED
YEAR ENDED AUGUST 31, ENDED OCTOBER 31,
-------------------------------------------- AUGUST 31, ------------------------
1997 1996 1995 1994 1993 1992
- ------------------------------------------------------------------------------------------------------------------------------
<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 $ 0.05 $ 0.05 $ 0.05 $ 0.02 $ 0.02 $ 0.03
Less distributions declared to
shareholders from net
investment income $(0.05) $(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 $ 1.00
===== ===== ===== ===== ===== =====
Total return 4.81% 4.73% 4.92% 2.64%+ 2.33% 3.27%
Ratios (to average net assets)/
Supplemental data:
Expenses## 0.85% 0.89% 0.84% 1.05%+ 0.99% 0.87%
Net investment income 4.02% 4.64% 4.82% 2.64%+ 2.20% 3.28%
Net assets at end of period
(000 omitted) $38,387 $42,499 $38,440 $38,347 $35,576 $47,629
+ Annualized.
## For fiscal years ending after September 1, 1995, the Fund's expenses are calculated without reduction for fees paid indirectly.
<CAPTION>
MFS Government Money Market Fund
- -----------------------------------------------------------------------------------------------------------------------------
YEAR ENDED OCTOBER 31, 1991 1990 1989 1988 1987
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value - beginning of period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
----- ----- ----- ----- -----
Income from investment operations -
Net investment income $ 0.06 $ 0.07 $ 0.08 $ 0.06 $ 0.05
Less distributions declared to shareholders
from net investment income $(0.06) $(0.07) $(0.08) $(0.06) $(0.05)
----- ----- ----- ----- -----
Net asset value - end of period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
===== ===== ===== ===== =====
Total return 5.68% 7.55% 8.61% 6.47% 5.73%
Ratios (to average net assets)/Supplemental data:
Expenses 0.83% 0.80% 0.85% 0.74% 0.59%
Net investment income 5.53% 7.34% 8.29% 6.29% 5.63%
Net assets at end of period (000 omitted) $50,655 $53,701 $51,619 $50,343 $59,875
</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 Funds may enter into repurchase agreements with
institutions that the Funds' investment adviser has determined are creditworthy.
Each repurchase agreement is recorded at cost. The Funds' require that the
securities purchased in a repurchase transaction be transferred to the custodian
in a manner sufficient to enable the Funds' to obtain those securities in the
event of a default under the repurchase agreement. The Funds' monitor, 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 Funds' under each such repurchase agreement.
The Funds', along with other affiliated entities of Massachusetts Financial
Service 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 is amortized or accreted for financial statement and tax
reporting purposes as required by federal income tax regulations.
Fees Paid Indirectly - The Funds' custody fee is calculated as a percentage of
the Funds' average daily net assets. The fees are reduced according to fee
arrangements which measure the value of cash deposited with the custodian by the
Funds. These amounts are shown as a reduction of expenses on the Statements of
Operations.
Tax Matters and Distributions - The Funds' 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 their taxable
income, including any net realized gain on investments. Accordingly, no
provision for federal income or excise tax is provided. The Funds' file tax
returns 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 Funds' tax returns 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 to
shareholders are recorded on the ex-dividend date.
(3) Transactions with Affiliates
Investment Adviser - The Funds have an investment advisory agreement with
Massachusetts Financial Services (MFS) to provide overall investment advisory
and administrative services and general office facilities. The management fee is
computed and paid monthly at an annual rate of 0.48% and 0.45% of average
aggregate daily net assets for the MFS Money Market and MFS Government Money
Market Fund, respectively.
Administrator - Effective March 1, 1997, the Funds have an administrative
services agreement with MFS to provide the Funds with certain financial, legal,
shareholder servicing, compliance, and other administrative services. As a
partial reimbursement for the cost of providing these services, the Funds pay
MFS an administrative fee at the following annual percentages of the Funds'
average daily net assets, provided that the administrative fee is not assessed
on Fund assets that exceed $3 billion:
First $1 billion 0.0150%
Next $1 billion 0.0125%
Next $1 billion 0.0100%
The Funds pay no compensation directly to its Trustees who are officers of the
investment adviser, or to officers of the Funds, all of whom receive
remuneration for their services to the Funds from MFS. Certain officers and
Trustees of the Funds are officers or directors of MFS, MFS Fund Distributors,
Inc. (MFD), and MFS Service Center, Inc. (MFSC). The Funds have an unfunded
defined benefit plan for all of 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 $14,159 and $9,087 for
the year ended August 31, 1997.
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 each Fund's average daily net assets at an effective annual rate
of 0.13%. Prior to January 1, 1997, the fee was calculated as a percentage of
the average daily net assets of each Fund at an effective annual rate of up to
0.15%.
(4) Portfolio Securities
Purchases and sales of money market investments, exclusive of securities subject
to repurchase agreements for MFS Money Market Fund, aggregated $4,856,040,101
and $4,858,027,699, respectively.
Purchases and sales of money market investments, exclusive of securities subject
to repurchase agreements for MFS Government Money Market Fund, aggregated
$252,735,883 and $248,379,729, 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 ($1.00 par value).
MFS Money Market Fund
YEAR ENDED YEAR ENDED
AUGUST 31, 1997 AUGUST 31, 1996
- -------------------------------------------------------------------------------
Shares sold 8,979,377,073 5,311,229,990
Shares issued to shareholders in
reinvestment of distributions 21,300,694 18,551,363
Shares reacquired (9,010,642,758) (5,096,374,350)
-------------- --------------
Net increase (decrease) (9,964,991) 233,407,003
============== ==============
MFS Government Money Market Fund
YEAR ENDED YEAR ENDED
AUGUST 31, 1997 AUGUST 31, 1996
- -------------------------------------------------------------------------------
Shares sold 118,706,075 476,964,289
Shares issued to shareholders in reinvestment of
distributions 1,548,739 1,585,296
Shares reacquired (124,367,744) (474,489,920)
------------ ------------
Net increase (decrease) (4,112,930) 4,059,665
============ ============
(6) Line of Credit
The Funds and other affiliated funds participate in a $400 million unsecured
line of credit provided by a syndication of banks under a line of credit
agreement. 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 fees allocated to
MFS Money Market Fund and MFS Government Money Market Fund were $5,060 and $309,
respectively, for the year ended August 31, 1997.
<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, 1997, the related statements of operations for the year then ended, the
statements of changes in net assets for the years ended August 31, 1997 and
1996, and the financial highlights for each of the years in the three-year
period ended August 31, 1997, the ten months ended August 31, 1994 and for each
of the years in the seven-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, 1997 by correspondence with the custodian. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of MFS Money Market
Fund and MFS Government Money Market Fund at August 31, 1997, 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 3, 1997
--------------------------------------------
This report is prepared for the general information of shareholders. It is
authorized for distribution to prospective investors only when preceded or
accompanied by a current prospectus.
<PAGE>
MFS(R) MONEY MARKET FUND
MFS(R) GOVERNMENT MONEY MARKET FUND
<TABLE>
<S> <C>
TRUSTEES CUSTODIAN
A. Keith Brodkin* - Chairman and President State Street Bank and Trust Company
Richard B. Bailey* - Private Investor; AUDITORS
Former Chairman and Director (until 1991), Deloitte & Touche LLP
Massachusetts Financial Services Company;
Director, Cambridge Bancorp; Director, Cambridge INVESTOR INFORMATION
Trust Company For MFS stock and bond market outlooks, call toll
free: 1-800-637-4458 anytime from a touch-tone
Peter G. Harwood - Private Investor telephone.
J. Atwood Ives - Chairman and Chief Executive For information on MFS mutual funds, call your
Officer, Eastern Enterprises financial adviser or, for an information kit, call
toll free: 1-800-637-2929 any business day from 9
Lawrence T. Perera - Partner, Hemenway & Barnes a.m. to 5 p.m. Eastern time (or leave a message
anytime).
William J. Poorvu - Adjunct Professor, Harvard
University Graduate School of Business INVESTOR SERVICE
Administration MFS Service Center, Inc.
P.O. Box 2281
Charles W. Schmidt - Private Investor Boston, MA 02107-9906
Arnold D. Scott* - Senior Executive Vice For general information, call toll free:
President, Director and Secretary, Massachusetts 1-800-225-2606 any business day from
Financial Services Company 8 a.m. to 8 p.m. Eastern time.
Jeffrey L. Shames* - President and Director, For service to speech- or hearing-impaired, call
Massachusetts Financial Services Company toll free: 1-800-637-6576 any business day from 9
a.m. to 5 p.m. Eastern time. (To use this service,
Elaine R. Smith - Independent Consultant your phone must be equipped with a
Telecommunications Device for the Deaf.)
David B. Stone - Chairman, North American
Management Corp. (investment advisers) For share prices, account balances, and exchanges,
call toll free: 1-800-MFS-TALK (1-800-637-8255)
INVESTMENT ADVISER anytime from a touch-tone telephone.
Massachusetts Financial Services Company
500 Boylston Street WORLD WIDE WEB
Boston, MA 02116-3741 www.mfs.com
DISTRIBUTOR [DALBAR For the fourth year in a row,
MFS Fund Distributors, Inc. LOGO] MFS earned a #1 ranking in the
500 Boylston Street DALBAR, Inc. Broker/Dealer Survey,
Boston, MA 02116-3741 Main Office Operations Service Quality
Category. The firm achieved a 3.42
PORTFOLIO MANAGER overall score on a scale of 1 to 4 in
Geoffrey L. Kurinsky* the 1997 survey. A total of 111 firms
responded, offering input on the
TREASURER quality of service they received from
W. Thomas London* 29 mutual fund companies nationwide.
The survey contained questions about
ASSISTANT TREASURERS service quality in 11 categories,
Mark E. Bradley* including "knowledge of operations
Ellen Moynihan* contact," "keeping you informed,"
James O. Yost* "ease of doing business" with the firm.
SECRETARY
Stephen E. Cavan*
ASSISTANT SECRETARY
James R. Bordewick, Jr.*
*Affiliated with the Investment Adviser
</TABLE>
<PAGE>
-------------
MFS(R) MONEY MARKET FUND BULK RATE
MFS(R) GOVERNMENT MONEY MARKET FUND U.S. POSTAGE
PAID
MFS
-------------
500 Boylston Street
Boston, MA 02116-3741
[LOGO] M F S(SM)
INVESTMENT MANAGEMENT
We invented the mutual fund(SM)
[DALBAR
LOGO]
TOP-RATED SERVICE
(C)1997 MFS Fund Distributors, Inc., 500 Boylston Street, Boston, MA 02116-3741
MCM-2 10/97 55M 10/22
<PAGE> 50
<TABLE>
<S> <C>
MFS(R) MUNICIPAL PROSPECTUS
BOND FUND JANUARY 1, 1998
(A member of the MFS Family of CLASS A SHARES OF BENEFICIAL
Funds(R)) INTEREST
CLASS B SHARES OF BENEFICIAL
INTEREST
</TABLE>
- --------------------------------------------------------------------------------
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.
(continued on next page)
INVESTMENT PRODUCTS ARE NOT INSURED BY THE FDIC OR ANY OTHER GOVERNMENT AGENCY,
AND ARE NOT DEPOSITS OR OTHER OBLIGATIONS OF, OR GUARANTEED BY, ANY FINANCIAL
INSTITUTION. SHARES OF MUTUAL FUNDS ARE SUBJECT TO INVESTMENT RISK, INCLUDING
POSSIBLE LOSS OF THE PRINCIPAL AMOUNT INVESTED, AND WILL FLUCTUATE IN VALUE. YOU
MAY RECEIVE MORE OR LESS THAN YOU PAID WHEN YOU REDEEM YOUR SHARES.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
INVESTORS SHOULD READ THIS PROSPECTUS AND RETAIN IT FOR FUTURE REFERENCE.
<PAGE> 51
(continued from previous page)
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, 1998, 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 33 for a further
description of the information set forth in the SAI. A copy of the SAI may be
obtained without charge by contacting the Shareholder Servicing Agent (see back
cover for address and phone number).The SEC maintains an Internet World Wide Web
site (http://www.sec.gov) that contains the SAI, materials that are incorporated
by reference into this Prospectus and the SAI, and other information regarding
the Fund. This Prospectus is available on the Adviser's Internet World Wide Web
site at http://www.mfs.com.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C> <C>
1. Expense Summary............................................ 3
2. Condensed Financial Information............................ 5
3. The Fund................................................... 7
4. Investment Objective and Policies.......................... 8
5. Management of the Fund..................................... 13
6. Information Concerning Shares of the Fund.................. 15
Purchases............................................. 15
Exchanges............................................. 21
Redemptions and Repurchases........................... 22
Distribution Plan..................................... 26
Distributions......................................... 27
Tax Status............................................ 27
Net Asset Value....................................... 28
Description of Shares, Voting Rights and
Liabilities...................................... 29
Performance Information............................... 29
7. Shareholder Services....................................... 30
Appendix A................................................. A-1
Appendix B................................................. B-1
Appendix C................................................. C-1
</TABLE>
2
<PAGE> 52
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 See
redemption proceeds, as applicable)........ Below(1) 4.00%
</TABLE>
ANNUAL OPERATING EXPENSES OF THE FUND (AS A PERCENTAGE OF AVERAGE NET ASSETS):
<TABLE>
<S> <C> <C>
Management Fees.............................. 0.40% 0.40%
Rule 12b-1 Fees.............................. 0.00% 0.82%(2)
Other Expenses(3)............................ 0.21% 0.21%
------- -------
Total Operating Expenses..................... 0.61% 1.43%
</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 Class B 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."
3
<PAGE> 53
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
--------------------------------- ------- ---------------
<S> <C> <C> <C>
(1)
1 year.......................... $ 53 $ 55 $ 15
3 years......................... 66 75 45
5 years......................... 80 98 78
10 years......................... 120 149(2) 149(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.
4
<PAGE> 54
2. 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
<TABLE>
<CAPTION>
TEN
MONTHS YEAR ENDED
YEAR ENDED AUGUST 31, ENDED OCTOBER 31,
------------------------- AUGUST 31, ---------------
1997 1996 1995 1994 1993 1992
------- ------ ------ ---------- ------ ------
CLASS A
-------
<S> <C> <C> <C> <C> <C> <C>
Per share data (for a share
outstanding throughout each
period):
Net asset value -- beginning of
period............................ $10.75 $10.83 $10.68 $ 11.64 $10.73 $10.80
------ ------ ------- -------- ------- ------
Income from investment operations#
--
Net investment income........... $ 0.57 $ 0.59 $ 0.60 $ 0.51 $ 0.61 $ 0.66
Net realized and unrealized gain
(loss) on investments......... 0.24 (0.09) 0.15 (0.77) 1.14 0.09
------ ------ ------- -------- ------- ------
Total from investment operations.... $ 0.81 $ 0.50 $ 0.75 $ (0.26) $ 1.75 $ 0.75
------ ------ ------- -------- ------- ------
Less distributions declared to
shareholders --
From net investment income...... $(0.57) $(0.58) $(0.60) $ (0.47) $(0.66) $(0.66)
From net realized gain on
investments................... -- -- -- (0.16) (0.15) (0.16)
In excess of net investment
income.......................... -- -- -- (0.04) (0.03) --
In excess of net realized gain
on investments................ -- -- -- (0.03) -- --
------ ------ ------- -------- ------- ------
Total distributions declared to
shareholders...................... $(0.57) $(0.58) $(0.60) $ (0.70) $(0.84) $(0.82)
------ ------ ------- -------- ------- ------
Net asset value -- end of period.... $10.99 $10.75 $10.83 $ 10.68 $11.64 $10.73
====== ====== ======= ======== ======= ======
Total return++++.................... 7.75% 4.67% 7.31% (2.33)%++ 16.97% 7.35%
Ratios (to average net assets)/
Supplemental data:
Expenses##...................... 0.60% 0.60% 0.61% 0.59%+ 0.59% 0.57%
Net investment income........... 5.29% 5.37% 5.70% 5.49%+ 5.63% 6.12%
Portfolio turnover.................. 91% 84% 90% 74% 56% 87%
Net assets at end of period (000,000
omitted).......................... $1,660 $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>
5
<PAGE> 55
FINANCIAL HIGHLIGHTS
<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)
From net realized gain on
investments.............. -- (0.27) -- -- --
In excess of net investment
income................... -- -- (0.08) -- (0.39)
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>
<S> <C>
++++ 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>
6
<PAGE> 56
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
TEN
MONTHS YEAR
YEAR ENDED AUGUST 31, ENDED ENDED
----------------------------- AUGUST 31, OCTOBER 31,
1997 1996 1995 1994 1993*
------- ------- ------- ---------- ------------
CLASS B
-------
<S> <C> <C> <C> <C> <C>
Per share data (for a share
outstanding throughout each
period):
Net asset value -- beginning of
period.......................... $ 10.74 $ 11.10 $ 10.67 $ 11.63 $ 11.68
------ ------ ------ ------- ------
Income from investment operations#
--
Net investment income......... $ 0.48 $ 0.49 $ 0.49 $ 0.40 $ 0.07
Net realized and unrealized
gain (loss) on
investments................. 0.25 (0.37) 0.16 (0.77) (0.05)
------ ------ ------ ------- ------
Total from investment
operations...................... $ 0.73 $ 0.12 $ 0.65 $ (0.37) $ 0.02
------ ------ ------ ------- ------
Less distributions declared to
shareholders --
From net investment income.... $ (0.48) $ (0.48) $ (0.49) $ (0.40) $ (0.07)++++
From net realized gain on
investments................. -- -- -- (0.16) --
In excess of net realized gain
on investments.............. -- -- -- (0.03) --
------ ------ ------ ------- ------
Total distributions declared to
shareholders.................... $ (0.48) $ (0.48) $ (0.49) $ (0.59) $ (0.07)
------ ------ ------ ------- ------
Net asset value -- end of
period.......................... $ 10.99 $ 10.74 $ 10.83 $ 10.67 $ 11.63
====== ====== ====== ======= ======
Total return...................... 6.84% 3.69% 6.35% (3.25)%++ 1.49%+
Ratios (to average net
assets)/Supplemental data:
Expenses##.................... 1.46% 1.55% 1.60% 1.72%+ 1.70%+
Net investment income......... 4.42% 4.42% 4.68% 4.41%+ 3.85%+
Portfolio turnover................ 91% 84% 90% 74% 56%
Net assets at end of period
(000,000 omitted)............... $ 76 $ 71 $ 56 $ 45 $ 10
</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.
* For the period from the inception of Class B shares, September 7, 1993, to
October 31, 1993.
++++ Amount includes a per share distribution in excess of net investment income of
$0.002.
</TABLE>
3. 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
7
<PAGE> 57
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.
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.
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;
8
<PAGE> 58
(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 40% 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.
9
<PAGE> 59
REPURCHASE AGREEMENTS: The Fund may enter into repurchase agreements in order
to earn income on available cash or as a temporary defensive measure. Under a
repurchase agreement, the Fund acquires securities subject to the seller's
agreement to repurchase at a specified time and price. If the seller becomes
subject to a proceeding under the bankruptcy laws or its assets are otherwise
subject to a stay order, the Fund's right to liquidate the securities may be
restricted (during which time the value of the securities could decline). As
discussed in the SAI, the Fund has adopted certain procedures intended to
minimize risk.
RESTRICTED SECURITIES: The Fund may also purchase securities that are not
registered under the Securities Act of 1933, as amended (the "1933 Act"),
("restricted securities") but can be offered and sold to "qualified
institutional buyers" under Rule 144A under the 1933 Act ("Rule 144A
Securities"). A determination is made 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, focusing on factors such as valuation, liquidity and availability of
information. Investing in Rule 144A Securities could have the effect of
decreasing the level of liquidity in the Fund to the extent that qualified
institutional buyers become for a time uninterested in purchasing Rule 144A
Securities held in the Fund's portfolio. Subject to the Fund's 15% limitation on
investments in illiquid investments, the Fund may also invest in restricted
securities that may not be sold under Rule 144A, which presents certain risks.
As a result, the Fund might not be able to sell these securities when the
Adviser wishes to do so, or 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. While awaiting delivery of securities
purchased on such bases, the Fund will segregate liquid assets sufficient to
cover its commitments. 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.
10
<PAGE> 60
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 liquid assets which can be liquidated
promptly to satisfy any obligation of the Fund to purchase the underlying
securities. The Fund may also write straddles (combinations of puts and calls on
the same underlying security). The writing of straddles generates additional
premium income but may present greater risk.
The Fund will receive a premium from writing a put or call option, which
increases the Fund's gross income in the event the option expires unexercised or
is closed out at a profit. The amount of the premium will reflect, among other
things, the relationship of the exercise price to the market price and
volatility of the underlying security, the remaining term of the option, supply
and demand and interest rates. By writing a call option, the Fund limits its
opportunity to profit from any increase in the market value of the underlying
security above the exercise price of the option. By writing a put option, the
Fund assumes the risk that it may be required to purchase the underlying
security for an exercise price higher than its then-current market value,
resulting in a potential capital loss unless the security subsequently
appreciates in value.
The Fund may terminate an option that it has written prior to its expiration by
entering into a closing purchase transaction in which it purchases an option
having the same terms as the option written. It is possible, however, that
illiquidity in the options markets may make it difficult from time to time for
the Fund to close out its written option positions.
The Fund may also purchase put or call options in anticipation of changes in
interest rates which may adversely affect the value of its portfolio or the
prices of securities that the Fund wants to purchase at a later date. The
premium paid for a put or call option plus any transaction costs will reduce the
benefit, if any, realized by the Fund upon exercise of the option, and, unless
the price of the underlying security changes sufficiently, the option may expire
without value to the Fund.
In addition, the Fund may purchase warrants on fixed income securities. A
warrant on a fixed income security is a long-dated call option conveying to the
holder of the warrant the right, but not the obligation, to purchase a fixed
income security of a specific description from the issuer on a certain date or
dates (the exercise date) at a fixed exercise price.
The Fund intends to write and purchase options on securities primarily for
hedging purposes and also in an effort to increase current income. Options on
securities, including warrants, that are written or purchased by the Fund will
be traded on U.S. securities exchanges and over-the-counter.
FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS: The Fund may purchase and
sell futures contracts on fixed income securities or indices of such securities,
including Municipal Bond indices and any other indices of fixed income
securities which may become available for trading ("Futures Contracts"). The
Fund may also purchase and write options on such Futures Contracts ("Options on
Futures Contracts"). These instruments will be used to hedge against
11
<PAGE> 61
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 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.
12
<PAGE> 62
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 Conduct Rules of the National Association of Securities
Dealers, Inc. (the "NASD") and such other policies as the Trustees may
determine, the Adviser may consider sales of shares of the Fund and of the other
investment company clients of MFD, the Fund's distributor, as a factor in the
selection of broker-dealers to execute the 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). Except with respect to the Fund's policies on borrowing and
investing in illiquid securities, the Fund's investment limitations, policies
and rating standards are adhered to at the time of purchase or utilization of
assets; a subsequent change in circumstances will not be considered to result in
a violation of policy.
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"). Under the
Advisory Agreement, the Adviser provides the Fund with overall investment
advisory services. 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 3.51% of gross income in excess of
in excess of $200 million $16 million
.168% of average daily net assets 3.16% of gross income in excess of
in excess of $2 billion $160 million
</TABLE>
13
<PAGE> 63
For the Fund's fiscal year ended August 31, 1997, MFS received management fees
under the Fund's investment advisory agreement of $7,363,899 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 Variable Insurance Trust, MFS/Sun Life Series Trust and seven
variable accounts, each of which is a registered investment company established
by Sun Life Assurance Company of Canada (U.S.) ("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 $69.4 billion on behalf of approximately 2.7 million accounts as
of November 30, 1997. As of such date, the MFS organization managed
approximately $6.5 billion of assets in municipal obligations and approximately
$20.1 billion of assets in fixed income funds and fixed income portfolios. MFS
is a subsidiary of Sun Life of Canada (U.S.), which is a subsidiary of Sun Life
of Canada (U.S.) Holdings, Inc., 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, James O. Yost, Ellen M. Moynihan
and Mark E. Bradley, all of whom are officers of MFS, are officers of the Trust.
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. Some simultaneous
transactions are inevitable when several clients receive investment advice from
MFS, 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.
ADMINISTRATOR -- MFS provides the Fund with certain financial, legal,
compliance, shareholder communications and other administrative services
pursuant to a Master Administrative Services Agreement dated March 1, 1997, as
amended. Under this Agreement, the Fund pays MFS an administrative fee of up to
0.015% per annum of the Fund's average daily net assets. This fee reimburses MFS
for a portion of the costs it incurs to provide such services.
14
<PAGE> 64
DISTRIBUTOR -- MFD, a wholly owned subsidiary of the Adviser, is the distributor
of shares of the Fund and also serves as distributor for each of the other MFS
Funds.
SHAREHOLDER SERVICING AGENT -- MFS Service Center, Inc. ("Shareholder Servicing
Agent"), a wholly owned subsidiary of MFS, performs transfer agency, certain
dividend disbursing agency and certain other services for the Fund.
6. INFORMATION CONCERNING SHARES OF THE FUND
PURCHASES
Class A and B shares of the Fund may be purchased at the public offering price
through any dealer. As used in the Prospectus and any appendices thereto, the
term "dealer" includes any broker, dealer, bank (including bank trust
departments), registered investment adviser, financial planner and any other
financial institutions having a selling agreement or other similar agreement
with MFD. Dealers may also charge their customers fees relating to 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>
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 $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
five circumstances, Class A shares are offered at net asset value without an
initial sales charge, but
15
<PAGE> 65
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;
(iv) on investments in Class A shares by certain retirement plans
subject to ERISA, if: (a) the plan establishes an account with the
Shareholder Servicing Agent on or after July 1, 1996 and (b) the plan has,
at the time of purchase, a market value of $500,000 or more invested in
shares of any class or classes of the MFS Funds; THE RETIREMENT PLAN WILL
QUALIFY UNDER THIS CATEGORY ONLY IF THE PLAN OR ITS SPONSORING ORGANIZATION
INFORMS THE SHAREHOLDER SERVICING AGENT PRIOR TO THE PURCHASE THAT THE PLAN
HAS A MARKET VALUE OF $500,000 OR MORE INVESTED IN SHARES OF ANY CLASS OR
CLASSES OF THE MFS FUNDS; THE SHAREHOLDER SERVICING AGENT HAS NO OBLIGATION
INDEPENDENTLY TO DETERMINE WHETHER SUCH A PLAN QUALIFIES UNDER THIS
CATEGORY; and
(v) on investments in Class A shares by certain retirement plans
subject to ERISA, as amended, if: (a) the plan establishes an account with
the Shareholder Servicing Agent on or after July 1, 1997; (b) such plan's
records are maintained on a pooled basis by the Shareholder Servicing Agent;
and (c) the sponsoring organization demonstrates to the satisfaction of MFD
that, at the time of purchase, the employer has at least 200 eligible
employees and the plan has aggregate assets of at least $2,000,000.
In the case of 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>
16
<PAGE> 66
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)
(a) with respect to plans which establish an account with the Shareholder
Servicing Agent on or after November 1, 1997, in the event that the plan makes a
complete redemption of all of its shares in the MFS Funds, or (b) with respect
to plans which established an account with the Shareholder Servicing Agent prior
to November 1, 1997, in the event that there is a change in law or regulations
which results in a material adverse change to the tax advantaged nature of the
plan, or in the event that the plan and/or sponsoring organization: (i) becomes
insolvent or bankrupt; (ii) is terminated under ERISA or is liquidated or
dissolved; or (iii) is acquired by, merged into, or consolidated with, any other
entity.
CLASS B SHARES: Class B shares are offered at net asset value without an initial
sales charge but subject to a CDSC upon redemption as follows:
<TABLE>
<CAPTION>
YEAR OF CONTINGENT
REDEMPTION DEFERRED SALES
AFTER PURCHASE CHARGE
-------------------------- ---------------
<S> <C>
First..................... 4%
Second.................... 4%
Third..................... 3%
Fourth.................... 3%
Fifth..................... 2%
Sixth..................... 1%
Seventh and following..... 0%
</TABLE>
17
<PAGE> 67
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 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
18
<PAGE> 68
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.
GENERAL: The following information applies to purchases of all classes of the
Fund's shares.
MINIMUM INVESTMENT. Except as described below, the minimum initial investment
is $1,000 per account and the minimum additional investment is $50 per account.
Accounts being established for monthly automatic investments and under payroll
savings programs and tax-deferred retirement programs (other than IRA's)
involving the submission of investments by means of group remittal statements
are subject to a $50 minimum on initial and additional investments per account.
The minimum initial investment for IRAs is $250 per account and the minimum
additional investment is $50 per account. Accounts being established for
participation in the Automatic Exchange Plan are subject to a $50 minimum on
initial and additional investments per account. There are also other limited
exceptions to these minimums for certain tax-deferred retirement programs. Any
minimums may be changed at any time at the discretion of MFD. The Fund reserves
the right to cease offering its shares for sale at any time.
SUBSEQUENT INVESTMENT BY TELEPHONE: Each shareholder may purchase additional
shares of any MFS Fund by telephoning the Shareholder Servicing Agent toll-free
at (800) 225-2606. The minimum purchase amount is $50 and the maximum purchase
amount is $100,000. Shareholders wishing to avail themselves of this telephone
purchase privilege must so elect on their Account Application and designate
thereon a bank and account number from which purchases will be made. If a
telephone purchase request is received by the Shareholder Servicing Agent on any
business day prior to the close of regular trading on the Exchange (generally,
4:00 p.m., Eastern time), the purchase will occur at the closing net asset value
of the shares purchased on that day. The Shareholder Servicing Agent may be
liable for any losses resulting from unauthorized telephone transactions if it
does not follow reasonable procedures designed to verify the identity of the
caller. The Shareholder Servicing Agent will request personal or other
information from the caller, and will normally also record calls. Shareholders
should verify the accuracy of confirmation statements immediately after their
receipt.
RIGHT TO REJECT PURCHASE ORDERS/MARKET TIMING. Purchases and exchanges should
be made for investment purposes only. The Fund and MFD each reserves the right
to reject any specific
19
<PAGE> 69
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. 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 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 or arrange for the sale of shares of the Fund. Such
concessions provided by MFD may include financial assistance to dealers in
connection with preapproved conferences or seminars, sales or training programs
for invited registered representatives and other employees, payment for travel
expenses, including lodging, incurred by registered representatives and other
employees for such seminars or training programs, seminars for the public,
advertising and sales campaigns regarding one or more MFS Funds, and/or other
dealer-sponsored events. From time to time, MFD may make expense reimbursements
for special training of a dealer's registered representatives and other
employees in group meetings or to help pay the expenses of sales contests. Other
concessions may be offered to the extent not prohibited by state laws or any
self-regulatory agency, such as the NASD.
SPECIAL INVESTMENT PROGRAMS. For shareholders who elect to participate in
certain investment programs (e.g., the Automatic Investment Plan) or other
shareholder services, MFD or its affiliates may either (i) give a gift of
nominal value, such as a hand-held calculator or (ii) make a nominal charitable
contribution on their behalf.
20
<PAGE> 70
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
21
<PAGE> 71
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, 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)
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a stock power with a written request for redemption or letter of instruction,
together with his share certificates (if any were issued), all in "good order"
for transfer. "Good order" generally means that the stock power, written request
for redemption, letter of instruction or certificate must be endorsed by the
record owner(s) exactly as the shares are registered and the signature(s) must
be guaranteed in the manner set forth below under the caption "Signature
Guarantee." In addition, in some cases "good order" will require the furnishing
of additional documents. The Shareholder Servicing Agent may make certain de
minimis exceptions to the above requirements for redemption. Within seven days
after receipt of a redemption request in "good order" by the Shareholder
Servicing Agent, the Fund will make payment in cash of the net asset value of
the shares next determined after such redemption request was received, reduced
by the amount of any applicable CDSC described above and the amount of any
income tax required to be withheld, except during any period in which the right
of redemption is suspended or date of payment is postponed because the Exchange
is closed or trading on such Exchange is restricted or to the extent otherwise
permitted by the 1940 Act if an emergency exists. See "Tax Status" below.
REDEMPTION BY TELEPHONE: Each shareholder may redeem an amount from his account
by telephoning the Shareholder Servicing Agent toll-free at (800) 225-2606.
Shareholders wishing to avail themselves of this telephone redemption privilege
must so elect on their Account Application, designate thereon a bank and account
number to receive the proceeds of such redemption, and sign the Account
Application Form with the signature(s) guaranteed in the manner set forth below
under the caption "Signature Guarantee." The proceeds of such a redemption,
reduced by the amount of any applicable CDSC and the amount of any income tax
required to be withheld, are mailed by check to the designated account, without
charge, if the redemption proceeds do not exceed $1,000, and are wired in
federal funds to the designated account if the redemption proceeds exceed
$1,000. If a telephone redemption request is received by the Shareholder
Servicing Agent by the close of regular trading on the Exchange on any 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
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<PAGE> 73
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 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
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<PAGE> 74
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 or exchanges, except in the case
of accounts being established for monthly automatic investments and certain
payroll savings programs, Automatic Exchange Plan accounts
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<PAGE> 75
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.
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
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<PAGE> 76
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 0.82% 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.
TAX STATUS
The Fund is treated as an entity separate from the other series of the Trust for
federal income tax purposes. In order to minimize the taxes the Fund would
otherwise be required to pay, the Fund intends to qualify each year as a
"regulated investment company" under Subchapter M of the Internal Revenue Code
of 1986, as amended (the "Code"). Because the Fund intends to distribute all of
its net investment income and net realized capital gains to its shareholders in
accordance with the timing requirements imposed by the Code, it is not expected
that the Fund will be required to pay any federal income or excise taxes.
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 the
distribution is paid in cash or reinvested 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
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<PAGE> 77
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. All exempt interest dividends may affect
a corporate shareholder's alternative minimum tax liability. Fund distributions
may be subject to state and local income taxes, depending on the nature of the
distribution and the residence of the shareholder. 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 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 (as well as the rate category or categories under which such gain is
taxable), the portion, if any, representing a return of capital (which is free
of current taxes but which results in a basis reduction), and the amount, if
any, of federal income tax withheld.
Fund distributions of net capital gains or net short-term capital gains will
reduce the Fund's net asset value per share. Shareholders who buy shares shortly
before the Fund makes such a distribution may thus pay the full price for the
shares and then effectively receive a portion of the purchase price back as a
taxable distribution.
The Fund intends to withhold U.S. federal income tax at the rate of 30% (or any
lower rate permitted under an applicable treaty) on taxable dividends and other
payments that are subject to such withholding and that are made to persons who
are neither citizens nor residents of the U.S. The Fund is also required in
certain circumstances to apply backup withholding at the rate of 31% on taxable
dividends and redemption proceeds paid to any shareholder (including a
shareholder who is neither a citizen nor a resident of the U.S.) who does not
furnish to the Fund certain information and certifications or who is otherwise
subject to backup withholding. Backup withholding will not, however, be applied
to payments that have been subject to 30% withholding. Prospective investors
should read the Fund's Account Application for additional information regarding
backup withholding of federal income tax and should consult their own tax
advisers as to the tax consequences to them of an investment in the Fund.
NET ASSET VALUE
The net asset value per share of each class of the Fund is determined each day
during which the Exchange is open for trading. This determination is made once
during each such day as of the close of regular trading on the Exchange by
deducting the amount of the liabilities attributable to the class from the value
of the Fund's assets attributable to the class and dividing the difference by
the number of shares of the class outstanding. Assets in the Fund's portfolio
are valued on the basis of valuations furnished by a pricing service or at their
fair value as determined by the Board of Trustees, as described in the SAI. The
net asset value of each class of shares is effective for orders received in
"good order" by the dealer prior to its calculation and received by MFD prior to
the close of that business day.
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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
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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 to, and purchased by,
the public on different dates (the class "inception date"). The calculation of
total rate of return for a class of shares which has a later inception date than
another class of shares of the Fund is based both on (i) the performance of the
Fund's newer class from its inception date and (ii) the performance of the
Fund's oldest class from its inception date up to the class inception date of
the newer class. See the SAI for further information on the calculation of total
rate of return for share classes with different class inception dates.
All performance quotations are based on historical performance and are not
intended to indicate future performance. Yield 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, 1997, please see the Fund's Annual Report. A
copy of the annual report may be obtained without charge by contacting the
Shareholder Servicing Agent (see back cover for address and phone number). In
addition to information provided in shareholder reports, the Fund may, in its
discretion, from time to time, make a list of all or a portion of its holdings
available to investors upon request.
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").
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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.
LETTER OF INTENT: If a shareholder (other than a group purchaser as
described in the SAI) anticipates purchasing $100,000 or more of Class A shares
of the Fund alone or in combination with shares of either class of other MFS
Funds or MFS Fixed Fund (a bank collective investment fund) within a 13-month
period (or 36-month period for purchases of $1 million or more), the shareholder
may obtain such shares at the same reduced sales charge as though the total
quantity were invested in one lump sum, subject to escrow agreements and the
appointment of an attorney for redemptions from the escrow amount if the
intended purchases are not completed, by completing the Letter of Intent section
of the Account Application.
RIGHT OF ACCUMULATION: A shareholder qualifies for cumulative quantity
discounts on purchases of Class A shares when his new investment, together with
the current offering price value of all holdings of Class A and Class B shares
of that shareholder in the MFS Funds or MFS Fixed Fund (a bank collective
investment fund), reaches a discount level.
DISTRIBUTION INVESTMENT PROGRAM: Shares of a particular class of the Fund
may be sold at net asset value (and without any applicable CDSC) through the
automatic reinvestment of dividends and capital gain distributions from the same
class of another MFS Fund. Furthermore, distributions made by the Fund may be
automatically invested at net asset value in shares of the
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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 business day of the month. Required forms are available from the
Shareholder Servicing Agent or investment dealers.
AUTOMATIC EXCHANGE PLAN: Shareholders having account balances of at least
$5,000 in any MFS Fund may exchange their shares for the same class of shares of
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 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.
------------------------
32
<PAGE> 82
The Fund's SAI, dated January 1, 1998, 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.
33
<PAGE> 83
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). As used in the Prospectus
and any appendices thereto, the term "dealer" includes any broker, dealer, bank
(including bank trust departments), registered investment adviser, financial
planner and any other financial institutions having a selling agreement or other
similar agreement with MFD.
I. WAIVERS OF ALL APPLICABLE SALES CHARGES
In the following circumstances, the initial 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 MFD serves
as distributor;
- Employees, directors, partners, officers and trustees of any sub-adviser to
any MFS Fund;
- Employees or registered representatives of dealers;
- Certain family members of any such individual and their spouses identified
above and certain trusts, pension, profit-sharing or other retirement plans
for the sole benefit of such persons, provided the shares are not resold
except to the MFS Fund which issued the Shares; and
- Institutional Clients of MFS or MFS Institutional Advisors, Inc.
A-1
<PAGE> 84
4. INVOLUNTARY REDEMPTIONS (CDSC WAIVER ONLY)
- Shares redeemed at an MFS Fund's direction due to the small size of a
shareholder's account. See "Redemptions and Repurchases -- General --
Involuntary Redemptions/Small Accounts" in the Prospectus.
5. RETIREMENT PLANS (CDSC WAIVER ONLY). Shares redeemed on account of
distributions made under the following circumstances:
INDIVIDUAL RETIREMENT ACCOUNTS ("IRAS")
- Death or disability of the IRA owner.
SECTION 401(A) PLANS ("401(A) PLANS") AND SECTION 403(B) EMPLOYER SPONSORED
PLANS ("ESP PLANS")
- Death, disability or retirement of 401(a) or ESP Plan participant;
- Loan from 401(a) or ESP Plan;
- Financial hardship (as defined in Treasury Regulation Section
1.401(k)-1(d)(2), as amended from time to time);
- Termination of employment of 401(a) or ESP Plan participant (excluding,
however, a partial or other termination of the Plan);
- Tax-free return of excess 401(a) or ESP Plan contributions;
- To the extent that redemption proceeds are used to pay expenses (or certain
participant expenses) of the 401(a) or ESP Plan (e.g., participant account
fees), provided that the Plan sponsor subscribes to the MFS FUNDamental
401(k) Plan or another similar recordkeeping system made available by MFS
Service Center, Inc. (the "Shareholder Servicing Agent"); and
- Distributions from a 401(a) or ESP Plan that has invested its assets in one
or more of the MFS Funds for more than 10 years from the later to occur of:
(i) January 1, 1993 or (ii) the date such 401(a) or ESP Plan first invests
its assets in one or more of the MFS Funds.
- The sales charges will be waived in the case of a redemption of all of the
401(a) or ESP Plan's shares in all MFS Funds (i.e., all the assets of the
401(a) or ESP Plan invested in the MFS Funds are withdrawn), unless
immediately prior to the redemption, the aggregate amount invested by the
401(a) or ESP Plan in shares of the MFS Funds (excluding the reinvestment of
distributions) during the prior four years equals 50% or more of the total
value of the 401(a) or ESP Plan's assets in the MFS Funds, in which case the
sales charges will not be waived.
SECTION 403(B) SALARY REDUCTION ONLY PLANS ("SRO PLANS")
- Death or disability of SRO Plan participant.
A-2
<PAGE> 85
6. CERTAIN TRANSFERS OF REGISTRATION (CDSC WAIVER ONLY). Shares transferred:
- To an IRA rollover account where any sales charges with respect to the
shares being reregistered would have been waived had they been redeemed; and
- From a single account maintained for a 401(a) Plan to multiple accounts
maintained by the Shareholder Servicing Agent on behalf of individual
participants of such Plan, provided that the Plan sponsor subscribes to the
MFS FUNDamental 401(k) Plan or another similar recordkeeping system made
available by the Shareholder Servicing Agent.
7. LOAN REPAYMENTS
- Shares acquired pursuant to repayments by retirement plan participants of
loans from 401(a) or ESP Plans with respect to which such Plan or its
sponsoring organization subscribes to the MFS FUNDamental 401(k) Program or
the MFS Recordkeeper Plus Program (but not the MFS Recordkeeper Program).
