As filed with the Securities and Exchange Commission on December 29, 2000
1933 Act File No. 2-54607
1940 Act File No. 811-2594
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM N-1A
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
POST-EFFECTIVE AMENDMENT NO. 35
AND
REGISTRATION STATEMENT
UNDER
THE INVESTMENT COMPANY ACT OF 1940
AMENDMENT NO. 31
MFS(R) SERIES TRUST IV
(Exact Name of Registrant as Specified in Charter)
500 Boylston, Street, Boston, Massachusetts 02116
(Address of Principal Executive Offices)
Registrant's Telephone Number, Including Area Code: 617-954-5000
Stephen E. Cavan, Massachusetts Financial Services Company,
500 Boylston Street, Boston, Massachusetts 02116
(Name and Address of Agent for Service)
Approximate Date of Proposed Public Offering:
It is proposed that this filing will become effective (check appropriate box)
|X| immediately upon filing pursuant to paragraph (b)
|_| on [date] pursuant to paragraph (b)
|_| 60 days after filing pursuant to paragraph (a)(i)
|_| on [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
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MFS(R) MONEY MARKET FUND/MFS(R) GOVERNMENT MONEY MARKET FUND
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JANUARY 1, 2001
Prospectus
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This Prospectus describes two funds:
o MFS Money Market Fund seeks high current income consistent with
preservation of capital and liquidity.
o MFS Government Money Market Fund seeks high current income consistent with
preservation of capital and liquidity.
The Securities and Exchange Commission has not approved or disapproved the
funds' shares or determined whether this prospectus is accurate or complete.
Anyone who tells you otherwise is committing a crime.
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TABLE OF CONTENTS
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Page
I Risk Return Summary.............................................. 1
II Expense Summary.................................................. 9
III Certain Investment Strategies and Risks.......................... 13
IV Management of the Funds.......................................... 14
V Description of Share Class....................................... 15
VI How to Purchase, Exchange and Redeem Shares...................... 16
VII Investor Services and Programs................................... 20
VIII Other Information................................................ 22
IX Financial Highlights............................................. 24
Appendix A -- Investment Techniques and Practices................ A-1
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I RISK RETURN SUMMARY
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1. MFS Money Market Fund
o Investment Objective
The fund's investment objective is to seek as high a level of current
income as is considered consistent with the preservation of capital and
liquidity. The fund's objective may not be changed without shareholder
approval.
o Principal Investment Policies
The fund is a money market fund, meaning it tries to maintain a share
price of $1.00 while paying income to its shareholders. The fund invests
in money market instruments, which are short-term notes or other debt
securities issued by banks or other corporations, or the U.S. government
or other governmental entities. Under normal market conditions, the fund
invests at least 80% of its total assets in the following money market
instruments:
o U.S. government securities, which are bonds or other debt
obligations issued by, or whose principal and interest payments are
guaranteed by, the U.S. government or one of its agencies or
instrumentalities
o Repurchase agreements collateralized by U.S. government securities
o Certificates of deposit, bankers' acceptances and other bank
obligations, provided that the bank obligations are insured by the
Federal Deposit Insurance Corporation or the issuing bank has
capital, surplus, and undivided profits in excess of $100 million
o Commercial paper which is rated within the highest credit rating by
one or more rating agencies or which is unrated and considered by
the fund's investment adviser, Massachusetts Financial Services
Company (referred to as MFS or the adviser) to be of comparable
quality
o Short-term corporate obligations which are rated within the two
highest credit ratings by one or more rating agencies
The fund may invest up to 20% of its total assets in short-term notes or
other debt securities not specifically described in the list above that
are of comparable high quality and liquidity. These securities may include
U.S. dollar-denominated securities of foreign issuers, including foreign
companies, foreign governments and sovereign entities (such as government
agencies), foreign banks and U.S. branches of foreign banks. These
securities will be rated in the two highest credit ratings by rating
agencies or unrated and considered by MFS to be of comparable quality.
The fund may invest in municipal securities and participation interests in
municipal securities issued by banks when yield differentials make
investment in these securities attractive. Up to 20% of the fund's assets
may be invested in these securities. Municipal securities are bonds or
other debt obligations of a U.S. state or political subdivision, such as a
county, city, town,
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village, or authority. Participation interests in municipal securities are
interests in holdings of municipal obligations backed by a letter of
credit or guarantee from the issuing bank.
A money market fund must follow strict rules as to the investment quality,
maturity, diversification and other features of the securities it
purchases. Money market instruments purchased by the fund have maturities
of 13 months or less, and the average remaining maturity of the securities
cannot be greater than 90 days.
The fund may invest in various types of securities and engage in various
investment techniques and practices which are not the principal focus of
the fund and therefore are not described in this Prospectus. The type of
securities and investment techniques and practices in which the fund may
engage are identified in Appendix A to this Prospectus, and are discussed,
together with their risks, in the fund's Statement of Additional
Information.
o Principal Risks of an Investment
The principal risks of investing in the fund and the circumstances
reasonably likely to cause the value of your investment in the fund to
decline are described below. Please note that there are many circumstances
which could cause the value of your investment in the fund to decline, and
which could prevent the fund from achieving its objective, that are not
described here.
The principal risks of investing in the fund are:
o Money Market Instruments Risk: Money market instruments provide
opportunities for income with low credit risk, but may result in a
lower yield than would be available from debt obligations of a lower
quality or longer term. Although the fund seeks to preserve the
value of your investment at $1.00 per share, it is possible to lose
money by investing in the fund.
o Foreign Markets Risk: Although the fund's investments in foreign
issuers involve relatively low credit risk, an investment in the
fund may involve a greater degree of risk than an investment in a
fund that invests only in debt obligations of U.S. domestic issuers.
Investing in foreign securities involves risks relating to
political, social and economic developments abroad, as well as risks
resulting from the differences between the regulations to which U.S.
and foreign issuers and markets are subject:
o These risks may include the seizure by the government of
company assets, excessive taxation, withholding taxes on
dividends and interest, limitations on the use or transfer of
portfolio assets, and political or social instability.
o Enforcing legal rights may be difficult, costly and slow in
foreign countries, and there may be special problems enforcing
claims against foreign governments.
o Foreign companies may not be subject to accounting standards
or governmental supervision comparable to U.S. companies, and
there may be less public information about their operations.
o Foreign markets may be less liquid and more volatile than U.S.
markets.
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o Municipal Securities Risk:
o Interest Rate Risk: As with any fixed income security, the
prices of municipal securities in the fund's portfolio will
generally fall when interest rates rise. Conversely, when
interest rates fall, the prices of municipal securities in the
fund's portfolio will generally rise.
o Maturity Risk: Interest rate risk will generally affect the
price of a municipal security more if the security has a
longer maturity. Municipal securities with longer maturities
will therefore be more volatile than other fixed income
securities with shorter maturities. Conversely, municipal
securities with shorter maturities will be less volatile but
generally provide lower returns than municipal securities with
longer maturities. The average maturity of the fund's
municipal security investments will affect the volatility of
the fund's share price.
o Credit Risk: Credit risk is the risk that the issuer of a
municipal security will not be able to pay principal and
interest when due. Rating agencies assign credit ratings to
certain municipal securities to indicate their credit risk.
The price of a municipal security will generally fall if the
issuer defaults on its obligation to pay principal or
interest, the rating agencies downgrade the issuer's credit
rating or other news affects the market's perception of the
issuer's credit risk. A participation interest is also subject
to the risk of default by the issuing bank.
o General Obligations and Revenue Obligations Risk: The fund may
invest in municipal bonds that are general obligations backed
by the full faith and credit of the municipal issuer. The fund
may also invest in municipal bonds called revenue obligations
which are subject to a higher degree of credit risk than
general obligations. Revenue obligations finance specific
projects, such as building a hospital, and are not backed by
the full faith and credit of the municipal issuer. Because
revenue obligations are repaid from the revenues from a
facility, they are subject to a risk of default in payments of
principal and interest if the facility does not generate
enough income.
An investment in the fund is not a bank deposit and is not insured or
guaranteed by the Federal Deposit Insurance Corporation or any other
government agency.
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o Bar Chart and Performance Table for MFS Money Market Fund
The bar chart and performance table below are intended to indicate some of
the risks of investing in the fund by showing changes in the fund's
performance over time. The chart and table provide past performance
information. The fund's past performance does not necessarily indicate how
the fund will perform in the future. The performance information in the
chart is based upon calendar year periods, while performance information
presented under the caption "Financial Highlights" and in the fund's
shareholder reports is based upon the fund's fiscal year. Therefore, these
performance results differ.
Bar Chart
The bar chart shows changes in the annual total returns of the fund's
shares for the past ten calendar years, assuming the reinvestment of
distributions.
[The following information was represented by
a bar chart in the printed material.]
7.71% 5.59% 3.03% 2.39% 3.52% 5.25% 4.75% 4.91% 4.96% 4.67%
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999
The total return for the nine month period ended September 30, 2000 was
4.33%. During the period shown in the bar chart, the highest quarterly
return was 1.90% (for the calendar quarter ended June 30, 1990) and the
lowest quarterly return was 0.56% (for the calendar quarter ended June 30,
1993).
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o Performance Table for MFS Money Market Fund
This table shows the average annual total returns of the shares for
certain periods and assumes the reinvestment of distributions.
Average Annual Total Returns as of December 31, 1999
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1 Year 5 Year 10 Year
Shares 4.67% 4.91% 4.67%
If you would like the fund's current yield, contact the MFS Service Center
at the toll free number set forth on the back cover page.