II. WAIVERS OF CLASS A SALES CHARGES
In addition to the waivers set forth in Section I above, in the following
circumstances the initial sales charge imposed on purchases of Class A shares
and the CDSC imposed on certain redemptions of Class A shares are waived:
1. WRAP ACCOUNT AND FUND "SUPERMARKET" INVESTMENTS
- Shares acquired by investments through certain dealers (including registered
investment advisers and financial planners) which have established certain
operational arrangements with MFD which include a requirement that such
shares be sold for the sole benefit of clients participating in a "wrap"
account, mutual fund "supermarket" account or a similar program under which
such clients pay a fee to such dealer.
2. INVESTMENT BY INSURANCE COMPANY SEPARATE ACCOUNTS
- Shares acquired by insurance company separate accounts.
3. RETIREMENT PLANS
ADMINISTRATIVE SERVICES ARRANGEMENTS
- Shares acquired by retirement plans or trust accounts whose third party
administrators or dealers have entered into an administrative services
agreement with MFD or one of its affiliates to perform certain
administrative services, subject to certain operational and minimum size
requirements specified from time to time by MFD or one or more of its
affiliates.
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.
A-3
<PAGE> 86
SHARES REDEEMED ON ACCOUNT OF DISTRIBUTIONS MADE UNDER THE FOLLOWING
CIRCUMSTANCES:
IRAS
- Distributions made on or after the IRA owner has attained the age of 59 1/2
years old; and
- Tax-free returns of excess IRA contributions.
401(A) PLANS
- Distributions made on or after the 401(a) Plan participant has attained the
age of 59 1/2 years old; and
- Certain involuntary redemptions and redemptions in connection with certain
automatic withdrawals from a 401(a) Plan.
ESP PLANS AND SRO PLANS
- Distributions made on or after the ESP or SRO Plan participant has attained
the age of 59 1/2 years old.
III. WAIVERS OF CLASS B 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
(or 15% per year, in the case of accounts registered as IRAs where the
redemption is made pursuant to Section 72(t) of the Internal Revenue Code of
1986, as amended) of the account value at the time of establishment.
2. DEATH OF OWNER
- Shares redeemed on account of the death of the account owner if the shares
are held solely in the deceased individual's name or in a living trust for
the benefit of the deceased individual.
3. DISABILITY OF OWNER
- Shares redeemed on account of the disability of the account owner if shares
are held either solely or jointly in the disabled individual's name or in a
living trust for the benefit of the disabled individual (in which case a
disability certification form is required to be submitted to the Shareholder
Servicing Agent).
4. RETIREMENT PLANS. Shares redeemed on account of distributions made under the
following circumstances:
A-4
<PAGE> 87
IRAS, 401(A) PLANS, ESP PLANS AND SRO PLANS
- Distributions made on or after the IRA owner or the 401(a), ESP or SRO Plan
participant, as applicable, has attained the age of 70 1/2 years old, but
only with respect to the minimum distribution under applicable Internal
Revenue Code ("Code") rules.
SALARY REDUCTION SIMPLIFIED EMPLOYEE PENSION PLANS ("SAR-SEP PLANS")
- Distributions made on or after the SAR-SEP Plan participant has attained the
age of 70 1/2 years old, but only with respect to the minimum distribution
under applicable Code rules; and
- Death or disability of a SAR-SEP Plan participant.
A-5
<PAGE> 88
APPENDIX B
TAXABLE EQUIVALENT YIELD TABLE
(UNDER FEDERAL INCOME TAX LAW AND RATES FOR 1997)
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 1997. (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>
JOINT RETURN TAX-EXEMPT YIELD
----------------- INCOME ---------------------------------------------------
SINGLE RETURN TAX FEDERAL
- -----------------
BRACKET** RATE
--------- -------
(TAXABLE INCOME)*
- ---------------------------------------
1997 3% 4% 5% 6% 7% 8%
---- ---- ---- ---- ----- -----
1997 EQUIVALENT TAXABLE YIELD
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$ 0-$ 24,650 $ 0-$ 41,200 0.15% 3.53% 4.71% 5.88% 7.06% 8.24% 9.41% 0.15%
$ 24,650-$ 59,750 $ 41,200-$ 99,600 28.00 4.17 5.56 6.94 8.33 9.72 11.11 0.28
$ 59,750-$124,650 $ 99,600-$151,750 31.00 4.35 5.80 7.25 8.70 10.14 11.59 0.31
$124,650-$271,050 $151,750-$271,050 0.36 4.69 6.25 7.81 9.38 10.94 12.50 0.36
$271,050 & Over $271,050 & 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> 89
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
C-1
<PAGE> 90
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.
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
C-2
<PAGE> 91
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.
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> 92
THE MFS FAMILY OF FUNDS(R) AMERICA'S OLDEST MUTUAL FUND GROUP
The members of the MFS Family of Funds are grouped below according to the types
of securities in their portfolios. For free prospectuses containing more
complete information, including the exchange privilege and all charges and
expenses, please contact your financial adviser or call MFS at 1-800-225-2606
any business day from 8 a.m. to 8 p.m. Eastern time. This material should be
read carefully before investing or sending money.
STOCK
- --------------------------------------------------------------------------------
Massachusetts Investors Trust
Massachusetts Investors Growth Stock Fund
MFS(R) Emerging Growth Fund
MFS(R) Equity Income Fund
MFS(R) Growth Opportunities Fund
MFS(R) Large Cap Growth Fund (1)
MFS(R) Managed Sectors Fund
MFS(R) Mid Cap Growth Fund (2)
MFS(R) New Discovery Fund
MFS(R) Research Fund
MFS(R) Research Growth and Income Fund
MFS(R) Strategic Growth Fund
MFS(R) Union Standard(R) Equity 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) International Growth Fund (3)
MFS(R) International Growth and
Income Fund (4)
MFS(R) World Asset Allocation Fund sm
MFS(R) World Equity Fund
MFS(R) World Governments Fund
MFS(R) World Growth Fund
MFS(R) World Total Return Fund
NATIONAL TAX-FREE BOND
- --------------------------------------------------------------------------------
MFS(R) Municipal Bond Fund
MFS(R) Municipal High Income Fund
MFS(R) Municipal Income Fund
STATE TAX-FREE BOND
- --------------------------------------------------------------------------------
Alabama, Arkansas, California, Florida, Georgia, Maryland, Massachusetts,
Mississippi, New York, North Carolina, Pennsylvania, South Carolina,
Tennessee, Virginia, West Virginia
MONEY MARKET
- --------------------------------------------------------------------------------
MFS(R) Cash Reserve Fund
MFS(R) Government Money Market Fund
MFS(R) Money Market Fund
(1) Formerly MFS(R) Capital Growth Fund.
(2) Formerly MFS(R) OTC Fund.
(3) Formerly MFS(R)/Foreign & Colonial International Growth Fund.
(4) Formerly MFS(R)/Foreign & Colonial International Growth and Income Fund.
<PAGE> 93
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
<PAGE> 94
-------------------
Bulk Rate
U.S. Postage
Paid
MFS
-------------------
[MFS LOGO]
We invented the Mutual fund
MFS(R) Municipal Bond Fund
500 Boylston Street, Boston, MA 02116-3741
This is your fund's current prospectus.
Please keep it with your financial
records because it provides important facts
about your investment.
<PAGE> 95
LOGO
<TABLE>
<S> <C>
MFS(R) MUNICIPAL STATEMENT OF
BOND FUND ADDITIONAL INFORMATION
(A member of the MFS Family of Funds(R)) January 1, 1998
</TABLE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PAGE
------
<S> <C>
1. Definitions............................................................................. 2
2. Investment Objective, Policies and Restrictions......................................... 2
3. Management of the Fund.................................................................. 8
Trustees............................................................................. 8
Officers............................................................................. 8
Trustee Compensation Table........................................................... 9
Investment Adviser................................................................... 10
Administrator........................................................................ 10
Custodian............................................................................ 10
Shareholder Servicing Agent.......................................................... 11
Distributor.......................................................................... 11
4. Portfolio Transactions and Brokerage Commissions........................................ 12
5. Shareholder Services.................................................................... 12
Investment and Withdrawal Programs................................................... 12
Exchange Privilege................................................................... 15
6. Tax Status.............................................................................. 15
7. Determination of Net Asset Value and Performance........................................ 17
8. Distribution Plan....................................................................... 19
9. Description of Shares, Voting Rights and Liabilities.................................... 20
10. Independent Auditors and Financial Statements........................................... 21
Appendix A.............................................................................. A-1
</TABLE>
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, 1998. This SAI should be read in conjunction with the Prospectus, a
copy of which may be obtained without charge by contacting the Shareholder
Servicing Agent (see last page for address and phone number).
THIS SAI IS NOT A PROSPECTUS AND IS AUTHORIZED FOR DISTRIBUTION TO PROSPECTIVE
INVESTORS ONLY IF PRECEDED OR ACCOMPANIED BY A CURRENT PROSPECTUS.
<PAGE> 96
1. DEFINITIONS
<TABLE>
<S> <C>
"Fund" -- MFS Municipal Bond Fund, a
diversified series of
MFS(R) Series Trust IV
(the "Trust"), a Massa-
chusetts business trust.
The Trust was known as
Massachusetts Cash
Management Trust prior to
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,
1998, as amended or
supplemented from time to
time.
</TABLE>
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 liquid assets sufficient to cover any commitments or to
limit any potential risk. However, although the Fund does not intend to make
such purchases for speculative purposes and intends to adhere to the provisions
of the SEC policy, purchases of securities on such 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
the short-term piece) as the comparable change in the market
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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 liquid assets in a segregated account with its custodian. A put
option written by the Fund is "covered" if the Fund maintains liquid assets with
a value equal to the exercise price in a segregated account with its custodian,
or else holds a put on the same security and in the same principal amount as the
put written where the exercise price of the put held 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 liquid
assets in a segregated account with its custodian. Put and call options written
by the Fund may also be covered in such other manner as may be in accordance
with the requirements of the exchange on which, or the 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 liquid assets. Such transactions permit
the Fund to generate additional premium income, which will partially offset
declines in the value of portfolio securities or increases in the cost of
securities to be acquired. Also, effecting a closing transaction will permit the
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 underlying security declines, the amount of
such decline will be offset in part, or entirely, by the premium received.
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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
liquid assets as a deposit payment ("initial deposit"). The initial deposit
varies but may be as low as 5% or less of the value of the contract. Daily
thereafter, the Futures Contract is valued and the payment of "variation margin"
may be required since each day the Fund would provide or receive cash that
reflects any decline or increase in the contract's value.
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At the time of delivery of securities pursuant to a Futures Contract based on
fixed income securities, adjustments are made to recognize differences in value
arising from the delivery of securities with a different interest rate from that
specified in the contract. In some (but not many) cases, securities called for
by a Futures Contract may not have been issued when the contract was written.
A Futures Contract based on an index of securities, such as a Municipal Bond
index Futures Contract, provides for a cash payment, equal to the amount, if
any, by which the value of the index at maturity is above or below the value of
the index at the time the contract was entered into, times a fixed index
"multiplier". The index underlying such a Futures Contract is generally a broad
based index of securities designed to reflect movements in the relevant market
as a whole. The index assigns weighted values to the securities included in the
index, and its composition is changed periodically.
Although Futures Contracts call for the actual delivery or acquisition of
securities or, in the case of Futures Contracts based on an index, the making or
acceptance of a cash settlement at a specified future time, the contractual
obligation is usually fulfilled before such date by buying or selling, as the
case may be, on a commodities exchange, an identical Futures Contract calling
for settlement in the same month, subject to the availability of a liquid
secondary market. The Fund incurs brokerage fees when it purchases and sells
Futures Contracts.
One 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 liquid
assets 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 markets regulated by the CFTC. Depending on the pricing of the
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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 liquid assets in a segregated account with its
custodian. The Fund may cover the writing of put Options on Futures Contracts
(a) through sales of the underlying Futures Contract, (b) through segregation of
liquid assets in an amount equal to the value of the security or index
underlying the Futures Contract, or (c) through the holding of a put on the same
Futures Contract and in the same principal amount as the put written where the
exercise price of the put held 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 liquid assets in a segregated account
with its custodian. Put and call Options on Futures Contracts written by the
Fund may also be covered in such other manner as may be in accordance with the
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
party. In addition, there are no daily price fluctuation limits, and adverse
market movements could therefore continue to an
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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 liquid assets 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
7
<PAGE> 102
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. As an
additional matter of non-fundamental policy, the Fund may not invest 25% or more
of the market value of its total assets in securities of issuers in any one
industry.
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.
Except with respect to Investment Restriction (1) and the Fund's non-fundamental
policy on investing in illiquid securities, these investment restrictions and
policies 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 (born 8/4/35)
Massachusetts Financial Services Company, Chairman, President and Director
RICHARD B. BAILEY* (born 9/14/26)
Private Investor; Massachusetts Financial Services Company, former Chairman and
Director (prior to September 30, 1991); Cambridge Bancorp, Director; Cambridge
Trust Company, Director
PETER G. HARWOOD (born 4/3/26)
Private Investor
Address: 211 Lindsay Pond Road, Concord, Massachusetts
J. ATWOOD IVES (born 5/1/36)
Eastern Enterprises (diversified services company), Chairman and Chief Executive
Officer
Address: 9 Riverside Road, Weston, Massachusetts
LAWRENCE T. PERERA (born 6/23/35)
Hemenway & Barnes (attorneys), Partner
Address: 60 State Street, Boston, Massachusetts
WILLIAM J. POORVU (born 4/10/35)
Harvard University Graduate School of Business Administration, Adjunct
Professor; CBL & Associates Properties, Inc. (a real estate investment trust),
Director; The Baupost Fund (a registered investment company), Vice Chairman
(since November 1993), Chairman and Trustee (prior to November 1993)
Address: Harvard Business School, Soldiers Field Road, Cambridge, Massachusetts
CHARLES W. SCHMIDT (born 3/18/28)
Private Investor; OHM Corporation, Director; Mohawk Paper Company, Director
Address: 30 Colpitts Road, Weston, Massachusetts
ARNOLD D. SCOTT* (born 12/16/42)
Massachusetts Financial Services Company, Senior Executive Vice President,
Secretary and Director
JEFFREY L. SHAMES* (born 6/2/55)
Massachusetts Financial Services Company, President and Director
ELAINE R. SMITH (born 4/25/46)
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 (born 9/2/27)
North American Management Corp. (investment adviser), Chairman and Director;
Eastern Enterprises, Trustee
Address: 10 Post Office Square, Suite 300, Boston, Massachusetts
OFFICERS
W. THOMAS LONDON,* Treasurer (born 3/1/44)
Massachusetts Financial Services Company, Senior Vice President
STEPHEN E. CAVAN,* Secretary and Clerk (born 11/6/53)
Massachusetts Financial Services Company, Senior Vice President, General Counsel
and Assistant Secretary
JAMES R. BORDEWICK, JR.,* Assistant Secretary (born
3/6/59)
Massachusetts Financial Services Company, Senior Vice President and Associate
General Counsel
ROBERT A. DENNIS,* Vice President (born 12/12/48)
Massachusetts Financial Services Company, Senior Vice President
GEOFFREY L. KURINSKY,* Vice President (born 7/7/53)
Massachusetts Financial Services Company, Senior Vice President
JAMES O. YOST,* Assistant Treasurer (born 6/12/60)
Massachusetts Financial
Services Company, Vice President
MARK E. BRADLEY,* Assistant Treasurer (born 11/23/59)
Massachusetts Financial Services Company, Vice President (since March 1997);
Putnam Investments, Vice President (from September 1994 until March 1997);
Ernst & Young, Senior Tax Manager (until September 1994)
ELLEN M. MOYNIHAN,* Assistant Treasurer (born 11/13/57)
Massachusetts Financial Services Company, Vice President (since September 1996);
Deloltte & Touche LLP, Senior Manager (until September 1996)
- ---------------
*"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.
8
<PAGE> 103
The Fund pays the compensation of non-interested Trustees and Mr. Bailey (who
currently receive a fee of $4,000 per year plus $180 per meeting and $150 per
committee meeting attended, together with such Trustee's out-of-pocket expenses)
and has adopted a retirement plan for non-interested Trustees and Mr. Bailey.
Under this plan, a Trustee will retire upon reaching age 73 and if the Trustee
has completed at least five years of service, he would be entitled to annual
payments during his lifetime of up to 50% of such Trustee's average annual
compensation (based on the three years prior to his retirement) depending on his
length of service. A Trustee may also retire prior to age 73 and receive reduced
payments if he has completed at least five years of service. Under the plan, a
Trustee (or his beneficiaries) will also receive benefits for a period of time
in the event the Trustee is disabled or dies. These benefits will also be based
on the Trustee's average annual compensation and length of service. There is no
retirement plan provided by the Trust for Messrs. Brodkin, Scott and Shames. The
Fund will accrue its allocable share of compensation expenses each year to cover
current year's service and amortize past service cost.
TRUSTEE COMPENSATION TABLE
<TABLE>
<CAPTION>
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.................................... $6,912 $2,100 8 $ 247,168
A. Keith Brodkin..................................... 0 0 N/A 0
Peter G. Harwood..................................... 7,237 1,539 5 105,995
J. Atwood Ives....................................... 6,912 2,181 17 98,750
Lawrence T. Perera................................... 7,512 3,562 26 98,310
William Poorvu....................................... 7,037 3,814 25 102,840
Charles W. Schmidt................................... 7,237 3,717 20 105,995
Arnold D. Scott...................................... 0 0 N/A 0
Jeffrey L. Shames.................................... 0 0 N/A 0
Elaine R. Smith...................................... 7,807 2,230 27 105,995
David B. Stone....................................... 7,387 3,125 11 108,710
</TABLE>
- ---------------
(1) For fiscal year ended August 31, 1997.
(2) Based on normal retirement age of 73. See the table below for the estimated
annual benefits payable upon retirement by the Fund to a Trustee based on
his or her estimated credited years of service.
(3) For calendar year 1996. All Trustees receiving compensation served as
Trustees of 23 funds within the MFS fund complex (having aggregate net
assets at December 31, 1996, of approximately $21.2 Billion) except Mr.
Bailey, who served as Trustee of 81 funds within the MFS fund complex
(having aggregate net assets at December 31, 1996, of approximately $38.5
Billion.
ESTIMATED ANNUAL BENEFITS PAYABLE BY FUND UPON RETIREMENT(4)
<TABLE>
<CAPTION>
YEARS OF SERVICE
AVERAGE -------------------------------------------------
TRUSTEE FEES 3 5 7 10 OR MORE
- ------------ ------ ------ ------ ----------
<S> <C> <C> <C> <C>
$6,220 $ 933 $1,555 $2,177 $3,110
6,694 1,004 1,673 2,343 $3,347
7,167 1,075 1,792 2,509 $3,584
7,641 1,146 1,910 2,674 $3,820
8,114 1,217 2,028 2,840 $4,057
8,587 1,288 2,147 3,006 $4,294
</TABLE>
- ---------------
(4) Other funds in the MFS fund complex provide similar retirement benefits to
the Trustees.
As of November 30, 1997, all Trustees and officers as a group owned less than 1%
of the outstanding shares of the Fund.
As of November 30, 1997, Merrill Lynch, Pierce, Fenner & Smith Inc., 4800 Deer
Lake Drive East, Jacksonville, FL 32246 was the record holder of approximately
6.66% 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
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<PAGE> 104
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 is an indirect
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"). Under the Advisory Agreement, the
Adviser provides the Fund with overall investment advisory services. Subject to
such policies as the Trustees may determine, the Adviser makes investment
decisions for the Fund. For these services and facilities, the Adviser receives
a management fee computed and paid monthly 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 3.51% of gross income in excess
assets in of
excess of $200 million $16 million
.168% of average daily net 3.16% of gross income in excess
assets in of
excess of $2 billion $160 million
</TABLE>
For the Fund's fiscal years ended August 31, 1997, August 31, 1996 and August
31, 1995, MFS received management fees of $7,363,899 (equivalent to an annual
rate of 0.40% of average daily net assets), $7,990,167 (equivalent to an annual
rate of 0.40% of average daily net assets) and $8,210,290 (equivalent to an
annual rate of 0.42% of average daily net assets), respectively.
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, 1997, 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 for managing the Fund's investments, effecting the Fund's portfolio
transactions and, in general, administering the Fund's affairs.
The Advisory Agreement will remain in effect until August 1, 1998, and will
continue in effect thereafter only if such continuance is specifically approved
at least annually by the Board of Trustees or by vote of a majority of the
Fund's outstanding voting securities (as defined under "Investment
Restrictions") and, in either case, by a majority of the Trustees who are not
parties to the Advisory Agreement or interested persons of any such party. The
Advisory Agreement terminates automatically if it is assigned and may be
terminated without penalty by vote of 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.
ADMINISTRATOR
MFS provides the Fund with certain financial, legal, compliance, shareholder
communications and other administrative services pursuant to a Master
Administrative Services Agreement dated March 1, 1997, as amended. Under the
Agreement, the Fund pays MFS an administrative fee up to 0.015% per annum of the
Fund's average daily net assets. This fee reimburses MFS for a portion of the
costs it incurs to provide such services. For the period from March 1, 1997
through August 31, 1997, MFS received fees under the Agreement of $124,924.
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,
10
<PAGE> 105
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 an effective rate of 0.13%. 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 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. 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, 1997, MFD and certain other
financial institutions received net commissions of $185,845 and $1,217,830,
respectively (as their concession on gross commissions of $1,403,675). The Fund
received $138,735,228, representing the aggregate net asset value of such
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
11
<PAGE> 106
the aggregate net asset value of such shares. During the Fund's fiscal year
ended August 31, 1997, the CDSC imposed upon the redemption of Class A and Class
B shares was $9,427 and $10,251, respectively. 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.
The Distribution Agreement will remain in effect until August 1, 1998, and will
continue in effect thereafter only if such continuance is specifically approved
at least annually by the Board of Trustees or by vote of a majority of the
Trust's shares (as defined in "Investment Restrictions") and, in either case, by
a majority of the Trustees who are not parties to the Distribution Agreement or
interested persons of any such party. The Distribution Agreement terminates
automatically if it is assigned and may be terminated without penalty by either
party on not more than 60 days' nor less than 30 days' notice.
4. PORTFOLIO TRANSACTIONS AND
BROKERAGE COMMISSIONS
Specific decisions to purchase or sell securities for the Fund are made by 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 Conduct Rules 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.
For the fiscal years ended August 31, 1997, 1996 and 1995, the Fund paid no
brokerage commissions.
In certain instances there may be securities which are suitable for the Fund's
portfolio as well as for that of one or more of the other clients of the Adviser
or any subsidiary of the Adviser. Investment decisions for the Fund and for such
other clients are made with a view to achieving their respective investment
objectives. It may develop that a particular security is bought or sold for only
one client even though it might be held by, or bought or sold for, other
clients. Likewise, a particular security may be bought for one or more clients
when one or more other clients are selling that same security. Some simultaneous
transactions are inevitable when several clients receive investment advice from
the same investment adviser, particularly when the same security is suitable for
the investment objectives of more than one client. When two or more clients are
simultaneously engaged in the purchase or sale of the same security, the
securities are allocated among clients in a manner believed by the Adviser to be
equitable to each. It is recognized that in some cases this system could have a
detrimental effect on the price or volume of the security as far as the Fund is
concerned. In other cases, however, the Fund believes that its ability to
participate in volume transactions will produce better executions for the Fund.
5. SHAREHOLDER SERVICES
INVESTMENT AND WITHDRAWAL PROGRAMS -- The Fund makes available the following
programs designed to enable shareholders to add to their investment or withdraw
from it with a minimum of paper work. These are described below and, in certain
cases, in the 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
12
<PAGE> 107
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 Class A, Class B and Class C shares of that shareholder in the MFS Funds or
MFS Fixed Fund (a bank collective investment fund) reaches a discount level (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.
SUBSEQUENT INVESTMENT BY TELEPHONE: Each shareholder may purchase additional
shares of any MFS Fund by tele-phoning the Shareholder Servicing Agent toll-free
at (800) 225-2606. The minimum purchase amount is $50 and the maximum purchase
amount is $100,000. Shareholders wishing to avail themselves of this telephone
purchase privilege must so elect on their Account Application and designate
thereon a bank and account number from which purchases will be made. If a
telephone purchase request is received by the Shareholder Servicing Agent on any
business day prior to the close of regular trading on the Exchange (generally,
4:00 p.m., Eastern time), the purchase will occur at the closing net asset value
of the shares purchased on that day. The Shareholder Servicing Agent may be
liable for any losses resulting from unauthorized telephone transactions if it
does not follow reasonable procedures designed to verify the identity of the
caller. The Shareholder Servicing Agent will request personal or other
information from the caller, and will normally also record calls. Shareholders
should verify the accuracy of confirmation statements immediately after their
receipt.
DISTRIBUTION INVESTMENT PROGRAM: Distributions of dividends and capital gains
made by the Fund with respect to a particular class of shares may be
automatically invested in shares of the same class of shares of one of the other
MFS Funds, if shares of the fund are available for sale. Such investments will
be subject to additional purchase minimums. Distributions will be invested at
net asset value (exclusive of any sales charge) and will not subject to any
CDSC). Distributions will be invested at the close of business on the payable
date for the distribution. A shareholder considering the Distribution Investment
Program should obtain and read the prospectus of the other fund and consider the
differences in objectives and policies before making any investment.
SYSTEMATIC WITHDRAWAL PLAN: A shareholder may direct the Shareholder Servicing
Agent to send him (or anyone he designates) regular periodic payments based upon
the value of his account. Each payment under a Systematic Withdrawal Plan (a
"SWP") must be at least $100, except in certain limited circumstances. The
aggregate withdrawals of Class B shares in any year pursuant to a SWP generally
are limited to 10% of the value of the account at the time of establishment of
the SWP. SWP payments are drawn from the proceeds of share redemptions (which
would be a return of principal and, if reflecting a gain, would be taxable).
Redemptions of Class B shares will be made in the following order: (i) any "Free
Amount"; (ii) to the extent necessary, any "Reinvested Shares"; and (iii) to the
extent necessary, the "Direct Purchase" subject to the lowest CDSC (as such
terms are defined in "Contingent Deferred Sales Charge" in the Prospectus). The
CDSC will be waived in the case of redemptions of Class B shares pursuant to a
SWP, but will not be waived in the case of SWP redemptions of Class A shares
which are subject to a CDSC. To the extent that 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
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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.
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
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any CDSC paid are then redeemed within six years of the initial purchase in the
case of Class B shares or 12 months of the initial purchase in the case of
certain Class A shares, a CDSC will be imposed upon redemption. Although
redemptions and repurchases of shares are taxable events, a reinvestment within
such 90-day period of time in the same fund may be considered a "wash sale" and
may result in the inability to recognize currently all or a portion of any loss
realized on the original redemption for federal income tax purposes. Please see
your tax adviser for further information.
EXCHANGE PRIVILEGE -- Subject to the requirements set forth below, some or all
of the shares in an account with the Fund for which payment has been received by
the Fund (i.e., an established account) may be exchanged for shares of the same
class of any of the other MFS Funds (if available for sale) at net asset value.
Exchanges will be made only after instructions in writing or by telephone (an
"Exchange Request") are received for an established account by the Shareholder
Servicing Agent.
Each Exchange Request must be in proper form (i.e., if in writing -- signed by
the record owner(s) exactly as the shares are registered; if by
telephone -- proper account identification is given by the dealer or shareholder
of record), and each exchange must involve either shares having an aggregate
value of at least $1,000 ($50 in the case of retirement plan participants whose
sponsoring organizations subscribe to the MFS FUNDamental 401(k) Plan or another
similar 401(k) record keeping system made available by the Shareholder Servicing
Agent) or all the shares in the account. Each exchange involves the redemption
of the shares of the Fund to be exchanged and the purchase at net asset value
(i.e., without a sales charge) of shares of the same class of the other MFS
Fund. Any gain or loss on the redemption of the shares exchanged is reportable
on the shareholder's federal income tax return. No more than five exchanges may
be made in any one Exchange Request by telephone. If an Exchange Request is
received by the Shareholder Servicing Agent prior to the close of regular
trading on the New York Stock Exchange (the "Exchange"), the exchange usually
will occur on that day if all of the requirements set forth above have been
complied with at that time. However, payment of the redemption proceeds by the
Fund, and thus the purchase of shares of the other MFS Fund, may be delayed for
up to seven days if the Fund determines that such a delay would be in the best
interest of all its shareholders. Investment dealers which have satisfied
criteria established by MFD may also communicate a shareholder's Exchange
Request to MFD by facsimile subject to the requirements set forth above.
No CDSC is imposed on exchanges among the MFS Funds, although liability for the
CDSC is carried forward to the exchanged shares. For purposes of calculating the
CDSC upon redemption of shares acquired in an exchange, the purchase of shares
acquired in one or more exchanges is deemed to have occurred at the time of the
original purchase of the exchanged shares.
Additional information with respect to any of the MFS Funds, including a copy of
its current prospectus, may be obtained from investment dealers or the
Shareholder Servicing Agent. A shareholder considering an exchange should obtain
and read the prospectus of the other MFS Fund and consider the differences in
objectives and policies before making any exchange. Shareholders of the other
MFS Funds (except holders of shares of MFS Money Market Fund, MFS Government
Money Market Fund and Class A shares of MFS Cash Reserve Fund acquired through
direct purchase or reinvested dividends prior to June 1, 1992) have the right to
exchange their shares for shares of the Fund, subject to the conditions, if any,
set forth in their respective prospectuses. In addition, unitholders of the MFS
Fixed Fund (a bank collective investment fund) have the right to exchange their
units (except units acquired through direct purchase) for shares of the Fund,
subject to the conditions, if any, imposed upon such unitholders by the MFS
Fixed Fund.
Any state income tax advantages for investment in shares of each state specific
series of MFS Municipal Series Trust may only benefit residents of such states.
Investors should consult with their own tax advisers to be sure this is an
appropriate investment, based on their residency and each state's income tax
laws.
The exchange privilege (or any aspect of it) may be changed or discontinued and
is subject to certain limitations, including certain restrictions on purchases
by market timers (see "Purchases" in the Prospectus).
6. TAX STATUS
The Fund has elected to be treated and intends to qualify each year as a
"regulated investment company" under Subchapter M of the Internal Revenue Code
of 1986, as amended (the "Code"), by meeting all applicable requirements of
Subchapter M, including requirements as to the nature of the Fund's gross
income, the amount of Fund distributions (as a percentage of both the Fund's
overall income and its tax-exempt income), and the composition of the Fund's
portfolio assets. Because the Fund intends to distribute all of its net
investment income and net realized capital gains to shareholders in accordance
with the timing requirements imposed by the Code, it is not expected that the
Fund will be required to pay 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 distributions of net investment income 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
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<PAGE> 110
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,
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
normally 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 exempt interest
dividends and any distributions from net short-term capital gains are taxable to
shareholders as ordinary income for federal income tax purposes whether the
distributions are paid in cash or reinvested in additional shares. Because the
Fund expects to earn primarily 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 net
long-term capital gains over net short-term capital losses), whether paid in
cash or reinvested in additional shares, are taxable to shareholders as
long-term capital gains for federal income tax purposes without regard to the
length of time the shareholders have held their shares. Such capital gains may
be taxable to shareholders that are individuals, estates or trusts at maximum
rates of 20%, 25% or 28%, depending upon the source of the gains. 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 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 a short-term capital gain or loss; a
long-term capital gain realized by an individual, estate or trust may be
eligible for reduced tax rates if the shares were held for more than 18 months.
However, any loss realized upon a disposition of shares in the Fund held for six
months or less will be 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 ninety days after their purchase followed by any purchase
(including purchases by exchange or by reinvestment) without payment of an
additional sales charge of Class A shares of the Fund or of another MFS Fund (or
any other shares of an MFS Fund generally sold subject to a sales charge).
The Fund's current dividend and accounting policies will affect the amount,
timing, and character of distributions to shareholders. Any 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
(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 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. federal income tax at the rate of 30% (or any
lower rate permitted under an applicable treaty) on taxable dividends and other
payments to Non-U.S. Persons that are subject to such withholding. Any amounts
overwithheld may be recovered by such persons by filing a claim for refund with
the U.S. Internal Revenue Service within the time period applicable to such
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claims. Distributions received by the Fund by Non-U.S. Persons also may be
subject to tax under the laws of their own jurisdictions. The Fund is also
required in certain circumstances to apply backup withholding at the rate of 31%
on taxable dividends and redemption proceeds paid to any shareholder (including
a Non-U.S. Person) who does not furnish to the Fund certain information and
certifications or who is otherwise subject to backup withholding. Backup
withholding will not, however, be applied to payments that have been subject to
30% withholding.
As long as it qualifies as a regulated investment company under the Code, the
Fund will not be required to pay Massachusetts income or excise taxes.
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 holdings of tax-exempt 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. Residents of certain
states may be subject to an intangible tax or a personal property tax on all or
a portion of the value of their shares. 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,
Martin Luther King, Jr., Day, Presidents' Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day and Christmas Day.) This
determination is made once during each 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, and purchase by, the public on different dates. The calculation of total
rate of return for a class of shares which has a later class inception date than
another class of shares of the Fund is based both on (i) the performance of the
Fund's newer class from its inception date and (ii) the performance of the
Fund's oldest class from its inception date up to the date of the newer class.
As discussed in the Prospectus, the sales charges, expenses and expense ratios,
and therefore the performance, of the Fund's classes of shares differ. In
calculating total rate of return for a newer class of shares in accordance with
certain formulas required by the SEC, the performance will be adjusted to take
into account the fact that the newer class is subject to a different sales
charge than the oldest class (e.g., if the newer class is Class A shares, the
total rate of return quoted will reflect the deduction of the initial sales
charge applicable to Class A shares; if the newer class is Class B shares, the
total rate of return quoted will reflect the deduction of the CDSC applicable to
Class B shares). However, the performance will not be adjusted to take into
account the fact that the newer class of shares bears different class specific
expenses than the oldest class of shares (e.g., Rule 12b-1 fees). Therefore, the
total rate of return quoted for a newer class of shares will differ from the
return that would 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
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<PAGE> 112
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 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
18
<PAGE> 113
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 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 require-
19
<PAGE> 114
ment 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, 1997, the Fund paid the following Distribution Plan
expenses:
<TABLE>
<CAPTION>
AMOUNT OF AMOUNT OF AMOUNT OF
DISTRIBUTION DISTRIBUTION DISTRIBUTION
AND SERVICE AND SERVICE AND SERVICE
FEES PAID BY FEES RETAINED FEES RECEIVED
CLASS OF SHARES FUND BY MFD BY DEALERS
- ------------------------ ------------ ------------- -------------
<S> <C> <C> <C>
Class B Shares.......... $605,681 $ 553,708 $51,973
</TABLE>
GENERAL: The Distribution Plan will remain in effect until August 1, 1998, and
will continue in effect thereafter only if such continuance is specifically
approved at least annually by vote of both the Trustees and a majority of the
Trustees who are not "interested persons" or financially interested parties of
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, one class of shares for each of the Trust's two money market series, and
Class A, Class B, Class C and Class I shares of one other of the Trust's four
series. Each share of a class of the Fund represents an equal proportionate
interest in the assets of the Fund allocable to that class. The Trust reserves
the right to create and issue additional series or classes of shares, in which
case the shares of each class of a series would participate equally in the
earnings, dividends and assets allocable to that class of the particular series
(subject to any expenses attributable to that class. Upon liquidation of the
Fund, shareholders of each class of the Fund are entitled to share pro rata in
the Fund's net assets allocable to such class available for distribution to
shareholders.
Shareholders are entitled to one vote for each share held and may vote in the
election of Trustees and on other matters submitted to meetings of shareholders.
Although Trustees are not elected annually by the shareholders, shareholders
have under certain circumstances the right to remove one or more Trustees in
accordance with the provisions of section 16(c) of the 1940 Act. No material
amendment may be made to the Trust's Declaration of Trust without the
affirmative vote of a majority of its shares (as defined in "Investment
Restrictions") or without a meeting by an instrument in writing, signed by a
majority of the Trustees and consented to by the holders of not less than a
majority of the shares outstanding and entitled to vote. Shares have no
preemptive or conversion rights (except as described in the Prospectus under
"Purchases -- Conversion of Class B Shares"). Shares are fully paid and
nonassessable. The Trust may enter into a merger or consolidation, or sell all
or substantially all of its assets (or all or substantially all of the assets
belonging to any series of the Trust), if approved by the vote of the holders of
two-thirds of the Trust's outstanding shares voting as a single class, or of the
affected series of the Trust, as the case may be, except that if the Trustees of
the Trust recommend such merger, consolidation or sale, the approval by vote of
the holders of a majority of the Trust's or the affected series' outstanding
shares (as defined in "Investment Restrictions") will be sufficient. The Trust
or any series of the Trust may also be terminated (i) upon liquidation and
distribution of its assets, if approved by the vote of the holders of two-
20
<PAGE> 115
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, 1997, the Statement of Assets and
Liabilities at August 31, 1997, the Statement of Operations for the year ended
August 31, 1997, the Statement of Changes in Net Assets for the year ended
August 31, 1997, and the year ended August 31, 1996, the Notes to Financial
Statements and the Independent Auditors' Report, each of which is included in
the Annual Report to shareholders of the Fund, are incorporated by reference
into this SAI and have been so incorporated in reliance upon the report of
Deloitte & Touche LLP, independent auditors, as experts in accounting and
auditing. A copy of the Annual Report accompanies this SAI.
21
<PAGE> 116
APPENDIX A
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
CLASS A SHARES
<TABLE>
<CAPTION>
VALUE OF VALUE OF
INITIAL CAPITAL VALUE OF
$10,000 GAIN REINVESTED TOTAL
YEAR ENDED INVESTMENT DISTRIBUTIONS DIVIDENDS VALUE
- ---------------------------------------------------------- ---------- ------------- ---------- ------
<S> <C> <C> <C> <C>
December 31, 1987......................................... 9,041 0 653 9,694
December 31, 1988......................................... 9,327 82 1,415 10,824
December 31, 1989......................................... 9,310 389 2,175 11,874
December 31, 1990......................................... 9,256 387 2,978 12,621
December 31, 1991......................................... 9,650 616 3,977 14,243
December 31, 1992......................................... 9,793 839 4,947 15,579
December 31, 1993......................................... 10,313 996 6,404 17,713
December 31, 1994......................................... 9,112 880 6,570 16,562
December 31, 1995......................................... 10,125 978 8,337 19,440
December 31, 1996......................................... 9,749 941 9,050 19,740
</TABLE>
EXPLANATORY NOTES:
The results in the table assume that income dividends and capital gain
distributions were invested in additional shares. The results also assume that
the initial investment in Class A shares was reduced by the current maximum
applicable sales charge. No adjustment has been made for any income taxes, if
any, payable by shareholders.
PERFORMANCE QUOTATIONS
All performance quotations are as of August 31, 1997.
<TABLE>
<CAPTION>
TAX EQUIVALENT
30-DAY YIELD
TAX BRACKETS: CURRENT
-------------- DISTRIBUTION
1 YEAR 5 YEAR 10 YEAR 30-DAY YIELD 28% 31% RATE
------ ------ ------- ------------ ---- ---- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Class A with sales charge................. 2.59% 5.36% 7.41% 4.77% 6.63% 6.91% 4.84%
Class A without sales charge.............. 7.75% 6.40% 7.97%
Class B with CDSC......................... 2.84% 5.25%(1) 7.52%(1) 4.24%
Class B without CDSC...................... 6.84% 5.57%(1) 7.50%(1) 4.25% 5.90% 6.16%
</TABLE>
- ---------------
(1) Class B share performance includes the performance of the Fund's Class A
shares for periods prior to the inception of Class B shares on September 7,
1993. Sales charges, expenses and expense ratios, and therefore performance,
for Class A and Class B shares differ. Class B share performance has been
adjusted to reflect that Class B shares generally are subject to a CDSC
(unless the performance quotation does not give effect to the CDSC) whereas
Class A shares generally are subject to an initial sales charge. Class B
share performance has not, however, been adjusted to reflect differences in
operating expenses (e.g., Rule 12b-1 fees), which generally are lower for
Class A shares.
A-1
<PAGE> 117
INVESTMENT ADVISER
Massachusetts Financial Services Company
500 Boylston Street, Boston, MA 02116
617-954-5000
DISTRIBUTOR
MFS Fund Distributors, Inc.
500 Boylston Street, Boston, MA 02116
(617)954-5000
CUSTODIAN AND DIVIDEND DISBURSING AGENT
State Street Bank and Trust Company
225 Franklin Street, Boston, MA 02110
SHAREHOLDER SERVICING AGENT
MFS Service Center, Inc.
500 Boylston Street, Boston, MA 02116
Toll free: (800)-225-2606
Mailing Address:
P.O. Box 2281, Boston, MA 02107-9906
INDEPENDENT AUDITORS
Deloitte & Touche LLP
125 Summer Street, Boston, MA 02110
MFS(R)
MUNICIPAL
BOND FUND
500 BOYLSTON STREET
BOSTON, MA 02116
[LOGO] MMB-13-1/97/500 17/217
<PAGE> 118
<PAGE>
[LOGO] M F S(SM) Annual Report
INVESTMENT MANAGEMENT August 31, 1997
MFS(R) MUNICIPAL BOND FUND
[Graphic Omitted]
<PAGE>
TABLE OF CONTENTS
Letter from the Chairman .................................................. 1
A Discussion with the Portfolio Manager ................................... 2
Portfolio Manager's Profile ............................................... 5
Fund Facts ................................................................ 6
Performance Summary ....................................................... 6
Portfolio Concentration ................................................... 8
Tax Form Summary .......................................................... 8
Portfolio of Investments .................................................. 9
Financial Statements ...................................................... 19
Notes to Financial Statements ............................................. 25
Independent Auditors' Report .............................................. 31
The MFS Family of Funds(R) ................................................ 32
Trustees and Officers ..................................................... 33
- --------------------------------------------------------------------------------
HIGHLIGHTS
o FOR THE 12 MONTHS ENDED AUGUST 31, 1997, CLASS A SHARES OF THE FUND
PROVIDED A TOTAL RETURN AT NET ASSET VALUE OF 7.75%, WHILE CLASS B SHARES
RETURNED 6.84%. (SEE PERFORMANCE SUMMARY FOR MORE INFORMATION.)
o THE PAST YEAR HAS PROVIDED HEALTHY RETURNS FOR MUNICIPAL BOND INVESTORS,
WITH YIELDS ON LONG-TERM, HIGH-GRADE MUNICIPALS DECLINING BY ABOUT 40
BASIS POINTS (0.40%) OVER THE PERIOD, WITH ABOUT HALF OF THIS DECLINE
COMING OVER THE PAST SIX MONTHS.
o THANKS TO SOUND BUDGETING PRACTICES AND A HEALTHY ECONOMY, MANY
MUNICIPALITIES ARE IN THEIR STRONGEST FINANCIAL POSITIONS IN SEVERAL
YEARS. THIS, ALONG WITH RELATIVELY LOW YIELDS AND THE GROWTH OF MUNICIPAL
BOND INSURANCE, HAS LED TO INCREASINGLY NARROW YIELD DIFFERENTIALS AMONG
BOND QUALITIES.
o THE FUND IS SEEKING TO AVOID LARGE PORTFOLIO RESTRUCTURINGS FOR PURPOSES
OF ANTICIPATING INTEREST-RATE CHANGES, WHILE PLACING INCREASED EMPHASIS
ON THE PORTFOLIO'S STRUCTURAL CHARACTERISTICS AND OVERALL QUALITY.