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I RISK RETURN SUMMARY
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2. MFS Government Money Market Fund
o Investment Objective
The fund's investment objective is to seek as high a level of current
income as is considered consistent with the preservation of capital and
liquidity. The fund's objective may not be changed without shareholder
approval.
o Principal Investment Policies
The fund is a money market fund, meaning it tries to maintain a share
price of $1.00 while paying income to its shareholders. The money market
instruments in which the fund invests include:
o U.S. government securities, which are bonds or other debt
obligations issued by, or whose principal and interest payments are
guaranteed by, the U.S. government or one of its agencies or
instrumentalities
o Repurchase agreements collateralized by U.S. government securities
A money market fund must follow strict rules as to the investment quality,
maturity, diversification and other features of the securities it
purchases. Money market instruments purchased by the fund have maturities
of 13 months or less, and the average remaining maturity of the securities
cannot be greater than 90 days.
The fund may invest in various types of securities and engage in various
investment techniques and practices which are not the principal focus of
the fund and therefore are not described in this Prospectus. The types of
securities and investment techniques and practices in which the fund may
engage are identified in Appendix A to this Prospectus, and are discussed,
together with their risks, in the fund's Statement of Additional
Information (referred to as the SAI), which you may obtain by contacting
MFS Service Center, Inc. (see back cover for address and phone number).
o Principal Risks of an Investment
The principal risks of investing in the fund and the circumstances
reasonably likely to cause the value of your investment in the fund to
decline are described below. Please note that there are many circumstances
which could cause the value of your investment in the fund to decline, and
which could prevent the fund from achieving its objective, that are not
described here.
The principal risks of investing in the fund are:
o Money Market Instruments Risk: Money market instruments provide
opportunities for income with low credit risk, but may result in a
lower yield than would be available from debt obligations of a lower
quality or longer term.
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Although the fund seeks to preserve the value of your investment at $1.00
per share, it is possible to lose money by investing in the fund.
An investment in the fund is not a bank deposit and is not insured or
guaranteed by the Federal Deposit Insurance Corporation or any other
government agency.
o Bar Chart and Performance Table for MFS Government Money Market Fund
The bar chart and performance table below are intended to indicate some of
the risks of investing in the fund by showing changes in the fund's
performance over time. The chart and table provide past performance
information. The fund's past performance does not necessarily indicate how
the fund will perform in the future. The performance information in the
chart is based upon calendar year periods, while performance information
presented under the caption "Financial Highlights" and in the fund's
shareholder reports is based upon the fund's fiscal year. Therefore, these
performance results differ.
Bar Chart
The bar chart shows changes in the annual total returns of the fund's
shares for the past ten calendar years, assuming the reinvestment of
distributions.
[The following information was represented by
a bar chart in the printed material.]
7.37% 5.28% 2.95% 2.18% 3.26% 5.18% 4.63% 4.64% 4.82% 4.39%
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999
The total return for the nine month period ended September 30, 2000 was
4.04%. During the period shown in the bar chart, the highest quarterly
return was 1.83% (for the calendar quarter ended March 31, 1990) and the
lowest quarterly return was 0.53% (for the calendar quarters ended
September 30, 1993 and December 31, 1993).
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Performance Table for MFS Government Money Market Fund
This table shows the average annual total returns of the shares for
certain periods and assumes the reinvestment of distributions.
Average Annual Total Returns as of December 31, 1999
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1 Year 5 Year 10 Year
Shares 4.39% 4.73% 4.46%
If you would like the fund's current yield, contact the MFS Service Center
at the toll free number set forth on the back cover page.
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II EXPENSE SUMMARY
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1. MFS Money Market Fund
o Expense Table
This table describes the fees and expenses that you may pay when you buy,
redeem and hold shares of the fund.
<TABLE>
<CAPTION>
Shareholder Fees (fees paid directly from your investment)
----------------------------------------------------------------------------------
<S> <C>
Maximum Sales Charge (Load) Imposed on
Purchases (as a percentage of offering price) ........................ 0.00%
Maximum Deferred Sales Charge (Load) (as a percentage of original
purchase price or redemption proceeds, whichever is less) ............ 0.00%
<CAPTION>
Annual Fund Operating Expenses (expenses that are deducted from fund assets)
----------------------------------------------------------------------------------
<S> <C>
Management Fees ........................................................ 0.42%
Other Expenses ......................................................... 0.24%
Total Annual Fund Operating Expenses(1) ................................ 0.66%
</TABLE>
(1) The fund has an expense offset arrangement which reduces the fund's
custodian fee based upon the amount of cash maintained by the fund
with its custodian and dividend disbursing agent, and may enter into
other such arrangements and directed brokerage arrangements (which
would also have the effect of reducing the fund's expenses). Any
such fee reductions are not reflected in the table. Had these fee
reductions been taken into account, the "Total Annual Fund Operating
Expenses" would have been 0.63%.
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o Example of Expenses
These examples are intended to help you compare the cost of investing in
the fund with the cost of investing in other mutual funds.
The examples assume that:
o You invest $10,000 in the fund for the time periods indicated and
you redeem your shares at the end of the time periods;
o Your investment has a 5% return each year and dividends and other
distributions are reinvested; and
o The fund's operating expenses remain the same.
Although your actual costs may be higher or lower, under these assumptions
your costs would be:
Share Class Year 1 Year 3 Year 5 Year 10
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Shares $ 67 $211 $368 $822
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II EXPENSE SUMMARY
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2. MFS Government Money Market Fund
o Expense Table
This table describes the fees and expenses that you may pay when you buy,
redeem and hold shares of the fund.
<TABLE>
<CAPTION>
Shareholder Fees (fees paid directly from your investment)
----------------------------------------------------------------------------------
<S> <C>
Maximum Sales Charge (Load) Imposed on
Purchases (as a percentage of offering price) ........................ 0.00%
Maximum Deferred Sales Charge (Load) (as a percentage of original
purchase price or redemption proceeds, whichever is less) ............ 0.00%
<CAPTION>
Annual Fund Operating Expenses (expenses that are deducted from fund assets)
----------------------------------------------------------------------------------
<S> <C>
Management Fees ........................................................ 0.50%
Other Expenses ......................................................... 0.36%
Total Annual Fund Operating Expenses(1) ................................ 0.86%
</TABLE>
(1) The fund has an expense offset arrangement which reduces the fund's
custodian fee based upon the amount of cash maintained by the fund
with its custodian and dividend disbursing agent, and may enter into
other such arrangements and directed brokerage arrangements (which
would also have the effect of reducing the fund's expenses). Any
such fee reductions are not reflected in the table. Had these fee
reductions been taken into account, the "Total Annual Fund Operating
Expenses" would have been 0.83%.
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o Example of Expenses
These examples are intended to help you compare the cost of investing in
the fund with the cost of investing in other mutual funds.
The examples assume that:
o You invest $10,000 in the fund for the time periods indicated and
you redeem your shares at the end of the time periods;
o Your investment has a 5% return each year and dividends and other
distributions are reinvested; and
o The fund's operating expenses remain the same.
Although your actual costs may be higher or lower, under these assumptions
your costs would be:
Share Class Year 1 Year 3 Year 5 Year 10
--------------------------------------------------------------------------
Shares $88 $274 $477 $1,061
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III CERTAIN INVESTMENT STRATEGIES AND RISKS
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o Further Information on Investment Strategies and Risks
Each fund may invest in various types of securities and engage in various
investment techniques and practices which are not the principal focus of
the fund and therefore are not described in this Prospectus. The types of
securities and investment techniques and practices in which each fund may
engage, including the principal investment techniques and practices
described above, are identified in Appendix A to this Prospectus, and are
discussed, together with their risks, in the funds' Statement of
Additional Information (referred to as the SAI), which you may obtain by
contacting MFS Service Center, Inc. (see back cover for address and phone
number).
o Temporary Defensive Policies
In addition, each fund may depart from its principal investment strategies
by temporarily investing for defensive purposes when adverse market,
economic or political conditions exist. While a fund invests defensively,
it may not be able to pursue its investment objective. A fund's defensive
investment position may not be effective in protecting its value.
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IV MANAGEMENT OF THE FUND
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o Investment Adviser
Massachusetts Financial Services Company (referred to as MFS or the
adviser) is the funds' investment adviser. 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, Massachusetts Investors Trust. Net assets under the management of
the MFS organization were approximately $137.95 billion as of November 30,
2000.
MFS provides investment management and related administrative services and
facilities to the fund, including portfolio management and trade
execution. For these services each fund pays MFS an annual management fee
computed and paid monthly at an annual rate equal to 0.50% of the first
$300 million of the average daily net assets of the fund; 0.45% of the
next $400 million of such assets; 0.40% of the next $300 million of such
assets; and 0.35% of such assets in excess of $1 billion. For each fund's
fiscal year ended August 31, 2000, MFS received management fees of 0.42%
and 0.50% of the average daily net assets of the MFS Money Market Fund and
MFS Government Money Market Fund, respectively.
o Portfolio Manager
Jean O. Alessandro, an Assistant Vice President of MFS, has been employed
in the investment management area of MFS since 1986 and has been a
portfolio manager of each fund since January 1, 1998. Terri Vittozzi has
been employed in the investment management area of MFS since 1992 and
became a portfolio manager of each fund effective October 1, 2000.
o Administrator
MFS provides each fund with certain financial, legal, compliance,
shareholder communications and other administrative services. MFS is
reimbursed by each fund for a portion of the costs it incurs in providing
these services.
o Distributor
MFS Fund Distributors, Inc. (referred to as MFD), a wholly owned
subsidiary of MFS, is the distributor of shares of the funds.
o Shareholder Servicing Agent
MFS Service Center, Inc. (referred to as MFSC), a wholly owned subsidiary
of MFS, performs transfer agency and certain other services for the funds,
for which it receives compensation from the funds.
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V DESCRIPTION OF SHARE CLASS
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Each fund offers one class of shares. Shares of each fund may be purchased
and redeemed at net asset value, normally $1.00 per share.
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VI HOW TO PURCHASE, EXCHANGE AND REDEEM SHARES
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You may purchase, exchange and redeem shares of each fund in the manner
described below. In addition, you may be eligible to participate in
certain investor services and programs to purchase, exchange and redeem
shares, which are described in the next section under the caption
"Investor Services and Programs."
o How to Purchase Shares
You may purchase shares of each fund at net asset value without incurring
a sales charge. It is anticipated that the net asset value of $1.00 per
share will remain constant. While there is no sales charge, your financial
adviser may charge you for their services in connection with purchasing
shares of either fund.