- --------------------------------------------------------------------------------
<PAGE>
LETTER FROM THE CHAIRMAN
[Photo of A. Keith Brodkin]
Dear Shareholders:
An unprecedented combination of generally positive factors has helped the U.S.
economy enjoy a sustained period of relative stability and moderate growth in
which thousands of new jobs have been created every month, inflation remains
under control, and the investment climate -- at least until now -- has been
favorable. For example, the increased use of technology and other productivity
enhancements, as well as corporate restructuring and global competition, is
improving companies' balance sheets and helping control inflation. Meanwhile,
borrowing by corporations and governments continues to decline, while consumer
confidence is increasing, although consumer debt levels are still
uncomfortably high. While some lenders are beginning to tighten standards to
address this problem, consumer debt and personal bankruptcies continue to
rise. The rapid pace of growth seen in the first quarter slowed slightly in
the second quarter, to an annual rate of 3.3%. While real (inflation-adjusted)
growth could moderate further in the third quarter, we believe economic
momentum will carry well into the first quarter of 1998. The money supply is
increasing at a rapid rate, the housing and automobile markets are
strengthening, and it now appears that Christmas sales could be quite good.
Because economic growth continues to be impressive, markets are likely to
begin focusing on the Federal Reserve Board's (the Fed's) willingness to raise
interest rates.
In the fixed-income markets, we have been encouraged by the Fed's decision at
its July meeting not to raise short-term interest rates. But we cannot rule
out the possibility of future monetary tightening in the second half of the
year if, as we now expect, the economy strengthens during the balance of 1997.
Therefore, our risk/reward outlook for the fixed-income markets is neutral,
and we believe that fixed-income investors should think in terms of earning
the coupon income from their investments rather than seeking possible gains
from price appreciation.
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 15, 1997
<PAGE>
A DISCUSSION WITH THE PORTFOLIO MANAGER
[Photo of Robert A. Dennis]
Robert A. Dennis
Generally, the past 12 months have provided healthy returns for municipal bond
investors. Long-term, high-grade municipal yields declined by about 40 basis
points (0.40%) over the period, with about half of this decline occurring over
the past six months. However, these numbers fail to reflect the market's
substantial volatility during the period as investors' perceptions changed
frequently concerning the rate of economic growth, the outlook for inflation,
and the prospects for Federal Reserve Board action. The range between March's
high point in yields and July's low was about 70 basis points (0.70%).
For the 12 months ended August 31, 1997, Class A shares of the Fund provided a
total return of 7.75%, while Class B shares returned 6.84%. These returns,
which assume the reinvestment of distributions but exclude the effects of any
sales charges, compare to a 9.27% return for the Lehman Brothers Municipal
Bond Index, an unmanaged index of approximately 8,000 investment-grade, mostly
long-term bonds. The Fund's 12-month returns compared unfavorably with the
8.83% average return for the General Municipal Bond fund category tracked by
Lipper Analytical Services, Inc., an independent firm that reports mutual fund
performance.
Q. WHAT DO YOU SEE AS SOME OF THE REASONS FOR THIS PERFORMANCE?
A. Contrary to the Fund's very favorable performance results achieved nearly
every year since its inception (compared with the average return of its
Lipper category) the results for the past 12 months have been
disappointing. Most of the underperformance occurred during the last four
months of 1996 when the Fund suffered from two significant miscalculations
relative to the course of interest rates. The Fund is doing relatively
better so far in 1997 as it seeks to avoid making major restructurings in
anticipation of possible changes in interest rates and focuses on adding
value through credit and sector analysis.
Q. IN GENERAL, HOW WOULD YOU DESCRIBE THE CURRENT MUNICIPAL MARKET?
A. For municipal credits, these have been the best of times. Reflecting the
effects of sound budgeting practices and a uniformly healthy economy,
municipal credits are in their strongest financial positions in many years.
This, along with the relatively low absolute yield levels and the continued
proliferation of municipal bond insurance, which now absorbs about half of
the new-issue calendar, has led to a narrowing of yield spreads among
qualities to historically low differentials. Over the past 12 months, the
yield spread between 20-year bonds rated "AAA" by Standard & Poor's and those
rated "BBB" has narrowed from 75 basis points (0.75%) to 40 basis points
(0.40%).
This significant narrowing of credit spreads has made it difficult to add
value to the portfolios in the traditional manner; that is, through
allocations among states, regions, and sectors. During this time of economic
stability and strength, but unusual interest-rate volatility, high-grade
municipals have become increasingly homogeneous, and portfolio performance
has been largely determined by maturity differentials and structural bond
differences.
Q. HOW HAS THE MUNICIPAL MARKET'S PERFORMANCE COMPARED WITH THAT OF THE
TAXABLE MARKET?
A. This market performed well against the taxable market because demand from
institutions and the retail market was consistent, while new-issue supply
was only slightly higher than last year's level. Borrowing for new public-
sector projects continued to be restrained, and interest rates were not low
enough to spark a new wave of refinancings.
Q. WHAT CAN YOU TELL US ABOUT THE AVERAGE CREDIT QUALITY OF THE FUND?
A. With quality yield spreads historically narrow, we believe prime-quality
bonds clearly offer the best values in the market. Accordingly, about two-
thirds of the Fund's assets are invested in bonds rated "AAA" and "AA" by
Standard & Poor's. Also, almost half of the Fund's assets are enhanced by
bond insurance.
Q. WHAT ABOUT THE INCREASED USE OF BOND INSURANCE? HOW HAS IT AFFECTED THE
MUNICIPAL MARKET AND HOW YOU MANAGE THE FUND?
A. The rise in bond insurance continues to be one of the most dramatic trends
in the municipal market. This, plus the healthy condition of municipal
credits and relatively low interest rates, has contributed to the continued
narrowing of already very low yield spreads among qualities in this market.
This means investors are generally not being adequately paid for buying
lower-grade bonds, and that in today's environment of nearly uniform economic
and financial health, it is that much harder to find unusual value among
investment-grade municipal bonds.
Q. WHAT ABOUT CALL PROTECTION? WHAT PORTION OF THE FUND IS IN NONCALLABLE
BONDS, AND WHY IS THIS IMPORTANT FOR INVESTORS?
A. Call protection is important, not just to help ensure the continuation of
the income stream from bonds, but also to help provide favorable total
return performance, particularly during periods of stable or declining
interest-rate trends. The fact that the Fund has more than 40% of its
assets in noncallable bonds is one of its most important characteristics.
Q. COULD YOU TALK ABOUT SOME OF THE LARGEST SECTORS IN THE FUND AND WHY YOU'RE
FAVORING THEM?
A. The Fund's largest sector holdings are in general obligation and other tax-
backed bonds, refunded bonds (escrowed in U.S. Treasury securities), and
essential-service electric and gas revenue bonds. These are traditionally
among the most secure and liquid sectors of municipal finance. At the same
time, the Fund is geographically well diversified, with holdings in 26
states.
Q. IN YOUR LAST REPORT, YOU SAID YOU INTENDED TO MAKE THE FUND LESS VULNERABLE
TO UNEXPECTED INTEREST-RATE MOVES. WHAT STEPS HAVE YOU TAKEN TO DO THIS?
A. As I mentioned, we are trying to avoid making major restructurings in
anticipation of possible interest-rate changes, while placing increased
emphasis on the portfolio's overall quality with the help of our
experienced municipal research staff. We believe this expertise should
prove more valuable in coming months as municipalities face new challenges,
including coping with the effects of the new federal welfare reform law,
other possible cuts in federal aid, and the deregulation of electric
utilities.
Q. LOOKING AHEAD, WHAT POTENTIAL CHANGES DO YOU SEE IN THE GENERAL ECONOMIC OR
POLITICAL ENVIRONMENT, AND HOW MIGHT THEY AFFECT THE FUND?
A. The most likely outlook is for a continuation of healthy, but not
overheated, growth and relatively low inflation. However, the price for
keeping the economy on a relatively even keel will be further volatility in
interest rates. We are determined not to take what we believe to be
unreasonable risks in trying to anticipate the trends in interest rates,
but to add value for our shareholders through market analysis based on our
long experience in portfolio management and credit analysis from our large
and highly experienced research staff.
/s/ Robert A. Dennis
-------------------------------
Robert A. Dennis
Portfolio Manager
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PORTFOLIO MANAGER'S PROFILE
ROBERT A. DENNIS IS A SENIOR VICE PRESIDENT OF MFS INVESTMENT MANAGEMENT(SM)
AND HAS BEEN PORTFOLIO MANAGER OF MFS(R) MUNICIPAL BOND FUND SINCE 1984. MR.
DENNIS JOINED MFS IN 1980 AND WAS NAMED ASSISTANT VICE PRESIDENT -
INVESTMENTS IN 1981, VICE PRESIDENT - INVESTMENTS IN 1983, AND SENIOR VICE
PRESIDENT IN 1986. HE IS A GRADUATE OF THE MASSACHUSETTS INSTITUTE OF
TECHNOLOGY AND ITS SLOAN SCHOOL OF MANAGEMENT.
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<PAGE>
- --------------------------------------------------------------------------------
FUND FACTS
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.
COMMENCEMENT OF
INVESTMENT OPERATIONS: CLASS A: DECEMBER 16, 1976
CLASS B: SEPTEMBER 7, 1993
SIZE: $1.7 BILLION NET ASSETS AS OF AUGUST 31, 1997
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PERFORMANCE SUMMARY
The information below and on the following page illustrates the historical
performance of MFS Municipal Bond Fund - Class A shares in comparison to
various market indicators. Class A share performance results reflect the
deduction of the 4.75% maximum sales charge; benchmark comparisons are
unmanaged and do not reflect any fees or expenses. The performance of other
share classes will be greater than or less than the line shown, based on the
differences in charges and fees paid by shareholders investing in different
classes. It is not possible to invest directly in an index.
GROWTH OF A HYPOTHETICAL $10,000 INVESTMENT
(For the 5-year period ended August 31, 1997)
MFS Lehman Consumer
Municipal Brothers Price
Bond Fund Municipal Index -
Class A Bond Index U.S.
---------- ---------- -------
8/92 $ 9,500 $10,000 $10,000
8/93 $10,800 $11,200 $10,300
8/94 $10,700 $11,200 $10,600
8/95 $11,500 $12,200 $10,900
8/96 $12,100 $12,900 $11,200
8/97 $12,984 $14,062 $11,405
GROWTH OF A HYPOTHETICAL $10,000 INVESTMENT
(For the 10-year period ended August 31, 1997)
MFS Lehman Consumer
Municipal Brothers Price
Bond Fund Municipal Index -
Class A Bond Index U.S.
---------- ---------- -------
8/87 $ 9,500 $10,000 $10,000
8/89 $11,400 $11,900 $10,900
8/91 $13,400 $14,100 $11,900
8/93 $17,100 $17,600 $12,700
8/95 $18,100 $19,200 $13,400
8/97 $20,443 $22,060 $14,044
AVERAGE ANNUAL TOTAL RETURNS AS OF AUGUST 31, 1997
<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
MFS Municipal Bond Fund (Class A)
including 4.75% sales charge (SEC results) +2.59% +4.86% +5.36% +7.41%
- ---------------------------------------------------------------------------------------------------------------------------
MFS Municipal Bond Fund (Class A)
at net asset value +7.75% +6.57% +6.40% +7.93%
- ---------------------------------------------------------------------------------------------------------------------------
MFS Municipal Bond Fund (Class B)
with CDSC (SEC results) +2.84% +4.71% +5.25% +7.52%
- ---------------------------------------------------------------------------------------------------------------------------
MFS Municipal Bond Fund (Class B)
at net asset value +6.84% +5.61% +5.57% +7.52%
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Lehman Brothers Municipal Bond Index* +9.27% +7.77% +7.06% +8.23%
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Average general municipal debt fund** +8.83% +6.99% +6.45% +7.81%
- ---------------------------------------------------------------------------------------------------------------------------
Consumer Price Index+* +2.19% +2.55% +2.66% +3.45%
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</TABLE>
* Source: CDA/Wiesenberger.
** Source: Lipper Analytical Services, Inc.
+ The Consumer Price Index is published by the U.S. Bureau of Labor Statistics
and measures the cost of living (inflation).
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.
Class A share SEC results include the maximum 4.75% sales charge. Class B
share 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 B share results include the performance and the operating expenses
(e.g., Rule 12b-1 fees) of the Fund's Class A shares for periods prior to the
commencement of offering of Class B shares. Because operating expenses
attributable to Class B shares are higher than those of Class A shares, Class
B share performance generally would have been lower than Class A share
performance. The Class A share performance 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.
Performance results reflect any applicable expense subsidies and waivers,
without which the results would have been less favorable. Current subsidies
and waivers may be discontinued at any time.
PORTFOLIO CONCENTRATION AS OF AUGUST 31, 1997
QUALITY RATINGS
"AAA" 58.7%
"AA" 9.0%
"A" 9.9%
"BBB" 15.4%
Cash and Equivalents 7.0%
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TAX FORM SUMMARY
IN JANUARY 1998, SHAREHOLDERS WILL BE MAILED A TAX FORM SUMMARY
REPORTING THE FEDERAL TAX STATUS OF ALL DISTRIBUTIONS PAID DURING THE
CALENDAR YEAR 1997.
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<PAGE>
PORTFOLIO OF INVESTMENTS - August 31, 1997
<TABLE>
<CAPTION>
Municipal Bonds - 94.1%
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PRINCIPAL AMOUNT
ISSUER (000 OMITTED) VALUE
- ---------------------------------------------------------------------------------------------------------
General Obligations - 13.1%
<S> <C> <C>
Chicago, IL, 5.25s, 2027 $ 6,000 $ 5,741,160
Chicago, IL, Board of Education, MBIA, 6.25s, 2012 2,500 2,795,875
Clark County, NV, Las Vegas Convention and Visitors
Authority, MBIA, 5.5s, 2021 3,570 3,537,120
Clark County, NV, School District, MBIA, 7s, 2010 4,000 4,733,440
Commonwealth of Massachusetts, 7s, 2007 1,285 1,425,489
Commonwealth of Massachusetts, 6.5s, 2008 6,400 7,283,840
Commonwealth of Massachusetts, FGIC, 7s, 2009 7,000 8,312,010
Commonwealth of Massachusetts, 5s, 2013 10,000 9,674,300
Commonwealth of Massachusetts, 5.125s, 2013 10,000 9,809,000
Commonwealth of Massachusetts, 5s, 2014 10,500 10,088,190
Commonwealth of Massachusetts, 5.125s, 2015 6,000 5,816,100
Detroit, MI, 6.25s, 2009 5,235 5,553,550
Detroit/Wayne County, MI, Stadium, 5.5s, 2017 6,000 6,032,580
District of Columbia, MBIA, 6.5s, 2010 6,000 6,723,900
Florida Board of Education, Capital Outlay, 9.125s, 2014 1,735 2,472,913
Florida Board of Education, Capital Outlay, 5.25s, 2022 7,905 7,670,538
Lewisville, TX, Independent School District, 5s, 2018 8,500 8,045,250
New York City, NY, 7.5s, 2002 12,500 13,852,000
New York City, NY, 7.5s, 2006 5,000 5,612,500
New York City, NY, 7.65s, 2006 295 330,126
New York City, NY, 7.5s, 2007 15,500 17,254,290
New York City, NY, 7.5s, 2008 10,000 11,131,800
New York City, NY, 7.7s, 2009 320 358,729
New York City, NY, 5.75s, 2013 8,500 8,644,755
New York City, NY, 5.75s, 2014 9,500 9,606,210
New York City, NY, 5.75s, 2015 11,085 11,208,930
State of California, 5.25s, 2011 5,250 5,292,262
State of California, 5.5s, 2013### 5,000 5,163,100
State of Florida, Broward County Expressway Authority, 10s, 2014 4,350 6,595,122
State of Washington, 6.75s, 2010 3,880 4,544,295
State of Washington, 6s, 2012 4,360 4,790,681
Virginia Public School Authority, School Financing,
5.125s, 2017 17,980 17,637,481
--------------
$ 227,737,536
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State and Local Appropriation - 27.3%
California Public Works Board, Lease Rev.
(Department of Corrections), AMBAC, 5.25s, 2013 $ 6,795 $ 6,852,622
California Public Works Board, Lease Rev.
(University of California), 5.5s, 2014 4,500 4,558,005
Chicago, IL, Board of Education Lease Certificates,
MBIA, 6.25s, 2009 5,160 5,738,797
Chicago, IL, Board of Education Lease Certificates,
MBIA, 6.25s, 2015 27,295 30,305,912
Indiana Office Building Community Capital Complex
Rev., 6.9s, 2011 9,500 11,189,575
King County, IL, Washington Lease Rev. (King Street
Center), MBIA, 5.125s, 2017 6,975 6,644,943
King County, IL, Washington Lease Rev. (King Street
Center), MBIA, 5.25s, 2026 6,000 5,726,580
Los Angeles County, CA, Public Works Rev. (Multiple
Capital Facilities), AMBAC, 5.125s, 2017 8,500 8,182,695
Massachusetts Bay Transportation Authority, 6.1s, 2013 10,200 11,166,960
Massachusetts Bay Transportation Authority, 5.875s, 2015 4,500 4,792,320
Massachusetts Bay Transportation Authority, 7s, 2021 19,185 23,395,340
Massachusetts Bay Transportation Authority, 5s, 2023 17,970 16,677,058
Massachusetts Bay Transportation Authority, 5.25s, 2026 5,000 4,800,950
Massachusetts Bay Transportation Authority, 5s, 2027 29,045 26,821,315
Metropolitan Government of Nashville & Davidson
Counties, TN, 7s, 2011 5,280 5,768,611
Metropolitan Transportation Authority, NY, Commuter,
5.5s, 2011 3,430 3,515,476
Metropolitan Transportation Authority, NY, Commuter,
5.125s, 2024 4,000 3,823,360
Metropolitan Transportation Authority, NY, Service
Contract, 7.4s, 2001 4,075 4,437,390
Metropolitan Transportation Authority, NY, Service
Contract, 7.375s, 2008 5,000 5,884,800
Metropolitan Transportation Authority, NY, Service
Contract, 5.75s, 2013 5,600 5,811,400
New York Dormitory Authority Rev. (State
University), 5.25s, 2010 9,390 9,317,321
New York Dormitory Authority Rev. (City University),
7s, 2009 13,765 15,888,114
New York Dormitory Authority Rev. (City University),
7.5s, 2010 15,650 18,771,079
New York Dormitory Authority Rev. (City University),
5.75s, 2013 25,150 26,181,150
New York Dormitory Authority Rev. (City University),
5.75s, 2013 5,000 5,205,000
New York Dormitory Authority Rev. (City University),
AMBAC, 5.5s, 2016 4,000 4,010,840
New York Dormitory Authority Rev. (Mental Health
Services Facilities), 6s, 2007 1,500 1,602,915
New York Dormitory Authority Rev. (Mental Health
Services Facilities), 5.75s, 2010 2,000 2,042,880
New York Dormitory Authority Rev. (Mental Health
Services Facilities), 5.5s, 2017 3,250 3,191,728
New York Dormitory Authority Rev. (State
University), 7.375s, 2010 16,100 19,071,094
New York Dormitory Authority Rev. (State
University), 5.5s, 2013 7,875 7,980,446
New York Medical Care Facilities Finance Agency
(Mental Health Services), 8.875s, 2007 1,725 1,791,102
New York Medical Care Facilities Finance Agency
(Mental Health Services), 7.875s, 2020 1,485 1,626,684
New York Urban Development Corp., FSA, 5.5s, 2014 4,525 4,597,174
New York Urban Development Corp., 5.5s, 2015 16,200 16,017,750
New York Urban Development Corp., 5.5s, 2016 14,690 14,897,863
New York Urban Development Corp., MBIA, 5.5s, 2019 3,500 3,501,015
New York Urban Development Corp. (Correctional
Facilities), 5.5s, 2014 5,000 5,036,300
New York Urban Development Corp. (Correctional
Facilities), 5.375s, 2015 10,000 9,815,300
Orange County, FL, School Board Certificates, MBIA,
5.375s, 2017 22,000 21,772,300
Philadelphia, PA, Municipal Authority, MBIA, 5.4s, 2017 5,000 4,993,550
Rhode Island Convention Center Authority, MBIA, 5.25s, 2015 20,870 20,581,785
Rhode Island Convention Center Authority, MBIA, 5s, 2023 20,360 18,783,118
San Bernardino, CA, Joint Powers Financing Authority
Lease Rev. (California Dept. of Transportation), 5.5s, 2014 10,000 10,064,400
San Bernardino, CA, Joint Powers Financing Authority
Lease Rev. (California Dept. of Transportation), 5.5s, 2020 4,000 3,942,960
Triborough Bridge & Tunnel Authority, 7.25s, 2010 22,905 26,472,225
--------------
$ 473,250,202
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Refunded and Special Obligations - 18.1%
Alameda County, CA, Certificates of Participation,
BIGI, 7.25s, 2011+ $ 4,560 $ 5,064,017
Alameda County, CA, Certificates of Participation,
BIGI, 7.25s, 2012+ 4,770 5,297,228
Alameda County, CA, Certificates of Participation,
BIGI, 7.25s, 2013 4,990 5,541,544
Alameda County, CA, Certificates of Participation,
BIGI, 7.25s, 2000 3,775 4,192,251
Austin, TX, Utility Systems Rev., 10.75s, 2000 2,615 3,043,520
Chicago, IL, Public Building Commission Mortgage
Rev., ETM, MBIA, 7.125s, 2015 6,590 7,122,670
Clark County, NV, School District, MBIA, 7s, 2001 10,050 11,045,151
Commonwealth of Massachusetts, 6.875s, 2001 4,825 5,340,503
Commonwealth of Massachusetts, Consolidated Loan,
7s, 2007 $ 3,305 $ 3,666,336
Florida Board of Education, Capital Outlay, ETM,
9.125s, 2014 265 375,471
Indianapolis, IN, Local Public Improvement Rev.,
7.4s, 2020 3,710 4,078,329
Maryland Health & Higher Education Facilities
Authority Rev. (University of Maryland Medical
System), FGIC, 7s, 2017 7,945 8,828,563
Massachusetts Port Authority Rev., ETM, 13s, 2013 3,500 5,968,690
Massachusetts Water Resources Authority, 7.625s, 2000 10,760 11,857,305
Massachusetts Water Resources Authority, 7.5s, 2000 15,850 17,418,516
Michigan Hospital Finance Authority Rev.
(Oakwood Hospital), FGIC, 7.2s, 2015 10,000 10,975,500
Michigan Municipal Bond Authority Rev. (Wayne
County), FGIC, 7s, 2000 10,000 10,909,200
Missouri Regional Convention & Sports Complex
Authority, 6.8s, 2003 8,950 10,062,932
Missouri Regional Convention & Sports Complex
Authority, 6.9s, 2003 21,520 24,307,701
New York Medical Care Facilities Finance Agency
(Mental Health Services), 7.875s, 2000 8,125 9,076,031
New York Urban Development Corp. (Correctional
Facilities), 7.625s, 2001 7,570 8,472,798
New York Urban Development Corp. (Correctional
Facilities), 7.375s, 2002 4,000 4,529,920
New York City, NY, 7.65s, 2006 4,705 5,369,675
New York City, NY, 7.7s, 2009 3,680 4,207,160
New York City, NY, 8s, 2001 2,475 2,835,484
Pennsylvania Convention Center Authority Rev., FGIC,
6.7s, 2016 51,195 60,121,872
Philadelphia, PA, Municipal Authority Rev. (Justice
Lease), FGIC, 7.1s, 2001 6,000 6,726,420
Philadelphia, PA, Municipal Authority Rev. (Justice
Lease), FGIC, MBIA, 7.125s, 2001 4,500 5,049,090
Philadelphia, PA, School District, MBIA, MBIA, 7s, 2005 9,440 10,392,024
Santa Clara County, CA, Certificates of
Participation (American Baptist Homes West), 8s, 1998 5,200 5,411,328
State of Florida, Jacksonville Transportation
Authority, ETM, 9.2s, 2015 2,000 2,795,480
Washington Public Power Supply System Rev.,
(Nuclear Proj. #2), 7.375s, 2000 20,000 21,972,400
Washington Public Power Supply System Rev.,
(Nuclear Proj. #2), 7.625s, 2001 10,815 12,086,952
--------------
$ 314,142,061
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Airport and Port Revenue - 1.9%
Connecticut Airport Rev. (Bradley International
Airport), FGIC, 7.65s, 2012 $ 5,000 $ 5,830,000
Denver, CO, City and County Airport Rev., MBIA,
5.6s, 2020 15,780 15,819,608
Massachusetts Port Authority Rev., 5.125s, 2020 3,290 3,155,209
Port of Seattle, WA, FGIC, 5.5s, 2022 8,250 8,194,807
--------------
$ 32,999,624
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Electric and Gas Utility Revenue - 15.4%
Austin, TX, Utility Systems Rev., AMBAC, 6.75s, 2012 (++) $ 2,500 $ 2,785,475
Georgia Municipal Electric Authority Rev., FGIC,
5.5s, 2020 5,045 5,090,153
Georgia Municipal Electric Authority Rev., MBIA,
5.5s, 2020 22,190 22,388,600
Georgia Municipal Electric Authority, Proj.
One Subordinated, AMBAC, 5.125s, 2020(++) 11,500 10,863,475
Georgia Municipal Electric Authority, Special
Obligation, AMBAC, 6.5s, 2017 8,510 9,701,740
Intermountain Power Agency, UT, Power Supply Rev.,
6.15s, 2014## 44,600 47,142,200
Intermountain Power Agency, UT, Power Supply Rev.,
MBIA, 6s, 2016 10,000 10,465,200
Intermountain Power Agency, UT, Power Supply Rev.,
AMBAC, 6s, 2021 9,000 9,359,460
Intermountain Power Agency, UT, Power Supply Rev.,
MBIA, 5.7s, 2017 12,000 12,158,160
Massachusetts Municipal Wholesale Electric Co.,
MBIA, 6.75s, 2017 6,030 6,607,975
Mercer County, ND, Pollution Control Rev. (Antelope
Valley Station), AMBAC, 7.2s, 2013 4,000 4,840,440
Michigan Strategic Fund, Limited Obligation Rev.
(Detroit Edison), MBIA, 7s, 2008 3,000 3,544,080
North Carolina Eastern Municipal Power, MBIA, 5.7s, 2013 7,000 7,250,950
North Carolina Eastern Municipal Power, MBIA, 5.625s, 2014 7,735 7,929,999
North Carolina Eastern Municipal Power, MBIA, 6.5s, 2018 9,250 10,533,438
North Carolina Municipal Power, MBIA, 5.125s, 2017(++) 5,000 4,766,150
Northern California Transmission Agency, MBIA, 7s, 2013 4,000 4,773,800
Piedmont, SC, Municipal Power Agency, Electric Rev.,
FGIC, 6.25s, 2021 4,150 4,603,263
Piedmont, SC, Municipal Power Agency, Electric Rev.,
MBIA, 5.375s, 2025 10,000 9,866,700
Southern California Public Power Authority Rev. (San
Juan Unit Power), MBIA, 5.25s, 2014 14,940 14,806,885
Washington Public Power Supply System Rev., MBIA,
5.75s, 2011 7,500 7,765,275
Washington Public Power Supply System Rev.
(Nuclear Proj. #1), MBIA, 5.75s, 2010 13,100 13,618,105
Washington Public Power Supply System Rev.
(Nuclear Proj. #2), MBIA, 5.625s, 2010 10,000 10,285,000
Washington Public Power Supply System Rev.
(Nuclear Proj. #2), MBIA, 5.7s, 2012 15,000 15,332,850
Washington Public Power Supply System Rev.
(Nuclear Proj. #3), 7.125s, 2016 5,145 6,117,457
Washington Public Power Supply System Rev.
(Nuclear Proj. #3), FGIC, 0s, 2005 6,895 4,697,839
--------------
$ 267,294,669
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Health Care Revenue - 3.3%
Cuyahoga County, OH, Hospital Rev. (Cleveland
Clinic), 8s, 2015 $ 8,550 $ 8,751,182
Michigan Hospital Finance Authority Rev. (Henry
Ford), 5.25s, 2020 18,450 17,848,345
Michigan Hospital Finance Authority Rev. (Hospital
Henry Ford Health), 5.25s, 2025 21,465 20,612,410
Michigan Hospital Finance Authority Rev. (Mercy
Health Services), 5.625s, 2016 8,375 8,440,409
Pennsylvania Higher Education Facilities, Health
Services Rev. (University of Pennsylvania), 5.75s, 2022 2,015 2,049,980
-------------
$ 57,702,326
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Insured Health Care Revenue - 4.9%
Davenport, IA, Hospital Rev. (St. Luke's Hospital),
AMBAC, 7.4s, 2020 $ 2,715 $ 2,951,911
District of Columbia Hospital Rev. (Medlantic
Healthcare), MBIA, 5.25s, 2019 6,750 6,436,733
Illinois Educational Facilities Authority Rev.,
MBIA, 5.7s, 2011 4,500 4,656,060
Illinois Educational Facilities Authority Rev.
(Loyola University Health Systems), MBIA, 5s, 2024 6,675 6,174,442
Lorain County, OH, Hospital Rev. (Catholic
Healthcare Partners), MBIA, 5.625s, 2013 4,775 4,846,052
Massachusetts Health & Education Facilities
Authority (University Hospital), MBIA, 7.25s, 2019 4,500 4,900,050
Michigan Hospital Finance Authority Rev. (Sisters of
Mercy Hospital), MBIA, 5.375s, 2014 9,000 9,073,350
New York Dormitory Authority Rev. (Montefiore Medical
Center), AMBAC, 5.25s, 2015 13,000 12,836,980
Peninsula Ports Authority, VA, Hospital Facilities
Rev. (Wittaker Memorial), FHA, 8.7s, 2023 1,595 1,650,809
Rhode Island Health & Education Building, Hospital
Financing, (Lifespan), MBIA, 5.25s, 2026 2,155 2,071,795
Sayre, PA, Health Care Facilities Authority Rev.
(Guthrie Healthcare Systems), AMBAC, 7s, 2011 6,000 6,553,800
Tarrant County, TX, Health Facilities Development
Corp. (Fort Worth Osteopathic), MBIA, 6s, 2021 6,000 6,469,980
Utah County, UT, Hospital Rev., IHC Health Services,
Inc., 5.25s, 2026 6,930 6,547,048
Washington County, PA, Hospital Authority Rev.
(Washington Hospital), AMBAC, 7.15s, 2017 9,000 9,736,470
-------------
$ 84,905,480
- ---------------------------------------------------------------------------------------------------------
Multi-Family Housing Revenue - 0.2%
Colorado Housing Finance Authority, FHA, 8.3s, 2023 $ 4,000 $ 4,281,120
- ---------------------------------------------------------------------------------------------------------
Sales and Excise Tax Revenue - 2.0%
Illinois Dedicated Tax Rev. (Civic Center), AMBAC,
6.25s, 2011 $ 3,640 $ 4,056,015
Illinois Sales Tax Rev., 6.5s, 2022 5,000 5,694,900
Illinois Sales Tax Rev. (Public Improvement), 0s, 2009 8,965 4,829,625
Metropolitan Atlanta, GA, Rapid Transit Authority, 6.25s, 2018 4,580 5,063,190
Rhode Island Depositors Economic Protection Corp.,
FSA, 5.75s, 2014 14,800 15,518,244
-------------
$ 35,161,974
- ---------------------------------------------------------------------------------------------------------
Solid Waste Revenue - 0.7%
Northeast Maryland Waste Disposal Authority,
(Southwest County Resource Recovery), MBIA, 7.2s, 2005 $ 3,000 $ 3,445,170
Tacoma, WA, Solid Waste Utility Rev., AMBAC, 5.5s, 2017 5,000 5,006,500
York County, PA, Industrial Development Rev., 8.2s, 2014 4,250 4,414,348
-------------
$ 12,866,018
- ---------------------------------------------------------------------------------------------------------
Special Assesment District - 0.4%
Chico, CA, Public Finance Authority Rev. (Southeast
Chico Redevelopment), FGIC, 6.625s, 2021 $ 6,435 $ 6,850,830
- ---------------------------------------------------------------------------------------------------------
Turnpike Revenue - 2.0%
New Jersey Transportation Trust Fund Authority,
Transportation Systems, 5.25s, 2015 $ 5,000 $ 4,959,050
New Jersey Transportation Trust Fund Authority,
Transportation Systems, 5.25s, 2016 10,000 9,915,800
New York Thruway Authority General Rev., 5.5s, 2015 10,340 10,483,002
New York Thruway Authority General Rev., 5.25s, 2021 9,000 8,786,790
-------------
$ 34,144,642
- ---------------------------------------------------------------------------------------------------------
Universities - 2.3%
Massachusetts Health & Education Facilities (Harvard
University), 6.25s, 2020 $ 32,200 $ 36,295,196
Texas A & M University (Permanent University Fund),
0s, 2007 6,695 4,152,507
-------------
$ 40,447,703
- ---------------------------------------------------------------------------------------------------------
Water and Sewer Utility Revenue - 1.8%
Detroit, MI, Sewage Disposal Rev., MBIA, 5s, 2022 $12,750 $ 11,940,885
East Bay, CA, Municipal Utility District, Water
Systems Rev., MBIA, 5s, 2014 7,900 7,654,152
Houston Texas Water & Sewer Systems Rev., FGIC,
5.375s, 2027 11,000 10,783,630
-------------
$ 30,378,667
- ---------------------------------------------------------------------------------------------------------
Other - 0.7%
Los Angeles County, CA, Public Works Rev., MBIA,
5.25s, 2014 $ 6,660 $ 6,599,865
Orange County, CA, California Recovery Certificates,
MBIA, 6s, 2026 5,000 5,249,351
-------------
$ 11,849,216
- ---------------------------------------------------------------------------------------------------------
Total Municipal Bonds (Identified Cost, $1,508,308,799) $1,634,012,068
- ---------------------------------------------------------------------------------------------------------
Floating Rate Demand Notes - 7.8%
- ---------------------------------------------------------------------------------------------------------
Allegheny County, PA, Hospital Development Authority
Rev. Presbyterian, due 09/04/97 $ 4,500 $ 4,500,000
Allegheny County, PA, Hospital Development Authority
Rev. Presbyterian, due 09/04/97 1,000 1,000,000
Burke County, GA, Development Authority, Pollution
Control Rev. (Georgia Power), due 09/02/97 3,100 3,100,000
California Pollution Control Financing Authority,
Control Rev. Shell Oil, due 09/02/97 $ 2,500 $2,500,000
California Statewide Community Development (Sutter
Health), due 09/02/97 2,300 2,300,000
Charleston County, SC, Industrial Rev. Massey Coal,
due 09/02/97 100 100,000
Commonwealth of Massachusetts, due 09/02/97 910 910,000
Dade County, FL, Health Facility Hospital Rev.
(Miami Childrens Hospital), due 09/03/97 4,500 4,500,000
Dade County, FL, Industrial Development Authority,
Pollution Control Rev., due 09/02/97 3,000 3,000,000
Delaware County, PA, Industrial Development
Authority (United Parcel Service), due 09/02/97 1,800 1,800,000
East Baton Rouge, LA, Parish, Pollution Control Rev.
Exxon, due 09/02/97 500 500,000
Georgia Hospital Financing Authority Rev. (Hospital
Loan Program), due 09/02/97 100 100,000
Harris County, TX, Health Facilities Hospital
(Memorial Hospital), due 09/03/97 1,300 1,300,000
Harris County, TX, Health Facilities Hospital
(Methodist Hospital), due 09/02/97 900 900,000
Harris County, TX, Health Facilities Hospital (St.
Lukes Episcopal), due 09/02/97 7,000 7,000,000
Harris County, TX, Health Facility Development,
Development Corp. Special Facilities Rev., due 09/02/97 3,100 3,100,000
Harris County, TX, Hospital Rev. (Methodist
Hospital), due 09/02/97 8,500 8,500,000
Harris County, TX, Industrial Development Corp.,
Pollution Control Rev., Control Rev., due 09/02/97 3,000 3,000,000
Jackson County, MS, Pollution Control Rev. (Chevron
USA, Inc.), due 09/02/97 1,700 1,700,000
Jacksonville, FL, Pollution Control Rev. Power &
Light, due 09/02/97 500 500,000
Kansas City, MO, Industrial Development Hospital,
due 09/02/97 1,500 1,500,000
Kansas City, MO, Industrial Development Hospital,
due 09/02/97 100 100,000
Kansas City, MO, Industrial Development Hospital,
Variable Insured Research Health Services Systems,
due 09/02/97 5,150 5,150,000
Lincoln County, WY, Pollution Control Rev. Exxon,
due 09/02/97 1,300 1,300,000
Lincoln County, WY, Pollution Control Rev., Exxon,
due 09/02/97 1,400 1,400,000
Lubbock, TX, Health Facilities Development Corp.
Rev. St. Joseph Health System, due 09/02/97 800 800,000
Lynchburg, VA, Industrial Development Authority,
due 09/03/97 7,700 7,700,000
Maricopa County, AZ, Industrial Development
Authority Samaritan Health Services Hospital, due 09/02/97 100 100,000
Municipal Assistance Corp., NY, due 07/01/08 17,300 17,300,000
New York, NY, Municipal Water Finance Authority,
due 09/02/97 1,500 1,500,000
Peninsula Ports Authority, VA, Shell Oil, due 09/02/97 1,700 1,700,000
Perry County, MS, Pollution Control Rev. Leaf River
Forest, due 09/02/97 3,400 3,400,000
Phenix City, AL, Environmental Improvement Rev.,
due 09/02/97 1,000 1,000,000
Pinellas County, FL, Health Facility Authority, due
09/02/97 6,100 6,100,000
St. Lucie County, FL, Pollution Control Rev. Power &
Light, due 09/02/97 400 400,000
State of Oregon, due 09/03/97 9,800 9,800,000
Triborough Bridge & Tunnel Authority, NY, Variable,
due 09/03/97 3,100 3,100,000
Uinta County, WY, Pollution Control Rev. (Chevron),
due 09/02/97 2,900 2,900,000
Uinta County, WY, Pollution Control Rev. (Chevron),
Pollution Control Rev. Chevron, due 09/02/97 1,150 1,150,000
Vermont Educational & Health Buildings Agency,
Capital Asset Financing Program, due 06/01/22 3,090 3,090,000
Vermont Educational & Health Buildings Agency,
Capital Asset Financing Program, due 06/01/27 15,645 15,645,000
- ---------------------------------------------------------------------------------------------------------
Total Floating Rate Demand Notes, at Identified Cost $ 135,445,000
- ---------------------------------------------------------------------------------------------------------
Non-Floating Rate Demand Notes
- ---------------------------------------------------------------------------------------------------------
New York City, NY, Municipal Water Finance
Authority, due 09/02/97, at Identified Cost $ 175 $ 175,000
- ---------------------------------------------------------------------------------------------------------
Total Investments (Identified Cost, $1,643,928,799) $ 1,769,632,068
Other Assets, Less Liabilities - (1.9)% (33,398,707)
- ---------------------------------------------------------------------------------------------------------
Net assets - 100.0% $ 1,736,233,361
- ---------------------------------------------------------------------------------------------------------
</TABLE>
(++)When-issued security. At August 31, 1997, the Fund had sufficient cash
and/or securities at least equal to the value of the when-issued security.
+Restricted security.
##SEC Rule 144A restriction.
###Security segregated as collateral for an open futures contract.
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS
Statement of Assets and Liabilities
- --------------------------------------------------------------------------------
AUGUST 31, 1997
- --------------------------------------------------------------------------------
Assets:
Investments, at value (identified cost, $1,643,928,799) $1,769,632,068
Cash 17,757
Receivable for daily variation margin on open futures
contracts 244,733
Receivable for Fund shares sold 544,710
Receivable for investments sold 36,059,024
Interest receivable 22,136,850
Other assets 16,219
--------------
Total assets $1,828,651,361
--------------
Liabilities:
Distributions payable $ 3,145,788
Payable for Fund shares reacquired 47,490,001
Payable for investments purchased 22,770,543
Payable for when-issued investments purchased 18,575,621
Payable to affiliates -
Management fee 57,527
Shareholder servicing agent fee 18,429
Distribution and service fee 14,551
Administrative fee 1,977
Accrued expenses and other liabilities 343,563
---------------
Total liabilities $ 92,418,000
--------------
Net assets $1,736,233,361
==============
Net assets consist of:
Paid-in capital $1,582,282,968
Unrealized appreciation on investments 125,758,180
Accumulated undistributed net realized gain on
investments 24,880,947
Accumulated net investment income 3,311,266
--------------
Total $1,736,233,361
==============
Shares of beneficial interest outstanding 157,932,054
===========
Class A shares:
Net asset value per share
(net assets of $1,660,375,045 / 151,027,931 shares of
beneficial interest outstanding) $10.99
======
Offering price per share (100 / 95.25) $11.54
======
Class B shares:
Net asset value and offering price per share
(net assets of $75,858,316 / 6,904,123 shares of
beneficial interest outstanding) $10.99
======
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
<PAGE>
FINANCIAL STATEMENTS - continued
Statement of Operations
- -------------------------------------------------------------------------------
YEAR ENDED AUGUST 31, 1997
- -------------------------------------------------------------------------------
Net investment income:
Interest income $ 107,440,862
-------------
Expenses -
Management fee $ 7,363,899
Trustees' compensation 82,080
Shareholder servicing agent fee 1,549,277
Shareholder servicing agent fee (Class A) 706,578
Shareholder servicing agent fee (Class B) 53,868
Distribution and service fee (Class B) 605,681
Administrative fee 124,924
Custodian fee 448,715
Postage 90,589
Printing 76,602
Auditing fees 54,155
Legal fees 13,116
Miscellaneous 522,422
-------------
Total expenses $ 11,691,906
Fees paid indirectly (357,434)
-------------
Net expenses $ 11,334,472
-------------
Net investment income $ 96,106,390
-------------
Realized and unrealized gain (loss) on investments:
Realized gain (loss) (identified cost basis) -
Investment transactions $ 52,199,616
Futures contracts (21,341,499)
-------------
Net realized gain on investments $ 30,858,117
-------------
Change in unrealized appreciation (depreciation) -
Investments $ 14,841,970
Futures contracts (1,733,527)
-------------
Net unrealized gain on investments $ 13,108,443
-------------
Net realized and unrealized gain on investments $ 43,966,560
-------------
Increase in net assets from operations $ 140,072,950
=============
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS - continued
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------
YEAR ENDED AUGUST 31, 1997 1996
- ------------------------------------------------------------------------------------------
Increase (decrease) in net assets:
From operations -
<S> <C> <C>
From net investment income $ 96,106,390 $ 105,338,973
Net realized gain on investments 30,858,117 24,385,079
Net unrealized gain (loss) on investments 13,108,443 (33,508,051)
--------------- ---------------
Increase in net assets from operations $ 140,072,950 $ 96,216,001
--------------- ---------------
Distributions declared to shareholders -
From net investment income (Class A) $ (92,663,173) $ (101,464,492)
From net investment income (Class B) (3,251,831) (2,800,303)
--------------- ---------------
Total distributions declared to shareholders $ (95,915,004) $ (104,264,795)
--------------- ---------------
Fund share (principal) transactions -
Net proceeds from sale of shares $ 2,033,525,620 $ 1,980,944,467
Net asset value of shares issued to shareholders in
reinvestment of distributions 59,510,183 60,332,570
Cost of shares reacquired (2,269,551,169) (2,169,208,109)
--------------- ---------------
Decrease in net assets from Fund share transactions $ (176,515,366) $ (127,931,072)
--------------- ---------------
Total decrease in net assets $ (132,357,420) $ (135,979,866)
Net assets:
At beginning of period 1,868,590,781 2,004,570,647
--------------- ---------------
At end of period (including accumulated distributions
in excess of net investment income of $3,311,266
and ($1,216,893), respectively) $ 1,736,233,361 $ 1,868,590,781
=============== ===============
</TABLE>
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS - continued
Financial Highlights
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
TEN MONTHS YEAR ENDED
YEAR ENDED AUGUST 31, ENDED OCTOBER 31,
--------------------------------------- AUGUST 31, -----------------------
1997 1996 1995 1994 1993 1992
- -----------------------------------------------------------------------------------------------------------------------------------
CLASS A
- -----------------------------------------------------------------------------------------------------------------------------------
Per share data (for a share outstanding throughout each period):
<S> <C> <C> <C> <C> <C> <C>
Net asset value - beginning of
period $ 10.75 $ 10.83 $ 10.68 $ 11.64 $ 10.73 $ 10.80
---------- ---------- ---------- ---------- ---------- ----------
Income from investment operations# -
Net investment income $ 0.57 $ 0.59 $ 0.60 $ 0.51 $ 0.61 $ 0.66
Net realized and unrealized gain
(loss) on investments 0.24 (0.09) 0.15 (0.77) 1.14 0.09
---------- ---------- ---------- ---------- ---------- ----------
Total from investment
operations $ 0.81 $ 0.50 $ 0.75 $ (0.26) $ 1.75 $ 0.75
---------- ---------- ---------- ---------- ---------- ----------
Less distributions declared to shareholders -
From net investment income $ (0.57) $ (0.58) $ (0.60) $ (0.47) $ (0.66) $ (0.66)
From net realized gain on
investments -- -- -- (0.16) (0.15) (0.16)
In excess of net investment
income -- -- -- (0.04) (0.03) --
In excess of net realized gain on
investments -- -- -- (0.03) -- --
---------- ---------- ---------- ---------- ---------- ----------
Total distributions declared
to shareholders $ (0.57) $ (0.58) $ (0.60) $ (0.70) $ (0.84) $ (0.82)
---------- ---------- ---------- ---------- ---------- ----------
Net asset value - end of period $ 10.99 $ 10.75 $ 10.83 $ 10.68 $ 11.64 $ 10.73
========== ========== ========== ========== ========== ==========
Total return(+) 7.75% 4.67% 7.31% (2.33)%++ 16.97% 7.35%
Ratios (to average net assets)/Supplemental data:
Expenses## 0.60% 0.60% 0.61% 0.59%+ 0.59% 0.57%
Net investment incme 5.29% 5.37% 5.70% 5.49%+ 5.63% 6.12%
Portfolio turnover 91% 84% 90% 74% 56% 87%
Net assets at end of period
(000,000 omitted) $ 1,660 $ 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, are based on
average shares outstanding.
##For fiscal years ending after September 1, 1995, the Fund's expenses are
calculated without reduction for fees paid indirectly.
(+)Total returns for Class A shares do not include the applicable sales
charge. If the charge had been included, the results would have been lower.
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS - continued
<TABLE>
<CAPTION>
Financial Highlights - continued
- -----------------------------------------------------------------------------------------------------------------------------------
YEAR ENDED OCTOBER 31, 1991 1990 1989 1988 1987
- -----------------------------------------------------------------------------------------------------------------------------------
CLASS A
- -----------------------------------------------------------------------------------------------------------------------------------
Per share data (for a share outstanding throughout each period):
<S> <C> <C> <C> <C> <C>
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)
From net realized gain on investments -- (0.27) -- -- --
In excess of net investment income -- -- (0.08) -- (0.39)
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>
(+)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
<PAGE>
FINANCIAL STATEMENTS - continued
<TABLE>
<CAPTION>
Financial Highlights - continued
- ------------------------------------------------------------------------------------------------------------------------------------
YEAR ENDED AUGUST 31, TEN MONTHS
ENDED YEAR ENDED
--------------------------------------- AUGUST 31, OCTOBER 31,
1997 1996 1995 1994 1993*
- -----------------------------------------------------------------------------------------------------------------------------------
CLASS B
- -----------------------------------------------------------------------------------------------------------------------------------
Per share data (for a share outstanding throughout each period):
<S> <C> <C> <C> <C> <C>
Net asset value - beginning of period $ 10.74 $ 11.10 $ 10.67 $ 11.63 $ 11.68
---------- ---------- ---------- ---------- ----------
Income from investment operations# -
Net investment income $ 0.48 $ 0.49 $ 0.49 $ 0.40 $ 0.07
Net realized and unrealized gain (loss) on
investments 0.25 (0.37) 0.16 (0.77) (0.05)
---------- ---------- ---------- ---------- ----------
Total from investment operations $ 0.73 $ 0.12 $ 0.65 $ (0.37) $ 0.02
---------- ---------- ---------- ---------- ----------
Less distributions declared to shareholders -
From net investment income $ (0.48) $ (0.48) $ (0.49) $ (0.40) $ (0.07)(++)
From net realized gain on investments -- -- -- (0.16) --
In excess of net realized gain on investments -- -- -- (0.03) --
---------- ---------- ---------- ---------- ----------
Total distributions declared to
shareholders $ (0.48) $ (0.48) $ (0.49) $ (0.59) $ (0.07)
---------- ---------- ---------- ---------- ----------
Net asset value - end of period $ 10.99 $ 10.74 $ 10.83 $ 10.67 $ 11.63
========== ========== ========== ========== ==========
Total return 6.84% 3.69% 6.35% (3.25)%++ 1.49%+
Ratios (to average net assets)/Supplemental data:
Expenses## 1.46% 1.55% 1.60% 1.72%+ 1.70%+
Net investment income 4.42% 4.42% 4.68% 4.41%+ 3.85%+
Portfolio turnover 91% 84% 90% 74% 56%
Net assets at end of period (000,000 omitted) $ 76 $ 71 $ 56 $ 45 $ 10
</TABLE>
+Annualized.
++Not annualized.
#Per share data for the periods subsequent to October 31, 1993, are based on
average shares outstanding.
##For fiscal years ending September 1, 1995, the Fund's expenses are
calculated without reduction for fees paid indirectly.
*For the period from the commencement of the Fund's offering of Class B
shares, September 7, 1993, through October 31, 1993.
(++)Amount includes a per share distribution in excess of net investment
income of $0.002.
See notes to financial statements
<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 revenues and expenses during the
reporting year. 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, forward contracts
and interest rate swaps, 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 reported
at market value using settlement prices. Over-the-counter options on
securities are valued by brokers. Over-the counter currency options are valued
through the use of a pricing model which takes into account forward rates,
implied volatility, and short term repurchase rates.
Futures Contracts - The Fund may enter into futures contracts for the delayed
delivery of securities or contracts based on financial indices at a fixed
price on a future date. In entering such contracts, the Fund is required to
deposit either in cash or securities an amount equal to a certain percentage
of the contract amount. Subsequent payments are made or received by the Fund
each day, depending on the daily fluctuations in the value of the underlying
security, and are recorded for financial statement purposes as unrealized
gains or losses by the Fund. The Fund's investment in futures contracts is
designed to hedge against anticipated future changes in interest rates or
securities prices. Investments in interest rate futures for purposes other
than hedging may be made to modify the duration of the portfolio without
incurring the additional transaction costs involved in buying and selling the
underlying securities. Should interest rates or securities prices move
unexpectedly, the Fund may not achieve the anticipated benefits of the futures
contracts and may realize a loss.
Indexed Securities - The Fund may invest in indexed securities whose value
may be linked to foreign currencies, interest rates, commodities, indices, or
other financial indicators. Indexed securities are fixed-income securities
whose proceeds at maturity (principal-indexed securities) or interest rates
(coupon-indexed securities) rise and fall according to the change in one or
more specified underlying instruments. Indexed securities may be more volatile
than the underlying instrument itself.
Investment Transactions and Income - Investment transactions are recorded on
the trade date. Interest income is recorded on the accrual basis. All premiums
and original issue discounts 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.
Some securities may be purchased on a "when-issued" or "forward delivery"
basis, which means that the securities will be delivered to the Fund at a
future date, usually beyond customary settlement time.
Fees Paid Indirectly - The Fund's custody fee is calculated as a percentage of
the Fund's average daily net assets. The fee is reduced according to an
arrangement which measures 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 includible by shareholders as gross income for federal
income tax purposes because the Fund intends to meet certain requirements of
the Code applicable to regulated investment companies, which will enable the
Fund to pay exempt-interest dividends. The portion of such interest, if any,
earned on private activity bonds issued after August 7, 1986, may be
considered a tax-preference item to shareholders. Distributions to
shareholders are recorded on the ex-dividend date.
The Fund distinguishes between distributions on a tax basis and a financial
reporting basis and requires that only distributions in excess of tax basis
earnings and profits are reported in the financial statements as a 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, 1997 $4,336,773 was
reclassified from accumulated undistributed net realized gain on investments
to accumulated net investment income due to differences between book and tax
accounting for market discount on tax-exempt obligations. 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
distribution and service fees. All shareholders bear the common expenses of
the Fund pro rata based on the 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 effective annual rate
of 0.19% of average daily net assets and 3.59% of investment income.
Administrator - Effective March 1, 1997, the Fund has an administrative
services agreement with MFS to provide the Fund with certain financial, legal,
compliance, shareholder communications, and other administrative services. As
a partial reimbursement for the cost of providing these services, the Fund
pays MFS an administrative fee up to 0.015% per annum of the Fund's average
daily net assets, provided that the administrative fee is not assessed on Fund
assets that exceed $3 billion.
The Fund pays no compensation directly to its Trustees who are officers of the
investment adviser, or to officers of the Fund, all of whom receive
remuneration for their services to the Fund from MFS. Certain officers and
Trustees of the Fund are officers or directors of MFS, MFS Fund Distributors,
Inc. (MFD), and MFS Service Center, Inc. (MFSC). The Fund has an unfunded
defined benefit plan for all of its independent Trustees and Mr. Bailey.
Included in Trustees' compensation is a net periodic pension expense of
$24,042 for the year ended August 31, 1997.
Distributor - MFD, a wholly owned subsidiary of MFS, as distributor, received
$129,418 for the year ended August 31, 1997, 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 Fund's 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 sale of Class B shares in the first year, 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, 1997. Fees incurred
under the distribution plan during the year ended August 31, 1997, were 0.82%
of average daily net assets attributable to Class B shares on an annualized
basis.
Purchases over $1 million of Class A shares are subject to a contingent
deferred sales charge in the event of a shareholder redemption within 12
months following such purchase. A contingent deferred sales charge is imposed
on shareholder redemptions of Class B shares in the event of a shareholder
redemption within six years of purchase. MFD receives all contingent deferred
sales charges. Contingent deferred sales charges imposed during the year ended
August 31, 1997, were $9,427 and $10,251 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 Fund's average daily net assets at an effective annual
rate of 0.13%. Prior to January 1, 1997, the fee was 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
$1,574,345,972 and $1,850,242,082, 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 $1,643,928,799
==============
Gross unrealized appreciation $ 127,927,592
Gross unrealized depreciation (2,224,323)
--------------
Net unrealized appreciation $ 125,703,269
==============
(5) Shares of Beneficial Interest
The Fund's Declaration of Trust permits the Trustees to issue an unlimited
number of full and fractional shares of beneficial interest (without par
value). Transactions in Fund shares were as follows:
Class A Shares
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31, 1997 YEAR ENDED AUGUST 31, 1996
------------------------------------- -------------------------------------
SHARES AMOUNT SHARES AMOUNT
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Shares sold 184,758,268 $ 2,004,238,212 178,715,545 $ 1,948,177,673
Shares issued to
shareholders in
reinvestment of
distributions 5,291,900 57,558,122 5,345,853 58,555,788
Shares reacquired (206,226,168) (2,241,605,376) (196,714,962) (2,150,166,037)
------------ --------------- ------------ ---------------
Net decrease (16,176,000) $ (179,809,042) (12,653,564) $ (143,432,576)
============ =============== ============ ===============
Class B Shares
YEAR ENDED AUGUST 31, 1997 YEAR ENDED AUGUST 31, 1996
------------------------------------- -------------------------------------
SHARES AMOUNT SHARES AMOUNT
- ---------------------------------------------------------------------------------------------------------
Shares sold 2,698,839 $ 29,287,408 2,997,177 $ 32,766,794
Shares issued to
shareholders in
reinvestment of
distributions 179,440 1,952,061 162,309 1,776,782
Shares reacquired (2,574,149) (27,945,793) (1,734,057) (19,042,072)
---------- ------------ ---------- -------------
Net increase 304,130 $ 3,293,676 1,425,429 $ 15,501,504
========== ============ ========== =============
</TABLE>
(6) Line of Credit
The Fund and other affiliated funds participate in a $400 million unsecured
line of credit provided by a syndication of banks under a line of credit
agreement. 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, 1997, was $17,759.
(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
indexed securities and 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.
Futures Contracts
<TABLE>
<CAPTION>
UNREALIZED
APPRECIATION
DESCRIPTION EXPIRATION CONTRACTS POSITION (DEPRECIATION)
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury Bonds September 1997 300 Short $60,529
Municipal Bonds September 1997 56 Short (5,618)
-------
$54,911
=======
</TABLE>
At August 31, 1997, the Fund had sufficient cash and/or securities to cover
margin requirements on open futures contracts.
(8) Restricted Securities
The Fund may invest not more than 15% of its total net assets in securities
which are subject to legal or contractual restrictions on resale. At August
31, 1997, the Fund owned the following restricted securities (constituting
0.6% of net assets) which may not be publicly sold without registration under
the Securities Act of 1933. The Fund does not have the right to demand that
such securities be registered. The value of these securities is determined by
valuations supplied by a pricing service or brokers or, if not available, in
good faith by or at the direction of the Trustees.
<PAGE>
<TABLE>
<CAPTION>
DATE OF PAR
DESCRIPTION ACQUISITION AMOUNT COST VALUE
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Alameda County, CA, Certificates of
Participation, BIGI, 7.25s, 2011 9/21/90 $4,560,000 $4,448,690 $ 5,064,017
Alameda County, CA, Certificates of
Participation, BIGI, 7.25s, 2012 9/19/90 4,770,000 4,667,397 5,297,228
-----------
$10,361,245
===========
</TABLE>
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Trustees of MFS Series Trust IV and Shareholders of MFS Municipal Bond
Fund:
We have audited the accompanying statement of assets and liabilities,
including the portfolio of investments, of MFS Municipal Bond Fund (one of the
series constituting MFS Series Trust IV) as of August 31, 1997, the related
statement of operations for the year then ended, the statement of changes in
net assets for the years ended August 31, 1997 and 1996, and the financial
highlights for each of the years in the three-year period ended August 31,
1997, the ten months ended August 31, 1994, and each of the years in the
seven-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 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, 1997 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, 1997, 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 3, 1997
--------------------------------------------
This report is prepared for the general information of shareholders. It is
authorized for distribution to prospective investors only when preceded or
accompanied by a current prospectus.
<PAGE>
MFS(R) MUNICIPAL BOND FUND
<TABLE>
<S> <C>
TRUSTEES CUSTODIAN
A. Keith Brodkin* - Chairman and President State Street Bank and Trust Company
Richard B. Bailey* - Private Investor; AUDITORS
Former Chairman and Director (until 1991), Deloitte & Touche LLP
Massachusetts Financial Services Company;
Director, Cambridge Bancorp; Director, Cambridge INVESTOR INFORMATION
Trust Company For MFS stock and bond market outlooks, call toll
free: 1-800-637-4458 anytime from a touch-tone
Peter G. Harwood - Private Investor telephone.
J. Atwood Ives - Chairman and Chief Executive For information on MFS mutual funds, call your
Officer, Eastern Enterprises financial adviser or, for an information kit, call
toll free: 1-800-637-2929 any business day from 9
Lawrence T. Perera - Partner, Hemenway a.m. to 5 p.m. Eastern time (or leave a message
& Barnes anytime).
William J. Poorvu - Adjunct Professor, Harvard INVESTOR SERVICE
University Graduate School of Business MFS Service Center, Inc.
Administration P.O. Box 2281
Boston, MA 02107-9906
Charles W. Schmidt - Private Investor
For general information, call toll free:
Arnold D. Scott* - Senior Executive Vice 1-800-225-2606 any business day from 8 a.m. to 8
President, Director and Secretary, Massachusetts p.m. Eastern time.
Financial Services Company
For service to speech- or hearing-impaired, call
Jeffrey L. Shames* - President and Director, toll free: 1-800-637-6576 any business day from 9
Massachusetts Financial Services Company a.m. to 5 p.m. Eastern time. (To use this service,
your phone must be equipped with a
Elaine R. Smith - Independent Consultant Telecommunications Device for the Deaf.)
David B. Stone - Chairman, North American For share prices, account balances, and exchanges,
Management Corp. (investment advisers) call toll free: 1-800-MFS-TALK (1-800-637-8255)
anytime from a touch-tone telephone.
INVESTMENT ADVISER
Massachusetts Financial Services Company WORLD WIDE WEB
500 Boylston Street www.mfs.com
Boston, MA 02116-3741
[DALBAR For the fourth year in a row,
DISTRIBUTOR LOGO] MFS earned a #1 ranking in the
MFS Fund Distributors, Inc. DALBAR, Inc. Broker/Dealer Survey,
500 Boylston Street Main Office Operations Service Quality
Boston, MA 02116-3741 Category. The firm achieved a 3.42
overall score on a scale of 1 to 4 in
PORTFOLIO MANAGER the 1997 survey. A total of 111 firms
Robert A. Dennis* responded, offering input on the
quality of service they received from
TREASURER 29 mutual fund companies nationwide.
W. Thomas London* The survey contained questions about
service quality in 11 categories,
ASSISTANT TREASURERS including "knowledge of operations
Mark E. Bradley* contact," "keeping you informed,"
Ellen Moynihan* "ease of doing business" with the firm.
James O. Yost*
SECRETARY
Stephen E. Cavan*
ASSISTANT SECRETARY
James R. Bordewick, Jr.*
*Affiliated with the Investment Adviser
</TABLE>
<PAGE>
-------------
MFS(R) MUNICIPAL BULK RATE
BOND FUND U.S. POSTAGE
PAID
MFS
-------------
500 Boylston Street
Boston, MA 02116-3741
[LOGO] M F S(SM)
INVESTMENT MANAGEMENT
We invented the mutual fund(SM)
[DALBAR
LOGO]
TOP-RATED SERVICE
(c)1997 MFS Fund Distributors, Inc.,
500 Boylston Street, Boston, MA 02116-3741
MMB-2 10/97 62M 11/211
<PAGE> 119
MFS MID CAP GROWTH FUND
SUPPLEMENT TO THE JANUARY 1, 1998 PROSPECTUS
AND STATEMENT OF ADDITIONAL INFORMATION
THE FOLLOWING INFORMATION SHOULD BE READ IN CONJUNCTION WITH THE FUND'S
PROSPECTUS AND STATEMENT OF ADDITIONAL INFORMATION ("SAI"), DATED JANUARY 1,
1998, AND CONTAINS A DESCRIPTION OF CLASS I SHARES.
CLASS I SHARES ARE AVAILABLE FOR PURCHASE ONLY BY CERTAIN INVESTORS AS
DESCRIBED UNDER THE CAPTION "ELIGIBLE PURCHASERS" BELOW.
EXPENSE SUMMARY
<TABLE>
<CAPTION>
SHAREHOLDER TRANSACTION EXPENSES: CLASS I
-------
<S> <C>
Maximum Initial Sales Charge Imposed on Purchases of Fund
Shares (as a percentage of offering price) .............................. None
Maximum Contingent Deferred Sales Charge (as a percentage
of original purchase price or redemption proceeds, as applicable) ....... None
ANNUAL OPERATING EXPENSES OF THE FUND (AS A PERCENTAGE OF AVERAGE NET ASSETS):
Management Fees ........................................................... 0.75%
Rule 12b-1 Fees ........................................................... None
Other Expenses(1)(2) ...................................................... 0.41%
----
Total Operating Expenses .................................................. 1.16%
</TABLE>
(1) "Other Expenses" is based on Class A expenses incurred during the
fiscal year ended August 31, 1997.
(2) The Fund has an expense offset arrangement which reduces the Fund's
custodian fee based upon the amount of cash maintained by the Fund with
its custodian and dividend disbursing agent, and may enter into other
such arrangements and directed brokerage arrangements (which would also
have the effect of reducing the Fund's expenses). Any such fee
reductions are not reflected under "Other Expenses."
EXAMPLE OF EXPENSES
An investor would pay the following dollar amounts of expenses on a $1,000
investment in Class I shares of the Fund, assuming (a) a 5% annual return and
(b) redemption at the end of each of the time periods indicated:
<TABLE>
<CAPTION>
PERIOD CLASS I
------ -------
<S> <C>
1 year..................... $12
3 years.................... 37
</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.
CONDENSED FINANCIAL INFORMATION
The following information should be read in conjunction with the financial
statements included in the Fund's Annual Report to shareholders, which are
incorporated by reference into the SAI.
-1-
<PAGE> 120
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
Year Ended
August 31, 1997*
---------------
<S> <C>
Class I
Per share data (for a share outstanding throughout the period):
Net asset value - beginning of period $ 8.50
--------
Income from investment operations# -
Net investment loss $ (0.05)
Net realized and unrealized gain on investments and
foreign currency transactions 0.99
--------
Total from investment operations $ 0.94
--------
Net asset value - end of period $ 9.44
--------
Total return 11.06%***
Ratios (to average net assets)/Supplemental data:
Expenses## 1.03%**
Net investment loss (0.74)%**
Portfolio turnover 170%
Average commission rate $ 0.0387
Net assets at end of period (000 omitted) $ 1,384
</TABLE>
- --------------------------
* For the period from the inception of Class I shares, January 3, 1997,
through August 31, 1997.
** Annualized
*** Not Annualized
# Per share distributions are based on average shares outstanding.
## The Fund's expenses are calculated without reduction for fees paid
indirectly.
ELIGIBLE PURCHASERS
Class I shares are available for purchase only by the following purchasers
("Eligible Purchasers"):
(i) certain retirement plans established for the benefit of employees of
Massachusetts Financial Services Company ("MFS"), the Fund's investment
adviser, and employees of MFS' affiliates;
(ii) any fund distributed by MFS Fund Distributors, Inc. ("MFD"), the Fund's
distributor, if the fund seeks to achieve its investment objective by
investing primarily in shares of the Fund and other funds distributed by
MFD;
(iii) any retirement plan, endowment or foundation which (a) purchases shares
directly through MFD (rather than through a third party broker or dealer
or other financial intermediary); (b) has, at the time of purchase of
Class I shares, aggregate assets of at least $100 million; and (c) invests
at least $10 million in Class I shares of the Fund either alone or in
combination with investments in Class I shares of other MFS funds
distributed by MFD (additional investments may be made in any amount);
provided that MFD may accept purchases from smaller plans, endowments or
foundations or in smaller amounts if it believes, in its sole discretion,
that such entity's aggregate assets will equal or exceed $100 million, or
that such entity will make additional investments which will cause its
total investment to equal or exceed $10 million, within a reasonable
period of time; and
(iv) bank trust departments which initially invest, on behalf of their trust
clients, at least $100,000 in Class I shares of the Fund (additional
investments may be made in any amount); provided that MFD may accept
smaller initial purchases if it believes, in its sole discretion, that the
bank trust department will make additional investments, on behalf of its
trust clients, which will cause its total investment to equal or exceed
$100,000 within a reasonable period of time.
In no event will the Fund, MFS, MFD or any of their affiliates pay any sales
commissions or compensation to any third party in connection with the sale of
Class I shares; the payment of any such sales commission or compensation would,
under the Fund's policies, disqualify the purchaser as an eligible investor of
Class I shares.
-2-
<PAGE> 121
SHARE CLASSES OFFERED BY THE FUND
Four classes of shares of the Fund currently are offered for sale, Class A
shares, Class B shares, Class C shares and Class I shares. Class I shares are
available for purchase only by Eligible Purchasers, as defined above, and are
described in this Supplement. Class A shares, Class B shares and Class C shares
are described in the Fund's Prospectus and are available for purchase by the
general public.
Class A shares are offered at net asset value plus an initial sales charge
up to a maximum of 5.75% of the offering price (or a contingent deferred sales
charge (a "CDSC") upon redemption of 1.00% during the first year in the case of
purchases of $1 million or more and certain purchases by retirement plans), and
are subject to an annual distribution fee and service fee up to a maximum of
0.35% per annum. Class B shares are offered at net asset value without an
initial sales charge but are subject to a CDSC upon redemption (declining from
4.00% during the first year to 0% after six years) and an annual distribution
fee and service fee up to a maximum of 1.00% per annum; Class B shares convert
to Class A shares approximately eight years after purchase. Class C shares are
offered at net asset value without an initial sales charge but are subject to a
CDSC upon redemption of 1.00% during the first year and an annual distribution
fee and service fee up to a maximum of 1.00% per annum. Class I shares are
offered at net asset value without an initial sales charge or CDSC and are not
subject to a distribution or service fee. Class C and Class I shares do not
convert to any other class of shares of the Fund.
OTHER INFORMATION
Eligible Purchasers may purchase Class I shares only directly through MFD.
Eligible Purchasers may exchange Class I shares of the Fund for Class I shares
of any other MFS Fund available for purchase by such Eligible Purchasers at
their net asset value (if available for sale), and may exchange Class I shares
of the Fund for shares of the MFS Money Market Fund (if available for sale), and
may redeem Class I shares of the Fund at net asset value. Distributions paid by
the Fund with respect to Class I shares generally will be greater than those
paid with respect to Class A shares, Class B shares and Class C shares because
expenses attributable to Class A shares, Class B shares and Class C shares
generally will be higher.
THE DATE OF THIS SUPPLEMENT IS JANUARY 1, 1998
<PAGE> 122
<TABLE>
<S> <C>
PROSPECTUS
JANUARY 1, 1998
CLASS A SHARES OF BENEFICIAL
INTEREST
CLASS B SHARES OF BENEFICIAL
MFS(R) MID CAP GROWTH FUND INTEREST
(A member of the MFS Family of CLASS C SHARES OF BENEFICIAL
Funds(R)) INTEREST
</TABLE>
- --------------------------------------------------------------------------------
500 Boylston Street, Boston, Massachusetts 02116 (617) 954-5000
This Prospectus pertains to the MFS Mid Cap Growth 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 equity securities of companies with medium market
capitalization which the Adviser believes have above-average growth potential.
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.
(continued on next page)
INVESTMENT PRODUCTS ARE NOT INSURED BY THE FDIC OR ANY OTHER GOVERNMENT AGENCY,
AND ARE NOT DEPOSITS OR OTHER OBLIGATIONS OF, OR GUARANTEED BY, ANY FINANCIAL
INSTITUTION. SHARES OF MUTUAL FUNDS ARE SUBJECT TO INVESTMENT RISK, INCLUDING
POSSIBLE LOSS OF THE PRINCIPAL AMOUNT INVESTED, AND WILL FLUCTUATE IN VALUE. YOU
MAY RECEIVE MORE OR LESS THAN YOU PAID WHEN YOU REDEEM YOUR SHARES.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
INVESTORS SHOULD READ THIS PROSPECTUS AND RETAIN IT FOR FUTURE REFERENCE.
<PAGE> 123
(continued from previous page)
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, 1998, 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 38 for a further
description of the information set forth in the SAI. A copy of the SAI may be
obtained without charge by contacting the Shareholder Servicing Agent (see back
cover for address and phone number). The SEC maintains an Internet World Wide
Web site (http://www.sec.gov) that contains the SAI, materials that are
incorporated by reference into this Prospectus and the SAI, and other
information regarding the Fund. This Prospectus is available on the Adviser's
Internet World Wide Web site at http://www.mfs.com.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
1. Expense Summary............................................. 3
2. Condensed Financial Information............................. 5
3. The Fund.................................................... 8
4. Investment Objective and Policies........................... 8
5. Certain Securities and Investment Techniques................ 9
6. Additional Risk Factors..................................... 15
7. Management of the Fund...................................... 18
8. Information Concerning Shares of the Fund................... 20
Purchases................................................ 20
Exchanges................................................ 27
Redemptions and Repurchases.............................. 28
Distribution Plan........................................ 31
Distributions............................................ 33
Tax Status............................................... 33
Net Asset Value.......................................... 34
Description of Shares, Voting Rights and Liabilities..... 34
Performance Information.................................. 35
Expenses................................................. 35
9. Shareholder Services........................................ 36
Appendix A.................................................. A-1
</TABLE>
2
<PAGE> 124
1. EXPENSE SUMMARY
SHAREHOLDER TRANSACTION EXPENSES:
<TABLE>
<CAPTION>
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 See
applicable)..................... 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)................. 0.41% 0.41% 0.41%
------- ------- -------
Total Operating Expenses.......... 1.41% 2.16% 2.16%
</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 or Class C shares, together with any CDSC payable upon
redemption of Class B and Class C shares, may cause long-term shareholders
to pay more than the maximum sales charge that would have been permissible
if imposed entirely as an initial sales charge. See "Information Concerning
Shares of the Fund -- Distribution Plan" below.
(4) The Fund has an expense offset arrangement which reduces the Fund's
custodian fee based upon the amount of cash maintained by the Fund with its
custodian and dividend disbursing agent, and may enter into other such
arrangements and directed brokerage arrangements (which would also have the
effect of reducing the Fund's expenses). Any such reductions are not
reflected under "Other Expenses."
3
<PAGE> 125
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 $ 22
3 years............................. 100 98 68 68 68
5 years............................. 130 136 116 116 116
10 years............................. 217 230(2) 230(2) 249 249
</TABLE>
- ---------------
(1) Assumes no redemption.
(2) Class B shares convert to Class A shares approximately eight years after
purchase; therefore, years nine and ten reflect Class A expenses.
The purpose of the expense table above is to assist investors in understanding
the various costs and expenses that a shareholder of the Fund will bear directly
or indirectly. More complete descriptions of the following expenses 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.
4
<PAGE> 126
2. 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. The financial statements for all but most recent six months are
included 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,
-----------------------------------------
1997 1996 1995 1994*
-------- -------- -------- --------
CLASS A
--------
<S> <C> <C> <C> <C>
Per share data (for a share outstanding
throughout each period):
Net asset value -- beginning of period....... $ 9.06 $ 10.08 $ 8.68 $ 7.83
------- ------- ------- -------
Income from investment operations# --
Net investment income loss(sec.)......... $ (0.09) $ (0.10) $ (0.03) $ (0.05)
Net realized and unrealized gain on
investments and foreign currency
transactions........................... 1.77 0.96 1.69 0.90
------- ------- ------- -------
Total from investment operations............. $ 1.68 $ 0.86 $ 1.66 $ 0.85
------- ------- ------- -------
Less distributions declared to
shareholders --
From net realized gain on investments and
foreign currency transactions.......... $ (1.32) $ (1.88) $ (0.26) $ --
------- ------- ------- -------
Net asset value -- end of period............. $ 9.42 $ 9.06 $ 10.08 $ 8.68
======= ======= ======= =======
Total return(dd)............................. 20.26% 10.55% 19.77% 10.86%++
Ratios (to average net assets)/Supplemental
data(sec.):
Expenses##............................... 1.41% 1.28% 1.29% 1.50%+
Net investment loss...................... (1.09)% (1.08)% (0.40)% (0.87)%+
Portfolio turnover........................... 170% 157% 218% 82%
Average commission rate###................... $ 0.0387 $ 0.0422 -- --
Net assets at end of period (000 omitted).... $ 41,737 $ 35,098 $ 30,194 $ 17,776
</TABLE>
- ---------------
<TABLE>
<C> <S>
* For the period from the inception of Class A shares, December 1, 1993, through
August 31, 1994.
+ Annualized.
++ Not annualized.
(dd) 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 are based on average shares outstanding.
## For fiscal years ending after September 1, 1995, the Fund's expenses are
calculated without reduction for fees paid indirectly.
### Average commission rate is calculated for funds with fiscal years beginning on or
after September 1, 1995.
sec. 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>
5
<PAGE> 127
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
-----------------------------------------------
1997 1996 1995 1994*
-------- -------- -------- --------
CLASS B
--------
<S> <C> <C> <C> <C>
Per share data (for a share outstanding
throughout each period):
Net asset value -- beginning of
period................................ $ 8.93 $ 9.94 $ 8.59 $ 7.83
------- ------- ------- -------
Income from investment operations# --
Net investment income loss(sec.).... $ (0.16) $ (0.17) $ (0.13) $ (0.12)
Net realized and unrealized gain on
investments and foreign currency
transactions...................... 1.75 0.95 1.69 0.88
------- ------- ------- -------
Total from investment operations........ $ 1.59 $ 0.78 $ 1.56 $ 0.76
------- ------- ------- -------
Less distributions declared to
shareholders --
From net realized gain on
investments and foreign currency
transactions...................... $ (1.25) $ (1.79) $ (0.21) $ --
------- ------- ------- -------
Net asset value -- end of period........ $ 9.27 $ 8.93 $ 9.94 $ 8.59
======= ======= ======= =======
Total return............................ 19.36% 9.67% 18.75% 9.71%++
Ratios (to average net
assets)/Supplemental data(sec.):
Expenses##.......................... 2.20% 2.13% 2.29% 2.57%+
Net investment loss................. (1.87)% (1.81)% (1.44)% (2.02)%+
Portfolio turnover...................... 170% 157% 218% 82%
Average commission rate###.............. $ 0.0387 $ 0.0422 -- --
Net assets at end of period (000
omitted).............................. $ 73,940 $ 67,043 $ 61,742 $ 36,849
</TABLE>
- ---------------
<TABLE>
<C> <S>
* For the period from the inception of Class B shares, December 1, 1993, through
August 31, 1994.
+ Annualized.
++ Not annualized.
# Per share data are based on average shares outstanding.
## For fiscal years ending after September 1, 1995, the Fund's expenses are
calculated without reduction for fees paid indirectly.
### Average commission rate is calculated for funds with fiscal years beginning on
or after September 1, 1995.
sec. 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>
6
<PAGE> 128
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
-----------------------------------------
1997 1996 1995 1994*
-------- -------- -------- --------
CLASS C
--------
<S> <C> <C> <C> <C>
Per share data (for a share outstanding
throughout each period):
Net asset value -- beginning of period........ $ 8.85 $ 9.91 $ 8.61 $ 7.80
------- ------- ------- -------
Income from investment operations# --
Net investment loss(sec.)................. $ (0.16) $ (0.17) $ (0.14) $ (0.04)
Net realized and unrealized gain on
investments and foreign currency
transactions............................ 1.74 0.94 1.69 0.85
------- ------- ------- -------
Total from investment operations.............. $ 1.58 $ 0.77 $ 1.55 $ 0.81
------- ------- ------- -------
Less distributions declared to shareholders --
From net realized gain on investments and
foreign currency transactions........... $ (1.24) $ (1.83) $ (0.25) $ --
------- ------- ------- -------
Net asset value -- end of period.............. $ 9.19 $ 8.85 $ 9.91 $ 8.61
======= ======= ======= =======
Total return.................................. 19.44% 9.60% 18.63% 10.38%++
Ratios (to average net assets)/Supplemental
data(sec.):
Expenses##................................ 2.16% 2.17% 2.30% 2.50%+
Net investment loss....................... (1.79)% (1.90)% (1.55)% (2.22)%+
Portfolio turnover............................ 170% 157% 218% 82%
Average commission rate###.................... $ 0.0387 $ 0.0422 -- --
Net assets at end of period (000 omitted)..... $ 5,796 $ 6,860 $ 3,209 $ 87
</TABLE>
- ---------------
<TABLE>
<C> <S>
* For the period from the inception of Class C shares, August 1, 1994, through
August 31, 1994.
+ Annualized.
++ Not annualized.
# Per share data are based on average shares outstanding.
## For fiscal years ending after September 1, 1995, the Fund's expenses are
calculated without reduction for fees paid indirectly.
### Average commission rate is calculated for funds with fiscal years beginning on
or after September 1, 1995.
sec. 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>
7
<PAGE> 129
3. 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 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 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.
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 equity
securities of companies with medium market capitalization which the Adviser
believes have above-average growth potential (see "Certain Securities and
Investment Techniques -- Equity Securities" below). Medium market capitalization
companies are those whose market capitalization falls within the range of the
Standard and Poor's MidCap 400 Index at the time of the Fund's investment. The
S&P MidCap 400 Index is a widely recognized, unmanaged index of mid-cap common
stock prices. Companies whose capitalization falls outside this range after
purchase continue to be considered medium-capitalization companies for purposes
of the Fund's 65% policy. The Fund may, but is not required to, purchase
securities of companies included in the S&P MidCap 400 Index. The Index is only
used by the Fund for purposes of defining the market capitalization range of
companies in which the Fund will invest; it is not intended to be used as a
benchmark against which the Fund
8
<PAGE> 130
compares its investment performance. As of November 30, 1997, the S&P MidCap 400
Index included companies with capitalizations of between $218 million and $11.8
billion.
Consistent with its investment objective, the Fund may invest in fixed income
securities and up to 20% of its net assets in non-convertible 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") (see "Certain Securities and
Investment Techniques -- "Fixed Income Securities" and "Additional Risk Factors
- -- Lower Rated Fixed Income Securities" below) and may also invest up to 35%
(and generally expects to invest up to 20%) of its net assets in foreign
securities which are not traded on a U.S. exchange (not including American
Depositary Receipts)(see "Additional Risk Factors -- Foreign Securities" below).
The Fund may engage in certain securities, transactions and investment
techniques as described under the caption "Certain Securities and Investment
Techniques" below and "Certain Securities and Investment Techniques" in the SAI.
The Fund's investments are subject to certain risks, as described in the
above-referenced sections of this Prospectus and the SAI and as described below
under the caption "Additional Risk Factors."
5. CERTAIN SECURITIES AND INVESTMENT TECHNIQUES
Additional information about certain of these securities and investment
techniques can be found under the caption "Certain Securities and Investment
Techniques" in the SAI.
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. These securities may be listed on
securities exchanges, traded in various over-the-counter markets or have no
organized markets.
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 "Additional 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.
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
9
<PAGE> 131
low- to middle-income economy according to the International Bank for
Reconstruction and Development, the country's foreign currency debt rating, its
political and economic stability and the development of its financial and
capital markets. The Adviser determines whether an issuer's principal activities
are located in an emerging market country by considering such factors as its
country of organization, the principal trading market for its securities and the
source of its revenues and location of its assets. The issuer's principal
activities generally are deemed to be located in a particular country if: (a)
the security is issued or guaranteed by the government of that country or any of
its agencies, authorities or instrumentalities; (b) the issuer is organized
under the laws of, and maintains a principal office in, that country; (c) the
issuer has its principal securities trading market in that country; (d) the
issuer derives 50% or more of its total revenues from goods sold or services
performed in that country; or (e) the issuer has 50% or more of its assets in
that country.
BRADY BONDS: The Fund may invest in Brady Bonds, which are securities created
through the exchange of existing commercial bank loans to public and private
entities in certain emerging markets for new bonds in connection with debt
restructurings under a debt restructuring plan introduced by former U.S.
Secretary of the Treasury, Nicholas F. Brady (the "Brady Plan"). Brady Plan debt
restructurings have been implemented to date in Argentina, Brazil, Bulgaria,
Costa Rica, Croatia, the Dominican Republic, Ecuador, Jordan, Mexico, Morocco,
Nigeria, Panama, Peru, the Philippines, Poland, Slovenia, Uruguay and Venezuela.