Initial Purchase. You can establish an account by having your financial
adviser process your purchase. The minimum initial investment is $1,000.
However, in the following circumstances the minimum initial investment is
only $50 per account:
o if you establish an automatic investment plan;
o if you establish an automatic exchange plan; or
o if you establish an account under either:
o a tax-deferred retirement program (other than an IRA) where
investments are made by means of group remittal statements; or
o an employer sponsored investment program.
The minimum initial investment for IRAs is $250 per account.
Adding to Your Account. There are several easy ways you can make
additional investments of at least $50 to your account:
o send a check with the returnable portion of your statement;
o ask your financial adviser to purchase shares on your behalf;
o wire additional investments through your bank (call MFSC first for
instructions); or
o authorize transfers by phone between your bank account and your MFS
account (the maximum purchase amount for this method is $100,000).
You must elect this privilege on your account application if you
wish to use it.
o How to Exchange Shares
You can exchange your shares of either fund for shares of the other fund
at net asset value by having your financial adviser process your exchange
request or by contacting MFSC directly. The minimum exchange amount is
generally $1,000 ($50 for exchanges made under the automatic exchange
plan). If you exchange your shares out of the funds into class A shares of
any other
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MFS fund, you will pay the initial sales charge if you have not already
paid this charge on these shares.
However, you will not pay the charge if:
o the shares exchanged from either fund were acquired by an exchange
from any other MFS fund;
o the shares exchanged from either fund were acquired by automatic
investment of dividends from any other MFS fund paid after June 1,
1992; or
o the shares being exchanged would have, at the time of purchase, been
eligible for purchase at net asset value had you invested directly
in the MFS fund into which the exchange is being made.
In addition, shares of the MFS Money Market fund previously acquired
through an exchange from class C or class I shares of an MFS Fund may be
exchanged for class C shares or class I shares of any of the other MFS
Funds at net asset value. Shares otherwise subject to a contingent
deferred sales charge ("CDSC") will not be charged a CDSC in an exchange.
However, when you redeem the shares acquired through the exchange, the
shares you redeem may be subject to a CDSC, depending upon when you
originally purchased the shares you exchanged. For purposes of computing
the CDSC, the length of time you have owned your shares will be measured
from the date of original purchase and will not be affected by any
exchange.
Certain qualified retirement plans may make exchanges between the MFS
funds and the MFS Fixed Fund, a bank collective investment fund, and sales
charges may also apply to these exchanges. Call MFSC for information
concerning these sales charges.
Exchanges may be subject to certain limitations and are subject to the MFS
funds' policies concerning excessive trading practices, which are policies
designed to protect the funds and their shareholders from the harmful
effect of frequent exchanges. These limitations and market timing policies
are described below under the captions "Right to Reject or Restrict
Purchase and Exchange Orders" and "Excessive Trading Practices." You
should read the prospectus of the MFS fund into which you are exchanging
and consider the differences in objectives, policies and rules before
making any exchange.
o How to Redeem Shares
You may redeem your shares either by having your financial adviser process
your redemption or by contacting MFSC directly. A fund will send out your
redemption proceeds within seven days after your request is received in
good order. "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. In
addition, you need to have your signature guaranteed and/or submit
additional documentation to redeem your shares. See "Signature
Guarantee/Additional Documentation" below, or contact MFSC for details
(see back cover page for address and phone number).
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Under unusual circumstances such as when the New York Stock Exchange is
closed, trading on the Exchange is restricted or if there is an emergency,
a fund may suspend redemptions or postpone payment. If you purchased the
shares you are redeeming by check, a fund may delay the payment of the
redemption proceeds until the check has cleared, which may take up to 15
days from the purchase date.
Redeeming Directly through MFSC.
o By telephone. You can call MFSC to have shares redeemed from your
account and the proceeds wired or mailed (depending on the amount
redeemed) directly to a pre-designated bank account. MFSC will
request personal or other information from you and will generally
record the calls. MFSC will be responsible for losses that result
from unauthorized telephone transactions if it does not follow
reasonable procedures designed to verify your identity. You must
elect this privilege on your account application if you wish to use
it.
o By mail. To redeem shares by mail, you can send a letter to MFSC
with the name of your fund, your account number, and the number of
shares or dollar amount to be sold.
Redeeming through Your Financial Adviser. You can call your financial
adviser to process a redemption on your behalf. Your financial adviser
will be responsible for furnishing all necessary documents to MFSC and may
charge you for this service.
Signature Guarantee/Additional Documentation. In order to protect against
fraud, each fund requires that your signature be guaranteed in order to
redeem your shares. Your signature may be guaranteed by an eligible bank,
broker, dealer, credit union, national securities exchange, registered
securities association, clearing agency, or savings association. MFSC may
require additional documentation for certain types of registrations and
transactions. Signature guarantees and this additional documentation shall
be accepted in accordance with policies established by MFSC, and MFSC may
make certain de minimis exceptions to these requirements.
o Other Considerations
Right to Reject or Restrict Purchase and Exchange Orders. Purchases and
exchanges should be made for investment purposes only. The MFS funds each
reserve the right to reject or restrict any specific purchase or exchange
request. Because an exchange request involves both a request to redeem
shares of one fund and to purchase shares of another fund, the MFS funds
consider the underlying redemption and purchase requests conditioned upon
the acceptance of each of these underlying requests. Therefore, in the
event that the MFS funds reject an exchange request, neither the
redemption nor the purchase side of the exchange will be processed. When a
fund determines that the level of exchanges on any day may be harmful to
its remaining shareholders, the fund may delay the payment of exchange
proceeds for up to seven days to permit cash to be raised through the
orderly liquidation of its portfolio securities to pay the redemption
proceeds. In this case, the purchase side of the exchange will be delayed
until the exchange proceeds are paid by the redeeming fund.
Excessive Trading Practices. The MFS funds do not permit market-timing or
other excessive trading practices. Excessive, short-term (market-timing)
trading practices may disrupt portfolio
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management strategies and harm fund performance. As noted above, the MFS
funds reserve the right to reject or restrict any purchase order
(including exchanges) from any investor. To minimize harm to the MFS funds
and their shareholders, the MFS funds will exercise these rights if an
investor has a history of excessive trading or if an investor's trading,
in the judgment of the MFS funds, has been or may be disruptive to a fund.
In making this judgment, the MFS funds may consider trading done in
multiple accounts under common ownership or control.
In-kind Distributions. The MFS funds have reserved the right to pay
redemption proceeds by a distribution in-kind of portfolio securities
(rather than cash). In the event that a fund makes an in-kind
distribution, you could incur the brokerage and transaction charges when
converting the securities to cash. Neither fund expects to make in-kind
distributions, and if it does, the fund will pay, during any 90-day
period, your redemption proceeds in cash up to either $250,000 or 1% of
the fund's net assets, whichever is less.
Involuntary Redemptions/Small Accounts. Because it is costly to maintain
small accounts, the MFS funds have generally reserved the right to
automatically redeem shares and close your account when it contains less
than $500 due to your redemptions or exchanges. Before making this
automatic redemption, you will be notified and given 60 days to make
additional investments to avoid having your shares redeemed.
19
<PAGE>
--------------------------------------------------------------------------------
VII INVESTOR SERVICES AND PROGRAMS
--------------------------------------------------------------------------------
As a shareholder of either fund, you have available to you a number of
services and investment programs. Some of these services and programs may
not be available to you if your shares are held in the name of your
financial adviser or if your investment in a fund is made through a
retirement plan.
o Distribution Options
The following distribution options are generally available to all accounts
and you may change your distribution option as often as you desire by
notifying MFSC:
o Dividend and capital gain distributions reinvested in additional
shares (this option will be assigned if no other option is
specified);
o Dividend distributions in cash; capital gain distributions
reinvested in additional shares; or
o Dividend and capital gain distributions in cash.
Reinvestments (net of any tax withholding) will be made in additional full
and fractional shares at the net asset value as of the close of business
on the record date. Distributions in amounts less than $10 will
automatically be reinvested in additional shares of a fund. If you have
elected to receive distributions in cash, and the postal or other delivery
service is unable to deliver checks to your address of record, or you do
not respond to mailings from MFSC with regard to uncashed distribution
checks, your distribution option will automatically be converted to having
all distributions reinvested in additional shares. Your request to change
a distribution option must be received by MFSC by the distribution record
date for a distribution in order to be effective for that distribution. No
interest will accrue on amounts represented by uncashed distribution or
redemption checks.
o Purchase and Redemption Programs
For your convenience, the following purchase and redemption programs are
made available to you by the MFS family of funds (the MFS funds) with
respect to class A, B and C shares, without extra charge:
Automatic Investment Plan. You can make cash investments of $50 or more
through your checking account or savings account on any day of the month.
If you do not specify a date, the investment will automatically occur on
the first business day of the month.
Automatic Exchange Plan. If you have an account balance of at least $5,000
in any MFS fund, you may participate in the automatic exchange plan, a
dollar-cost averaging program. This plan permits you to make automatic
monthly or quarterly exchanges from your account in an MFS fund for shares
of the same class of shares of other MFS funds. You may make exchanges of
at least $50 to up to six different funds under this plan. Exchanges will
generally be made at net asset value without any sales charges. If you
exchange shares out of the MFS Money Market Fund or MFS Government Money
Market Fund, into class A shares of any other MFS
20
<PAGE>
fund, you will pay the initial sales charge if you have not already paid
this charge on these shares.
Reinvest Without a Sales Charge. You can reinvest dividend and capital
gain distributions into your account without a sales charge to add to your
investment easily and automatically.
Distribution Investment Program. You may purchase shares of any MFS fund
without paying an initial sales charge or a CDSC upon redemption by
automatically reinvesting a minimum of $50 of dividend and capital gain
distributions from the same class of another MFS fund.
Systematic Withdrawal Plan. You may elect to automatically receive (or
designate someone else to receive) periodic payments of at least $100.
Each payment under this systematic withdrawal is funded through the
redemption of your fund shares.
Free Checkwriting. You may redeem your shares of certain funds by writing
checks against your account. Checks must be for at least $500 and
investments made by check must have been in your account for at least 15
days before you can write checks against them. There is no charge for this
service. To authorize your account for checkwriting, contact MFSC (see
back cover page for address and phone number).
Shares in your account equal in value to the amount of the check plus the
applicable CDSC (if any) and any income tax required to be withheld (if
any) are redeemed to cover the amount of the check. If your account value
is not great enough to cover these amounts, your check will be dishonored.
21
<PAGE>
--------------------------------------------------------------------------------
VIII OTHER INFORMATION
--------------------------------------------------------------------------------
o Pricing of Fund Shares
The price of each fund's shares is based on its net asset value. The net
asset value of each fund's shares is determined at the close of regular
trading each day that the New York Stock Exchange is open for trading
(generally, 4:00 p.m., Eastern time) (referred to as the valuation time).
The New York Stock Exchange is closed on most national holidays and Good
Friday. To determine net asset value, the funds value their securities at
amortized cost or at fair value as determined by the adviser under the
direction of the Board of Trustees that oversees the fund if the Trustees
determine that amortized cost does not constitute fair value.
Fair value pricing may be used by a fund when current market values are
unavailable or when an event occurs after the close of the market on which
the fund's portfolio securities are principally traded that is likely to
have changed the value of the securities. The use of fair value pricing by
a fund may cause the net asset value of its shares to differ significantly
from the net asset value that would be calculated using current market
values.
You will receive the net asset value next calculated, after any required
tax withholding, if your order is complete (has all required information)
and MFSC receives your order by:
o the valuation time, if placed directly by you (not through a
financial adviser such as a broker or bank) to MFSC; or
o MFSC's close of business, if placed through a financial adviser, so
long as the financial adviser (or its authorized designee) received
your order by the valuation time.
o Distributions
Each fund intends to declare daily as dividends substantially all of its
net income (excluding any net capital gains) and to pay these dividends to
shareholders at least monthly. Because the net income of each fund's
shares is declared as a dividend each day that the net income of a share
is determined, the net asset value of a fund's shares remains at $1.00 per
share immediately after such determination and dividend declaration. Any
increase in the value of your investment in the funds, representing the
reinvestment of dividend income, is reflected by an increase in the number
of shares of a fund in your account. Any realized net capital gains are
distributed at least annually.
o Tax Considerations
The following discussion is very general. You are urged to consult your
tax adviser regarding the effect that an investment in a fund may have on
your particular tax situation.
22
<PAGE>
Taxability of Distributions. As long as a fund qualifies for treatment as
a regulated investment company (which each fund has in the past and
intends to do in the future), it pays no federal income tax on the
earnings it distributes to shareholders.
You will normally have to pay federal income taxes, and any state or local
taxes, on the distributions you receive from a fund, whether you take the
distributions in cash or reinvest them in additional shares. Distributions
designated as capital gain dividends are taxable as long-term capital
gains. Other distributions (including distributions derived from interest
or municipal securities) are generally taxable as ordinary income.
Distributions derived from interest on U.S. government securities (but not
distributions of gain from the sale of such securities) may be exempt from
state and local taxes. Some dividends paid in January may be taxable as if
they had been paid the previous December.
The Form 1099 that is mailed to you every January details your
distributions and how they are treated for federal tax purposes.
If you are neither a citizen nor a resident of the U.S., each fund will in
which you invest withhold U.S. federal income tax at the rate of 30% on
taxable dividends and other payments that are subject to such withholding.
You may be able to arrange for a lower withholding rate under an
applicable tax treaty if you supply the appropriate documentation required
by the fund. Each fund is also required in certain circumstances to apply
backup withholding at the rate of 31% on taxable dividends paid to any
shareholder (including a shareholder who is neither a citizen nor a
resident of the U.S.) who does not furnish to the fund certain information
and certifications or who is otherwise subject to backup withholding.
Backup withholding will not, however, be applied to payments that have
been subject to 30% withholding. Prospective investors in a should read
that fund's Account Application for additional information regarding
backup withholding of federal income tax.
o Unique Nature of Fund
MFS may serve as the investment adviser to other funds which have
investment goals and principal investment policies and risks similar to
those of each fund, and which may be managed by a fund's portfolio
manager(s). While a fund may have many similarities to these other funds,
its investment performance will differ from their investment performance.
This is due to a number of differences between the funds, including
differences in sales charges, expense ratios and cash flows.
o Provision of Annual and Semiannual Reports and Prospectuses
Each fund produces financial reports every six months and updates its
prospectus annually. To avoid sending duplicate copies of materials to
households, only one copy of a fund's annual and semiannual report and
prospectus will be mailed to shareholders having the same residential
address on the fund's records. However, any shareholder may contact MFSC
(see back cover for address and phone number) to request that copies of
these reports and prospectuses be sent personally to that shareholder.
23
<PAGE>
--------------------------------------------------------------------------------
IX FINANCIAL HIGHLIGHTS
--------------------------------------------------------------------------------
The financial highlights table is intended to help you understand each
fund's financial performance for the past 5 years. Certain information
reflects financial results for a single fund share. The total returns in
the table represent the rate by which an investor would have earned (or
lost) on an investment in a fund (assuming reinvestment of all
distributions). This information has been audited by the funds'
independent auditors, whose report, together with a fund's financial
statements, are included in each fund's Annual Report to shareholders.
Each fund's Annual Report is available upon request by contacting MFSC
(see back cover for address and telephone number). These financial
statements are incorporated by reference into the SAI. The funds'
independent auditors are Deloitte & Touche LLP.
Class A Shares
--------------------------------------------------------------------------
MFS Money Market Fund
--------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended August 31,
---------------------
2000 1999 1998 1997 1996
--------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per share data (for a share outstanding
throughout each period):
Net asset value -- beginning of period ......... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
------ ------ ------ ------ ------
Income from investment operations --
Net investment income ........................ $ 0.05 $ 0.04 $ 0.05 $ 0.05 $ 0.05
Less distributions declared to shareholders
from net investment income ................... $(0.05) $(0.04) $(0.05) $(0.05) $(0.05)
------ ------ ------ ------ ------
Net asset value -- end of period ............... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
====== ====== ====== ====== ======
Total return ................................... 5.58% 4.54% 5.03% 4.61% 4.86%
Ratios (to average net assets)/
Supplemental data:
Expenses## ................................... 0.66% 0.69% 0.74% 0.80% 0.79%
Net investment income ........................ 5.38% 4.38% 4.88% 4.71% 4.78%
Net assets at end of period
(000,000 Omitted) ............................ $ 913 $1,080 $1,071 $ 634 $ 644
</TABLE>
## Ratios do not reflect expense reductions from certain expense offset
arrangements.
24
<PAGE>
MFS Government Money Market Fund
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended August 31,
---------------------
2000 1999 1998 1997 1996
--------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per share data (for a share outstanding
throughout each period):
Net asset value -- beginning of period ..... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
-------- -------- -------- -------- --------
Income from investment operations --
Net investment income .................... $ 0.05 $ 0.04 $ 0.05 $ 0.05 $ 0.05
Less distributions declared to
shareholders
From net investment income ............. $ (0.05) $ (0.04) $ (0.05) $ (0.05) $ (0.05)
-------- -------- -------- -------- --------
Net asset value -- end of period ........... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
======== ======== ======== ======== ========
Total return ............................... 5.18% 4.35% 4.85% 4.81% 4.73%
Ratios (to average net assets)/
Supplemental data:
Expenses## ............................... 0.86% 0.78% 0.88% 0.85% 0.89%
Net investment income .................... 5.05% 4.26% 4.70% 4.02% 4.64%
Net assets at end of period
(000 Omitted) ............................ $ 44,038 $ 57,074 $ 44,843 $ 38,387 $ 42,499
</TABLE>
## Ratios do not reflect expense reductions from certain expense offset
arrangements.
25
<PAGE>
--------------------------------------------------------------------------------
APPENDIX A
--------------------------------------------------------------------------------
o Investment Techniques and Practices
In pursuing its investment objective, the fund may engage in the following
principal and non-principal investment techniques and practices.
Investment techniques and practices which are the principal focus of the
fund are also described, together with these risks, in the Risk Return
Summary of the Prospectus. Both principal and non-principal investment
techniques are described, together with their risks, in the SAI.
Investment Techniques/Practices
--------------------------------------------------------------------------
Symbols + permitted -- not permitted
--------------------------------------------------------------------------
MFS Money Market Fund
Debt Securities
Asset-Backed Securities
Collateralized Mortgage Obligations and Multiclass
Pass-Through Securities --
Corporate Asset-Backed Securities +
Mortgage Pass-Through Securities --
Stripped Mortgage-Backed Securities --
Corporate Securities +
Loans and Other Direct Indebtedness --
Lower Rated Bonds --
Municipal Bonds +
Speculative Bonds --
U.S. Government Securities +
Variable and Floating Rate Obligations +
Zero Coupon Bonds, Deferred Interest Bonds and PIK Bonds +
Equity Securities --
Foreign Securities Exposure
Brady Bonds --
Depositary Receipts --
Dollar-Denominated Foreign Debt Securities +
Emerging Markets --
Foreign Securities --
Forward Contracts --
Futures Contracts --
Indexed Securities --
Inverse Floating Rate Obligations --
A-1
<PAGE>
Investment Techniques/Practices (continued)
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Symbols + permitted -- not permitted
--------------------------------------------------------------------------
MFS Money Market Fund
Investment in Other Investment Companies
Open-End Funds --*
Closed-End Funds +
Lending of Portfolio Securities --*
Leveraging Transactions
Bank Borrowings --*
Mortgage "Dollar-Roll" Transactions +**
Reverse Repurchase Agreements --*
Options
Options on Foreign Currencies --
Options on Futures Contracts --
Options on Securities --
Options on Stock Indices --
Reset Options --
"Yield Curve" Options --
Repurchase Agreements +
Restricted Securities --*
Short Sales --*
Short Sales Against the Box --*
Short Term Instruments +
Swaps and Related Derivative Instruments --
Temporary Borrowings +
Temporary Defensive Positions +
Warrants --
"When-issued" Securities --
* May only be changed with shareholder approval
** The fund will enter into "covered" mortgage dollar-roll
transactions, meaning that the fund segregates liquid securities
equal in value to the securities it will repurchase and does not use
these transactions as a form of leverage.