Brady Bonds have been issued only recently, and for that reason do not have a
long payment history. Brady Bonds may be collateralized or uncollateralized, are
issued in various currencies (but primarily the U.S. dollar) and are actively
traded in over-the-counter secondary markets. U.S. dollar-denominated,
collateralized Brady Bonds, which may be fixed-rate bonds or floating-rate
bonds, are generally collateralized in full as to principal by U.S. Treasury
zero coupon bonds having the same maturity as the bonds. Brady Bonds are often
viewed as having three or four valuation components: the collateralized
repayment of principal at final maturity; the collateralized interest payments;
the uncollateralized interest payments; and any uncollateralized repayment of
principal at maturity (these uncollateralized amounts constituting the "residual
risk"). In light of the residual risk of Brady Bonds and the history of defaults
of countries issuing Brady Bonds with respect to commercial bank loans by public
and private entities, investments in Brady Bonds may be viewed as speculative.
AMERICAN DEPOSITARY RECEIPTS: The Fund may invest in American Depositary
Receipts ("ADRs") which are certificates issued by a U.S. depository (usually a
bank) and represent a specified quantity of shares of an underlying non-U.S.
stock on deposit with a custodian bank as collateral. Because ADRs trade on
United States securities exchanges, the Adviser does not treat them as foreign
securities. However, they are subject to many of the risks of foreign securities
such as changes in exchange rates and more limited information about foreign
issuers.
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.
10
<PAGE> 132
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. While awaiting delivery of securities purchased on
such bases, the Fund will segregate liquid assets sufficient to cover its
commitments. Although the Fund does not intend to make such purchases for
speculative purposes, purchases of securities on such bases may involve more
risk than other types of purchases.
INDEXED SECURITIES: The Fund may invest in indexed securities whose value is
linked to foreign currencies, 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 changes in the value of one or more
specified underlying instruments. Indexed securities may be positively or
negatively indexed (i.e., their principal value or interest rates may increase
or decrease if the underlying instrument appreciates), and may have return
characteristics similar to direct investments in the underlying instrument or to
one or more options on the underlying instrument. Indexed securities may be more
volatile than the underlying instrument itself and could involve the loss of all
or a portion of the principal amount of or interest on the investment.
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"). A determination is made based upon a continuing review of the
trading markets for a specific Rule 144A security, whether such security is
liquid and thus not subject to the Fund's limitations on investing not more than
15% of its net assets in illiquid investments. The Board of Trustees has adopted
guidelines and delegated to MFS the daily function of determining and monitoring
the liquidity of Rule 144A securities. The Board, however, retains
11
<PAGE> 133
oversight, focusing on factors such as valuation, liquidity and availability of
information. Investing in Rule 144A securities could have the effect of
decreasing the level of liquidity in the Fund to the extent that qualified
institutional buyers become for a time uninterested in purchasing Rule 144A
securities held in the Fund's portfolio. Subject to the Fund's 15% limitation on
investments in illiquid investments, the Fund may also invest in restricted
securities that may not be sold under Rule 144A, which presents certain risks.
As a result, the Fund might not be able to sell these securities when the
Adviser wishes to do so, or 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. However, the writing of options constitutes only a
partial hedge, up to the amount of the premium, less any transaction costs. In
contrast, if the price of the security underlying the option moves adversely to
the Fund's position, the option may be exercised and the Fund will be required
to purchase or sell the security at a disadvantageous price, resulting in losses
which may only be partially offset by the amount of the premium. The Fund may
also write combinations of put and call options on the same security, known as
"straddles." Such transactions can generate additional premium income but also
present increased risk.
The Fund may purchase put or call options in anticipation of declines in the
value of portfolio securities or increases in the value of securities to be
acquired. In the event that such declines or increases occur, the Fund may be
able to offset the resulting adverse effect on its portfolio, in whole or in
part, through the options purchased. The risk assumed by the Fund in connection
with such transactions is limited to the amount of the premium and related
transaction costs associated with the option, although the Fund may be required
to forfeit such amounts in the event that the prices of securities underlying
the options do not move in the direction or to the extent anticipated.
The Fund may also enter into options on the yield "spread," or yield
differential, between two securities, a transaction referred to as a "yield
curve" option, for hedging purposes and non-hedging purposes (which may be
speculative). In contrast to other types of options, a yield curve option is
based on the difference between the yields of designated securities rather than
the actual 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
12
<PAGE> 134
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.
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
13
<PAGE> 135
purchases and sells Futures Contracts, and will be required to maintain margin
deposits. In addition, Futures Contracts entail risks. Although the Adviser
believes that use of such contracts will benefit the Fund, if its investment
judgment about the general direction of exchange rates or the stock market is
incorrect, the Fund's overall performance may be poorer than if it had not
entered into any such contract and the Fund may realize a loss. Futures
Contracts may also be entered into for non-hedging purposes, to the extent
permitted by applicable law, which involves greater risks and could result in
losses which are not offset by gains on other portfolio assets. The Fund will
not enter into any Futures Contract if immediately thereafter the value of
securities and other obligations underlying all such Futures Contracts would
exceed 50% of the value of its total assets.
OPTIONS ON FUTURES CONTRACTS: The Fund may purchase and write options on
Futures Contracts ("Options on Futures Contracts") in order to protect against
declines in the values of portfolio securities or against increases in the cost
of securities to be acquired. Purchases of Options on Futures Contracts may
present less risk in hedging the Fund's portfolio than the purchase 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 which require use of segregated
assets or "cover" in connection with the purchase and sale of such contracts.
14
<PAGE> 136
6. ADDITIONAL RISK FACTORS
The following discussion of additional risk factors supplements the risk factors
described above. Additional information concerning risk factors can be found
under the caption "Certain Securities and Investment Techniques" in the SAI.
MEDIUM CAPITALIZATION STOCKS: Investing in medium capitalization stocks may
involve greater risk than investing in large capitalization stocks, since they
can be subject to more abrupt or erratic movements. However, they tend to
involve less risk than stocks of small capitalization companies.
EMERGING GROWTH COMPANIES: The stocks of companies in which the Fund may invest
may be early in their life cycle but have the potential to become major
enterprises (emerging growth companies). Such companies generally may be of any
size, would be expected to show earnings growth over time that is well above the
growth rate of the overall economy and the rate of inflation, and would have the
products, technologies, management and market and other opportunities which are
usually necessary to become more widely recognized as growth companies. Emerging
growth companies in which the Fund invests may be established companies whose
rates of earnings growth are expected to accelerate because of special factors,
such as rejuvenated management, new products, changes in consumer demand, or
basic changes in economic environment.
The nature of investing in emerging growth companies involves greater risk than
is customarily associated with investments in other companies which do not have
emerging growth characteristics. Emerging growth companies often have limited
product lines, markets or financial resources, and they may be dependent on the
management abilities of a limited number of people. In addition, there may be
less research available on many promising emerging growth companies, making it
more difficult to find and analyze these companies. The securities of emerging
growth companies may have limited marketability and may be subject to more
abrupt or erratic market movements than securities of more established growth
companies or the market averages in general. 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.
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 non-convertible fixed income securities that are in the lower rating
categories (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"). 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
15
<PAGE> 137
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.
FOREIGN SECURITIES: Investing in securities of foreign issuers generally
involves risks not ordinarily associated with investing in securities of
domestic issuers. These include changes in currency rates, exchange control
regulations, governmental administration or economic or monetary policy (in the
United States or abroad) or circumstances in dealings between nations. Costs may
be incurred in connection with conversions between various currencies. Special
considerations may also include more limited information about foreign issuers,
higher brokerage costs, different accounting standards and thinner trading
markets. Foreign securities markets may also be less liquid, more volatile and
less subject to government supervision than in the United States. Investments in
foreign countries could be affected by other factors including expropriation,
confiscatory taxation and potential difficulties in enforcing contractual
obligations and could be subject to extended settlement periods. The Fund may
hold foreign currency received in connection with investments in foreign
securities when, in the judgment of the Adviser, it would be beneficial to
convert such currency into U.S. dollars at a later date, based on anticipated
changes in the relevant exchange rate. The Fund may also hold foreign currency
in anticipation of purchasing foreign securities. See the SAI for further
discussion of foreign securities and the holding of foreign currency, as well as
the associated risks.
EMERGING MARKETS: The risks of investing in foreign securities may be
intensified in the case of investments in emerging markets. Securities of many
issuers in emerging markets may be less liquid and more volatile than securities
of comparable domestic issuers. Emerging markets also have different clearance
and settlement procedures, and in certain markets there have been times when
settlements have been unable to keep pace with the volume of securities
transactions, making it difficult to conduct such transactions. Delays in
settlement could result in temporary periods when a portion of the assets of the
Fund is uninvested and no return is earned thereon. The inability of the Fund to
make intended security purchases due to settlement problems could cause the Fund
to miss attractive investment opportunities. Inability to dispose of portfolio
securities due to settlement problems could result in losses to the Fund due to
subsequent declines in value of the portfolio security, a decrease in the level
of liquidity in the Fund's portfolio, or, if the Fund has entered into a
contract to sell the security, in possible liability to the purchaser. Certain
markets may require payment for securities before delivery, and in such markets
the Fund bears the risk that the securities will not be delivered and that the
Fund's payments will not be returned. Securities prices in emerging markets can
be significantly more volatile than in the more developed nations of the world,
reflecting the greater uncertainties of investing in less established markets
and economies. In particular, countries with emerging markets may have
relatively unstable governments, present the risk of nationalization of
businesses, restrictions on foreign ownership, or prohibitions of repatriation
of assets, and may have less protection of property rights than more developed
countries. The economies of
16
<PAGE> 138
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
17
<PAGE> 139
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
Conduct Rules of the National Association of Securities Dealers, Inc. (the
"NASD"), and such other policies as the Trustees may determine, the Adviser may
consider sales of shares of the Fund and of the other investment company clients
of MFD, the Fund's distributor, as a factor in the selection of broker-dealers
to execute the Fund's portfolio transactions. From time to time, the Adviser may
direct certain portfolio transactions to broker-dealer firms which, in turn,
have agreed to pay a portion of the Fund's operating expenses (e.g., fees
charged by the custodian of the Fund's assets). For a further discussion of
portfolio trading, see "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, 1997, 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). Except with respect to the Fund's policy on borrowing and investing
in illiquid securities, the Fund's investment limitations, policies and rating
standards are adhered to at the time of purchase or utilization of assets; a
subsequent change in circumstances will not be considered to result in a
violation of policy.
7. MANAGEMENT OF THE FUND
INVESTMENT ADVISER -- The Adviser manages the Fund pursuant to an Investment
Advisory Agreement, dated October 20, 1993 (the "Advisory Agreement"). Under the
Advisory Agree-
18
<PAGE> 140
ment, the Adviser provides the Fund with overall investment advisory services.
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, 1997, management
fees paid to MFS under the Advisory Agreement were $868,526.
MFS also serves as investment adviser to each of the other funds in the MFS
Family of Funds (the "MFS Funds") and to MFS(R)/Sun Life Series Trust, MFS
Institutional Trust, MFS Variable Insurance Trust, MFS Municipal Income Trust,
MFS Government Markets Income Trust, MFS Multimarket Income Trust, MFS
Intermediate Income Trust, MFS Charter Income Trust, MFS Special Value Trust,
and seven variable accounts, each of which is a registered investment company
established by Sun Life Assurance Company of Canada (U.S.) ("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 $69.4 billion on behalf of approximately 2.7 million investor
accounts as of November 30, 1997. As of such date, the MFS organization managed
approximately $44.2 billion in assets in equity securities and $20.1 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 Life of
Canada (U.S.), which is a subsidiary of Sun Life of Canada (U.S.) Holdings,
Inc., 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,
Ellen M. Moynihan, Mark E. Bradley and James R. Bordewick, Jr., all of whom are
officers of MFS, are officers of the Trust.
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. Some simultaneous
transactions are inevitable when several clients receive investment advice from
MFS, particularly when the same security is suitable for more than one client.
While in some cases this arrangement could have a detrimental effect on the
price or availability of the security as far as the Fund is concerned, in other
cases, however, it may produce increased investment opportunities for the Fund.
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<PAGE> 141
ADMINISTRATOR -- MFS provides the Fund with certain financial, legal,
compliance, shareholder communications and other administrative services
pursuant to a Master Administrative Services Agreement dated March 1, 1997, as
amended. Under this Agreement, the Fund pays MFS an administrative fee up to
0.015% per annum of the Fund's average daily net assets. This fee reimburses MFS
for a portion of the costs it incurs to provide such services.
DISTRIBUTOR -- MFD, a wholly owned subsidiary of MFS, is the distributor of
shares of the Fund and also serves as distributor for each of the other MFS
Funds.
SHAREHOLDER SERVICING AGENT -- MFS Service Center, Inc. (the "Shareholder
Servicing Agent"), a wholly owned subsidiary of MFS, performs transfer agency
and certain other services for the Fund.
8. INFORMATION CONCERNING SHARES OF THE FUND
PURCHASES
Class A, B and C shares of the Fund may be purchased at the public offering
price through any dealer. As used in the Prospectus and any appendices thereto
the term "dealer" includes any broker, dealer, bank (including bank trust
departments), registered investment adviser, financial planner and any other
financial institutions having a selling agreement or other similar agreement
with MFD. Dealers may also charge their customers fees relating to 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.
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 DEALER
PERCENTAGE 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
20
<PAGE> 142
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
five circumstances, Class A shares are offered at net asset value without an
initial sales charge, but subject to a CDSC equal to 1% of the lesser of the
value of the shares redeemed (exclusive of reinvested dividend and capital gain
distributions) or the total cost of such shares, in the event of a share
redemption within 12 months following the purchase:
(i) on investments of $1 million or more in Class A shares:
(ii) on investments in Class A shares by certain retirement plans
subject to the Employee Retirement Income Security Act of 1974, as amended
("ERISA"), if, prior to July 1, 1996: (a) the plan had established an
account with the Shareholder Servicing Agent and (b) the sponsoring
organization had demonstrated to the satisfaction of MFD that either (i) the
employer had at least 25 employees or (ii) the aggregate purchases by the
retirement plan of Class A shares of 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;
(iiv) on investments in Class A shares by certain retirement plans
subject to ERISA, if: (a) the plan establishes an account with the
Shareholder Servicing Agent on or after July 1, 1996 and (b) the plan has,
at the time of purchase, a market value of $500,000 or more invested in
shares of any class or classes of the MFS Funds; THE RETIREMENT PLAN WILL
QUALIFY UNDER THIS CATEGORY ONLY IF THE PLAN OR ITS SPONSORING ORGANIZATION
INFORMS THE SHAREHOLDER SERVICING AGENT PRIOR TO THE PURCHASE THAT THE PLAN
HAS A MARKET VALUE OF $500,000 OR MORE INVESTED IN SHARES OF ANY CLASS OR
CLASSES OF THE MFS FUNDS; THE SHAREHOLDER SERVICING AGENT HAS NO OBLIGATION
INDEPENDENTLY TO DETERMINE WHETHER SUCH A PLAN QUALIFIES UNDER THIS
CATEGORY; and
(v) on investments in Class A shares by certain retirement plans
subject to ERISA if: (a) the plan establishes an account with the
Shareholder Servicing Agent on or after July 1, 1997; (b) such plan's
records are maintained on a pooled basis by the Shareholder Servicing Agent;
and (c) the sponsoring organization demonstrates to the satisfaction of MFD
that, at the time of purchase the employer has at least 200 eligible
employees and the plan has aggregate assets of at least $2,000,000.
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<PAGE> 143
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 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)
(a) with respect to plans which establish an account with the Shareholder
Servicing Agent on or after November 1, 1997, in the event that the plan makes a
complete redemption of all of its shares in the MFS Funds, or (b) with respect
to plans which established an account with the Shareholder Servicing Agent prior
to November 1, 1997, in the event that there is a change in law or regulations
which results in a material adverse change to the tax advantaged nature of the
plan, or in the event that the plan and/or sponsoring organization: (i) becomes
insolvent or bankrupt; (ii) is terminated under ERISA or is liquidated or
dissolved; or (iii) is acquired by, merged into, or consolidated with, any other
entity.
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<PAGE> 144
CLASS B SHARES: Class B shares are offered at net asset value without an
initial sales charge but subject to a CDSC upon redemption as follows:
<TABLE>
<CAPTION>
YEAR OF CONTINGENT
REDEMPTION DEFERRED SALES
AFTER PURCHASE CHARGE
--------------------------- --------------
<S> <C>
First...................... 4%
Second..................... 4%
Third...................... 3%
Fourth..................... 3%
Fifth...................... 2%
Sixth...................... 1%
Seventh and following...... 0%
</TABLE>
The CDSC imposed is assessed against the lesser of the value of the shares
redeemed (exclusive of reinvested dividends and capital gain distributions) or
the total cost of such shares. No CDSC is assessed against shares acquired
through the automatic reinvestment of dividends or capital gain distributions.
Except as described below, MFD will pay commissions to dealers of 3.75% of the
purchase price of Class B shares purchased through dealers. MFD will also
advance to dealers the first year service fee payable under the Fund's
Distribution Plan (see "Distribution Plan" below) at a rate equal to 0.25% of
the purchase price of such shares. Therefore, the total amount paid to a dealer
upon the sale of Class B shares is 4% of the purchase price of the shares
(commission rate of 3.75% plus a service fee equal to 0.25% of the purchase
price).
Class B shares purchased by a retirement plan whose sponsoring organization
subscribes to the MFS Participant Recordkeeping System and which has established
its account with the Shareholder Servicing Agent on or after July 1, 1996, will
be subject to the CDSC described above, only under limited circumstances, as
explained below under "Waivers of CDSC." With respect to such purchases, MFD
pays an amount to dealers equal to 3.00% of the amount purchased through such
dealers (rather than the 4.00% payment described above), which is comprised of a
commission of 2.75% plus the advancement of the first year service fee equal to
0.25% of the purchase price payable under the Fund's Distribution Plan. As
discussed above, such retirement plans are eligible to purchase Class A shares
of the 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
23
<PAGE> 145
with the Shareholder Servicing Agent on or after July 1, 1996; provided,
however, that the CDSC will not be waived (i.e., it will be imposed) in the
event that there is a change in law or regulations which results in a material
adverse change to the tax advantaged nature of the plan, or in the event that
the plan and/or sponsoring organization: (i) becomes insolvent or bankrupt; (ii)
is terminated under ERISA or is liquidated or dissolved; or (iii) is acquired
by, merged into, or consolidated with, any other entity.
CONVERSION OF CLASS B SHARES. Class B shares of the Fund that remain
outstanding for approximately eight years will convert to Class A shares of the
same Fund. Shares purchased through the reinvestment of distributions paid in
respect of Class B shares will be treated as Class B shares for purposes of the
payment of the distribution and service fees under the Fund's Distribution Plan.
See "Distribution Plan" below. However, for purposes of conversion to Class A
shares, all shares in a shareholder's account that were purchased through the
reinvestment of dividends and distributions paid in respect of Class B shares
(and which have not converted to Class A shares as provided in the following
sentence) will be held in a separate sub-account. Each time any Class B shares
in the shareholder's account (other than those in the sub-account) convert to
Class A shares, a portion of the Class B shares then in the sub-account will
also convert to Class A shares. The portion will be determined by the ratio that
the shareholder's Class B shares not acquired through reinvestment of dividends
and distributions that are converting to Class A shares bear to the
shareholder's total Class B shares not acquired through reinvestment. The
conversion of Class B shares to Class A shares is subject to the continuing
availability of a ruling from the Internal Revenue Service or an opinion of
counsel that such conversion will not constitute a taxable event for federal tax
purposes. There can be no assurance that such ruling or opinion will be
available, and the conversion of Class B shares to Class A shares will not occur
if such ruling or opinion is not available. In such event, Class B shares would
continue to be subject to higher expenses than Class A shares for an indefinite
period.
CLASS C SHARES: Class C shares are offered at net asset value without an
initial sales charge but are subject to a CDSC 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 $1,000,000
per transaction.
The CDSC imposed is assessed against the lesser of the value of the shares
redeemed (exclusive of reinvested dividend and capital gain distributions) or
the total cost of such shares. No CDSC is assessed against shares acquired
through the automatic reinvestment of dividend or capital gain distributions.
See "Redemptions and Repurchases -- Contingent Deferred Sales Charge" below for
further discussion of the CDSC.
MFD will pay dealers 1.00% of the purchase price of Class C shares purchased
through dealers and, as compensation therefor, MFD will retain the 1.00% per
annum distribution and service fee paid under the Fund's Distribution Plan to
MFD for the first year after purchase (see "Distribution Plan" below).
Class C shares are not currently available for purchase by any retirement plan
qualified under Sections 401(a) or 403(b) of the Code if the retirement plan
and/or the sponsoring organization subscribe to the MFS FUNDamental 401(k) Plan
or another similar recordkeeping program made available by the Shareholder
Servicing Agent.
24
<PAGE> 146
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.
SUBSEQUENT INVESTMENT BY TELEPHONE: Each shareholder may purchase additional
shares of any MFS Fund by telephoning the Shareholder Servicing Agent toll-free
at (800) 225-2606. The minimum purchase amount is $50 and the maximum purchase
amount is $100,000. Shareholders wishing to avail themselves of this telephone
purchase privilege must so elect on their Account Application and designate
thereon a bank and account number from which purchases will be made. If a
telephone purchase request is received by the Shareholder Servicing Agent on any
business day prior to the close of regular trading on the Exchange (generally,
4:00 p.m., Eastern time), the purchase will occur at the closing net asset value
of the shares purchased on that day. The Shareholder Servicing Agent may be
liable for any losses resulting from unauthorized telephone transactions if it
does not follow reasonable procedures designed to verify the identity of the
caller. The Shareholder Servicing Agent will request personal or other
information from the caller, and will normally also record calls. Shareholders
should verify the accuracy of confirmation statements immediately after their
receipt.
RIGHT TO REJECT PURCHASE ORDERS/MARKET TIMING. Purchases and exchanges should
be made for investment purposes only. The Fund and MFD each reserves the right
to reject or restrict any specific purchase or exchange request. In the event
that the Fund or MFD rejects an exchange request, neither the redemption nor the
purchase side of the exchange will be processed.
The Fund is not designed for professional market timing organizations or other
entities using programmed or frequent exchanges. The Fund defines a "market
timer" as an individual, or organization acting on behalf of one or more
individuals, if (i) the individual or organization makes three or more exchange
requests out of the Fund per calendar year and (ii) any one of such exchange
requests represents shares equal in value to 1/2 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
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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.
DEALER CONCESSIONS. Dealers may receive different compensation with respect to
sales of Class A, Class B and Class C shares. In addition, from time to time,
MFD may pay dealers 100% of the applicable sales charge on sales of Class A
shares of certain specified MFS Funds sold by such dealer during a specified
sales period. In addition, MFD or its affiliates may, from time to time, pay
dealers an additional commission equal to 0.50% of the net asset value of all of
the Class B and/or Class C shares of certain specified MFS Funds sold by such
dealer during a specified sales period. In addition, from time to time, MFD, at
its expense, may provide additional commissions, compensation or promotional
incentives ("concessions") to dealers which sell or arrange for the sale of
shares of the Fund. Such concessions provided by MFD may include financial
assistance to dealers in connection with preapproved conferences or seminars,
sales or training programs for invited registered representatives and other
employees, payment for travel expenses, including lodging, incurred by
registered representatives and other employees for such seminars or training
programs, seminars for the public, advertising and sales campaigns regarding one
or more MFS 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 and other employees in group meetings or to help pay the
expenses of sales contests. Other concessions may be offered to the extent not
prohibited by state laws or any self-regulatory agency, such as the NASD.
SPECIAL INVESTMENT PROGRAMS. For shareholders who elect to participate in
certain investment programs (e.g., the Automatic Investment Plan) or other
shareholder services, MFD or its affiliates may either (i) give a gift of
nominal value, such as a hand-held calculator or (ii) make a nominal charitable
contribution on their behalf.
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.
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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.
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
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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 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.
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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.
At the time of a redemption, the amount by which the value of a shareholder's
account for a particular class of shares represented by Direct Purchases exceeds
the sum of the six calendar year aggregations (12 months in the case of
purchases of Class C shares and of purchases of
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$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 or exchanges, except in the case
of accounts being established for monthly automatic investments and certain
payroll savings programs, Automatic Exchange Plan accounts and tax-deferred
retirement plans, for which there is a lower minimum investment requirement.
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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: There are features of the Distribution
Plan that are common to each class of shares, as described below.
SERVICE FEES. The Distribution Plan provides that the Fund may pay MFD a
service fee of up to 0.25% of the average daily net assets attributable to the
class of shares to which the Distribution Plan relates (i.e., Class A shares,
Class B shares or Class C shares, as appropriate) (the "Designated Class")
annually in order that MFD may pay expenses on behalf of the Fund relating to
the servicing of shares of the Designated Class. The service fee is used by MFD
to compensate dealers which enter into a sales agreement with MFD in
consideration for all personal services and/or account maintenance services
rendered by the dealer with respect to shares of the Designated Class owned by
investors for whom such dealer is the dealer or holder of record. MFD may from
time to time reduce the amount of the service fees paid for shares sold prior to
a certain date. Service fees may be reduced for a dealer that is the holder or
dealer of record for an investor who owns shares of the Fund having an aggregate
net asset value at or above a certain dollar level. Dealers may from time to
time be required to meet certain criteria in order to receive service fees. MFD
or its affiliates are entitled to retain all service fees payable under the
Distribution Plan for which there is no dealer of record or for which
qualification standards have not been met as partial consideration for personal
services and/or account maintenance services performed by MFD or its affiliates
to shareholder accounts.
DISTRIBUTION FEES. The Distribution Plan provides that the Fund may pay MFD a
distribution fee based on the average daily net assets attributable to the
Designated Class as partial consideration for distribution services performed
and expenses incurred in the performance of MFD's obligations under its
distribution agreement with the Fund. See "Management of the Fund --
Distributor" in the SAI. The amount of the distribution fee paid by the Fund
with respect to each class differs under the Distribution Plan, as does the use
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
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Distribution Plan relating to operating policies as well as initial approval,
renewal, amendment and termination are substantially identical as they relate to
each class of shares covered by the Distribution Plan.
FEATURES UNIQUE TO EACH CLASS OF SHARES: There are certain features of the
Distribution Plan that are unique to each class of shares, as described below.
CLASS A SHARES. Class A shares are generally offered pursuant to an initial
sales charge, a substantial portion of which is paid to or retained by the
dealer making the sale (the remainder of which is paid to MFD). See "Purchases
- -- Class A Shares" above. In addition to the initial sales charge, the dealer
also generally receives the ongoing 0.25% per annum service fee, as discussed
above.
The distribution fee paid to MFD under the Distribution Plan is equal, on an
annual basis, to 0.10% of the Fund's average daily net assets attributable to
Class A shares. As noted above, MFD may use the distribution fee to cover
distribution-related expenses incurred by it under its distribution agreement
with the Fund, including commissions to dealers and payments to wholesalers
employed by MFD (e.g., MFD pays commission to dealers with respect to purchases
of $1 million or more 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 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.
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<PAGE> 154
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. In order to minimize the taxes the Fund would
otherwise be required to pay, the Fund intends to qualify each year as a
"regulated investment company" under Subchapter M of the Code. Because the Fund
intends to distribute all of its net investment income and net realized capital
gains to its shareholders in accordance with the timing requirements imposed by
the Code, it is not expected that the Fund will be required to pay any federal
income or excise taxes, although the Fund's foreign-source income may be subject
to foreign withholding taxes.
Shareholders of the Fund normally will have to pay federal income taxes (and any
state or local taxes) on the dividends and capital gain distributions they
receive from the Fund, whether paid in cash or reinvested in additional shares.
A portion of the dividends received from the Fund (but none of the Fund's
capital gain distributions) may qualify for the dividends received deduction for
corporations. Shortly after the end of each calendar year, each shareholder will
be sent a statement setting forth the federal income tax status of all dividends
and distributions for that year, including the portion taxable as ordinary
income, the portion taxable as long-term capital gain (as well as the rate
category or categories under which such gain is taxable), the portion, if any,
representing a return of capital (which is free of current taxes but results in
a basis reduction), and the amount, if any, of federal income tax withheld.
Fund distributions will reduce the Fund's net asset value per share.
Shareholders who buy shares shortly before the Fund makes a distribution may
thus pay the full price for the shares and then effectively receive a portion of
the purchase price back as a taxable distribution.
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The Fund intends to withhold U.S. federal income tax at the rate of 30% (or any
lower rate permitted under an applicable treaty) on taxable dividends and other
payments that are subject to such withholding and that are made to persons who
are neither citizens nor residents of the U.S. The Fund is also required in
certain circumstances to apply backup withholding at the rate of 31% on taxable
dividends and redemption proceeds paid to any shareholder (including a
shareholder who is neither a citizen nor a resident of the U.S.) who does not
furnish to the Fund certain information and certifications or who is otherwise
subject to backup withholding. Backup withholding will not, however, be applied
to payments that have been subject to 30% withholding. Prospective investors
should read the Fund's Account Application for additional information regarding
backup withholding of federal income tax and should consult their own tax
advisers as to the tax consequences to them of an investment in the Fund.
NET ASSET VALUE
The net asset value per share of each class of shares of the Fund is determined
each day during which the Exchange is open for trading. This determination is
made once each day as of the close of regular trading on the Exchange by
deducting the amount of 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
34
<PAGE> 156
and certificates will not be issued except in connection with pledges and
assignments and in certain other limited circumstances.
The Trust is an entity of the type commonly known as a "Massachusetts business
trust." Under Massachusetts law, shareholders of such a trust may, under certain
circumstances, be held personally liable as partners for its obligations.
However, the risk of a shareholder incurring financial loss on account of
shareholder liability is limited to circumstances in which both inadequate
insurance (e.g., fidelity bonding and errors and omissions insurance) existed
and the Trust itself was unable to meet its obligations.
PERFORMANCE INFORMATION
From time to time, the Fund will provide total rate of return quotations for
each class of shares and may also quote fund rankings in the relevant fund
category from various sources, such as the Lipper Analytical Services, Inc. and
Wiesenberger Investment Companies Service. Total rate of return quotations will
reflect the average annual percentage change over stated periods in the value of
an investment in each class of shares of the Fund made at the maximum public
offering price of the shares of that class with all distributions reinvested and
which will give effect to the imposition of any applicable CDSC assessed upon
redemptions of the Fund's Class B and Class C shares. Such total rate of return
quotations may be accompanied by quotations which do not reflect the reduction
in value of the initial investment due to the sales charge or the deduction of a
CDSC, and which will thus be higher. The Fund offers multiple classes of shares
which were initially offered for sale to, and purchased by, the public on
different dates (the class "inception date"). The calculation of total rate of
return for a class of shares which has a later class inception date than another
class of shares of the Fund is based both on (i) the performance of the Fund's
newer class from its inception date and (ii) the performance of the Fund's
oldest class from its inception date up to the class inception date of the newer
class. See the SAI for further information on the calculation of total rate of
return for share classes with different class inception dates.
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, 1997, please see the Fund's Annual Report. A copy of the Annual
Report may be obtained without charge by contacting the Shareholder Servicing
Agent (see back cover for address and phone number). In addition to information
provided in shareholder reports, the Fund may, in its discretion, from time to
time, make a list of all or a portion of its holdings available to investors
upon request.
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,
35
<PAGE> 157
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 State
Street Bank and 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.
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.
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<PAGE> 158
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 Class A, Class B and Class C
shares of that shareholder in the MFS Funds and MFS Fixed Fund (a bank
collective trust), reaches a discount level.
DISTRIBUTION INVESTMENT PROGRAM -- Shares of a particular class of the Fund
may be sold at net asset value (and without any applicable CDSC) through the
automatic reinvestment of dividend and capital gain distributions from the same
class of another MFS Fund. Furthermore, distributions made by the Fund may be
automatically invested at net asset value in shares of the same class of another
MFS Fund, if shares of such fund are available for sale (without a sales charge
and not subject to any applicable CDSC).
SYSTEMATIC WITHDRAWAL PLAN -- A shareholder may direct the Shareholder
Servicing Agent to send him (or anyone he designates) regular periodic payments
based upon the value of his account. Each payment under a Systematic Withdrawal
Plan (a "SWP") must be at least $100, except in certain limited circumstances.
The aggregate withdrawals of Class B and Class C shares in any year pursuant to
a SWP will not be subject to a CDSC and are generally limited to 10% of the
value of the account at the time of the establishment of the SWP. The CDSC will
not be waived in the case of SWP redemptions of Class A shares which are subject
to a CDSC.
DOLLAR COST AVERAGING PROGRAMS
AUTOMATIC INVESTMENT PLAN: Cash investments of $50 or more may be made
through a shareholder's checking account on any day of the month. If the
shareholder does not specify a date, the investment will automatically occur on
the first business day of the month. Required forms are available from the
Shareholder Servicing Agent or investment dealers.
AUTOMATIC EXCHANGE PLAN: Shareholders having account balances of at least
$5,000 in any MFS Fund may exchange their shares for the same class of shares of
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
37
<PAGE> 159
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, 1998, 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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<PAGE> 160
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). As used in the Prospectus and any appendices thereto the term
"dealer" includes any broker, dealer, bank (including bank trust departments),
registered investment adviser, financial planner and any other financial
institutions having a selling agreement or other similar agreement with MFD.
I. WAIVERS OF ALL APPLICABLE SALES CHARGES
In the following circumstances, the initial 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;
- 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.
A-1
<PAGE> 161
5. RETIREMENT PLANS (CDSC WAIVER ONLY). Shares redeemed on account of
distributions made under the following circumstances:
INDIVIDUAL RETIREMENT ACCOUNTS ("IRAS")
- Death or disability of the IRA owner.
SECTION 401(A) PLANS ("401(A) PLANS") AND SECTION 403(B) EMPLOYER SPONSORED
PLANS ("ESP PLANS")
- Death, disability or retirement of 401(a) or ESP Plan participant;
- Loan from 401(a) or ESP Plan;
- Financial hardship (as defined in Treasury Regulation Section
1.401(k)-1(d)(2), as amended from time to time);
- Termination of employment of 401(a) or ESP Plan participant (excluding,
however, a partial or other termination of the Plan);
- Tax-free return of excess 401(a) or ESP Plan contributions;
- To the extent that redemption proceeds are used to pay expenses (or certain
participant expenses) of the 401(a) or ESP Plan (e.g., participant account
fees), provided that the Plan sponsor subscribes to the MFS FUNDamental
401(k) Plan or another similar recordkeeping system made available by MFS
Service Center, Inc. (the "Shareholder Servicing Agent"); and
- Distributions from a 401(a) or ESP Plan that has invested its assets in one
or more of the MFS Funds for more than 10 years from the later to occur of:
(i) January 1, 1993 or (ii) the date such 401(a) or ESP Plan first invests
its assets in one or more of the MFS Funds.
- The sales charges will be waived in the case of a redemption of all of the
401(a) or ESP Plan's shares in all MFS Funds (i.e., all the assets of the
401(a) or ESP Plan invested in the MFS Funds are withdrawn), unless
immediately prior to the redemption, the aggregate amount invested by the
401(a) or ESP Plan in shares of the MFS Funds (excluding the reinvestment of
distributions) during the prior four years equals 50% or more of the total
value of the 401(a) or ESP Plan's assets in the MFS Funds, in which case the
sales charges will not be waived.
SECTION 403(B) SALARY REDUCTION ONLY PLANS ("SRO PLANS")
- Death or disability of SRO Plan participant.
6. CERTAIN TRANSFERS OF REGISTRATION (CDSC WAIVER ONLY). Shares transferred:
- To an IRA rollover account where any sales charges with respect to the
shares being reregistered would have been waived had they been redeemed; and
- From a single account maintained for a 401(a) Plan to multiple accounts
maintained by the Shareholder Servicing Agent on behalf of individual
participants of such Plan, provided that the Plan sponsor subscribes to the
MFS FUNDamental 401(k) Plan or another similar recordkeeping system made
available by the Shareholder Servicing Agent.
A-2
<PAGE> 162
7. LOAN REPAYMENTS.
- Shares acquired pursuant to repayments by retirement plan participants of
loans from 401(a) or ESP Plans with respect to which such Plan or its
sponsoring organization subscribes to the MFS FUNDamental 401(k) Program or
the MFS Recordkeeper Plus Program (but not the MFS Recordkeeper Program).
II. WAIVERS OF CLASS A SALES CHARGES
In addition to the waivers set forth in Section I above, in the following
circumstances the initial sales charge imposed on purchases of Class A shares
and the CDSC imposed on certain redemptions of Class A shares are waived:
1. WRAP ACCOUNT AND FUND "SUPERMARKET" INVESTMENTS
- Shares acquired by investments through certain dealers (including registered
investment advisers and financial planners) which have established certain
operational arrangements with MFD which include a requirement that such
shares be sold for the sole benefit of clients participating in a "wrap"
account, mutual fund "supermarket" account or a similar program under which
such clients pay a fee to such dealer.
2. INVESTMENT BY INSURANCE COMPANY SEPARATE ACCOUNTS
- Shares acquired by insurance company separate accounts.
3. RETIREMENT PLANS
ADMINISTRATIVE SERVICES ARRANGEMENTS
- Shares acquired by retirement plans or trust accounts whose third party
administrators or dealers have entered into an administrative services
agreement with MFD or one of its affiliates to perform certain
administrative services, subject to certain operational and minimum size
requirements specified from time to time by MFD or one or more of its
affiliates.
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> 163
ESP PLANS AND SRO PLANS
- Distributions made on or after the ESP or SRO Plan participant has attained
the age of 59 1/2 years old.
4. PURCHASE OF AT LEAST $5 MILLION (CDSC WAIVER ONLY)
- Shares acquired of Eligible Funds (as defined below) if the shareholder's
investment equals or exceeds $5 million in one or more Eligible Funds (the
"Initial Purchase") (this waiver applies to the shares acquired from the
Initial Purchase and all shares of Eligible Funds subsequently acquired by
the shareholder); provided that the dealer through which the Initial
Purchase is made enters into an agreement with MFD to accept delayed payment
of commissions with respect to the Initial Purchase and all subsequent
investments by the shareholder in the Eligible Funds subject to such
requirements as may be established from time to time by MFD (for a schedule
of the amount of commissions paid by MFD to the dealer on such investments
see "Purchases -- Class A Shares -- Purchases subject to a CDSC" in the
Prospectus). The Eligible Funds are all funds included in the MFS Family of
Funds, except for Massachusetts Investors Trust, Massachusetts Investors
Growth Stock Fund, MFS Municipal Bond Fund, MFS Municipal Limited Maturity
Fund, MFS Money Market Fund, MFS Government Money Market Fund and MFS Cash
Reserve Fund.
III. WAIVERS OF CLASS B AND CLASS C SALES CHARGES
- In addition to the waivers set forth in Section I above, in the following
circumstances the CDSC imposed on redemptions of Class B shares is waived:
1. SYSTEMATIC WITHDRAWAL PLAN
- Systematic Withdrawal Plan redemptions with respect to up to 10% per year
(or 15% per year, in the case of accounts registered as IRAs where the
redemption is made pursuant to Section 72(t) of the Internal Revenue Code of
1986, as amended) of the account value at the time of establishment.
2. DEATH OF OWNER
- Shares redeemed on account of the death of the account owner if the shares
are held solely in the deceased individual's name or in a living trust for
the benefit of the deceased individual.
3. DISABILITY OF OWNER
- Shares redeemed on account of the disability of the account owner if shares
are held either solely or jointly in the disabled individual's name or in a
living trust for the benefit of the disabled individual (in which case a
disability certification form is required to be submitted to the Shareholder
Servicing Agent).
A-4
<PAGE> 164
4. RETIREMENT PLANS. Shares redeemed on account of distributions made under the
following circumstances:
IRAS, 401(A) PLANS, ESP PLANS AND SRO PLANS
- Distributions made on or after the IRA owner or the 401(a), ESP or SRO Plan
participant, as applicable, has attained the age of 70 1/2 years old, but
only with respect to the minimum distribution under applicable Internal
Revenue Code ("Code") rules.
SALARY REDUCTION SIMPLIFIED EMPLOYEE PENSION PLANS ("SAR-SEP PLANS")
- Distributions made on or after the SAR-SEP Plan participant has attained the
age of 70 1/2 years old, but only with respect to the minimum distribution
under applicable Code rules; and
- Death or disability of a SAR-SEP Plan participant.
A-5
<PAGE> 165
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
<PAGE> 166
THE MFS FAMILY OF FUNDS(R) AMERICA'S OLDEST MUTUAL FUND GROUP
The members of the MFS Family of Funds are grouped below according to the types
of securities in their portfolios. For free prospectuses containing more
complete information, including the exchange privilege and all charges and
expenses, please contact your financial adviser or call MFS at 1-800-225-2606
any business day from 8 a.m. to 8 p.m. Eastern time. This material should be
read carefully before investing or sending money.
STOCK
- --------------------------------------------------------------------------------
Massachusetts Investors Trust
Massachusetts Investors Growth Stock Fund
MFS(R) Emerging Growth Fund
MFS(R) Equity Income Fund
MFS(R) Growth Opportunities Fund
MFS(R) Large Cap Growth Fund (1)
MFS(R) Managed Sectors Fund
MFS(R) Mid Cap Growth Fund (2)
MFS(R) New Discovery Fund
MFS(R) Research Fund
MFS(R) Research Growth and Income Fund
MFS(R) Strategic Growth Fund
MFS(R) Union Standard(R) Equity 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) International Growth Fund (3)
MFS(R) International Growth and
Income Fund (4)
MFS(R) World Asset Allocation Fund sm
MFS(R) World Equity Fund
MFS(R) World Governments Fund
MFS(R) World Growth Fund
MFS(R) World Total Return Fund
NATIONAL TAX-FREE BOND
- --------------------------------------------------------------------------------
MFS(R) Municipal Bond Fund
MFS(R) Municipal High Income Fund
MFS(R) Municipal Income Fund
STATE TAX-FREE BOND
- --------------------------------------------------------------------------------
Alabama, Arkansas, California, Florida, Georgia, Maryland, Massachusetts,
Mississippi, New York, North Carolina, Pennsylvania, South Carolina,
Tennessee, Virginia, West Virginia
MONEY MARKET
- --------------------------------------------------------------------------------
MFS(R) Cash Reserve Fund
MFS(R) Government Money Market Fund
MFS(R) Money Market Fund
(1) Formerly MFS(R) Capital Growth Fund.