A-2
<PAGE>
o Investment Techniques and Practices
In pursuing its investment objective, the fund may engage in the following
principal and non-principal investment techniques and practices.
Investment techniques and practices which are the principal focus of the
fund are also described, together with these risks, in the Risk Return
Summary of the Prospectus. Both principal and non-principal investment
techniques are described, together with their risks, in the SAI.
Investment Techniques/Practices (continued)
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Symbols + permitted -- not permitted
--------------------------------------------------------------------------
MFS Government Money Market Fund
Debt Securities
Asset-Backed Securities
Collateralized Mortgage Obligations and Multiclass
Pass-Through Securities --
Corporate Asset-Backed Securities --
Mortgage Pass-Through Securities --
Stripped Mortgage-Backed Securities --
Corporate Securities --
Loans and Other Direct Indebtedness --
Lower Rated Bonds --
Municipal Bonds --
Speculative Bonds --
U.S. Government Securities +
Variable and Floating Rate Obligations +
Zero Coupon Bonds, Deferred Interest Bonds and PIK Bonds +
Equity Securities --
Foreign Securities Exposure
Brady Bonds --
Depositary Receipts --
Dollar-Denominated Foreign Debt Securities --
Emerging Markets --
Foreign Securities --
Forward Contracts --
Futures Contracts --
Indexed Securities/Structured Products --
Inverse Floating Rate Obligations --
A-3
<PAGE>
Investment Techniques/Practices (continued)
--------------------------------------------------------------------------
Symbols + permitted -- not permitted
--------------------------------------------------------------------------
MFS Government Money Market Fund
Investment in Other Investment Companies
Open-End Funds --*
Closed-End Funds +
Lending of Portfolio Securities --
Leveraging Transactions
Bank Borrowings --*
Mortgage "Dollar-Roll" Transactions +**
Reverse Repurchase Agreements --*
Options
Options on Foreign Currencies --
Options on Futures Contracts --
Options on Securities --
Options on Securities Indices --
Reset Options --
"Yield Curve" Options --
Repurchase Agreements +
Restricted Securities --*
Short Sales --*
Short Sales Against the Box --*
Short Term Instruments --
Swaps and Related Derivative Instruments --
Temporary Borrowings +
Temporary Defensive Positions +
Warrants --
"When-issued" Securities --
* May only be changed with shareholder approval.
** The fund will only enter into "covered" mortgage dollar-roll
transactions, meaning that the fund segregates liquid securities
equal in value to the securities it will repurchase and does not use
these transactions as a form of leverage.
A-4
<PAGE>
MFS(R) MONEY MARKET/GOVERNMENT MONEY MARKET FUND
If you want more information about the funds, the following documents are
available free upon request:
Annual/Semiannual Reports. These reports contain information about a fund's
actual investments. Annual reports discuss the effect of recent market
conditions and a fund's investment strategy on the fund's performance during its
last fiscal year.
Statement of Additional Information (SAI). The SAI, dated January 1, 2001,
provides more detailed information about the funds and is incorporated into this
prospectus by reference.
You can get free copies of the annual/semiannual reports, the SAI and other
information about the funds, and make inquiries about the fund, by contacting:
MFS Service Center, Inc.
2 Avenue de Lafayette
Boston, MA 02111-1738
Telephone: 1-800-225-2606
Internet: http://www.mfs.com
Information about the funds (including its prospectus, SAI and shareholder
reports) can be reviewed and copied at the:
Public Reference Room
Securities and Exchange Commission
Washington, D.C., 20549-0102
Information on the operation of the Public Reference Room may be obtained by
calling the Commission at 1-202-942-8090. Reports and other information about
the fund are available on the EDGAR Database on the Commission's Internet
website at http://www.sec.gov, and copies of this information may be obtained,
upon payment of a duplicating fee, by electronic request at the following e-mail
address: [email protected], or by writing the Public Reference Section at the
above address.
The fund's Investment Company Act file number is 811-2594
MCM-1 12/00 143M 10/310/810/22
<PAGE>
--------------------------------------------------------------------------------
MFS(R) MONEY MARKET/GOVERNMENT MONEY MARKET FUND
--------------------------------------------------------------------------------
JANUARY 1, 2001
Statement of Additional Information
[MFS LOGO](R)
INVESTMENT MANAGEMENT
We invented the mutual fund(R)
Each a series of MFS Series Trust IV
500 Boylston Street, Boston, MA 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, 2001. This SAI should be read in conjunction with the Prospectus.
Each Fund's financial statements are incorporated into this SAI by reference to
the Fund's most recent Annual Report to shareholders. A copy of the Annual
Report accompanies this SAI. You may obtain a copy of the Funds' Prospectus and
Annual Report without charge by contacting MFS Service Center, Inc. (see back
cover of Part II of this SAI for address and phone number).
This SAI is divided into two Parts -- Part I and Part II. Part I contains
information that is particular to the Funds, while Part II contains information
that generally applies to each of the funds in the MFS Family of Funds (the "MFS
Funds"). Each Part of the SAI has a variety of appendices which can be found at
the end of Part I and Part II, respectively.
This SAI is NOT a prospectus and is authorized for distribution to prospective
investors only if preceded or accompanied by a current prospectus.
MCM-13 12/00 1M 10/310/810/22
<PAGE>
Statement of Additional Information
PART I
Part I of this SAI contains information that is particular to the Funds.
--------------------------------------------------------------------------------
TABLE OF CONTENTS
--------------------------------------------------------------------------------
Page
I Definitions ......................................................... 1
II Management of the Funds ............................................. 1
The Funds ........................................................... 1
Trustees and Officers -- Identification and Background .............. 1
Trustee Compensation ................................................ 1
Affiliated Service Provider Compensation ............................ 1
III Sales Charges and Distribution Plan Payments ........................ 1
Sales Charges ....................................................... 1
Distribution Plan Payments .......................................... 1
IV Portfolio Transactions and Brokerage Commissions .................... 1
V Share Ownership ..................................................... 1
VI Performance Information ............................................. 1
VII Investment Techniques, Practices, Risks and Restrictions ............ 1
Investment Techniques, Practices and Risks .......................... 1
Investment Restrictions ............................................. 2
VIII Tax Considerations .................................................. 3
IX Independent Auditors and Financial Statements ....................... 3
Appendix A -- Trustees and Officers -- Identification
and Background ........................................ A-1
Appendix B -- Trustee Compensation .................................. B-1
Appendix C -- Affiliated Service Provider Compensation .............. C-1
Appendix D -- Sales Charges and Distribution Plan Payments .......... D-1
Appendix E -- Portfolio Transactions and Brokerage Commissions ...... E-1
Appendix F -- Share Ownership ....................................... F-1
Appendix G -- Performance Information ............................... G-1
<PAGE>
I DEFINITIONS
"Funds" -- MFS(R) Money Market Fund and MFS(R) Government Money Market
Fund, each a series of the Trust.
"Trust" -- MFS Series Trust IV, a Massachusetts 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" or "Distributor" -- MFS Fund Distributors, Inc., a Delaware
corporation.
"Prospectus" -- The Prospectus of the Funds, dated January 1, 2001, as
amended or supplemented from time to time.
II MANAGEMENT OF THE FUNDS
The Funds
Each Fund is a diversified series of the Trust. This means that, with
respect to 75% of a Fund's total assets, the Fund may not (1) purchase
more than 10% of the outstanding voting securities of any one issuer, or
(2) purchase securities of any issuer if as a result more than 5% of a
Fund's total assets would be invested in that issuer's securities. This
limitation does not apply to obligations of the U.S. Government or its
agencies or instrumentalities. The Trust is an open-end management
investment company.
Each Fund and its Adviser and Distributor have adopted a code of ethics as
required under the Investment Company Act of 1940 (the "1940 Act").
Subject to certain conditions and restrictions, this code permits
personnel subject to the code to invest in securities for their own
accounts, including securities that may be purchased, held or sold by the
Funds. Securities transactions by some of these persons may be subject to
prior approval of the Adviser's Compliance Department. Securities
transactions of certain personnel are subject to quarterly reporting and
review requirements. The code is on public file with, and is available
from, the SEC. See the back cover of the prospectus for information on
obtaining a copy.
Trustees and Officers -- Identification and Background
The identification and background of the Trustees and officers of the
Trust are set forth in Appendix A of this Part I.
Trustee Compensation
Compensation paid to the non-interested Trustees and to Trustees who are
not officers of the Trust, for certain specified periods, is set forth in
Appendix B of this Part I.
Affiliated Service Provider Compensation
Compensation paid by a Fund to its affiliated service providers -- to MFS,
for investment advisory and administrative services, and to MFSC, for
transfer agency services -- for certain specified periods is set forth in
Appendix C to this Part I.
III SALES CHARGES AND DISTRIBUTION PLAN PAYMENTS
Sales Charges
Sales charges, if any, paid in connection with the purchase and sale of
each Fund's shares for certain specified periods are set forth in Appendix
D to this Part I, together with the Fund's schedule of dealer
reallowances.
Distribution Plan Payments
Payments made by each Fund under its Distribution Plan, if any, for its
most recent fiscal year end are set forth in Appendix D to this Part I.