(2) Formerly MFS(R) OTC Fund.
(3) Formerly MFS(R)/Foreign & Colonial International Growth Fund.
(4) Formerly MFS(R)/Foreign & Colonial International Growth and Income Fund.
<PAGE> 167
-------------------
Bulk Rate
U.S. Postage
Paid
MFS
-------------------
[MFS LOGO]
We invented the Mutual fund
MFS(R) MID-CAP GROWTH STOCK FUND
500 Boylston Street, Boston, MA 02116-3741
This is your fund's current prospectus.
Please keep it with your financial
records because it provides important facts
about your investment.
<PAGE> 168
[MFS LOGO](SM)
INVESTMENT MANAGEMENT
WE INVENTED THE MUTUAL FUND(SM)
MFS(R) MID CAP GROWTH FUND STATEMENT OF
ADDITIONAL INFORMATION
(A Member of the MFS Family of Funds(R)) January 1, 1998
- ------------------------------------------------------------------------
Page
-----
1. Definitions................................................ 2
2. Investment Objective, Policies and Restrictions............ 2
Certain Securities and Investment Techniques........... 2
3. Management of the Fund..................................... 13
Trustees............................................... 13
Officers............................................... 13
Trustee Compensation Table............................. 14
Investment Adviser..................................... 14
Administrator.......................................... 15
Custodian.............................................. 15
Shareholder Servicing Agent............................ 15
Distributor............................................ 15
4. Portfolio Transactions and Brokerage Commissions........... 16
5. Shareholder Services....................................... 17
Investment and Withdrawal Programs..................... 17
Exchange Privilege..................................... 20
Tax-Deferred Retirement Plans.......................... 20
6. Tax Status................................................. 21
7. Determination of Net Asset Value and Performance........... 22
8. Distribution Plan.......................................... 24
9. Description of Shares, Voting Rights and Liabilities....... 25
10. Independent Auditors and Financial Statements.............. 26
Appendix A................................................. A-1
MFS MID CAP GROWTH 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, 1998. This SAI should be read in conjunction with the Prospectus, a
copy of which may be obtained without charge by contacting the Shareholder
Servicing Agent (see last page for address and phone number).
THIS SAI IS NOT A PROSPECTUS AND IS AUTHORIZED FOR DISTRIBUTION TO PROSPECTIVE
INVESTORS ONLY IF PRECEDED OR ACCOMPANIED BY A CURRENT PROSPECTUS.
<PAGE> 169
1. DEFINITIONS
"Fund" -- MFS Mid Cap Growth Fund, a non-diversified series of
MFS Series Trust IV (the "Trust"), a Massachusetts
business trust. The Fund was known as MFS OTC Fund
until its name was changed on August 29, 1997, and
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, 1998,
as amended or supplemented from time to time.
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.
CERTAIN SECURITIES AND INVESTMENT TECHNIQUES
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
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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.
"WHEN-ISSUED" SECURITIES: When the Fund commits to purchase a security on a
"when-issued" or "forward delivery" basis, it will set up procedures consistent
with the General Statement of Policy of the Securities and Exchange Commission
(the "SEC") concerning such purchases. Since that policy currently recommends
that an amount of the Fund's assets equal to the amount of the purchase be held
aside or segregated to be used to pay for the commitment, the Fund will always
have liquid assets sufficient to cover any commitments or to limit any potential
risk. However, although the Fund does not intend to make such purchases for
speculative purposes and intends to adhere to the provisions of the SEC policy,
purchases of securities on such 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. Indexed securities
may be more volatile than the underlying instrument itself and could involve the
loss of all or a portion of the principal amount of the investment. 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. The Fund records these transactions as sale and purchase transactions
rather than as borrowing transactions. During the roll period, the Fund foregoes
principal and interest paid on the mortgage-backed securities. The Fund is
compensated for the lost interest by the difference between the current sales
price and the lower price for the future purchase (often referred to as the
"drop") as well as by the interest earned on the cash proceeds of the initial
sale. The Fund may also be compensated by receipt of a commitment fee.
FOREIGN SECURITIES: The Fund may 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). 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
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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.
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 non-convertible
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
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yielding fixed income securities generally tend to reflect economic changes (and
the outlook for economic growth), short-term corporate and industry developments
and the market's perception of their credit quality (especially during times of
adverse publicity) to a greater extent than higher rated securities which react
primarily to fluctuations in the general level of interest rates (although these
lower rated fixed income securities are also affected by changes in interest
rates). In the past, economic downturns or an increase in interest rates have,
under certain circumstances, caused a higher incidence of default by the issuers
of these securities and may do so in the future, especially in the case of
highly leveraged issuers. The prices for these securities may be affected by
legislative and regulatory developments. For example, federal rules require that
savings and loan associations gradually reduce their holdings of high-yield
securities. An effect of such legislation may be to depress the prices of
outstanding lower rated high yielding fixed income securities. The market for
these lower rated fixed income securities may be less liquid than the market for
investment grade fixed income securities. Furthermore, the liquidity of these
lower rated securities may be affected by the market's perception of their
credit quality. Therefore, the Adviser's judgment may at times play a greater
role in valuing these securities than in the case of investment grade fixed
income securities, and it also may be more difficult during times of certain
adverse market conditions to sell these lower rated securities to meet
redemption requests or to respond to changes in the market.
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 liquid assets. A put option written by the Fund is covered if the
Fund maintains liquid assets with a value equal to the exercise price in a
segregated account with its custodian, or else holds a put on the same security
and in the same principal amount as the put written where the exercise price of
the put held (i) is equal to or greater than the exercise price of the put
written or (ii) is less than the exercise price of the put written if the
difference is maintained by the Fund in liquid assets. 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
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declines, the amount of such decline will be offset in part, or entirely, by the
premium received.
The writing of covered put options is similar in terms of risk/return
characteristics to buy-and-write transactions. Put options could be used by the
Fund in the same market environments that call options would be used in
equivalent buy-and-write transactions.
The Fund may write combinations of put and call options on the same security, a
practice known as a "straddle." By writing a straddle, the Fund undertakes a
simultaneous obligation to sell and purchase the same security in the event that
one of the options is exercised. If the price of the security subsequently rises
sufficiently above the exercise price to cover the amount of the premium and
transaction costs, the call will likely be exercised and the Fund will be
required to sell the underlying security at a below market price. This loss may
be offset, however, in whole or in part, by the premiums received on the writing
of the two options. Conversely, if the price of the security declines by a
sufficient amount, the put will likely be exercised. The writing of straddles
will likely be effective, therefore, only where the price of a security remains
stable and neither the call nor the put is exercised. In an instance where one
of the options is exercised, the loss on the purchase or sale of the underlying
security may exceed the amount of the premiums received.
By writing a call option, the Fund limits its opportunity to profit from any
increase in the market value of the underlying security above the exercise price
of the option. By writing a put option, the Fund assumes the risk that it may be
required to purchase the underlying security for an exercise price above its
then current market value, resulting in a capital loss unless the security
subsequently appreciates in value. The writing of options on securities will be
undertaken by the Fund for purposes in addition to hedging, and could involve
certain risks which are not present in the case of hedging transactions.
Moreover, even where options are written for hedging purposes, such transactions
will constitute only a partial hedge against declines in the value of portfolio
securities or against increases in the value of securities to be acquired, up to
the amount of the premium.
The Fund also may purchase put and call options on securities. Put options would
be purchased to hedge against a decline in the value of securities held in the
Fund's portfolio. If such a decline occurs, the put options will permit the Fund
to sell the underlying securities at the exercise price, or to close out the
options at a profit. By using put options in this way, the Fund will reduce any
profit it might otherwise have realized in the underlying security by the amount
of the premium paid for the put option and related transaction costs. The Fund
may purchase call options to hedge against an increase in the price of
securities that the Fund anticipates purchasing in the future. If such an
increase occurs, the call option will permit the Fund to purchase the securities
at the exercise price or to close out the option at a profit. The premium paid
for a call or put option plus any transaction costs will reduce the benefit, if
any, realized by the Fund upon exercise of the option, and, unless the price of
the underlying security rose or declined sufficiently, the option may expire
worthless to the Fund.
The staff of the SEC has taken the position that purchased over-the-counter
options and assets used to cover written over-the-counter options are illiquid
and, therefore, together with other illiquid securities, cannot exceed a certain
percentage of the Fund's assets (the "SEC illiquidity ceiling"). Although the
Adviser disagrees with this position, the Adviser intends to limit the Fund's
writing of over-the-counter options in accordance with the following procedure.
Except as provided below, the Fund intends to write over-the-counter options
only with primary U.S. Government securities dealers recognized by the Federal
Reserve Bank of New York. Also, the contracts which the Fund has in place with
such primary dealers will provide that the Fund has the absolute right to
repurchase an option it writes at any time at a price which represents the fair
market value, as determined in good faith through negotiation between the
parties, but which in no event will exceed a price determined pursuant to a
formula in the contract. Although the specific formula may vary between
contracts with different primary dealers, the formula will generally be based on
a multiple of the premium received by the Fund for writing the option, plus the
amount, if any, of the option's intrinsic value (i.e., the amount that the
option is in-the-money). The formula may also include a factor to account for
the difference between the price of the security and the strike price of the
option if the option is written out-of-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 liquid assets in a segregated
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account with its custodian. The Fund may cover put options on stock indices by
maintaining liquid assets with a value equal to the exercise price in a
segregated account with its custodian, or else by holding a put on the same
security and in the same principal amount as the put written where the exercise
price of the put held (a) is equal to or greater than the exercise price of the
put written or (b) is less than the exercise price of the put written if the
difference is maintained by the Fund in liquid assets. 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
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value of the currency did decline, the Fund would have the right to sell such
currency for a fixed amount in dollars and would thereby offset, in whole or in
part, the adverse effect on its portfolio which otherwise would have resulted.
Conversely, where a rise in the dollar value of a currency in which securities
to be acquired are denominated is projected, thereby increasing the cost of such
securities, the Fund may purchase call options thereon. The purchase of such
options could offset, at least partially, the effects of the adverse movements
in exchange rates. As in the case of other types of options, however, the
benefit to the Fund deriving from purchases of Options on Foreign Currencies
would be reduced by the amount of the premium and related transaction costs. In
addition, where currency exchange rates do not move in the direction or to the
extent anticipated, the Fund could sustain losses on transactions in Options on
Foreign Currencies which would require it to forego a portion or all of the
benefits of advantageous changes in such rates.
The Fund may write Options on Foreign Currencies for the same types of hedging
purposes. For example, where the Fund anticipates a decline in the dollar value
of foreign-denominated securities due to adverse fluctuations in exchange rates
it may, instead of purchasing a put option, write a call option on the relevant
currency. If the expected decline occurred, the option would most likely not be
exercised, and the diminution in value of portfolio securities would be offset
by the amount of the premium received less related transaction costs. As in the
case of other types of options, therefore, the writing of Options on Foreign
Currencies will constitute only a partial hedge.
FUTURES CONTRACTS: The Fund may enter into stock index and foreign currency
futures contracts ("Futures Contracts") 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
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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 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 liquid assets in a segregated account with its
custodian. The Fund may cover the writing of put Options on Futures Contracts
(a) through sales of the underlying Futures Contract, (b) through segregation of
liquid assets in an amount equal to the value of the security or index
underlying the Futures Contract, or (c) through the holding of a put on the same
Futures Contract and in the same principal amount as the put written where the
exercise price of the put held (i) is equal to or greater than the exercise
price of the put written or (ii) is less than the exercise price of the put
written if the difference is maintained by the Fund in liquid assets in a
segregated account with its custodian. Put and Call Options on Futures Contracts
written by the Fund may also be covered in such other manner as may be in
accordance with the rules of the exchange on which, or the counterparty with
which, the option is traded, and applicable laws and regulations. Upon the
exercise of a call Option on a Futures Contract written by the Fund, the Fund
will be required to sell the underlying Futures Contract which, if the Fund has
covered its obligation through the purchase of such Contract, will serve to
liquidate its futures position. Similarly, where a put Option on a Futures
Contract written by the Fund is exercised, the Fund will be required to purchase
the underlying Futures Contract which, if the Fund has covered its obligation
through the sale of such Contract, will close out its futures position.
The Fund may purchase Options on Futures Contracts for hedging purposes as an
alternative to purchasing or selling the underlying Futures Contracts. For
example, where a decrease in the value of portfolio securities is anticipated as
a result of a projected market-wide decline or changes in interest or exchange
rates, the Fund could, in lieu of selling Futures Contracts, purchase put
options thereon. In the event that such decrease occurs, it may be offset, in
whole or part, by a profit on the option. Conversely, where it is projected that
the value of securities to be acquired by the Fund will increase prior to
acquisition, due to a market advance or changes in interest or exchange rates,
the Fund could purchase call Options on Futures Contracts, rather than
purchasing the underlying Futures Contracts.
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 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
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maintain liquid assets, which will be marked to market on a daily basis, in an
amount equal to the value of its commitments under Forward Contracts.
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) above and nonfundamental
investment policy (1) below, these investment restrictions and policies 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; currently, the Fund does not intend to
invest more than 5% of its net assets in such securities;
(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
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less than three years' continuous operation or relevant business experience;
(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;
(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; or
(11) invest 25% or more of the market value of its total assets in
securities of issuers in any one industry.
3. MANAGEMENT OF THE FUND
The Board of Trustees provides broad supervision over the affairs of the Fund.
The Adviser is responsible for the management of the Fund's assets, and the
officers of the Trust are responsible for the Fund's operations. The Trust's
officers and Trustees are listed below, together with their principal
occupations during the past five years. (Their titles may have varied during
that period.)
TRUSTEES
A. KEITH BRODKIN,* Chairman and President (born 8/4/35)
Massachusetts Financial Services Company, Chairman
RICHARD B. BAILEY* (born 9/14/26)
Private Investor; Massachusetts Financial Services Company, former Chairman and
Director (prior to September 30, 1991); Cambridge Bancorp, Director; Cambridge
Trust Company, Director
PETER G. HARWOOD (born 4/3/26)
Private Investor
Address: 211 Lindsay Pond Road, Concord, Massachusetts
J. ATWOOD IVES (born 5/1/36)
Eastern Enterprises (diversified services company), Chairman and Chief Executive
Officer
Address: 9 Riverside Road, Weston, Massachusetts
LAWRENCE T. PERERA (born 6/23/35)
Hemenway & Barnes (attorneys), Partner
Address: 60 State Street, Boston, Massachusetts
WILLIAM J. POORVU (born 4/10/35)
Harvard University Graduate School of Business Administration, Adjunct
Professor; CBL Associates Properties, Inc. (a real estate investment trust),
Director; The Baupost Fund (a registered investment company), Vice Chairman
(since November 1993), Chairman and Trustee (prior to November 1993)
Address: Harvard Business School, Soldier's Field Road, Cambridge, Massachusetts
CHARLES W. SCHMIDT (born 3/18/28)
Private Investor; OHM Corporation, Director; Mohawk Paper Company, Director
Address: 30 Colpitts Road, Weston, Massachusetts
ARNOLD D. SCOTT* (born 12/16/42)
Massachusetts Financial Services Company, Senior Executive Vice President,
Secretary and Director
JEFFREY L. SHAMES* (born 6/2/55)
Massachusetts Financial Services Company, President and Director
ELAINE R. SMITH (born 4/25/46)
Independent Consultant; Brigham and Women's Hospital, Executive Vice President
and Chief Operating Officer (prior to September 1992)
Address: Weston, Massachusetts
DAVID B. STONE (born 9/2/27)
North American Management Corp. (investment adviser), Chairman and Director;
Eastern Enterprises, Trustee
Address: Ten Post Office Square, Suite 300, Boston Massachusetts
OFFICERS
ROBERT A. DENNIS,* Vice President (born 12/12/48)
Massachusetts Financial Services Company, Senior Vice President
GEOFFREY L. KURINSKY,* Vice President (born 7/7/53)
Massachusetts Financial Services Company, Senior Vice President
W. THOMAS LONDON,* Treasurer (born 3/1/44)
Massachusetts Financial Services Company, Senior Vice President
STEPHEN E. CAVAN,* Secretary and Clerk (born 11/6/53)
Massachusetts Financial Services Company, Senior Vice President, General Counsel
and Assistant Secretary
JAMES R. BORDEWICK, JR.,* Assistant Secretary (born 3/6/59)
Massachusetts Financial Services Company, Senior Vice President and Associate
General Counsel
JAMES O. YOST,* Assistant Treasurer (born 6/12/60)
Massachusetts Financial Services Company, Vice President
MARK E. BRADLEY,* Assistant Treasurer (born 11/23/59)
Massachusetts Financial Services Company, Vice President (since March 1997);
Putnam Investments, Vice President (from September 1994 until March 1997);
Ernst & Young, Senior Tax Manager (prior to September 1994).
ELLEN M. MOYNIHAN,* Assistant Treasurer (born 11/13/57)
Massachusetts Financial Services Company, Vice President (since September 1996);
Deloitte & Touche LLP, Senior Manager (prior to September 1996).
- ---------------
*"Interested persons" (as defined in the Investment Company Act of 1940, as
amended (the "1940 Act")) of the Adviser whose address is 500 Boylston Street,
Boston, Massachusetts 02116.
Each Trustee and officer holds comparable positions with certain 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 $1,000 per year plus
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$65 per meeting and $50 per committee meeting attended, together with such
Trustee's out-of-pocket expenses) and has adopted a retirement plan for
non-interested Trustees and Mr. Bailey. Under 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) will
also receive benefits for a period of time in the event the Trustee is disabled
or dies. These benefits will also be based on the Trustee's average annual
compensation and length of service. There is no retirement plan provided by the
Trust for Messrs. Brodkin, Scott and Shames. The Fund will accrue its allocable
share of compensation expenses each year to cover current year's service and
amortize past service cost.
TRUSTEE COMPENSATION TABLE
<TABLE>
<CAPTION>
RETIREMENT TOTAL
BENEFIT ESTIMATED TRUSTEE
TRUSTEE ACCRUED AS CREDITED FEES FROM
FEES PART OF YEARS FUND AND
FROM FUND OF FUND
TRUSTEE FUND(1) EXPENSE(1) SERVICE(2) COMPLEX(3)
------- ------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Richard B. Bailey..... $1,638 $169 6 $247,168
A. Keith Brodkin...... 0 0 N/A 0
Peter G. Harwood...... 1,718 194 5 105,995
J. Atwood Ives........ 1,638 181 15 98,750
Lawrence T. Perera.... 1,838 174 14 98,310
William Poorvu........ 1,683 192 14 102,840
Charles W. Schmidt.... 1,718 184 7 105,995
Arnold D. Scott....... 0 0 N/A 0
Jeffrey L. Shames..... 0 0 N/A 0
Elaine R. Smith....... 1,903 184 25 105,995
David B. Stone........ 1,768 198 7 108,710
</TABLE>
- ---------------
(1) For fiscal year ended August 31, 1997.
(2) Based on normal retirement age of 73. See the table below for the estimated
annual benefits payable upon retirement by the Fund to a Trustee based on
his or her estimated credited years of service.
(3) For calendar year 1996. All Trustees receiving compensation served as
Trustees of 23 funds within the MFS fund complex (having aggregate net
assets at December 31, 1996, of approximately $21.2 billion) except Mr.
Bailey, who served as Trustee of 81 funds within the MFS fund complex
(having aggregate net assets at December 31, 1996, of approximately $38.5
billion).
ESTIMATED ANNUAL BENEFITS PAYABLE BY FUND UPON RETIREMENT(4)
<TABLE>
<CAPTION>
AVERAGE YEARS OF SERVICE
TRUSTEE ----------------------------------------
FEES 3 5 7 10 OR MORE
------- ----- ----- ----- ----------
<S> <C> <C> <C> <C>
$1,474 $ 221 $ 369 $ 516 $ 737
1,598 240 400 559 799
1,722 258 430 603 861
1,846 277 461 646 923
1,969 295 492 689 985
2,093 314 523 733 1,047
</TABLE>
- ---------------
(4) Other funds in the MFS fund complex provide similar retirement benefits to
the Trustees.
As of November 30, 1997, the Trustees and officers as a group owned 0.49% of the
Fund's outstanding shares (not including 122,810 shares representing
approximately 0.97% of the outstanding shares of the Fund owned of record by an
employee benefit plan of MFS of which Messrs. Brodkin, Scott and Shames are
Trustees).
As of November 30, 1997, Merrill Lynch, Pierce, Fenner & Smith Inc., 4800 Deer
Lake Drive East, Jacksonville, FL 32246, was the record owner of approximately
8.66% and 9.07% of the outstanding Class B and Class C shares, respectively, of
the Fund.
As of November 30, 1997, MFS Defined Contribution Plan, 500 Boylston Street,
Boston, MA 02116, was the record owner of approximately 99.99% of the
outstanding Class I shares.
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 is an
indirect 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"). Under the Advisory Agreement, the
Adviser provides the Fund with overall investment advisory services. Subject to
such policies as the Trustees may determine, the Adviser makes investment
decisions for the Fund. For these services and facilities, the Adviser receives
a management fee, computed and paid monthly, 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, 1997, August 31, 1996, and August 31, 1995, the Adviser received
investment advisory fees of $868,526, $755,233, and $594,194, respectively.
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, 1998, and will
continue in effect thereafter only if such continuance is specifically approved
at least annually by the Board of Trustees or by vote of a majority of the
Fund's outstanding
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<PAGE> 182
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.
ADMINISTRATOR
MFS provides the Fund with certain financial, legal, compliance, shareholder
communications and other administrative services pursuant to a Master
Administrative Services Agreement dated March 1, 1997, as amended. Under the
Agreement, the Fund pays MFS an administrative fee up to 0.015% per annum of the
Fund's average daily net assets. This fee reimburses MFS for a portion of the
costs it incurs to provide such services. For the period from March 1, 1997
through August 31, 1997, MFS received fees under the Agreement of $8,511.
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 shares of each class of the Fund. The Custodian does not
determine the investment policies of the Fund or decide which securities the
Fund will buy or sell. The Fund may, however, invest in securities of the
Custodian and may deal with the Custodian as principal in securities
transactions. The Trustees have reviewed and approved as in the best interests
of the Fund and its shareholders subcustodial arrangements with The Chase
Manhattan Bank 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 the Fund at an effective annual rate of 0.13%. In
addition, the Shareholder Servicing Agent will be reimbursed by the Fund for
certain expenses incurred by the Shareholder Servicing Agent on behalf of the
Fund. State Street Bank and Trust Company, the dividend and distribution
disbursing agent of the Fund, has contracted with the Shareholder Servicing
Agent to 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
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<PAGE> 183
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. 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, 1997, MFD and certain other
financial institutions received net commissions of $23,709 and $160,236,
respectively (as their concession on gross commissions of $183,945) for selling
Class A shares of the Fund. The Fund received $9,075,877, representing the
aggregate net asset value of such 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 value of such shares. During the Fund's fiscal year
ended August 31, 1997, the CDSC imposed on redemption of Class A, Class B and
Class C shares was $304, $140,576 and $3,156, respectively. 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.
The Distribution Agreement will remain in effect until August 1, 1998, and will
continue in effect thereafter only if such continuance is specifically approved
at least annually by the Board of Trustees or by vote of a majority of the
Trust's shares (as defined in "Investment Restrictions") and, in either case, by
a majority of the Trustees who are not parties to the Distribution Agreement or
interested persons of any such party. The Distribution Agreement terminates
automatically if it is assigned and may be terminated without penalty by either
party on not more than 60 days' nor less than 30 days' notice.
4. PORTFOLIO TRANSACTIONS AND BROKERAGE
COMMISSIONS
Specific decisions to purchase or sell securities for the Fund are made by
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 Conduct Rules 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,
16
<PAGE> 184
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 $50,980 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 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, 1997, the Fund paid brokerage
commissions of $325,249 on total transactions of $151,828,905. 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.
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
17
<PAGE> 185
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 Class A,
Class B and Class C 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.
SUBSEQUENT INVESTMENT BY TELEPHONE: Each shareholder may purchase additional
shares of any MFS Fund by telephoning the Shareholder Servicing Agent toll-free
at (800) 225-2606. The minimum purchase amount is $50 and the maximum purchase
amount is $100,000. Shareholders wishing to avail themselves of this telephone
purchase privilege must so elect on their Account Application and designate
thereon a bank and account number from which purchases will be made. If a
telephone purchase request is received by the Shareholder Servicing Agent on any
business day prior to the close of regular trading on the Exchange (generally,
4:00 p.m., Eastern time), the purchase will occur at the closing net asset value
of the shares purchased on that day. The Shareholder Servicing Agent may be
liable for any losses resulting from unauthorized telephone transactions if it
does not follow reasonable procedures designed to verify the identity of the
caller. The Shareholder Servicing Agent will request personal or other
information from the caller, and will normally also record calls. Shareholders
should verify the accuracy of confirmation statements immediately after their
receipt.
DISTRIBUTION INVESTMENT PROGRAM: Distributions of dividends and capital gains
made by the Fund with respect to a particular class of shares may be
automatically invested in shares of the same class of one of the other MFS
Funds, if shares of the fund are available for sale. Such investments will be
subject to additional purchase minimums. Distributions will be invested at net
asset value (exclusive of any sales charge) and will not be subject to any CDSC.
Distributions will be invested at the close of business on the payable date for
the distribution. A shareholder considering the Distribution Investment Program
should obtain and read the prospectus of the other fund and consider the
differences in objectives and policies before making any investment.
SYSTEMATIC WITHDRAWAL PLAN: A shareholder may direct the Shareholder Servicing
Agent to send him (or anyone he designates) regular periodic payments based upon
the value of his account. Each payment under a Systematic Withdrawal Plan (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
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on deposit by, or certificates for such shares must be deposited with, the
Shareholder Servicing Agent. With respect to Class A shares, maintaining a
withdrawal plan concurrently with an investment program would be disadvantageous
because of the sales charges included in share purchases and the imposition of a
CDSC on certain redemptions. The shareholder may deposit into the account
additional shares of the Fund, change the payee or change the dollar amount of
each payment. The Shareholder Servicing Agent may charge the account for
services rendered and expenses incurred beyond those normally assumed by the
Fund with respect to the liquidation of shares. No charge is currently assessed
against the account, but one could be instituted by the Shareholder Servicing
Agent on 60 days' notice in writing to the shareholder in the event that the
Fund ceases to assume the cost of these services. The Fund may terminate any SWP
for an account if the value of the account falls below $5,000 as a result of
share redemptions (other than as a result of a SWP) or an exchange of shares of
the Fund for shares of another MFS Fund. Any SWP may also be terminated at any
time by either the shareholder or the Fund.
INVEST BY MAIL: Additional investments of $50 or more may be made at any time by
mailing a check payable to the Fund directly to the Shareholder Servicing Agent.
The shareholder's account number and the name of his investment dealer must be
included with each investment.
GROUP PURCHASES: A bona fide group and all of its members may be treated as a
single purchaser and, under the Right of Accumulation (but not a Letter of
Intent), obtain quantity sales charge discounts on the purchase of Class A
shares if the group (1) gives its endorsement or authorization to the investment
program so it may be used by the investment dealer to facilitate solicitation of
the membership, thus effecting economies of sales effort; (2) has been in
existence for at least six months and has a legitimate purpose other than to
purchase mutual fund shares at a discount; (3) is not a group of individuals
whose sole organizational nexus is as credit cardholders of a company,
policyholders of an insurance company, customers of a bank or broker-dealer,
clients of an investment adviser or other similar groups; and (4) agrees to
provide certification of membership of those members investing money in the MFS
Funds upon the request of MFD.
AUTOMATIC EXCHANGE PLAN: Shareholders having account balances of at least $5,000
in any MFS Fund may exchange their shares for the same class of shares of other
MFS Funds (if available for sale) 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
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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 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
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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 of the Fund's portfolio assets. Because the Fund intends to
distribute all of its net investment income and net realized capital gains to
shareholders in accordance with the timing requirements imposed by the Code, it
is not expected that the Fund will be required to pay any federal income or
excise taxes, although the Fund's foreign-source income may be subject to
foreign withholding taxes. If the Fund should fail to qualify as a "regulated
investment company" in any year, the Fund would incur a regular corporate
federal income tax upon its taxable income and Fund distributions would
generally be taxable as ordinary dividend income to shareholders.
Shareholders of the Fund normally will have to pay federal income taxes, and any
state or local taxes, on the dividends and capital gain distributions they
receive from the Fund. Dividends from ordinary income and any distributions from
net short-term capital gains are taxable to shareholders as ordinary income for
federal income tax purposes, whether the distributions are paid in cash or
reinvested in additional shares. A portion of the Fund's ordinary income
dividends is normally eligible for the dividends received deduction for
corporations if the recipient otherwise qualifies for that deduction with
respect to its holding of Fund shares. Availability of the deduction for
particular corporate shareholders is subject to certain limitations, and
deducted amounts may be subject to the alternative minimum tax or result in
certain basis adjustments. Distributions of net capital gains (i.e., the excess
of net long-term capital gains over net short-term capital losses), whether paid
in cash or reinvested in additional shares, are taxable to shareholders as long-
term capital gains for federal income tax purposes without regard to the length
of time the shareholders have held their shares. Such capital gains may be
taxable to shareholders that are individuals, estates or trusts at maximum rates
of 20%, 25% or 28%, depending upon the source of the gains. Any Fund dividend
that is declared in October, November or December of any calendar year, that is
payable to shareholders of record in such a month and that is paid the following
January will be treated as if received by the shareholders on December 31 of the
year in which the dividend is declared. The Fund will notify shareholders
regarding the federal tax status of its distributions after the end of each
calendar year.
Any Fund distribution will have the effect of reducing the per share net asset
value of shares in the Fund by the amount of the distribution. Shareholders
purchasing shares shortly before the record date of any distribution may thus
pay the full price for the shares and then effectively receive a portion of the
purchase price back as a taxable distribution.
In general, any gain or loss realized upon a taxable disposition of shares of
the Fund by a shareholder that holds such shares as a capital asset will be
treated as a long-term capital gain or loss if the shares have been held for
more than twelve months and otherwise as a short-term capital gain or loss; a
long-term capital gain realized by an individual, estate or trust may be
eligible for reduced tax rates if the shares were held for more than 18 months.
However, any loss realized upon a disposition of shares in the Fund held for six
months or less will be treated as a long-term capital loss to the extent of any
distributions of net capital gain made with respect to those shares. Any loss
realized upon a disposition of shares may also be disallowed under rules
relating to wash sales. Gain may be increased (or loss reduced) upon a
redemption of Class A shares of the Fund within ninety days after their purchase
followed by any purchase (including purchases by exchange or by reinvestment)
without payment of an additional sales charge of Class A shares of the Fund or
of another MFS Fund (or any shares of an MFS Fund generally sold subject to a
sales charge).
The Fund's current dividend and accounting policies will affect the amount,
timing and character of distributions to shareholders and may, under certain
circumstances, make an economic return of capital taxable to shareholders. Any
investment in zero coupon bonds, deferred interest bonds, payment-in-kind bonds
and certain securities purchased at a market discount will cause the Fund to
recognize income prior to the receipt of cash payments with respect to those
securities. In order to distribute this income and avoid a tax on the Fund, the
Fund may be required to liquidate portfolio securities that it might otherwise
have continued to hold, potentially resulting in additional taxable gain or loss
to the Fund.
The Fund's transactions in options, Futures Contracts, Forward Contracts, short
sales "against the box," and swaps and related transactions will be subject to
special tax rules that may affect the amount, timing, and character of Fund
income and distributions to shareholders. For example, certain positions held by
the Fund on the last business day of each taxable year will be marked to market
(i.e., treated as if closed out) on that day, and any gain or loss associated
with the positions will be treated as 60% long-term and 40% short-term capital
gain or loss. Certain positions held by the Fund that substantially diminish its
risk of loss with respect to other positions in its portfolio may constitute
"straddles," and may be subject to special tax rules that would cause deferral
of Fund losses, adjustments in the holding periods of Fund securities, and
conversion of short-term into long-term capital losses. Certain tax elections
exist for straddles that may alter the effects of these rules. The Fund will
limit its activities in options, Futures Contracts, and Forward Contracts and
swaps and related transactions to the extent necessary to meet the requirements
of Subchapter M of the Code.
Special tax considerations apply with respect to foreign investments of the
Fund. Foreign exchange gains and losses realized by the Fund will generally be
treated as ordinary income and
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losses. The use of foreign currencies for non-hedging purposes and investment by
the Fund in certain "passive foreign investment companies" may be limited in
order to avoid taxes on the Fund. The Fund may elect to mark to market any
investments in "passive foreign investment companies" on the last day of each
taxable year. This election may cause the Fund to recognize income prior to the
receipt of cash payments with respect to those investments; in order to
distribute this income and avoid a tax on the Fund, the Fund may be required to
liquidate portfolio securities that it might otherwise have continued to hold.
Investment income received by the Fund from foreign securities may be subject to
foreign income taxes withheld at the source; the Fund does not expect to be able
to pass through to shareholders foreign tax credits or deductions with respect
to such foreign taxes. The United States has entered into tax treaties with many
foreign countries that may entitle the Fund to a reduced rate of tax or an
exemption from tax on such income; the Fund intends to qualify for treaty
reduced rates where available. It is not possible, however, to determine the
Fund's effective rate of foreign tax in advance since the amount of the Fund's
assets to be invested within various countries is not known.
Dividends and certain other payments to persons who are not citizens or
residents of the United States or U.S. entities ("Non-U.S. Persons") are
generally subject to U.S. tax withholding at the rate of 30%. The Fund intends
to withhold U.S. federal income tax payments at the rate of 30% (or any lower
rate permitted under an applicable treaty) on taxable dividends and other
payments to Non-U.S. Persons that are subject to such withholding. Any amounts
overwithheld may be recovered by such persons by filing a claim for refund with
the U.S. Internal Revenue Service within the time period appropriate to such
claims. Distributions received from the Fund by Non-U.S. Persons may also be
subject to tax under the laws of their own jurisdictions. The Fund is also
required in certain circumstances to apply backup withholding at the rate of 31%
on taxable dividends and redemption proceeds paid to any shareholder (including
a Non-U.S. Person) who does not furnish to the Fund certain information and
certifications or who is otherwise subject to backup withholding. Backup
withholding will not, however, be applied to payments that have been subject to
30% withholding.
As long as it qualifies as a regulated investment company under the Code, the
Fund will not be required to pay 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, Martin Luther King, Jr.,
Day, Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day and Christmas Day.) This determination is made once each day as
of the close of regular trading on the Exchange by deducting the amount of the
liabilities attributable to the class from the value of the assets attributable
to the class and dividing the difference by the number of shares of the class
outstanding.
Bonds and other fixed income securities (other than short-term obligations) 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 stock
market, in which case they are valued at the last sale price or, if no sales
occurred during the day, at the last quoted bid price. Short-term obligations
with a remaining maturity in excess of 60 days will be valued based upon dealer
supplied valuations. 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
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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) 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, and purchased by, the public on different dates (the class "inception
date"). The calculation of total rate of return for a class of shares which has
a later inception date than another class of shares of the Fund is based both on
(i) the performance of the Fund's newer class from it's inception date 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 class inception date of the newer
class.
As discussed in the Prospectus, the sales charges, expenses and expense ratios,
and therefore the performance, of the Fund's classes of shares differ. In
calculating total rate of return for a newer class of shares in accordance with
certain formulas required by the SEC, the performance will be adjusted to take
into account the fact that the newer class is subject to a different sales
charge than the oldest class (e.g., if the newer class is Class A shares, the
total rate of return quoted will reflect the deduction of the initial sales
charge applicable to Class A shares; if the newer class is Class B shares, the
total rate of return quoted will reflect the deduction of the CDSC applicable to
Class B shares). However, the performance will not be adjusted to take into
account the fact that the newer class of shares bears different class specific
expenses than the oldest class of shares (e.g., Rule 12b-1 fees). Therefore, the
total rate of return quoted for a newer class of shares will differ from the
return that would 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 A
attached hereto under the heading "Performance Quotations."
PERFORMANCE RESULTS: The performance results for Class A shares presented in
Appendix A attached hereto under the heading "Performance Results" assume an
initial investment of $10,000 in Class A shares, cover the period from December
1, 1993 to December 31, 1996. It has been assumed that dividend and capital gain
distributions were reinvested in additional shares. These performance results,
as well as any yield, 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.
23
<PAGE> 191
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.
-- 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.
24
<PAGE> 192
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, 1997, the Fund paid the following Distribution
Plan expenses:
<TABLE>
<CAPTION>
AMOUNT OF AMOUNT OF AMOUNT OF
DISTRIBUTION DISTRIBUTION DISTRIBUTION
AND SERVICE AND SERVICE AND SERVICE
FEES PAID BY FEES RETAINED FEES RECEIVED
CLASSES OF SHARES FUND BY MFD BY DEALERS
- ----------------- ------------ ------------- -------------
<S> <C> <C> <C>
Class A Shares $98,318 $18,471 $79,847
Class B Shares $713,344 $205,350 $507,994
Class C Shares $57,908 $302 $57,606
</TABLE>
GENERAL: The Distribution Plan will remain in effect until August 1, 1998, and
will continue in effect thereafter only if such continuance is specifically
approved at least annually by vote of both the Trustees and a majority of the
Trustees who are not "interested persons" or financially interested parties of
such Plan ("Distribution Plan Qualified Trustees"). The Distribution Plan also
requires that the Fund and MFD each shall provide the Trustees, and the Trustees
shall review, at least quarterly, a written report of the amounts expended (and
purposes therefor) under such Plan. The Distribution Plan may be terminated at
any time by vote of a majority of the Distribution Plan Qualified Trustees or by
vote of the holders of a majority of the respective class of the Fund's shares
(as defined in "Investment Restrictions"). All agreements relating to the
Distribution Plan entered into between the Fund or MFD and other organizations
must be approved by the Board of Trustees, including a majority of the
Distribution Plan Qualified Trustees. Agreements under the Distribution Plan
must be in writing, will be terminated automatically if assigned, and may 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
25
<PAGE> 193
submitted to meetings of shareholders. Although Trustees are not elected
annually by the shareholders, shareholders have, under certain circumstances,
the right to remove one or more Trustees in accordance with the provisions of
section 16(c) of the 1940 Act. No material amendment may be made to the
Declaration of Trust without the affirmative vote of a majority of the Trust
shares (as defined in "Investment Restrictions") or by an instrument in writing
without a meeting, signed by a majority of Trustees and consented to by the
holders of not less than a majority of the shares outstanding and entitled to
vote. Shares have no pre-emptive or conversion rights (except as described in
the Prospectus under "Purchases -- Conversion of Class B Shares"). Shares are
fully paid and non-assessable. The Trust may enter into a merger or
consolidation, or sell all or substantially all of its assets (or all or
substantially all of the assets belonging to any series of the Trust), if
approved by the vote of the holders of two-thirds of the Trust's outstanding
shares voting as a single class, or of the affected series of the Trust, as the
case may be, except that if the Trustees of the Trust recommend such merger,
consolidation or sale, the approval by vote of the holders of a majority of the
Trust's or the affected series' outstanding shares (as defined in "Investment
Restrictions") will be sufficient. The Trust or any series of the Trust may also
be terminated (i) upon liquidation and distribution of its assets, if approved
by the vote of the holders of two-thirds of its outstanding shares, or (ii) by
the Trustees by written notice to the shareholders of the Trust or the affected
series. If not so terminated the Trust will continue indefinitely.
The Trust is an entity of the type commonly known as a "Massachusetts business
trust." Under Massachusetts law, shareholders of such a trust may, under certain
circumstances, be held personally liable as partners for its obligations.
However, the Declaration of Trust contains an express disclaimer of shareholder
liability for acts, obligations or affairs of the Trust and provides for
indemnification and reimbursement of expenses out of the Trust property for any
shareholder held personally liable for the obligations of the Trust. The
Declaration of Trust also provides that the Trust shall maintain appropriate
insurance (for example, fidelity bonding and errors and omissions insurance) for
the protection of the Trust, its shareholders, Trustees, officers, employees and
agents covering possible tort and other liabilities. Thus, the risk of a
shareholder incurring financial loss on account of shareholder liability is
limited to circumstances in which both inadequate insurance existed and the
Trust itself was unable to meet its obligations.
The Declaration of Trust further provides that obligations of the Trust are not
binding upon the Trustees individually but only upon the property of the Trust
and that the Trustees will not be liable for any action or failure to act, but
nothing in the Declaration of Trust protects a Trustee against any liability to
which he would otherwise be subject by reason of willful misfeasance, bad faith,
gross negligence or reckless disregard of the duties involved in the conduct of
his office.
10. INDEPENDENT AUDITORS AND
FINANCIAL STATEMENTS
Deloitte & Touche LLP are the Fund's independent auditors providing audit
services, tax return preparation and assistance and consultation with respect to
the preparation of filings with the SEC.
The Portfolio of Investments at August 31, 1997, the Statement of Assets and
Liabilities at August 31, 1997, the Statement of Operations for the year ended
August 31, 1997, the Statement of Changes in Net Assets for the years ended
August 31, 1997 and 1996, and 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> 194
APPENDIX A
PERFORMANCE INFORMATION
The performance results and quotations below should not be considered as
representative of the performance of the Fund in the future since the net asset
value and public offering price of shares of the Fund will vary. See
"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
December 31, 1996............. 10,264 0 4,795 15,059
</TABLE>
- ---------------
(1) Based on initial investment made on December 1, 1993, the inception 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 as of August 31, 1997.
<TABLE>
<CAPTION>
LIFE OF
1 YEAR FUND
------ -------
<S> <C> <C>
Class A with sales charge............................ 13.37% 14.52%(1)
Class A without sales charge......................... 20.26% 16.36%(1)
Class B with CDSC.................................... 15.36% 14.75%(1)
Class B without CDSC................................. 19.36% 15.29%(1)
Class C with CDSC.................................... 18.44% 15.33%(2)
Class C without CDSC................................. 19.44%() 15.33%(2)
Class I shares....................................... 20.51%(3) 16.42%(3)
</TABLE>
- ---------------
(1) From the inception of Class A and B shares on December 1, 1993.
(2) Class C share performance includes the performance of the Fund's Class A
shares for periods prior to the inception of Class C shares on 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.