IV PORTFOLIO TRANSACTIONS AND BROKERAGE COMMISSIONS
Brokerage commissions paid by each Fund for certain specified periods, and
information concerning purchases by each Fund of securities issued by its
regular broker-dealers for its most recent fiscal year, are set forth in
Appendix E to this Part I.
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 a Fund. The Trustees (together with the Trustees of certain
other MFS funds) have directed the Adviser to allocate a total of $43,800
of commission business from certain MFS funds (including the Funds) to the
Pershing Division of Donaldson Lufkin & Jenrette as consideration for the
annual renewal of certain publications provided by Lipper Inc. (which
provides information useful to the Trustees in reviewing the relationship
between the funds and the Adviser).
V SHARE OWNERSHIP
Information concerning the ownership of each Fund's shares by Trustees and
officers of the Trust as a group, by investors who control a Fund, if any,
and by investors who own 5% or more of any class of Fund shares, if any,
is set forth in Appendix F to this Part I.
VI PERFORMANCE INFORMATION
Performance information, as quoted by the Funds in sales literature and
marketing materials, is set forth in Appendix G to this Part I.
VII INVESTMENT TECHNIQUES, PRACTICES, RISKS AND RESTRICTIONS
Investment Techniques, Practices and Risks
The investment objective and principal investment policies of each Fund
are described in the Prospectus. In pursuing its investment objective and
principal investment policies, each
Part I -- 1
<PAGE>
Fund may engage in a number of investment techniques and practices, which
involve certain risks. These investment techniques and practices, which
may be changed without shareholder approval unless indicated otherwise,
are identified in Appendix A to the Prospectus, and are more fully
described, together with their associated risks, in Part II of this SAI.
The following percentage limitations apply to the investment techniques
and practices of the MFS Money Market Fund:
Percentage Limitation
Investment Limitation (based on net assets)
Finance companies, banks, bank
holding companies and utility Up to 75%
companies ........................................... of net assets
Bank obligations where the issuing
bank has capital, surplus and
undivided profits less than or equal Up to 10%
to $100 million ..................................... of net assets
Investment Restrictions
The Funds have adopted the following restrictions which cannot be changed
without the approval of the holders of a majority of a 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 Series or class, as applicable, or
(ii) 67% or more of the outstanding shares of the Trust or the Fund or
class, as applicable, present at a meeting at which holders of more than
50% of the outstanding shares of the Trust or a series or class, as
applicable, are represented in person or by proxy). Except with respect to
the Funds' policy on borrowing and 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.
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 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 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;
(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;
Part I -- 2
<PAGE>
(10) Purchase any securities on margin, except that either Fund may
obtain such credits as may be necessary for the clearance of
purchases and sales of securities.
(11) Make short sales of securities.
(12) 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;
(13) Write, purchase or sell any put or call option.
(14) 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.
(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.
In addition, each Fund has the following nonfundamental policy which may
be changed without shareholder approval. Neither Fund will:
(1) Invest more than 25% of its total assets (taken at market value) in
any one industry.
VIII TAX CONSIDERATIONS
For a discussion of tax considerations, see Part II of this SAI.
IX INDEPENDENT AUDITORS AND FINANCIAL STATEMENTS
Deloitte & Touche LLP are each Fund's independent auditors, providing
audit services, tax services, and assistance and consultation with respect
to the preparation of filings with the Securities and Exchange Commission.
The Portfolio of Investments and the Statement of Assets and Liabilities
at August 31, 2000, the Statement of Operations for the year ended August
31, 2000, the Statement of Changes in Net Assets for the two years ended
August 31, 1999 and August 31, 2000, the Notes to Financial Statements and
the Report of the Independent Auditors, each of which is included in the
Annual Reports to Shareholders of the Funds, are incorporated by reference
into this SAI in reliance upon the report of Deloitte & Touche LLP,
independent auditors, given upon their authority as experts in accounting
and auditing. A copy of the Annual Report accompanies this SAI.
Part I -- 3
<PAGE>
--------------------------------------------------------------------------------
PART I -- APPENDIX A
--------------------------------------------------------------------------------
TRUSTEES AND OFFICERS-- IDENTIFICATION AND BACKGROUND
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
JEFFREY L. SHAMES* Chairman and President (born 6/2/55)
Massachusetts Financial Services Company, Chairman and Chief Executive Officer
J. ATWOOD IVES (born 5/1/36)
Private Investor; Eastern Enterprises (diversified services company), Chairman,
Trustee and Chief Executive Officer (until November 2000); KeySpan Corporation
(energy related services), Director
Address: Weston, Massachusetts
LAWRENCE T. PERERA (born 6/23/35)
Hemenway & Barnes (attorneys), Partner
Address: 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 mutual fund), Vice Chairman (since November 1993),
Chairman and Trustee (prior to November 1993)
Address: Cambridge, Massachusetts
CHARLES W. SCHMIDT (born 3/18/28)
Private Investor; IT Group Inc. (diversified environmental and consulting),
Director
Address: Weston, Massachusetts
ARNOLD D. SCOTT* (born 12/16/42)
Massachusetts Financial Services Company, Senior Executive Vice President and
Director
ELAINE R. SMITH (born 4/25/46)
Independent Consultant
Address: Weston, Massachusetts
DAVID B. STONE (born 9/2/27)
North American Management Corp. (investment adviser), Chairman and Director
Address: Boston Massachusetts
Officers
GEOFFREY L. KURINSKY,* Vice President (born 7/7/53)
Massachusetts Financial Services Company, Senior Vice President
STEPHEN E. CAVAN,* Clerk and Secretary (born 11/6/53)
Massachusetts Financial Services Company, Senior Vice President, General
Counsel and Secretary
JAMES R. BORDEWICK, JR.,* Assistant Clerk and Assistant Secretary (born
3/6/59)
Massachusetts Financial Services Company, Senior Vice President and Associate
General Counsel
JAMES O. YOST,* Treasurer (born 6/12/60)
Massachusetts Financial Services Company, Senior 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)
ELLEN 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)
LAURA HEALY,* Assistant Treasurer (born 3/20/64)
Massachusetts Financial Services Company, Vice President (since December 1996);
State Street Bank Fund Administration Group, Assistant Vice President (prior to
December 1996)
ROBERT R. FLAHERTY,* Assistant Treasurer (born 9/18/63)
Massachusetts Financial Services Company, Vice President (since August 2000);
UAM Fund Services; Senior Vice President (since 1996); Chase Global Fund
Services, Vice President (1995 to 1996)
----------
* "Interested persons" (as defined in the Investment Company Act of 1940, as
amended (the "1940 Act")) of the Adviser, whose address is 500 Boylston
Street, Boston, Massachusetts 02116.
Each Trustee and officer holds comparable positions with certain MFS affiliates
or with certain other funds of which MFS or a subsidiary of MFS is the
investment adviser or distributor. Messrs. Shames and Scott, Directors of MFD,
and Mr. Cavan, the Secretary of MFD, hold similar positions with certain other
MFS affiliates.
Part I -- A-1
<PAGE>
--------------------------------------------------------------------------------
PART I -- APPENDIX B
--------------------------------------------------------------------------------
MFS MONEY MARKET FUND TRUSTEE COMPENSATION
The Fund pays the compensation of non-interested Trustees and of Trustees who
are not officers of the Trust, who currently receive a fee of $3,250 per year
plus $165 per meeting and $130 per committee meeting attended, together with
such Trustee's out-of-pocket expenses. In addition, the Trust has a retirement
plan for these Trustees as described under the caption "Management of the Fund--
Trustee Retirement Plan" in Part II. The retirement age under the plan is 73.
<TABLE>
<CAPTION>
Trustee Compensation Table
----------------------------------------------------------------------------------------------------------------------------
Retirement Benefit Total Trustee
Trustee Fees Accrued as Part Estimated Credited Fees from Fund
Trustee from Fund(1) of Fund Expense(1) Years of Service(2) and Fund Complex(3)
----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Jeffrey L. Shames $ 0 $ 0 N/A $ 0
J. Atwood Ives 5,423 2,032 17 132,623
Lawrence T. Perera 5,528 2,310 26 144,098
William Poorvu 5,693 2,319 25 141,338
Charles W. Schmidt 5,463 2,235 20 137,678
Arnold D. Scott 0 0 N/A 0
Elaine R. Smith 5,953 2,205 27 144,098
David B. Stone 6,492 2,532 12 151,418
</TABLE>
----------
(1) For the fiscal year ended August 31, 2000.
(2) Based upon normal retirement age of 73 (age 74 for Mr. Stone).
(3) Information provided is provided for calendar year 1999. All Trustees
receiving compensation served as Trustees of 34 funds within the MFS fund
complex (having aggregate net assets at December 31, 1999, of
approximately $58.6 billion).
Estimated Annual Benefits Payable by Fund Upon Retirement(4)
--------------------------------------------------------------------------------
Years of Service
Average
Trustee Fees 3 5 7 10 or more
--------------------------------------------------------------------------------
$4,881 $ 732 $1,220 $1,708 $2,440
5,333 800 1,333 1,866 2,666
5,785 868 1,446 2,025 2,892
6,237 936 1,559 2,183 3,119
6,689 1,003 1,672 2,341 3,345
7,141 1,071 1,785 2,499 3,571
----------
(4) Other funds in the MFS Fund complex provide similar retirement benefits to
the Trustees.
Part I -- B-1
<PAGE>
--------------------------------------------------------------------------------
PART I -- APPENDIX B
--------------------------------------------------------------------------------
MFS GOVERNMENT MONEY MARKET FUND TRUSTEE COMPENSATION
The Fund pays the compensation of non-interested Trustees and of Trustees who
are not officers of the Trust, who currently receive a fee of $500 per year plus
$35 per meeting and $30 per committee meeting attended, together with such
Trustee's out-of-pocket expenses. In addition, the Trust has a retirement plan
for these Trustees as described under the caption "Management of the Fund--
Trustee Retirement Plan" in Part II. The retirement age under the plan is 73.
<TABLE>
<CAPTION>
Trustee Compensation Table
----------------------------------------------------------------------------------------------------------------------
Retirement Benefit Total Trustee
Trustee Fees Accrued as Part Estimated Credited Fees from Fund
Trustee from Fund(1) of Fund Expense(1) Years of Service(2) and Fund Complex(3)
----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Jeffrey L. Shames $ 0 $ 0 N/A $ 0
J. Atwood Ives 903 239 17 132,623
Lawrence T. Perera 918 266 26 144,098
William Poorvu 953 270 25 141,338
Charles W. Schmidt 903 254 19 137,678
Arnold D. Scott 0 0 N/A 0
Elaine R. Smith 1,013 265 27 144,098
David B. Stone 1,103 310 11 151,418
</TABLE>
----------
(1) For the fiscal year ended August 31, 2000.
(2) Based upon normal retirement age of 73 (age 74 for Mr. Stone).
(3) Information provided is provided for calendar year 1999. All Trustees
served as Trustees of 34 funds within the MFS fund complex (having
aggregate net assets at December 31, 1999, of approximately $58.6
billion).
Estimated Annual Benefits Payable by Fund Upon Retirement(4)
--------------------------------------------------------------------------------
Years of Service
Average
Trustee Fees 3 5 7 10 or more
--------------------------------------------------------------------------------
$ 813 $122 $203 $284 $406
893 134 223 312 446
973 146 243 341 486
1,053 158 263 369 527
1,133 170 283 397 567
1,213 182 303 425 607
----------
(4) Other funds in the MFS Fund complex provide similar retirement benefits to
the Trustees.
Part I -- B-2
<PAGE>
--------------------------------------------------------------------------------
PART I -- APPENDIX C
--------------------------------------------------------------------------------
AFFILIATED SERVICE PROVIDER COMPENSATION
--------------------------------------------------------------------------------
Each Fund paid compensation to its affiliated service providers over the
specified periods as follows:
MFS Money Market Fund
<TABLE>
<CAPTION>
Paid to MFS Amount Paid to MFS for Paid To MFSC Amount Aggregate
for Advisory Waived Administrative for Transfer Waived Amount Paid
Fiscal Year Ended Services By MFS Services Agency Services by MFSC To MFS and MFSC
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
August 31, 2000 $5,455,364 $0 $181,685 $1,276,880 $0 $6,913,929
August 31, 1999 4,563,031 0 131,831 1,084,990 0 5,779,852
August 31, 1998 3,293,238 0 98,748 822,465 0 4,214,451
</TABLE>
MFS Government Money Market Fund
<TABLE>
<CAPTION>
Paid to MFS Amount Paid to MFS for Paid To MFSC Amount Aggregate
for Advisory Waived Administrative for Transfer Waived Amount Paid
Fiscal Year Ended Services By MFS Services Agency Services by MFSC To MFS and MFSC
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
August 31, 2000 $261,537 $0 $7,190 $52,308 $0 $321,035
August 31, 1999 248,853 0 6,388 53,118 0 308,359
August 31, 1998 238,557 0 6,702 56,337 0 301,596
</TABLE>
Part I -- C-1
<PAGE>
--------------------------------------------------------------------------------
PART I -- APPENDIX D
--------------------------------------------------------------------------------
MFS MONEY MARKET FUND
SALES CHARGES AND DISTRIBUTION PLAN PAYMENTS
Sales Charges -- Not Applicable
--------------------------------------------------------------------------------
Distribution Plan Payments -- Not Applicable
--------------------------------------------------------------------------------
MFS GOVERNMENT MONEY MARKET FUND
SALES CHARGES AND DISTRIBUTION PLAN PAYMENTS
Sales Charges -- Not Applicable
--------------------------------------------------------------------------------
Distribution Plan Payments -- Not Applicable
--------------------------------------------------------------------------------
Part I -- D-1
<PAGE>
--------------------------------------------------------------------------------
PART I -- APPENDIX E
--------------------------------------------------------------------------------
MFS MONEY MARKET FUND
PORTFOLIO TRANSACTIONS AND BROKERAGE COMMISSIONS
Brokerage Commissions
--------------------------------------------------------------------------------
The following brokerage commissions were paid by the Fund during the specified
time periods:
Brokerage Commissions
Fiscal Year End Paid by Fund
--------------------------------------------------------------------------------
August 31, 2000 $0
August 31, 1999 $0
August 31, 1998 $0
Securities Issued By Regular Broker-Dealers
--------------------------------------------------------------------------------
During the fiscal year ended August 31, 2000, the Fund purchased securities
issued by the following regular broker-dealers of the Fund, which had the
following values as of August 31, 2000:
Value of Securities
Broker-Dealer as of August 31, 2000
--------------------------------------------------------------------------------
Goldman Sachs & Co. $150,000,000
MFS GOVERNMENT MONEY MARKET FUND
PORTFOLIO TRANSACTIONS AND BROKERAGE COMMISSIONS
Brokerage Commissions
--------------------------------------------------------------------------------
The following brokerage commissions were paid by the Fund during the specified
time periods:
Brokerage Commissions
Fiscal Year End Paid by Fund
--------------------------------------------------------------------------------
August 31, 2000 $0
August 31, 1999 $0
August 31, 1998 $0
Securities Issued By Regular Broker-Dealers
--------------------------------------------------------------------------------
During the fiscal year ended August 31, 2000, the Fund purchased securities
issued by the following regular broker-dealers of the Fund, which had the
following values as of August 31, 2000:
Value of Securities
Broker-Dealer as of August 31, 2000
--------------------------------------------------------------------------------
Goldman Sachs & Co $4,448,000
Part I -- E-1
<PAGE>
--------------------------------------------------------------------------------
PART I -- APPENDIX F
--------------------------------------------------------------------------------
MFS MONEY MARKET FUND
SHARE OWNERSHIP
Ownership by Trustees and Officers
As of November 30, 2000, the Trustees and officers of the Trust as a group owned
less than 1% of the Fund's shares, not including 13,744,899.49 shares
representing approximately 0.84% of the outstanding shares of the Fund owned by
an employee benefit plan of MFS of which Mr. Shames is a Trustee.
25% or Greater Ownership
The following table identifies those investors who own 25% or more of the Fund's
shares as of November 30, 2000, and are therefore presumed to control the Fund:
Jurisdiction of Organization
Name and Address of Investor (If a Company) Percentage Ownership
--------------------------------------------------------------------------------
None
5% or Greater Ownership of Share Class
The following table identifies those investors who own 5% or more of the Fund's
shares as of November 30, 2000:
Name and Address of Investor Ownership Percentage
--------------------------------------------------------------------------------
None
Part I -- F-1
<PAGE>
--------------------------------------------------------------------------------
PART I -- APPENDIX F
--------------------------------------------------------------------------------
MFS GOVERNMENT MONEY MARKET FUND
SHARE OWNERSHIP
Ownership by Trustees and Officers
As of November 30, 2000, the Trustees and officers of the Trust as a group owned
less than 1% of the Fund's shares, not including 560,051 shares representing
approximately 1.0% of the outstanding shares of the Fund owned of record by an
employee benefit plan of MFS of which Mr. Shames is a Trustee.
25% or Greater Ownership
The following table identifies those investors who own 25% or more of the Fund's
shares as of November 30, 2000, and are therefore presumed to control the Fund:
Jurisdiction of Organization
Name and Address of Investor (If a Company) Percentage Ownership
--------------------------------------------------------------------------------
None
5% or Greater Ownership of Share Class
The following table identifies those investors who own 5% or more of the Fund's
shares as of November 30, 2000:
Name and Address of Investor Ownership Percentage
--------------------------------------------------------------------------------
Judith A. Brodkin Executrix 5.97%
Estate A. Keith Brodkin
76 Farm Road
P.O. Box 599
Sherborn, MA 01770-0599
--------------------------------------------------------------------------------
TEX TIN Settling 22.59%
1290 Hercules Ave. St G202
Houston, TX 77058-2769
--------------------------------------------------------------------------------
Part I -- F-2
<PAGE>
--------------------------------------------------------------------------------
PART I -- APPENDIX G
--------------------------------------------------------------------------------
PERFORMANCE INFORMATION
--------------------------------------------------------------------------------
MFS MONEY MARKET FUND
All performance quotations are as of August 31, 2000.
<TABLE>
<CAPTION>
Average Annual Actual 30-
Total Returns Day Yield 30-Day Yield Current
---------------------------------- (Including (Without Any Distribution
1 Year 5 Year 10 Year Waivers) Waivers) Rate
-----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Shares, at net asset value 5.58% 4.96% 4.53% N/A N/A N/A
</TABLE>
PERFORMANCE INFORMATION
--------------------------------------------------------------------------------
MFS GOVERNMENT MONEY MARKET FUND
All performance quotations are as of August 31, 2000.
<TABLE>
<CAPTION>
Average Annual Actual 30-
Total Returns Day Yield 30-Day Yield Current
---------------------------------- (Including (Without Any Distribution
1 Year 5 Year 10 Year Waivers) Waivers) Rate
-----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Shares, at net asset value 5.18% 4.75% 4.32% N/A N/A N/A
</TABLE>
Part I -- G-1
<PAGE>
INVESTMENT ADVISER
MFS Investment Management(R)
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.
2 Avenue de LaFayette, Boston, MA 02111-1738
Toll free: 1 (800) 225-2606
MAILING ADDRESS:
P.O. Box 2281, Boston, MA 02107-9906
[MFS LOGO](R)
INVESTMENT MANAGEMENT
We invented the mutual fund(R)
500 Boylston Street, Boston, MA 02116
<PAGE>
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
PART II
Part II of this SAI describes policies and practices that apply to each of the
Funds in the MFS Family of Funds. References in this Part II to a "Fund" means
each Fund in the MFS Family of Funds, unless noted otherwise. References in
this Part II to a "Trust" means the Massachusetts business trust of which the
Fund is a series, or, if the Fund is not a series of a Massachusetts business
trust, references to a "Trust" shall mean the Fund.