(3) Class I share performance includes the performance of the Fund's Class A
shares for the periods prior to the inception of Class I shares on January
2, 1997. Sales charges, expenses and expense ratios, and therefore
performance, for Class I and Class A shares differ. Class I share
performance has been adjusted to reflect that Class I shares are not subject
to an initial sales charge, whereas Class A shares generally are subject to
an initial sales charge. Class I share performance has not, however, been
adjusted to reflect differences in operating expenses (e.g., Rule 12b-1
fees), which generally are lower for Class I shares.
A-1
<PAGE> 195
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
State Street Bank and Trust Company
225 Franklin Street, Boston, MA 02110
DIVIDEND DISBURSING AGENT
State Street Bank and Trust Company
225 Franklin Street, Boston, MA 02110
SHAREHOLDER SERVICING AGENT
MFS Service Center, Inc.
500 Boylston Street, Boston, MA 02116
Toll free: (800) 225-2606
Mailing Address:
P.O. Box 2281, Boston, MA 02107-9906
INDEPENDENT AUDITORS
Deloitte & Touche LLP
125 Summer Street, Boston, MA 02110
MFS(R) MID CAP GROWTH FUND
500 BOYLSTON STREET
BOSTON, MA 02116
[MFS LOGO](SM)
INVESTMENT MANAGEMENT
WE INVENTED THE MUTUAL FUND(SM) MMC-13-9/97/525 83/283/383
<PAGE> 196
<PAGE>
[LOGO] MFS Annual Report
INVESTMENT MANAGEMENT August 31, 1997
MFS(R) MID CAP GROWTH FUND (FORMERLY MFS(R) OTC FUND)
[Graphic Omitted]
<PAGE>
TABLE OF CONTENTS
Letter from the Chairman .................................................. 1
A Discussion with the Portfolio Manager ................................... 2
Portfolio Manager's Profile ............................................... 5
Fund Facts ................................................................ 6
Performance Summary ....................................................... 6
Tax Form Summary .......................................................... 8
Portfolio Concentration ................................................... 8
Portfolio of Investments .................................................. 10
Financial Statements ...................................................... 15
Notes to Financial Statements ............................................. 21
Independent Auditors' Report .............................................. 27
The MFS Family of Funds(R) ................................................ 28
Trustees and Officers ..................................................... 29
- --------------------------------------------------------------------------------
HIGHLIGHTS
o FOR THE 12 MONTHS ENDED AUGUST 31, 1997, CLASS A SHARES OF THE FUND
PROVIDED A TOTAL RETURN AT NET ASSET VALUE OF 20.26%, CLASS B SHARES
19.36%, CLASS C SHARES 19.44%, AND CLASS I SHARES 20.51%. (SEE
PERFORMANCE SUMMARY FOR MORE INFORMATION.)
o THE PAST YEAR WAS MARKED BY A STRONG DIVERGENCE OF PERFORMANCE BASED ON
CAPITALIZATION, WITH MANY OF THE LARGER COMPANIES IN THE STANDARD &
POOR'S 500 COMPOSITE INDEX EASILY OUTPERFORMING THE SMALLER COMPANIES
REPRESENTED BY THE RUSSELL 2000 TOTAL RETURN INDEX.
o THE FUND'S HEAVIEST INVESTMENT IN TECHNOLOGY IS IN SOFTWARE, AN AREA IN
WHICH GOOD COMPANIES CAN CAPTURE ATTRACTIVE MARKETS AND GROW IN A
PREDICTABLE MANNER AS HARDWARE PRODUCTS BECOME MORE POWERFUL, REQUIRING
NEW SOFTWARE TO RUN THEM.
o EFFECTIVE SEPTEMBER 1, 1997, THE NAME OF THE FUND WAS CHANGED TO MFS(R)
MID CAP GROWTH FUND. WHILE THE FUND'S INVESTMENT OBJECTIVE -- LONG-TERM
GROWTH OF CAPITAL -- IS THE SAME, THE FUND WILL BE ABLE TO INVEST AT
LEAST 65% IN MEDIUM CAPITALIZATION COMPANIES, AS OPPOSED TO BEING
LIMITED TO STOCKS LISTED ON THE OVER-THE-COUNTER MARKET, OR NASDAQ.
- --------------------------------------------------------------------------------
<PAGE>
LETTER FROM THE CHAIRMAN
[Photo of A. Keith Brodkin[
Dear Shareholders:
An unprecedented combination of generally positive factors has helped the U.S.
economy enjoy a sustained period of relative stability and moderate growth in
which thousands of new jobs have been created every month, inflation remains
under control, and the investment climate -- at least until now -- has been
favorable. For example, the increased use of technology and other productivity
enhancements, as well as corporate restructuring and global competition, is
improving companies' balance sheets and helping control inflation. Meanwhile,
borrowing by corporations and governments continues to decline, while consumer
confidence is increasing, although consumer debt levels are still
uncomfortably high. While some lenders are beginning to tighten standards to
address this problem, consumer debt and personal bankruptcies continue to
rise. The rapid pace of growth seen in the first quarter slowed slightly in
the second quarter, to an annual rate of 3.3%. While real (inflation-adjusted)
growth could moderate further in the third quarter, we believe economic
momentum will carry well into the first quarter of 1998. The money supply is
increasing at a rapid rate, the housing and automobile markets are
strengthening, and it now appears that Christmas sales could be quite good.
Because economic growth continues to be impressive, markets are likely to
begin focusing on the Federal Reserve Board's willingness to raise interest
rates.
Although the U.S. equity market has seen increased price volatility of late,
we have been surprised by its overall strength thus far in 1997. Much of this
is the result of continuing gains in corporate earnings. Even as the current
recovery enters its seventh year, more and more U.S. companies have been
exceeding analysts' earnings estimates. In the first quarter of 1997, for
example, two-thirds of all companies met or exceeded analysts' expectations, a
trend that could be an important indicator of the U.S. equity market's future
direction. However, while the near-term outlook for profits is generally
favorable, we believe equity valuations have risen to a point where a cautious
investment approach seems warranted.
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 15, 1997
<PAGE>
A DISCUSSION WITH THE PORTFOLIO MANAGER
[Photo of Mark Regan]
Mark Regan
For the 12 months ended August 31, 1997, Class A shares of the Fund provided a
total return of 20.26%, Class B shares 19.36%, Class C shares 19.44%, and
Class I shares 20.51%. These returns, which include the reinvestment of
distributions but exclude the effects of any sales charges, compare to a
29.05% return for the Russell 2000 Total Return Index (the Russell 2000), an
unmanaged index of 2,000 of the smallest U.S.-domiciled company common stocks
that are traded on the New York Stock Exchange, the American Stock Exchange,
and NASDAQ; and to a 40.78% return for the Standard & Poor's 500 Composite
Index (the S&P 500), a popular, unmanaged index of common stock total return
performance.
Q. WHAT DO YOU SEE AS SOME OF THE MAJOR REASONS FOR THE FUND'S PERFORMANCE
OVER THE PAST YEAR?
A. There was a strong divergence over the past year of performance based on
capitalization, with many of the larger companies dramatically
outperforming smaller companies. This was reflected in the S&P 500, which
easily outperformed the Russell 2000 as well as the unmanaged NASDAQ
Composite Index, which returned 14.65%.
Q. HAVE YOU MADE ANY SIGNIFICANT CHANGES IN EMPHASIS AMONG SECTORS OVER THE
PAST YEAR, AND IF SO, WHY?
A. We have reduced the weightings in health care and communications and added
to holdings in business services and retail. Health care was pared through
a reduction in health maintenance organizations (HMOs), although we expect
many of the problems HMOs face to be resolved through improved health care
information systems. Thus, the increased investment in business services
was largely an investment in a broad range of health care information
companies. Holdings in the retail sector were increased as a number of what
we regard as promising companies in the high-growth specialty retail area
were added at attractive prices.
Q. WHAT ABOUT INDIVIDUAL STOCKS? ANY IMPORTANT CHANGES THERE?
A. Several of the Fund's top holdings changed over the past year. These changes
were often the result of companies in the portfolio being acquired by larger
companies, such as St. Jude Medical's buying Ventritex and Gemstar's buying
Starsight Telecast. Among gaming stocks, holdings in Showboat, Harrah's
Entertainment, and Argosy were reduced because our outlook for that industry
calls for a slowdown in the establishment of new gaming jurisdictions. Among
holdings added were Cable Design Systems, a leading company in
high-performance communications cables, and Oracle Systems, the leading
provider of client-server software.
Q. YOUR LARGEST INDUSTRY SECTOR REMAINS TECHNOLOGY. COULD YOU TALK ABOUT WHAT
YOU LIKE ABOUT THIS SECTOR AND ANY PARTICULAR TECHNOLOGY SUBSECTORS AND
STOCKS YOU LIKE?
A. We continue to find the most growth opportunities in technology. These
opportunities are driven by fundamental technological advancements and
innovations that are then integrated into the industries that make use of
them. For example, our heaviest investment in technology is in software, an
area in which a good company can capture an attractive niche and grow in a
predictable manner as computers and networks become more powerful. These
companies benefit from the need to constantly update software to
accommodate the new hardware. Companies in this sector that have performed
well over the past year include Intel, Microsoft, Oracle Systems, BMC
Software, Electronic Arts, Synopsys, and Cadence Design Systems, each of
which is a dominant player in its field.
Q. THE FUND'S NEXT LARGEST SECTOR IS HEALTH CARE. HOW HAS THIS SECTOR
PERFORMED, AND WHAT STOCKS SEEM TO BE DOING PARTICULARLY WELL THESE DAYS?
A. Our health care holdings have been changed to focus on subacute care,
medical devices, and medical services. Although HMO stocks have seen some
improved performance over the past year, our holdings in this area have
been reduced. Meanwhile, the subacute care sector has benefited from
favorable regulation and consolidation, both of which have combined to push
up the group's performance. At the same time, the medical devices and
services areas performed well as new products and services drove stock
performance.
Q. COULD YOU TALK ABOUT SOME OF THE FUND'S HOLDINGS THAT PERFORMED BETTER THAN
EXPECTED, AND WHY YOU THINK THEY DID WELL?
A. A large number of companies had a positive impact on the Fund, including
Gemstar International, Oracle Systems, Mariner Health Group, Cadence Design
Systems, and Synopsys. Gemstar benefited from a consolidation in its business
that left it with no strong competitors in the very attractive market of
electronic guides and navigators for broadcast television. Oracle, Cadence
Design, and Synopsys also performed well as their dominant software positions
provided exceptional growth. Mariner Health, a provider of long-term care and
subacute care, also did well as its operational problems were resolved and
concerns about health care regulation abated.
Q. NOW, WHAT ABOUT SOME STOCKS OR SECTORS THAT DID NOT PERFORM AS WELL AS YOU
WOULD HAVE LIKED?
A. Four companies had an adverse impact on performance: Ascend Communications,
HCIA, Inc., Uromed, and Spectrum Holobyte. A variety of issues affected
these companies, although management execution and product delays were the
primary culprits. However, we believe these companies are poised for solid
recoveries in the next 12 months.
Q. IN GENERAL, HOW WOULD YOU CHARACTERIZE THE BUSINESS AND ECONOMIC
ENVIRONMENT OF THE PAST YEAR?
A. It has been an extremely favorable environment, with the primary area of
concern being the slowing of European markets and the impact of currency
fluctuations, particularly on U.S. companies that derive a large percentage
of their revenue from overseas sales.
Q. EFFECTIVE SEPTEMBER 1, 1997, THE NAME OF THE FUND WAS CHANGED TO MFS MID
CAP GROWTH FUND. WHILE THE INVESTMENT OBJECTIVE -- LONG-TERM GROWTH OF
CAPITAL -- IS THE SAME, THE INVESTMENT POLICY AND STRATEGY ARE DIFFERENT.
COULD YOU TALK ABOUT WHY THIS CHANGE WAS MADE AND THE KIND OF INVESTMENTS
YOU EXPECT TO BE MAKING?
A. The change in the Fund's name and the modification of its investment policy
have been made for a number of reasons. First, the requirement to invest in
NASDAQ stocks has limited the majority of our investments to holdings that
trade on a specific exchange (the NASDAQ), as opposed to companies that are
small- or medium-sized or that are in growth or value industries. This change
allows us to invest in small- and medium-capitalization companies without
being limited to just one exchange. Second, many of our holdings have been
leaving the NASDAQ, forcing us to liquidate these holdings as they move to
the New York Stock Exchange. Finally, the Fund's new focus will be to invest
in mid-cap and, to a lesser extent, small-cap growth companies. We will seek
to find what we believe are attractive growth companies as they become
winners in favorable growth segments.
/s/ Mark Regan
Mark Regan
Portfolio Manager
- --------------------------------------------------------------------------------
PORTFOLIO 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(R) MID
CAP GROWTH FUND SINCE ITS INCEPTION IN 1993.
- --------------------------------------------------------------------------------
<PAGE>
NOTE: THE FUND CHANGED ITS NAME FROM MFS OTC FUND TO MFS(R) MID CAP GROWTH
FUND AS OF SEPTEMBER 1, 1997.
FUND FACTS
OBJECTIVE: THE INVESTMENT OBJECTIVE OF THE FUND IS TO SEEK LONG-
TERM GROWTH OF CAPITAL.
COMMENCEMENT OF
INVESTMENT OPERATIONS: CLASS A: DECEMBER 1, 1993
CLASS B: DECEMBER 1, 1993
CLASS C: AUGUST 1, 1994
CLASS I: JANUARY 2, 1997
SIZE: $122.9 MILLION NET ASSETS AS OF AUGUST 31, 1997
PERFORMANCE SUMMARY
The information below illustrates the historical performance of MFS Mid Cap
Growth Fund - Class A shares in comparison to various market indicators. Class
A share performance results reflect the deduction of the 5.75% maximum sales
charge; benchmark comparisons are unmanaged and do not reflect any fees or
expenses. The performance of other share classes will be greater than or less
than the line shown, based on the differences in charges and fees paid by
shareholders investing in different classes. It is not possible to invest
directly in an index.
GROWTH OF A HYPOTHETICAL $10,000 INVESTMENT
(For the period from December 1, 1993, through August 31, 1997)
MFS Consumer
Mid Cap S&P 500 Russell Price
Growth Fund Composite 2000 Index
- Class A Index Index - U.S.
----------- --------- ------- ---------
12/93 9,400 10,000 10,000 10,000
8/94 10,400 10,500 10,400 10,200
8/95 12,500 12,800 12,500 10,500
8/96 13,800 15,200 13,900 10,800
8/97 16,630 21,321 17,921 11,022
<PAGE>
AVERAGE ANNUAL TOTAL RETURNS AS OF AUGUST 31, 1997
<TABLE>
<CAPTION>
Life of
1 Year 3 Years Fund*
- ----------------------------------------------------------------------------------------------------------------------------------
MFS Mid Cap Growth Fund (Class A) including 5.75% sales charge
<S> <C> <C> <C>
(SEC results) +13.37% +14.48% +14.52%
- ----------------------------------------------------------------------------------------------------------------------------------
MFS Mid Cap Growth Fund (Class A) at net asset value +20.26% +16.77% +16.36%
- ----------------------------------------------------------------------------------------------------------------------------------
MFS Mid Cap Growth Fund (Class B) with CDSC (SEC results) +15.36% +15.09% +14.75%
- ----------------------------------------------------------------------------------------------------------------------------------
MFS Mid Cap Growth Fund (Class B) at net asset value +19.36% +15.84% +15.29%
- ----------------------------------------------------------------------------------------------------------------------------------
MFS Mid Cap Growth Fund (Class C) with CDSC (SEC results) +18.44% +15.80% +15.33%
- ----------------------------------------------------------------------------------------------------------------------------------
MFS Mid Cap Growth Fund (Class C) at net asset value +19.44% +15.80% +15.33%
- ----------------------------------------------------------------------------------------------------------------------------------
MFS Mid Cap Growth Fund (Class I) at net asset value +20.51% +16.85% +16.42%
- ----------------------------------------------------------------------------------------------------------------------------------
Average small-company growth fund** +26.85% +22.10% +17.29%
- ----------------------------------------------------------------------------------------------------------------------------------
Russell 2000 Total Return Index+ +29.05% +19.96% +16.86%
- ----------------------------------------------------------------------------------------------------------------------------------
Standard & Poor's 500 Composite Index+ +40.78% +26.58% +22.40%
- ----------------------------------------------------------------------------------------------------------------------------------
Consumer Price Index++ + 2.19% + 2.55% + 2.63%
- ----------------------------------------------------------------------------------------------------------------------------------
* For the period from the commencement of the Fund's investment operations, December 1,
1993, through August 31, 1997.
** Source: Lipper Analytical Services, Inc.
+ Source: CDA/Wiesenberger.
++ The Consumer Price Index is published by the U.S. Bureau of Labor Statistics and measures
the cost of living (inflation).
</TABLE>
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.
Class A share SEC results include the maximum 5.75% sales charge. Class B
share 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 SEC
results reflect the 1% CDSC applicable to shares redeemed within 12 months of
purchase. Class I shares, which became available on January 2, 1997, have no
sales charge or Rule 12b-1 fees and are only available to certain
institutional investors.
Class C share results include the performance and the operating expenses
(e.g., Rule 12b-1 fees) of the Fund's Class B shares for periods prior to the
commencement of offering of Class C shares. Operating expenses attributable to
Class C shares are not significantly different than those of Class B shares.
The Class B share performance included within the Class C share SEC
performance has been adjusted to reflect the CDSC generally applicable to
Class C shares rather than the CDSC generally applicable to Class B shares.
Class I share results include the performance and the operating expenses
(e.g., Rule 12b-1 fees) of the Fund's Class A shares for periods prior to the
commencement of offering of Class I shares. Because operating expenses
attributable to Class A shares are greater than those of Class I shares, Class
I share performance generally would have been higher than Class A share
performance.
Performance results reflect any applicable expense subsidies and waivers,
without which the results would have been less favorable. Current subsidies
and waivers may be discontinued at any time.
- --------------------------------------------------------------------------------
TAX FORM SUMMARY
IN JANUARY 1998, SHAREHOLDERS WILL BE MAILED A TAX FORM SUMMARY
REPORTING THE FEDERAL TAX STATUS OF ALL DISTRIBUTIONS PAID DURING THE
CALENDAR YEAR 1997.
DIVIDENDS RECEIVED DEDUCTION
FOR THE YEAR ENDED AUGUST 31, 1997, THE AMOUNT OF DISTRIBUTIONS FROM
INCOME ELIGIBLE FOR THE 70% DIVIDENDS-RECEIVED DEDUCTION FOR
CORPORATIONS CAME TO 49.27%.
- --------------------------------------------------------------------------------
PORTFOLIO CONCENTRATION AS OF AUGUST 31, 1997
TOP 10 EQUITY HOLDINGS
GEMSTAR INTERNATIONAL GROUP LTD. EDIFY CORP.
Audio/video products company Internet software company
ASCEND COMMUNICATIONS, INC. VIKING OFFICE PRODUCTS, INC.
Developer of telecommunications Mail-order office products
systems and products retailer
CABLE DESIGN TECHNOLOGIES CORP. ST. JUDE MEDICAL, INC.
Manufacturer of data transmission Developer and manufacturer of
cables medical instruments
MARINER HEALTH GROUP, INC. SPECTRUM HOLOBYTE, INC.
Nursing home and health care Developer of entertainment and
company educational software
ORACLE SYSTEMS CORP. TYCO INTERNATIONAL LTD.
Developer and manufacturer of Manufacturer of fire protection,
database software packaging, and electronic
equipment
LARGEST SECTORS
[Graphic Omitted]
Technology 36.7%
Health Care 15.6%
Leisure 13.3%
Miscellaneous 9.5%
(conglomerates, special products/services)
Retailing 9.3%
Other Sectors 15.6%
For a more complete breakdown, refer to the Portfolio of Investments.
<PAGE>
PORTFOLIO OF INVESTMENTS - August 31, 1997
<TABLE>
<CAPTION>
Stocks - 97.5%
- ---------------------------------------------------------------------------------------------------------
ISSUER SHARES VALUE
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C>
U.S. Stocks - 96.7%
Apparel and Textiles -
Polo Ralph Lauren Corp.* 1,800 $ 47,250
- ---------------------------------------------------------------------------------------------------------
Banks and Credit Companies - 2.4%
Compass Bancshares, Inc. 31,400 $ 1,118,625
First Hawaiian, Inc. 31,800 1,172,625
ONBANCorp., Inc. 12,000 624,000
------------
$ 2,915,250
- ---------------------------------------------------------------------------------------------------------
Biotechnology
Perspective Biosystems, Inc.* 45 $ 548
- ---------------------------------------------------------------------------------------------------------
Business Machines - 0.3%
Affiliated Computer Services, Inc., "A"* 11,800 $ 309,750
- ---------------------------------------------------------------------------------------------------------
Business Services - 2.9%
BDM International, Inc.* 44,100 $ 1,113,525
Carbo Ceramics, Inc. 11,200 312,200
Claremont Technology Group, Inc.* 36,200 642,550
First USA Paymentech, Inc.* 10,700 325,013
Galileo International, Inc.* 2,300 60,806
Hall Kinion & Associates, Inc.* 200 4,275
HPR, Inc.* 29,500 527,312
Lamalie Associates, Inc.* 100 1,900
Technology Solutions Co.* 24,150 561,487
TeleSpectrum Worldwide, Inc.* 18,300 83,494
------------
$ 3,632,562
- ---------------------------------------------------------------------------------------------------------
Cellular Telephones - 0.8%
Telephone & Data Systems, Inc. 23,700 $ 936,150
- ---------------------------------------------------------------------------------------------------------
Computer Software - Personal Computers - 6.2%
Electronic Arts, Inc.* 46,600 $ 1,482,462
Microsoft Corp.* 16,600 2,194,312
Quantum Corp.* 15,800 553,988
Read Rite Corp.* 11,800 338,513
Spectrum Holobyte, Inc.*## 634,000 3,051,125
----------------
$ 7,620,400
- ---------------------------------------------------------------------------------------------------------
Computer Software - Systems - 13.7%
Adobe Systems, Inc. 34,900 $ 1,374,188
Aris Corp.* 400 9,800
Aspen Technology, Inc.* 10,200 348,075
BMC Software, Inc.* 30,200 1,891,275
Cadence Design Systems, Inc.* 58,920 2,802,382
Cerner Corp.* 10,300 303,850
Clarify, Inc.* 9,200 144,900
Compuware Corp.* 11,500 710,125
E Trade Group, Inc.* 1,800 57,825
Edify Corp.* 241,100 3,495,950
Great Plains Software, Inc.* 200 5,275
Netscape Communications Corp.* 349 13,894
Oracle Systems Corp.* 98,750 3,764,844
Rational Software Corp.* 22,590 372,735
RWD Technologies, Inc.* 200 3,850
Synopsys, Inc.* 44,200 1,530,425
TSI International Software Ltd.* 600 7,350
------------
$ 16,836,743
- ---------------------------------------------------------------------------------------------------------
Consumer Goods and Services - 2.5%
800-JR. Cigar, Inc.* 300 $ 9,600
Novel Denim Holdings Ltd.* 500 10,937
Tyco International Ltd.* 38,217 2,997,646
------------
$ 3,018,183
- ---------------------------------------------------------------------------------------------------------
Electronics - 4.7%
Analog Devices, Inc.* 25,300 $ 838,062
Atmel Corp.* 18,600 657,975
Intel Corp. 15,000 1,381,875
KLA-Tencor Corp.* 9,200 652,050
Kulicke & Soffa Industries, Inc.* 10,000 459,375
Teradyne, Inc.* 33,200 1,848,825
------------
$ 5,838,162
- ---------------------------------------------------------------------------------------------------------
Entertainment - 9.6%
American Radio Systems Corp. 3,800 $ 187,150
Gemstar International Group Ltd.* 475,000 9,737,500
Jacor Communications, Inc.* 22,700 998,800
LIN Television Corp.* 18,800 891,825
Silverleaf Resorts, Inc.* 900 17,325
Travel Services International, Inc.* 200 4,875
------------
$ 11,837,475
- ---------------------------------------------------------------------------------------------------------
Financial Institutions - 1.1%
Advanta Corp., "B" 8,400 $ 266,700
AmeriTrade Holding Corp., "A"* 500 9,406
ARM Financial Group, Inc., "A" 500 9,719
Delta Financial Corp.* 600 11,813
Franklin Resources, Inc. 14,200 1,098,725
------------
$ 1,396,363
- ---------------------------------------------------------------------------------------------------------
Food and Beverage Products - 2.2%
McCormick & Co., Inc. 43,900 $ 1,037,138
Smith's Food & Drug Centers, Inc., "B"* 29,900 1,637,025
------------
$ 2,674,163
- ---------------------------------------------------------------------------------------------------------
Insurance - 1.5%
Compdent Corp.* 47,900 $ 1,161,575
Conseco, Inc.* 14,400 619,200
Hartford Life, Inc., "A" 1,000 37,313
Nationwide Financial Services, Inc., "A" 1,700 47,175
Penn America Group, Inc.* 800 14,600
------------
$ 1,879,863
- ---------------------------------------------------------------------------------------------------------
Machinery - 0.4%
Greenfield Industries, Inc.* 20,800 $ 548,600
- ---------------------------------------------------------------------------------------------------------
Medical and Health Products - 4.2%
Acuson Corp.* 18,700 $ 503,731
Mentor Corp. 19,900 611,925
Schick Technologies, Inc.* 300 7,950
Transition Systems, Inc.* 71,400 1,365,525
Uromed Corp.* 450,000 2,615,625
------------
$ 5,104,756
- ---------------------------------------------------------------------------------------------------------
Medical and Health Technology and Services - 15.8%
AmeriSource Health Corp., "A"* 32,000 $ 1,602,000
Centennial Healthcare Corp.* 500 10,063
CRA Managed Care, Inc.* 17,500 971,250
Cytyc Corp.* 12,800 256,000
HBO & Co. 17,500 1,253,437
HCIA, Inc.* 107,300 1,663,150
Hologic, Inc.* 26,100 632,925
IDEXX Labs, Inc.* 44,500 837,156
IDX Systems Corp.* 14,100 477,638
Mariner Health Group, Inc.* 262,200 3,801,900
Monarch Dental Corp.* 200 3,625
Physician Sales and Service, Inc.* 23,100 392,700
Renal Treatment Centers, Inc.* 23,400 792,675
Shared Medical System* 52,000 2,548,000
St. Jude Medical, Inc.* 90,000 3,425,625
United Healthcare Corp. 15,779 767,254
------------
$ 19,435,398
- ---------------------------------------------------------------------------------------------------------
Oil Services - 3.2%
Cal Dive International, Inc.* 300 $ 10,200
Cooper Cameron Corp.* 16,600 1,076,925
Diamond Offshore Drilling, Inc. 13,000 710,125
Friede Goldman International, Inc.* 600 24,150
Global Industries Ltd.* 37,900 1,380,981
Hanover Compressor Co.* 500 11,813
National Oilwell, Inc.* 5,600 344,750
Noble Drilling Corp.* 11,400 324,187
------------
$ 3,883,131
- ---------------------------------------------------------------------------------------------------------
Oils - 0.6%
Apache Corp. 16,500 $ 654,844
Santa Fe International Corp.* 1,700 76,075
------------
$ 730,919
- ---------------------------------------------------------------------------------------------------------
Pollution Control
Waste Industries, Inc., "A"* 300 $ 5,475
- ---------------------------------------------------------------------------------------------------------
Printing and Publishing -
CMP Media, Inc., "A"* 400 $ 10,700
- ---------------------------------------------------------------------------------------------------------
Railroads - 1.6%
Genesee & Wyoming, Inc., "A"* 15,000 $ 468,750
Wisconsin Central Transportation Corp.* 47,500 1,472,500
------------
$ 1,941,250
- ---------------------------------------------------------------------------------------------------------
Real Estate -
Lasalle Partners, Inc* 400 $ 11,900
- ---------------------------------------------------------------------------------------------------------
Restaurants and Lodging - 1.4%
Applebee's International, Inc. 45,500 $ 1,160,250
Prime Hospitality Corp.* 28,600 543,400
------------
$ 1,703,650
- ---------------------------------------------------------------------------------------------------------
Special Products and Services - 1.1%
Keystone International, Inc. 35,800 $ 1,349,213
- ---------------------------------------------------------------------------------------------------------
Stores - 7.7%
AnnTaylor Stores Corp.* 71,100 $ 1,217,588
Gymboree Corp.* 119,800 2,935,100
Rite Aid Corp. 37,700 1,887,356
Viking Office Products, Inc.* 162,600 3,434,925
------------
$ 9,474,969
- ---------------------------------------------------------------------------------------------------------
Telecommunications - 12.8%
ADC Telecommunications, Inc.* 20,600 $ 764,775
Aerial Communications, Inc.* 122,500 1,064,219
Ascend Communications, Inc.* 109,400 4,642,662
Aspect Telecommunications Corp.* 88,300 1,942,600
Cable Design Technologies Corp.* 132,200 4,420,437
Cabletron Systems, Inc.* 17,400 526,350
Cisco Systems, Inc.* 7,400 557,775
Cox Communications, Inc., "A"* 5,100 138,019
Genesys Telecommunications Laboratory* 200 5,600
Qwest Communications International, Inc.* 700 28,525
Tel-Save Holdings, Inc.* 16,600 296,725
U.S. Cellular Corp.* 37,900 1,141,738
U.S. West Media Group* 9,200 184,000
------------
$ 15,713,425
- ---------------------------------------------------------------------------------------------------------
Total U.S. Stocks $118,856,248
- ---------------------------------------------------------------------------------------------------------
Foreign Stocks - 0.8%
Canada - 0.8%
Rogers Communications, Inc., "B"
(Telecommunications)* 94,800 $ 663,600
Southern Africa Minerals Corp. (Precious Metals and
Minerals)*++ 810,000 303,345
------------
$ 966,945
- ---------------------------------------------------------------------------------------------------------
Total Foreign Stocks $ 966,945
- ---------------------------------------------------------------------------------------------------------
Total Stocks (Identified Cost, $108,223,597) $119,823,193
- ---------------------------------------------------------------------------------------------------------
Warrants -
- ---------------------------------------------------------------------------------------------------------
Perseptive Biosystems, Inc. (Identified Cost, $0) 25 $ 0
- ---------------------------------------------------------------------------------------------------------
Short-Term Obligations - 1.2%
- ---------------------------------------------------------------------------------------------------------
PRINCIPAL AMOUNT
(000 OMITTED)
- ---------------------------------------------------------------------------------------------------------
General Electric Capital Corp., due 09/02/97,
at Amortized Cost and Value $1,400 $ 1,399,781
- ---------------------------------------------------------------------------------------------------------
Total Investments (Identified Cost, $109,623,378) $121,222,974
Other Assets, Less Liabilities - 1.3% 1,634,786
- ---------------------------------------------------------------------------------------------------------
Net Assets -- 100.0% $122,857,760
- ---------------------------------------------------------------------------------------------------------
*Non-income producing security.
##SEC Rule 144A restriction.
++Affiliated issuers are those in which the Fund's holdings of an issuer represent 5% or
more of the outstanding voting securities of the issuer.
</TABLE>
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS
Statement of Assets and Liabilities
- --------------------------------------------------------------------------------
AUGUST 31, 1997
- --------------------------------------------------------------------------------
Assets:
Investments, at value -
Unaffiliated issuers (identified cost, $108,529,649) $120,919,629
Affiliated issuer (identified cost, $1,093,729) 303,345
------------
Total investments, at value (identified cost,
$109,623,378) $121,222,974
Cash 1,465,766
Receivable for Fund shares sold 661,407
Receivable for investments sold 296,226
Dividends receivable 11,517
Other assets 1,062
------------
Total assets $123,658,952
------------
Liabilities:
Payable for investments purchased $ 436,368
Payable for Fund shares reacquired 231,933
Payable to affiliates -
Management fee 7,293
Administrative fee 152
Shareholder servicing agent fee 1,312
Distribution and service fee 62,053
Accrued expenses and other liabilities 62,081
------------
Total liabilities $ 801,192
------------
Net assets $122,857,760
============
Net assets consist of:
Paid-in capital $111,850,491
Unrealized appreciation on investments 11,599,596
Accumulated net realized loss on investments and foreign
currency transactions (582,892)
Accumulated net investment loss (9,435)
------------
Total $122,857,760
============
Shares of beneficial interest outstanding 13,178,659
=========
Class A shares:
Net asset value per share
(net assets of $41,737,337 / 4,429,126 shares of
beneficial interest outstanding) $9.42
=====
Offering price per share (100 / 94.25) $9.99
=====
Class B shares:
Net asset value and offering price per share
(net assets of $73,940,102 / 7,972,462 shares of
beneficial interest outstanding) $9.27
=====
Class C shares:
Net asset value and offering price per share
(net assets of $5,796,283/ 630,395 shares of beneficial
interest outstanding) $9.19
=====
Class I shares:
Net asset value, offering price, and redemption price per share
(net assets of $1,384,038 / 146,676 shares of
beneficial interest outstanding) $9.44
=====
On sales of $50,000 or more, the offering price of Class A shares is reduced.
A contingent deferred sales charge may be imposed on redemptions of Class A,
Class B, and Class C shares.
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS - continued
<TABLE>
<CAPTION>
Statement of Operations
- --------------------------------------------------------------------------------------------
YEAR ENDED AUGUST 31, 1997
- --------------------------------------------------------------------------------------------
Net investment income:
Income -
<S> <C>
Interest $ 195,845
Dividends 175,657
-----------
Total investment income $ 371,502
-----------
Expenses -
Management fee $ 868,526
Trustees' compensation 18,091
Shareholder servicing agent fee 99,472
Shareholder servicing agent fee (Class A) 19,320
Shareholder servicing agent fee (Class B) 53,443
Shareholder servicing agent fee (Class C) 3,228
Distribution and service fee (Class A) 98,318
Distribution and service fee (Class B) 713,344
Distribution and service fee (Class C) 57,908
Administration fee 8,511
Printing 52,377
Auditing fee 50,652
Postage 34,033
Custodian fee 32,120
Legal fee 4,748
Miscellaneous 97,179
-----------
Total expenses $ 2,211,270
Fees paid indirectly (71)
-----------
Net expenses $ 2,211,199
-----------
Net investment loss $(1,839,697)
-----------
Realized and unrealized gain (loss) on investments:
Realized gain (loss) (identified cost basis) -
Investment transactions $ 2,977,138
Foreign currency transactions (325)
-----------
Net realized gain on investments and foreign currency transactions $ 2,976,813
-----------
Change in unrealized appreciation on investments $19,823,645
-----------
Net realized and unrealized gain on investments and foreign
currency $22,800,458
-----------
Increase in net assets from operations $20,960,761
===========
</TABLE>
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS - continued
<TABLE>
<CAPTION>
Statement of Changes in Net Assets
- -------------------------------------------------------------------------------------------------------------
YEAR ENDED AUGUST 31, 1997 1996
- -------------------------------------------------------------------------------------------------------------
Increase (decrease) in net assets:
From operations -
<S> <C> <C>
Net investment loss $ (1,839,697) $ (1,585,695)
Net realized gain on investment transactions 2,976,813 20,722,363
Net unrealized gain (loss) on investments 19,823,645 (12,184,307)
------------ ------------
Increase in net assets from operations $ 20,960,761 $ 6,952,361
------------ ------------
Distributions declared to shareholders -
From net realized gain on investments and foreign
currency transactions (Class A) $ (5,360,182) $ (5,350,459)
From net realized gain on investments and foreign
currency transactions (Class B) (9,603,644) (10,344,167)
From net realized gain on investments and foreign
currency transactions (Class C) (727,466) (756,617)
------------ ------------
Total distributions declared to shareholders $(15,691,292) $(16,451,243)
------------ ------------
Fund share (principal) transactions -
Net proceeds from sale of shares $ 72,372,396 $ 80,419,295
Net asset value of shares issued to shareholders in
reinvestment of distributions 14,135,101 14,791,845
Cost of shares reacquired (77,920,481) (71,855,199)
------------ ------------
Increase in net assets from Fund share transactions $ 8,587,016 $ 23,355,941
------------ ------------
Total increase in net assets $ 13,856,485 $ 13,857,059
Net assets:
At beginning of period 109,001,275 95,144,216
------------ ------------
At end of period (including accumulated net investment
loss of $9,435, and $1,588,957, respectively) $122,857,760 $109,001,275
============ ============
See notes to financial statements
</TABLE>
<PAGE>
FINANCIAL STATEMENTS - continued
Financial Highlights
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------------
YEAR ENDED AUGUST 31, 1997 1996 1995 1994*
- -------------------------------------------------------------------------------------------------------------------------------
CLASS A
- -------------------------------------------------------------------------------------------------------------------------------
Per share data (for a share outstanding throughout each period):
<S> <C> <C> <C> <C>
Net asset value - beginning of period $ 9.06 $ 10.08 $ 8.68 $ 7.83
------- ------- ------- -------
Income from investment operations# -
Net investment loss $ (0.09) $ (0.10) $ (0.03) $ (0.05)
Net realized and unrealized gain on investments and
foreign currency transactions 1.77 0.96 1.69 0.90
------- ------- ------- -------
Total from investment operations $ 1.68 $ 0.86 $ 1.66 $ 0.85
------- ------- ------- -------
Less distributions declared to shareholders -
From net realized gain on investments and foreign $
currency transactions
$ (1.32) $ (1.88) $ (0.26) --
------- ------- ------- -------
Net asset value - end of period $ 9.42 $ 9.06 $ 10.08 $ 8.68
======= ======= ======= =======
Total return(+) 20.26% 10.55% 19.77% 10.86%++
Ratios (to average net assets)/Supplemental data(S):
Expenses## 1.41% 1.28% 1.29% 1.50%+
Net investment loss (1.09)% (1.08)% (0.40)% (0.87)%+
Portfolio turnover 170% 157% 218% 82%
Average commission rate### $0.0387 $0.0422 $ -- $ --
Net assets at end of period (000 omitted) $41,737 $35,098 $30,194 $17,776
*For the period from the commencement of the Fund's investment operations, December 1,
1993, through 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 are 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 advisor 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 asets):
Expenses -- -- -- 2.03%+
Net investment loss -- -- -- (1.40)%+
See notes to financial statements
</TABLE>
<PAGE>
FINANCIAL STATEMENTS - continued
Financial Highlights - continued
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
YEAR ENDED AUGUST 31, 1997 1996 1995 1994*
- -------------------------------------------------------------------------------------------------------------------------------
CLASS B
- -------------------------------------------------------------------------------------------------------------------------------
Per share data (for a share outstanding throughout each period):
<S> <C> <C> <C> <C>
Net asset value - beginning of period $ 8.93 $ 9.94 $ 8.59 $ 7.83
------- ------- ------- -------
Income from investment operations# -
Net investment loss $ (0.16) $ (0.17) $ (0.13) $ (0.12)
Net realized and unrealized gain on investments and
foreign currency transactions 1.75 0.95 1.69 0.88
------- ------- ------- -------
Total from investment operations $ 1.59 $ 0.78 $ 1.56 $ 0.76
------- ------- ------- -------
Less distributions declared to shareholders from net
realized gain on investments and foreign currency
transactions $ (1.25) $ (1.79) $ (0.21) $ --
------- ------- ------- -------
Net asset value - end of period $ 9.27 $ 8.93 $ 9.94 $ 8.59
======= ======= ======= =======
Total return 19.36% 9.67% 18.75% 9.71%++
Ratios (to average net assets)/Supplemental data(S):
Expenses## 2.20% 2.13% 2.29% 2.57%+
Net investment loss (1.87)% (1.81)% (1.44)% (2.02)%+
Portfolio turnover 170% 157% 218% 82%
Average commission rate### $0.0387 $0.0422 $ -- $ --
Net assets at end of period (000 omitted) $73,940 $67,043 $61,742 $36,849
*For the period from the commencement of the Fund's investment operations, December 1,
1993, through August 31, 1994.
+Annualized.
++Not annualized.
#Per share data are based on average shares outstanding.
##For fiscal years ending after September 1, 1995, the Fund's expenses are calculated
without reduction for fees paid indirectly.
###Average commission rate is calculated for funds with fiscal years beginning on or after
September 1, 1995.
(S)The investment advisor 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 asets):
Expenses -- -- -- 3.10%+
Net investment loss -- -- -- (2.56)%+
</TABLE>
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS - continued
<TABLE>
<CAPTION>
Financial Highlights - continued
- -----------------------------------------------------------------------------------------------------------------------------------
YEAR ENDED AUGUST 31, 1997 1996 1995 1994* 1997**
- -----------------------------------------------------------------------------------------------------------------------------------
CLASS C CLASS I
- -----------------------------------------------------------------------------------------------------------------------------------
Per share data (for a share outstanding throughout each period):
<S> <C> <C> <C> <C> <C>
Net asset value - beginning of period $ 8.85 $ 9.91 $ 8.61 $ 7.80 $ 8.50
------- ------- ------- ------- -------
Income from investment operations# -
Net investment loss $ (0.16) $ (0.17) $ (0.14) $ (0.04) $ (0.05)
Net realized and unrealized gain on
investments and foreign currency
transactions 1.74 0.94 1.69 0.85 0.99
------- ------- ------- ------- -------
Total from investment operations $ 1.58 $ 0.77 $ 1.55 $ 0.81 $ 0.94
------- ------- ------- ------- -------
Less distributions declared to shareholders -
From net realized gain on investments and
foreign currency transactions $ (1.24) $ (1.83) $ (0.25) $ -- $ --
------- ------- ------- ------- -------
Net asset value - end of period $ 9.19 $ 8.85 $ 9.91 $ 8.61 $ 9.44
======= ======= ======= ======= =======
Total return 19.44% 9.60% 18.63% 10.38%++ 11.06%++
Ratios (to average net assets)/Supplemental data(S):
Expenses## 2.16% 2.17% 2.30% 2.50%+ 1.03%+
Net investment loss (1.79)% (1.90)% (1.55)% (2.22)%+ (0.74)%+
Portfolio turnover 170% 157% 218% 82% 170%
Average commission rate### $0.0387 $0.0422 $ -- $ -- $0.0387
Net assets at end of period (000 omitted) $ 5,796 $ 6,860 $ 3,209 $ 87 $ 1,384
*For the period from the commencement of offering of Class C shares, August 1,
1994, through August 31, 1994. **For the period from the commencement of the
Fund's offering of Class I shares, January 3, 1997, through August 31, 1997.