-----------------
TABLE OF CONTENTS
-----------------
PAGE
I Management of the Fund ............................................ 1
Trustees/Officers ................................................. 1
Investment Adviser ................................................ 1
Administrator ..................................................... 2
Custodian ......................................................... 2
Shareholder Servicing Agent ....................................... 2
Distributor ....................................................... 2
Code of Ethics .................................................... 2
II Principal Share Characteristics ................................... 2
Class A Shares .................................................... 2
Class B Shares, Class C Shares and Class I Shares ................. 3
Waiver of Sales Charges ........................................... 3
Dealer Commissions and Concessions ................................ 3
General ........................................................... 3
III Distribution Plan ................................................. 3
Features Common to Each Class of Shares ........................... 3
Features Unique to Each Class of Shares ........................... 4
IV Investment Techniques, Practices and Risks ........................ 5
V Net Income and Distributions ...................................... 5
Money Market Funds ................................................ 5
Other Funds ....................................................... 6
VI Tax Considerations ................................................ 6
Taxation of the Fund .............................................. 6
Taxation of Shareholders .......................................... 6
Special Rules for Municipal Fund Distributions .................... 8
VII Portfolio Transactions and Brokerage Commissions .................. 8
VIII Determination of Net Asset Value .................................. 10
Money Market Funds ................................................ 10
Other Funds ....................................................... 10
IX Performance Information ........................................... 11
Money Market Funds ................................................ 11
Other Funds ....................................................... 11
General ........................................................... 12
MFS Firsts ........................................................ 13
X Shareholder Services .............................................. 13
Investment and Withdrawal Programs ................................ 13
Exchange Privilege ................................................ 16
Tax-Deferred Retirement Plans ..................................... 17
XI Description of Shares, Voting Rights and Liabilities .............. 17
Appendix A -- Waivers of Sales Charges ............................ A-1
Appendix B -- Dealer Commissions and Concessions .................. B-1
Appendix C -- Investment Techniques, Practices and Risks .......... C-1
Appendix D -- Description of Bond Ratings ......................... D-1
I MANAGEMENT OF THE FUND
TRUSTEES/OFFICERS
BOARD OVERSIGHT -- The Board of Trustees which oversees the Fund provides
broad supervision over the affairs of the Fund. The Adviser is responsible
for the investment management of the Fund's assets, and the officers of the
Trust are responsible for its operations.
TRUSTEE RETIREMENT PLAN -- Each Trust (except MFS Series Trust XI) has a
retirement plan for Trustees who are non-interested Trustees and Trustees
who are not officers of the Trust. Under this plan, a Trustee will retire
upon reaching a specified age (see Part I -- "Appendix B ") ("Retirement
Age") 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 his Retirement Age 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. The Fund will
accrue its allocable portion of compensation expenses under the retirement
plan each year to cover the current year's service and amortize past
service cost.
INDEMNIFICATION OF TRUSTEES AND OFFICERS -- The Declaration of Trust of the
Trust provides that the Trust will indemnify its Trustees and officers
against liabilities and expenses incurred in connection with litigation in
which they may be involved because of their offices with the Trust, unless,
as to liabilities of the Trust or its shareholders, it is determined that
they engaged in willful misfeasance, bad faith, gross negligence or
reckless disregard of the duties involved in their offices, or with respect
to any matter, unless it is adjudicated that they did not act in good faith
in the reasonable belief that their actions were in the best 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 they have not engaged in willful misfeasance, bad faith, gross
negligence or reckless disregard of their duties.
INVESTMENT ADVISER
The Trust has retained Massachusetts Financial Services Company ("MFS" or
the "Adviser") as the Fund's investment adviser. MFS and its predecessor
organizations have a history of money management dating from 1924. MFS is a
subsidiary of Sun Life of Canada (U.S.) Financial Services Holdings, Inc.,
which in turn is an indirect wholly owned subsidiary of Sun Life of Canada
(an insurance company).
MFS has retained, on behalf of certain MFS Funds, sub-investment advisers
to assist MFS in the management of the Fund's assets. A description of
these sub-advisers, the services they provide and their compensation is
provided under the caption "Management of the Fund -- Sub-Adviser" in Part
I of this SAI for Funds which use sub-advisers.
INVESTMENT ADVISORY AGREEMENT -- The Adviser manages the Fund pursuant to
an Investment Advisory Agreement (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 an annual management fee, computed and
paid monthly, as disclosed in the Prospectus under the heading "Management
of the Fund[s]."
The Adviser pays the compensation of the Trust's officers and of any
Trustee who is an officer 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 Fund's
investments and effecting its portfolio transactions.
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: advisory and administrative services;
governmental fees; interest charges; taxes; membership dues in the
Investment Company Institute allocable to the Fund; fees and expenses of
independent auditors, of legal counsel, and of any transfer agent,
registrar or dividend disbursing agent of the Fund; expenses of
repurchasing and redeeming shares and servicing shareholder accounts;
expenses of preparing, printing and mailing prospectuses, 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
Fund's custodian, for all services to the Fund, including safekeeping of
funds and securities and maintaining required books and accounts; expenses
of calculating the net asset value of shares of the Fund; and expenses of
shareholder meetings. Expenses relating to the issuance, registration and
qualification of shares of the Fund and the preparation, printing and
mailing of prospectuses are borne by the Fund except that the Distribution
Agreement with MFD requires MFD to pay for prospectuses that are to be used
for sales purposes. Expenses of the Trust which are not attributable to a
specific series are allocated between the series in a manner believed by
management of the Trust to be fair and equitable.
The Advisory Agreement has an initial two year term and continues in
effect thereafter only if such continuance is specifically approved at
least annually by the Board of Trustees or by vote of a majority of the
Fund's shares (as defined in "Investment Restrictions" in Part I of this
SAI) 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" in Part I of this SAI), or by either
party on not more than 60 days" nor less than 30 days" written notice. The
Advisory Agreement provides that if MFS ceases to serve as the Adviser to
the Fund, the Fund will change its name so as to delete the initials "MFS"
and that MFS may render services to others and may permit other fund
clients to use the initials "MFS" in their names. The Advisory Agreement
also provides that neither the Adviser nor its personnel shall be liable
for any error of judgment or mistake of law or for any loss arising out of
any investment or for any act or omission in the execution and 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. Under this Agreement, the Fund
pays MFS an administrative fee of up to 0.0175% on the first $2.0 billion;
0.0130% on the next $2.5 billion; 0.0005% on the next $2.5 billion; and
0.0% on amounts in excess of $7.0 billion, 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.
CUSTODIAN
State Street Bank and Trust Company (the "Custodian") is the custodian of
the Fund's assets. The Custodian's responsibilities include safekeeping and
controlling the Fund's cash and securities, handling the receipt and
delivery of securities, determining income and collecting interest and
dividends on the Fund's investments, maintaining books of original entry
for portfolio and fund accounting and other required books and accounts,
and calculating the daily net asset value of each class of shares of the
Fund. The Custodian does not determine the investment policies of the Fund
or decide which securities the Fund will buy or sell. The Fund may,
however, invest in securities of the Custodian and may deal with the
Custodian as principal in securities transactions. The Custodian also acts
as the dividend disbursing agent of the Fund.
SHAREHOLDER SERVICING AGENT
MFS Service Center, Inc. ("MFSC"), a wholly owned subsidiary of MFS, is the
Fund's shareholder servicing agent, pursuant to an Amended and Restated
Shareholder Servicing Agreement (the "Agency Agreement"). The Shareholder
Servicing Agent's responsibilities under the Agency Agreement include
administering and performing transfer agent functions and the keeping of
records in connection with the issuance, transfer and redemption of each
class of shares of the Fund. For these services, MFSC will receive a fee
calculated as a percentage of the average daily net assets of the Fund at
an effective annual rate of up to 0.1125%. In addition, MFSC will be
reimbursed by the Fund for certain expenses incurred by MFSC on behalf of
the Fund. The Custodian has contracted with MFSC to perform certain
dividend disbursing agent functions for the Fund.
DISTRIBUTOR
MFS Fund Distributors, Inc. ("MFD"), a wholly owned subsidiary of MFS,
serves as distributor for the continuous offering of shares of the Fund
pursuant to an Amended and Restated Distribution Agreement (the
"Distribution Agreement"). The Distribution Agreement has an initial two
year term and continues in effect thereafter only if such continuance is
specifically approved at least annually by the Board of Trustees or by vote
of a majority of the Fund's shares (as defined in "Investment Restrictions"
in Part I of this SAI) 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.
CODE OF ETHICS
The Fund and its Adviser and Distributor have adopted a code of ethics as
required under the Investment Company Act of 1940 ("the 1940 Act"). Subject
to certain conditions and restrictions, this code permits personnel subject
to the code to invest in securities for their own accounts, including
securities that may be purchased, held or sold by the Fund. Securities
transactions by some of these persons may be subject to prior approval of
the Adviser's Compliance Department. Securities transactions of certain
personnel are subject to quarterly reporting and review requirements. The
code is on public file with, and is available from, the SEC. See the back
cover of the prospectus for information on obtaining a copy.
II PRINCIPAL SHARE CHARACTERISTICS
Set forth below is a description of Class A, B, C and I shares offered by
the MFS Family of Funds. Some MFS Funds may not offer each class of shares
-- see the Prospectus of the Fund to determine which classes of shares the
Fund offers.
CLASS A SHARES
MFD acts as agent in selling Class A shares of the Fund to dealers. The
public offering price of Class A shares of the Fund is their net asset
value next computed after the sale plus a sales charge which varies based
upon the quantity purchased. The public offering price of a Class A share
of the Fund is calculated by dividing the net asset value of a Class A
share by the difference (expressed as a decimal) between 100% and the sales
charge percentage of offering price applicable to the purchase (see "How to
Purchase, Exchange and Redeem Shares" 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 and other funds (as noted under
Right of Accumulation) by any person, including members of a family unit
(e.g., husband, wife and minor children) and bona fide trustees, and also
applies to purchases made under the Right of