+Annualized.
++Not annualized.
+++The Fund's expenses are calculated without reduction for fees paid
indirectly. #Per share distributions are based on average shares outstanding.
##For fiscal years ending after September 1, 1995, 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 advisor 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>
See notes to financial statements
<PAGE>
NOTES TO FINANCIAL STATEMENTS
(1) Business and Organization
MFS Mid Cap Growth 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. Effective September 1, 1997, the name
of the Fund was changed from MFS OTC Fund to MFS Mid Cap Growth Fund.
(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, 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.
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.
Dividends received in cash are recorded on the ex-dividend date. Dividend and
interest payments received in additional securities are recorded on the ex-
dividend or ex-interest date in an amount equal to the value of the security
on such date.
Fees Paid Indirectly - The Fund's custody fee is calculated as a percentage of
the Fund's average daily net assets. This fee is reduced according to an
expense offset arrangement with State Street Bank, 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 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.
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, 1997, $1,835,920 was reclassified
from accumulated net realized loss on investments and foreign currency
transactions to accumulated net investment loss due to differences between
book and tax accounting for the offset of short-term capital gains against
accumulated net investment loss. This change had no effect on the net assets
or net asset value per share. At August 31, 1997, accumulated net realized
loss under book accounting was different from tax accounting due to temporary
differences in accounting for wash sale transactions.
Multiple Classes of Shares of Beneficial Interest - The Fund offers multiple
classes of shares. The classes of shares differ in their respective
distribution and service fees. All shareholders bear the common expenses of
the Fund pro rata based on average daily net assets of each class, without
distinction between share classes. Dividends are declared separately for each
class. No class has preferential dividend rights; differences in per share
dividend rates are generally due to differences in separate class expenses.
(3) Transactions with Affiliates
Investment Adviser - The Fund has an investment advisory agreement with
Massachusetts Financial Services Company (MFS) to provide overall investment
advisory and administrative services and general office facilities. The
management fee is computed daily and paid monthly at an annual rate of 0.75%
of average daily net assets.
Administrator - Effective March 1, 1997, the Fund has an administrative
services agreement with MFS to provide the Fund with certain financial, legal,
and other administrative services. As a partial reimbursement for the cost of
providing these services, the Fund pays MFS an administrative fee at the
following annual percentages of the Fund's average daily net assets, provided
that the administrative fee is not assessed on Fund assets that exceed $3
billion:
First $1 billion 0.0150%
Next $1 billion 0.0125%
Next $1 billion 0.0100%
In excess of $3 billion 0.0000%
The Fund pays no compensation directly to its Trustees who are officers of the
investment adviser, or to officers of the Fund, all of whom receive
remuneration for their services to the Fund from MFS. Certain officers and
Trustees of the Fund are officers or directors of MFS, MFS Fund Distributors,
Inc. (MFD), and MFS Service Center, Inc. (MFSC). The Fund has an unfunded
defined benefit plan for all of its independent Trustees and Mr. Bailey.
Included in Trustees' compensation is a net periodic pension expense of $4,184
for the year ended August 31, 1997.
Distributor - MFD, a wholly owned subsidiary of MFS, as distributor, received
$23,709 for the year ended August 31, 1997, as its portion of the sales charge
on sales of Class A shares of the Fund. The Trustees have adopted a
distribution plan for Class A, Class B, and Class C shares pursuant to Rule
12b-1 of the Investment Company Act of 1940 as follows:
The Fund's distribution plan provides that the Fund will pay MFD up to 0.35%
per annum of its average daily net assets attributable to Class A shares in
order that MFD may pay expenses on behalf of the Fund related to the
distribution and servicing of its shares. These expenses include a service fee
to each securities dealer that enters into a sales agreement with MFD of up to
0.25% per annum of the Fund's average daily net assets attributable to Class A
shares which are attributable to that securities dealer, a distribution fee to
MFD of up to 0.10% per annum of the Fund's average daily net assets
attributable to Class A shares, commissions to dealers and payments to MFD
wholesalers for sales at or above a certain dollar level, and other such
distribution-related expenses that are approved by the Fund. MFD retains the
service fee for accounts not attributable to a securities dealer which
amounted to $18,471 for the year ended August 31, 1997. Payment of the 0.10%
per annum Class A distribution fee will be implemented on such date as the
Trustees of the Trust may determine. Fees incurred under the distribution plan
during the year ended August 31, 1997, were .26% of average daily net assets
attributable to Class A shares on an annualized basis.
The Fund's 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 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 $20,179
and $302 for Class B and Class C shares, respectively, for the year ended
August 31, 1997. Fees incurred under the distribution plan during the year
ended August 31, 1997, were 1.00% of average daily net assets attributable to
Class B, and Class C shares on an annualized basis, respectively.
Purchases over $1 million of Class A shares and certain purchases by
retirement plans are subject to a contingent deferred sales charge in the
event of a shareholder redemption within 12 months following such purchase. A
contingent deferred sales charge is imposed on shareholder redemptions of
Class B shares in the event of a shareholder redemption within six years of
purchase. A contingent deferred sales charge is imposed on shareholder
redemptions of Class C shares in the event of a shareholder redemption within
twelve months of purchase. MFD receives all contingent deferred sales charges.
Contingent deferred sales charges imposed during the year ended August 31,
1997, were $304, $140,576, and $3,156 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 fund's average daily net assets at an effective annual
rate of 0.13%. Prior to January 1, 1997, the fee was 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
$191,450,780 and $203,178,277, 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 $110,655,476
============
Gross unrealized appreciation $ 18,497,710
Gross unrealized depreciation 7,930,212
------------
Net unrealized appreciation $ 10,567,498
============
(5) Shares of Beneficial Interest
The Fund's Declaration of Trust permits the Trustees to issue an unlimited
number of full and fractional shares of beneficial interest (without par
value). Transactions in Fund shares were as follows:
Class A Shares
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31, 1997 YEAR ENDED AUGUST 31, 1996
-------------------------------- --------------------------------
SHARES AMOUNT SHARES AMOUNT
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Shares sold 3,045,715 $ 27,193,349 2,953,255 $ 28,054,414
Shares issued to shareholders in
reinvestment of distributions 589,985 4,958,075 609,434 4,991,266
Shares transferred to Class I (265,865) (2,259,849)
Shares reacquired (2,816,583) (25,053,752) (2,683,072) (24,825,437)
---------- ------------ ---------- -------------
Net increase 553,252 $ 4,837,823 879,617 $ 8,220,243
========== ============ ========== =============
Class B Shares
YEAR ENDED AUGUST 31, 1997 YEAR ENDED AUGUST 31, 1996
-------------------------------- --------------------------------
SHARES AMOUNT SHARES AMOUNT
- -------------------------------------------------------------------------------------------------------
Shares sold 4,632,366 $ 40,232,895 3,674,349 $ 33,978,577
Shares issued to shareholders in
reinvestment of distributions 1,017,100 8,502,410 1,119,205 9,076,592
Shares reacquired (5,182,228) (44,830,300) (3,501,980) (31,963,123)
---------- ------------ ---------- -------------
Net increase 467,237 $ 3,905,005 1,291,574 $ 11,092,046
========== ============ ========== =============
Class C Shares
YEAR ENDED AUGUST 31, 1997 YEAR ENDED AUGUST 31, 1996
-------------------------------- --------------------------------
SHARES AMOUNT SHARES AMOUNT
- -------------------------------------------------------------------------------------------------------
Shares sold 555,743 $ 4,850,217 2,005,344 $ 18,386,304
Shares issued to shareholders in
reinvestment of distributions 81,725 674,616 89,936 723,987
Shares reacquired (782,083) (6,947,620) (1,644,089) (15,066,639)
---------- ------------ ---------- -------------
Net increase (decrease) (144,615) $ (1,422,787) 451,191 $ 4,043,652
========== ============ ========== =============
Class I Shares
YEAR ENDED AUGUST 31, 1997
--------------------------------
SHARES AMOUNT
- -------------------------------------------------------------------
Shares sold 12,016 $ 95,935
Shares transferred from Class A 265,865 2,259,849
Shares reacquired (131,205) (1,088,809)
---------- ------------
Net increase 146,676 $ 1,266,975
========== ============
</TABLE>
(6) Line of Credit
The Fund and other affiliated funds participate in a $400 million unsecured
line of credit provided by a syndication of banks under a line of credit
agreement. 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, 1997, was $1,130.
(7) Transactions in Securities of Affiliated Issuers
Affiliated issuers, as defined under the Investment Company Act of 1940, are
those in which the Fund's holdings of an issuer represent 5% or more of the
outstanding voting securities of the issuer. A summary of affiliated issues at
August 31, 1997, is set forth below.
ENDING PURCHASE MARKET
AFFILIATE SHARE AMOUNT COST VALUE
- --------------------------------------------------------------------------------
Southern African
Minerals Corp. 810,000 $1,093,729 $303,345
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Trustees of MFS Series Trust IV Shareholders of MFS Mid Cap Growth
Fund:
We have audited the accompanying statement of assets and liabilities,
including the portfolio of investments, of MFS Mid Cap Growth Fund as of
August 31, 1997, the related statement of operations for the year then ended,
the statement of changes in net assets for the years ended August 31, 1997 and
1996, and the financial highlights for the year ended August 31, 1997 and for
each of the years in the four-year period ended August 31, 1997. 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, 1997 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 Mid Cap Growth
Fund at August 31, 1997, 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 3, 1997
--------------------------------------------
This report is prepared for the general information of shareholders. It is
authorized for distribution to prospective investors only when preceded or
accompanied by a current prospectus.
<PAGE>
MFS(R) MID CAP GROWTH FUND
<TABLE>
<S> <C>
TRUSTEES CUSTODIAN
A. Keith Brodkin* - Chairman and President State Street Bank and Trust Company
Richard B. Bailey* - Private Investor; AUDITORS
Former Chairman and Director (until 1991), Deloitte & Touche LLP
Massachusetts Financial Services Company;
Director, Cambridge Bancorp; Director, Cambridge INVESTOR INFORMATION
Trust Company For MFS stock and bond market outlooks, call toll
free: 1-800-637-4458 anytime from a touch-tone
Peter G. Harwood - Private Investor telephone.
J. Atwood Ives - Chairman and Chief Executive For information on MFS mutual funds, call your
Officer, Eastern Enterprises financial adviser or, for an information kit, call
toll free: 1-800-637-2929 any business day from
Lawrence T. Perera - Partner, Hemenway & Barnes 9 a.m. to 5 p.m. Eastern time (or leave a message
anytime).
William J. Poorvu - Adjunct Professor, Harvard
University Graduate School of Business INVESTOR SERVICE
Administration MFS Service Center, Inc.
P.O. Box 2281
Charles W. Schmidt - Private Investor Boston, MA 02107-9906
Arnold D. Scott* - Senior Executive Vice For general information, call toll free:
President, Director and Secretary, Massachusetts 1-800-225-2606 any business day from
Financial Services Company 8 a.m. to 8 p.m. Eastern time.
Jeffrey L. Shames* - President and Director, For service to speech- or hearing-impaired, call
Massachusetts Financial Services Company toll free: 1-800-637-6576 any business day from
9 a.m. to 5 p.m. Eastern time. (To use this service,
Elaine R. Smith - Independent Consultant your phone must be equipped with a
Telecommunications Device for the Deaf.)
David B. Stone - Chairman, North American
Management Corp. (investment advisers) For share prices, account balances, and exchanges,
call toll free: 1-800-MFS-TALK (1-800-637-8255)
INVESTMENT ADVISER anytime from a touch-tone telephone.
Massachusetts Financial Services Company
500 Boylston Street WORLD WIDE WEB
Boston, MA 02116-3741 www.mfs.com
DISTRIBUTOR [DALBAR For the fourth year in a row,
MFS Fund Distributors, Inc. LOGO] MFS earned a #1 ranking in the
500 Boylston Street DALBAR, Inc. Broker/Dealer Survey,
Boston, MA 02116-3741 Main Office Operations Service Quality
Category. The firm achieved a 3.42
PORTFOLIO MANAGER overall score on a scale of 1 to 4 in
Mark Regan* the 1997 survey. A total of 111 firms
responded, offering input on the
TREASURER quality of service they received from
W. Thomas London* 29 mutual fund companies nationwide.
The survey contained questions about
ASSISTANT TREASURERS service quality in 11 categories,
Mark E. Bradley* including "knowledge of operations
Ellen Moynihan* contact," "keeping you informed,"
James O. Yost* "ease of doing business" with the firm.
SECRETARY
Stephen E. Cavan*
ASSISTANT SECRETARY
James R. Bordewick, Jr.*
*Affiliated with the Investment Adviser
</TABLE>
<PAGE>
-------------
MFS(R) MID CAP BULK RATE
GROWTH FUND U.S. POSTAGE
PAID
MFS
-------------
500 Boylston Street
Boston, MA 02116-3741
[LOGO] M F S(SM)
INVESTMENT MANAGEMENT
We invented the mutual fund(SM)
[DALBAR
LOGO]
TOP-RATED SERVICE
(C)1997 MFS Fund Distributors, Inc., 500 Boylston Street, Boston, MA 02116-3741
MMC-2 10/97 24M 83/283/383/883
<PAGE> 197
PART C
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS
FOR MFS MONEY MARKET FUND AND MFS GOVERNMENT MONEY MARKET FUND
(a) FINANCIAL STATEMENTS INCLUDED IN PART A:
For the seven years ended October 31, 1993, the ten
months ended August 31, 1994, and the three years ended
August 31, 1997:
Financial Highlights
FINANCIAL STATEMENTS INCLUDED IN PART B:
At August 31, 1997:
Statement of Assets and Liabilities*
Portfolio of Investments*
For the two years in the period ended August 31, 1997:
Statement of Changes in Net Assets*
- ----------
* Incorporated herein by reference to the Fund's Annual Report to Shareholders
dated August 31, 1997, filed with the SEC via EDGAR on November 3, 1997.
FOR MFS MUNICIPAL BOND FUND
(a) FINANCIAL STATEMENTS INCLUDED IN PART A:
For the seven years ended October 31, 1993, the ten
months ended August 31, 1994, and the three years ended
August 31, 1997:
Financial Highlights
FINANCIAL STATEMENTS INCLUDED IN PART B:
At August 31, 1997:
Statement of Assets and Liabilities*
Portfolio of Investments*
For the two years in the period ended August 31, 1997:
Statement of Changes in Net Assets*
- ----------
* Incorporated herein by reference to the Fund's Annual Report to Shareholders
dated August 31, 1997, filed with the SEC via EDGAR on October 29, 1997.
FOR MFS MID CAP GROWTH FUND
(a) FINANCIAL STATEMENTS INCLUDED IN PART A:
For the period from December 1, 1993 to August 31, 1994
and for the three years ended August 31, 1997:
Financial Highlights
<PAGE> 198
FINANCIAL STATEMENTS INCLUDED IN PART B:
At August 31, 1997:
Statement of Assets and Liabilities*
Portfolio of Investments*
For the two years in the period ended August 31, 1997:
Statement of Changes in Net Assets*
For the year ended August 31, 1997:
Statement of Operations*
- ----------
* Incorporated herein by reference to the Fund's Annual Report to Shareholders
dated August 31, 19976, filed with the SEC via EDGAR on October 30, 1997.
(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. (7)
(c) Form of Amendment to Declaration of Trust. (10)
2 Amended and Restated By-Laws, dated December 21,
1994. (1)
3 Not Applicable.
4 Form of Share Certificate for Classes of Shares.
(6)
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, and the Mutual Fund
Agreement between MFD and a bank or NASD affiliate,
as amended April 11, 1997. (5)
<PAGE> 199
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. (4)
(b) Amendment to Custodian Contract, dated April 25,
1988. (4)
(c) Amendment to Custodian Contract, dated October 1,
1989. (4)
(d) Amendment to Custodian Contract, dated September
17, 1991. (4)
9 (a) Shareholder Servicing Agent Agreement, dated August
1, 1985. (1)
(b) Amendment to Shareholder Servicing Agreement dated
January 1, 1997 to amend Fee Schedule. (10)
(c) Exchange Privilege Agreement, dated July 30, 1997.
(11).
(d) Loan Agreement among MFS Borrowers and The First
National Bank of Boston, dated as of February 21,
1995. (9)
(e) Third Amendment to the Loan Agreement among MFS
Borrowers and The First National Bank of Boston,
dated as of February 14, 1997. (9)
(f) Dividend Disbursing Agent Agreement, dated February
1, 1986. (2)
(g) Master Administrative Services Agreement, dated
March 1, 1997, as amended. (8)
10 Consent and Opinion of Counsel, dated December 22,
1997; filed herewith.
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. (3)
(b) Forms 403(b) Custodial Account Agreement, as
currently in effect. (3)
<PAGE> 200
(c) Forms for MFS Prototype Paired Defined Contribution
Plans as Trust Agreement, as currently in effect.
(3)
15 (a) Master Distribution Plan Pursuant to Rule 12b-1
Under the Investment Company Act of 1940, effective
January 1, 1997. (10)
(b) Exhibits as revised October 15, 1997 to Master
Distribution Plan pursuant to Rule 12b-1 under the
Investment Company Act of 1940 to replace those
exhibits to the Master Distribution Plan contained in
Exhibit 15(a) above. (11)
16 (a) Schedule for Computation of Performance Quotations
for MFS Money Market Fund and MFS Government Money
Market Fund - Seven-Day Yield Calculation. (1)
(b) Schedule for Computation of Performance Quotations
for MFS Municipal Bond Fund - Yield, Tax-Equivalent
Yield, Distribution Rate and Average Annual Total
Return. (1)
(c) Schedule for Computation of Performance Quotations
for MFS Mid Cap Growth Fund (formerly MFS OTC Fund)
- Average Annual Total Return. (1)
17 Financial Data Schedules for each class of each
series; filed herewith.
18 Plan pursuant to Rule 18f-3(d) under the Investment
Company Act of 1940. (6)
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. 28 filed with the SEC via EDGAR
on July 28, 1995.
(3) 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.
(4) Incorporated by reference to the Registrant's Post-Effective Amendment No.
27 filed with the SEC via EDGAR on October 11, 1995.
(5) Incorporated by reference to MFS Series Trust III (File Nos. 2-60491 and
811-2794) Post-Effective Amendment No. 24 filed with the SEC via EDGAR on
May 29, 1997.
(6) 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.
(7) Incorporated by reference to Registrant's Post-Effective Amendment No. 29
filed with the SEC on August 28, 1996.
(8) Incorporated by reference to MFS/Sun Life Series Trust (File Nos. 2-83616
and 811-3732) Post-Effective Amendment No. 19 filed with the SEC via EDGAR
on March 18, 1997.
(9) Incorporated by reference to MFS Series Trust I (File Nos. 33-7638 and
811-4777) Post-Effective Amendment No. 28 filed with the SEC via EDGAR on
June 26, 1997.
(10) Incorporated by reference to the Registrant's Post-Effective Amendment No.
31 filed with the SEC via EDGAR on June 27, 1997.
(11) Incorporated by reference to Massachusetts Investors Growth Stock Fund
(File Nos. 2-14677 and 811-859) Post-Effective Amendment No. 64 filed with
the SEC via EDGAR on October 29, 1997.
<PAGE> 201
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 52,550
(without par value) (as of November 30, 1997)
FOR MFS GOVERNMENT MONEY MARKET FUND
(1) (2)
TITLE OF CLASS NUMBER OF RECORD HOLDERS
Shares of Beneficial Interest 2,211
(without par value) (as of November 30, 1997)
<PAGE> 202
FOR MFS MUNICIPAL BOND FUND
(1) (2)
TITLE OF CLASS NUMBER OF RECORD HOLDERS
Class A Shares of Beneficial Interest 38,578
(without par value) (as of November 30, 1997)
Class B Shares of Beneficial Interest 2,194
(without par value) (as of November 30, 1997)
FOR MFS MID CAP GROWTH FUND
(1) (2)
TITLE OF CLASS NUMBER OF RECORD HOLDERS
Class A Shares of Beneficial Interest 4,120
(without par value) (as of November 30, 1997)
Class B Shares of Beneficial Interest 7,213
(without par value) (as of November 30, 1997)
Class C Shares of Beneficial Interest 661
(without par value) (as of November 30, 1997)
Class I Shares of Beneficial Interest 3
(without par value) (as of November 30, 1997)
ITEM 27. INDEMNIFICATION
The Trustees and officers of the Trust and the personnel of the
Trust's investment adviser and principal underwriter are insured under an errors
and omissions liability insurance policy. The Trust and its officers are also
insured under the fidelity bond required by Rule 17g-1 under the Investment
Company Act of 1940, as amended.
Reference is hereby made to (a) Article V of the Trust's Declaration
of Trust, and (b) Section 9 of the Shareholder Servicing Agent Agreement both
incorporated by reference to Post-Effective Amendment No. 26, filed with the SEC
via EDGAR on February 28, 1995.
ITEM 28. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER
MFS serves as investment adviser to the following open-end Funds
comprising the MFS Family of Funds: Massachusetts Investors Trust, Massachusetts
Investors Growth Stock Fund, MFS Growth Opportunities Fund, MFS Government
Securities Fund, MFS Government Limited Maturity Fund, MFS Series Trust I (which
has thirteen series: MFS Managed Sectors Fund, MFS Cash Reserve Fund, MFS World
Asset Allocation Fund, MFS Aggressive Growth Fund, MFS Research Growth and
Income Fund, MFS Core Growth Fund, MFS Equity Income Fund, MFS Special
Opportunities Fund, MFS Convertible Securities Fund, MFS Blue Chip Fund, MFS New
Discovery Fund, MFS Science and Technology Fund and MFS Research International
Fund), MFS Series Trust II (which has three series:
<PAGE> 203
MFS Emerging Growth Fund, MFS Large Cap Growth Fund and MFS Intermediate Income
Fund), MFS Series Trust III (which has two series: MFS High Income Fund and MFS
Municipal High Income Fund), MFS Series Trust IV (which has four series: MFS
Money Market Fund, MFS Government Money Market Fund, MFS Municipal Bond Fund and
MFS Mid Cap Growth Fund), MFS Series Trust V (which has two series: MFS Total
Return Fund and MFS Research Fund), MFS Series Trust VI (which has three series:
MFS World Total Return Fund, MFS Utilities Fund and MFS World Equity Fund), MFS
Series Trust VII (which has two series: MFS World Governments Fund and MFS Value
Fund), MFS Series Trust VIII (which has two series: MFS Strategic Income Fund
and MFS World Growth Fund), MFS Series Trust IX (which has three series: MFS
Bond Fund, MFS Limited Maturity Fund and MFS Municipal Limited Maturity Fund),
MFS Series Trust X (which has four series: MFS Government Mortgage Fund,
MFS/Foreign & Colonial Emerging Markets Equity Fund, MFS/Foreign & Colonial
International Growth Fund and MFS/Foreign & Colonial International Growth and
Income Fund), and MFS Municipal Series Trust (which has 16 series: MFS Alabama
Municipal Bond Fund, MFS Arkansas Municipal Bond Fund, MFS California Municipal
Bond Fund, MFS Florida Municipal Bond Fund, MFS Georgia Municipal Bond Fund, MFS
Maryland Municipal Bond Fund, MFS Massachusetts Municipal Bond Fund, MFS
Mississippi Municipal Bond Fund, MFS New York Municipal Bond Fund, MFS North
Carolina Municipal Bond Fund, MFS Pennsylvania Municipal Bond Fund, MFS South
Carolina Municipal Bond Fund, MFS Tennessee Municipal Bond Fund, MFS Virginia
Municipal Bond Fund, MFS West Virginia Municipal Bond Fund and MFS Municipal
Income Fund) (the "MFS Funds"). The principal business address of each of the
MFS Funds is 500 Boylston Street, Boston, Massachusetts 02116.
MFS also serves as investment adviser of the following no-load,
open-end Funds: MFS Institutional Trust ("MFSIT") (which has seven series), MFS
Variable Insurance Trust ("MVI") (which has twelve series) and MFS Union
Standard Trust ("UST"). The principal business address of each of the
aforementioned funds is 500 Boylston Street, Boston, Massachusetts 02116.
In addition, MFS serves as investment adviser to the following
closed-end funds: MFS Municipal Income Trust, MFS Multimarket Income Trust, MFS
Government Markets Income Trust, MFS Intermediate Income Trust, MFS Charter
Income Trust and MFS Special Value Trust (the "MFS Closed-End Funds"). The
principal business address of each of the MFS Closed-End Funds is 500 Boylston
Street, Boston, Massachusetts 02116.
Lastly, MFS serves as investment adviser to MFS/Sun Life Series
Trust ("MFS/SL"), Money Market Variable Account, High Yield Variable Account,
Capital Appreciation Variable Account, Government Securities Variable Account,
World Governments Variable Account, Total Return Variable Account and Managed
Sectors Variable Account. The principal business address of each of the
aforementioned funds is One Sun Life Executive Park, Wellesley Hills,
Massachusetts 02181.
MFS International Ltd. ("MIL"), a limited liability company
organized under the laws of Bermuda and a subsidiary of MFS, whose principal
business address is Cedar House, 41 Cedar Avenue, Hamilton HM12 Bermuda, serves
as investment adviser to and distributor for MFS American Funds (which has six
portfolios: MFS American Funds-U.S. Equity Fund, MFS American Funds-U.S.
Emerging Growth Fund, MFS American Funds-U.S. High Yield Bond Fund, MFS American
Funds - U.S. Dollar Reserve Fund, MFS American Funds-Charter Income Fund and MFS
American Funds-U.S. Research Fund) (the "MIL Funds"). The MIL Funds are
organized in Luxembourg and qualify as an undertaking for collective investments
in transferable securities (UCITS). The principal business address of the MIL
Funds is 47, Boulevard Royal, L-2449 Luxembourg.
<PAGE> 204
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, MFS
Meridian U.S. High Yield Fund and MFS Emerging Markets Debt Fund (collectively
the "MFS Meridian Funds"). Each of the MFS Meridian Funds is organized as an
exempt company under the laws of the Cayman Islands. The principal business
address of each of the MFS Meridian Funds is P.O. Box 309, Grand Cayman, Cayman
Islands, British West Indies.
MFS International (U.K.) Ltd. ("MIL-UK"), a private limited company
registered with the Registrar of Companies for England and Wales whose current
address is 4 John Carpenter Street, London, England ED4Y 0NH, is involved
primarily in marketing and investment research activities with respect to
private clients and the MIL Funds and the MFS Meridian Funds.
MFS Fund Distributors, Inc. ("MFD"), a wholly owned subsidiary of
MFS, serves as distributor for the MFS Funds, MVI, UST and MFSIT.
Clarendon Insurance Agency, Inc. ("CIAI"), a wholly owned
subsidiary of MFS, serves as distributor for certain life insurance and
annuity contracts issued by Sun Life Assurance Company of Canada (U.S.).
MFS Service Center, Inc. ("MFSC"), a wholly owned subsidiary of
MFS, serves as shareholder servicing agent to the MFS Funds, the MFS
Closed-End Funds, MFSIT, MVI and UST.
MFS Institutional Advisors, Inc. ("MFSI"), a wholly owned
subsidiary of MFS, provides investment advice to substantial private clients.
MFS Retirement Services, Inc. ("RSI"), a wholly owned subsidiary
of MFS, markets MFS products to retirement plans and provides administrative
and record keeping services for retirement plans.
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., Patricia A. Zlotin, John W. Ballen, Thomas J. Cashman, Jr., Joseph W.
Dello Russo and Kevin R. Parke are Executive Vice Presidents, Stephen E.
Cavan is a Senior Vice President, General Counsel and an Assistant Secretary,
Robert T. Burns is a Senior Vice President, Associate General Counsel and an
Assistant Secretary of MFS, and Thomas B. Hastings is a Vice President and
Treasurer of MFS.
MASSACHUSETTS INVESTORS TRUST
MASSACHUSETTS INVESTORS GROWTH STOCK FUND
MFS GROWTH OPPORTUNITIES FUND
MFS GOVERNMENT SECURITIES FUND
MFS SERIES TRUST I
MFS SERIES TRUST V
MFS SERIES TRUST VI
<PAGE> 205
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, Ellen M.
Moynihan and Mark E. Bradley, Vice Presidents of MFS, are the Assistant
Treasurers, James R. Bordewick, Jr., Senior Vice President and Associate
General Counsel of MFS, is the Assistant Secretary.
MFS SERIES TRUST II
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, Ellen M.
Moynihan and Mark E. Bradley are the Assistant Treasurers, and James R.
Bordewick, Jr., is the Assistant Secretary.
MFS GOVERNMENT MARKETS INCOME TRUST
MFS INTERMEDIATE INCOME TRUST
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, Ellen M.
Moynihan and Mark E. Bradley are the Assistant Treasurers, 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, and Bernard Scozzafava, Vice President of MFS, are Vice
Presidents, Sheila Burns-Magnan, Assistant Vice President of MFS, and Daniel
E. McManus, Vice President of MFS, are Assistant Vice Presidents, Stephen E.
Cavan is the Secretary, W. Thomas London is the Treasurer, James O. Yost,
Ellen M. Moynihan and Mark E. Bradley are the Assistant Treasurers, and James
R. Bordewick, Jr., is the Assistant Secretary.
<PAGE> 206
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, Ellen M. Moynihan and Mark E. Bradley are the Assistant Treasurers
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, Ellen M. Moynihan and Mark E. Bradley are the Assistant Treasurers
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, Ellen M.
Moynihan and Mark E. Bradley are the Assistant Treasurers and James R.
Bordewick, Jr., is the Assistant Secretary.
MFS MUNICIPAL SERIES TRUST
A. Keith Brodkin is the Chairman and President, Cynthia M. Brown
and Robert A. Dennis are Vice Presidents, David B. Smith, Geoffrey L.
Schechter and David R. King, Vice Presidents of MFS, are Vice Presidents,
Daniel E. McManus, Vice President of MFS, is an Assistant Vice President,
Stephen E. Cavan is the Secretary, W. Thomas London is the Treasurer, James
O. Yost, Ellen M. Moynihan and Mark E. Bradley are the Assistant Treasurers
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, Ellen M.
Moynihan and Mark E. Bradley are the Assistant Treasurers and James R.
Bordewick, Jr., is the Assistant Secretary.
MFS MUNICIPAL INCOME TRUST
A. Keith Brodkin is the Chairman and President, Cynthia M. Brown
and Robert J. Manning are Vice Presidents, Stephen E. Cavan is the Secretary,
W. Thomas London is the Treasurer, James O. Yost, Ellen M. Moynihan and Mark
E. Bradley are the Assistant Treasurers and James R. Bordewick, Jr., is the
Assistant Secretary.
<PAGE> 207
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, Ellen M. Moynihan and Mark
E. Bradley are the Assistant Treasurers and James R. Bordewick, Jr., is the
Assistant Secretary.
MFS SPECIAL VALUE TRUST
A. Keith Brodkin is the Chairman and President, Jeffrey L. Shames
and Robert J. Manning are Vice Presidents, Stephen E. Cavan is the Secretary,
W. Thomas London is the Treasurer, James O. Yost, Ellen M. Moynihan and Mark
E. Bradley are the Assistant Treasurers and James R. Bordewick, Jr., is the
Assistant Secretary.
MFS/SUN LIFE SERIES TRUST
John D. McNeil, Chairman and Director of Sun Life Assurance
Company of Canada, is the Chairman, Stephen E. Cavan is the Secretary, W.
Thomas London is the Treasurer, James O. Yost, Ellen M. Moynihan and Mark E.
Bradley are the Assistant Treasurers and James R. Bordewick, Jr., is the
Assistant Secretary.
MONEY MARKET VARIABLE ACCOUNT
HIGH YIELD VARIABLE ACCOUNT
CAPITAL APPRECIATION VARIABLE ACCOUNT
GOVERNMENT SECURITIES VARIABLE ACCOUNT
TOTAL RETURN VARIABLE ACCOUNT
WORLD GOVERNMENTS VARIABLE ACCOUNT
MANAGED SECTORS VARIABLE ACCOUNT
John D. McNeil is the Chairman, Stephen E. Cavan is the
Secretary, and James R. Bordewick, Jr., is the Assistant Secretary.
MIL
A. Keith Brodkin is a Director and the Chairman, Arnold D. Scott
and Jeffrey L. Shames are Directors, Thomas J. Cashman, Jr., an Executive
Vice President of MFS, is a Senior Vice President, Stephen E. Cavan is a
Director, Senior Vice President and the Clerk, James R. Bordewick, Jr. is a
Director, Vice President and an Assistant Clerk, Robert T. Burns is an
Assistant Clerk, Joseph W. Dello Russo, Executive Vice President and Chief
Financial Officer of MFS, is the Treasurer and Thomas B. Hastings is the
Assistant Treasurer.
MIL-UK
A. Keith Brodkin is a Director and the Chairman, Arnold D. Scott,
Jeffrey L. Shames, and James R. Bordewick, Jr., are Directors, Stephen E.
Cavan is a Director and the Secretary, James E. Russell is the Treasurer, and
Robert T. Burns is the Assistant Secretary.
MIL FUNDS
<PAGE> 208
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, Ellen M. Moynihan and Mark E. Bradley are the
Assistant Treasurers and James R. Bordewick, Jr., is the Assistant Secretary.
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 and James O. Yost, Ellen M. Moynihan and Mark E.
Bradley are the Assistant Treasurers.
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.
MFSC
A. Keith Brodkin is the Chairman and a Director, Arnold D. Scott
and Jeffrey L. Shames are Directors, Joseph A. Recomendes, a Senior Vice
President of MFS, is Vice Chairman and a Director, Janet A. Clifford is the
Executive Vice President, Joseph W. Dello Russo is the Treasurer, Thomas B.
Hastings is the Assistant Treasurer, Stephen E. Cavan is the Secretary, and
Robert T. Burns is the Assistant Secretary.
MFSI
A. Keith Brodkin is the Chairman and a Director, Jeffrey L.
Shames, and Arnold D. Scott are Directors, Thomas J. Cashman, Jr., is the
President and a Director, Leslie J. Nanberg is a Senior Vice President, a
Managing Director and a Director, George F. Bennett, Carol A. Corley, John A.
Gee, Brianne Grady and Kevin R. Parke (who is an Executive Vice President of
MFS) 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.
<PAGE> 209
RSI
William W. Scott, Jr. and Bruce C. Avery are Directors, Arnold D.
Scott is the Chairman and a Director, Joseph W. Dello Russo is the Treasurer,
Thomas B. Hastings is the Assistant Treasurer, Stephen E. Cavan is the
Secretary, Robert T. Burns is the Assistant Secretary and Sharon A. Brovelli
and Martin E. Beaulieu are Senior Vice Presidents.
In addition, the following persons, Directors or officers of MFS,
have the affiliations indicated:
A. Keith Brodkin Director, Sun Life Assurance Company
of Canada (U.S.), One Sun Life
Executive Park, Wellesley Hills,
Massachusetts
Director, Sun Life Insurance and
Annuity Company of New York, 67 Broad
Street, New York, New York
Donald A. Stewart President and a Director, Sun Life
Assurance Company of Canada, Sun Life
Centre, 150 King Street West,
Toronto, Ontario, Canada (Mr. Stewart
is also an officer and/or Director of
various subsidiaries and affiliates
of Sun Life)
John D. McNeil Chairman, Sun Life Assurance Company
of Canada, Sun Life Centre, 150 King
Street West, Toronto, Ontario, Canada
(Mr. McNeil is also an officer and/or
Director of various subsidiaries and
affiliates of Sun Life)
Joseph W. Dello Russo Director of Mutual Fund Operations,
The Boston Company, Exchange Place,
Boston, Massachusetts (until August,
1994)
ITEM 29. DISTRIBUTORS
(a) Reference is hereby made to Item 28 above.
(b) Reference is hereby made to Item 28 above; the principal
business address of each of these persons is 500 Boylston Street, Boston,
Massachusetts 02116.
(c) Not applicable.
ITEM 30. LOCATION OF ACCOUNTS AND RECORDS
The accounts and records of the Registrant are located, in whole
or in part, at the
<PAGE> 210
office of the Registrant and the following locations:
NAME ADDRESS
Massachusetts Financial Services 500 Boylston Street
Company (investment adviser) Boston, MA 02116
MFS Fund Distributors, Inc. 500 Boylston Street
(principal underwriter) Boston, MA 02116
State Street Bank and Trust Company State Street South
(custodian) 5-West
North Quincy, MA 02171
MFS Service Center, Inc. 500 Boylston Street
(transfer agent) Boston, MA 02116
ITEM 31. MANAGEMENT SERVICES
Not Applicable.
ITEM 32. Undertakings
(a) Not Applicable.
(b) Not Applicable.
(c) Registrant undertakes to furnish each person to whom a
prospectus is delivered with a copy of its latest annual report to shareholders
upon request and without charge.
(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> 211
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant certifies that it meets all of
the requirements for effectiveness of this Registration Statement pursuant to
Rule 485(b) under the Securities Act of 1933 and has duly caused this
Post-Effective Amendment to the Registration Statement to be signed on its
behalf by the undersigned, thereto duly authorized, in the City of Boston and
The Commonwealth of Massachusetts on the 19th day of December, 1997.
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 19, 1997.
SIGNATURE TITLE
A. KEITH BRODKIN* Chairman, President (Principal Executive
- ------------------------------------- Officer) and Trustee
A. Keith Brodkin
W. THOMAS LONDON* Treasurer (Principal Financial Officer
- ------------------------------------- and Principal Accounting Officer)
W. Thomas London
RICHARD B. BAILEY* Trustee
- -------------------------------------
Richard B. Bailey
PETER G. HARWOOD* Trustee
- -------------------------------------
Peter G. Harwood
J. ATWOOD IVES* Trustee
- -------------------------------------
J. Atwood Ives
<PAGE> 212
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, filed electronically with
the Securities and Exchange
Commission on February 28, 1995.
<PAGE> 213
INDEX TO EXHIBITS
EXHIBIT NO. DESCRIPTION OF EXHIBIT PAGE NO.
10 Consent and Opinion of Counsel
11 Consent of Deloitte & Touche LLP
17 Financial Data Schedules for each class of
each series
<PAGE> 1
EXHIBIT 10
MASSACHUSETTS FINANCIAL SERVICES COMPANY
500 Boylston Street Boston Massachusetts 02116-3741
617 954-5182 / 800 343 2829 / FACSIMILE 617 954 6624
JAMES R. BORDEWICK, JR.
Senior Vice President and
Associate General Counsel
December 22, 1997
MFS Series Trust IV
500 Boylston Street
Boston, MA 02116
Gentlemen:
I am a Senior Vice President and Associate General Counsel of
Massachusetts Financial Services Company, which serves as investment adviser to
MFS Series Trust IV (the "Trust"), and the Assistant Secretary of the Trust. I
am admitted to practice law in The Commonwealth of Massachusetts. The Trust was
created under a written Declaration of Trust dated September 8, 1975, executed
and delivered in Boston, Massachusetts, as amended and restated December 21,
1994, as amended (the "Declaration of Trust"). The beneficial interest
thereunder is represented by transferable shares without par value. The Trustees
have the powers set forth in the Declaration of Trust, subject to the terms,
provisions and conditions therein provided.
I am of the opinion that the legal requirements have been complied with in
the creation of the Trust, and that said Declaration of Trust is legal and
valid.
Under Article III, Section 3.4 and Article VI, Section 6.4 of the
Declaration of Trust, the Trustees are empowered, in their discretion, from time
to time to issue shares of the Trust for such amount and type of consideration,
at such time or times and on such terms as the Trustees may deem best. Under
Article VI, Section 6.1, it is provided that the number of shares of beneficial
interest authorized to be issued under the Declaration of Trust is unlimited.
By vote adopted on January 18, 1995, the Trustees of the Trust determined
to sell to the public the authorized but unissued shares of beneficial interest
of the Trust for cash at a price which will net the Trust (before taxes) not
less than the net asset value thereof, as defined in the Trust's By-Laws,
determined next after the sale is made or at some later time after such sale.
The Trust has registered an indefinite number of shares of beneficial
interest under the Securities Act of 1933 (the "Shares").
<PAGE> 2
MFS Series Trust IV
December 22, 1997
Page 2
I am of the opinion that all necessary Trust action precedent to the issue
of all the authorized but unissued Shares of the Trust has been duly taken, and
that all the Shares were legally and validly issued, and when sold, will be
fully paid and non-assessable, assuming the receipt by the Trust of the cash
consideration therefor in accordance with the terms of the January 18, 1995 vote
of the Trustees described above, except as described below. I express no opinion
as to compliance with the Securities Act of 1933, the Investment Company Act of
1940, or applicable state "Blue Sky" or securities laws in connection with the
sale of the Shares.
The Trust is an entity of the type commonly known as a "Massachusetts
business trust." Under Massachusetts law, shareholders could, under certain
circumstances, be held personally liable for the obligations of the Trust.
However, the Declaration of Trust disclaims shareholder liability for acts or
obligations of the Trust and requires that notice of such disclaimer be given
in each agreement, obligation, or instrument entered into or executed by the
Trust or the Trustees. The Declaration of Trust provides for indemnification
out of the Trust property for all loss and expense of any shareholder held
personally liable for the obligations of the Trust. Thus, the risk of a
shareholder incurring financial loss on account of shareholder liability is
limited to circumstances in which the Trust itself would be unable to meet its
obligations.
I consent to your filing this opinion with the Securities and Exchange
Commission.
Very truly yours,
JAMES R. BORDEWICK, JR.
JRB/bjn
<PAGE> 1
EXHIBIT 11
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in this Post-Effective
Amendment No. 32 to Registration Statement No. 2-54607 of MFS Series Trust IV,
of our reports each dated October 3, 1997, appearing in the annual reports to
shareholders for the year ended August 31, 1997, of MFS Money Market Fund and
MFS Government Money Market Fund, MFS Municipal Bond Fund and MFS Mid Cap Growth
Fund (formerly 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 19, 1997
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<TABLE> <S> <C>
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<PER-SHARE-NAV-END> 9.44
<EXPENSE-RATIO> 1.03
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
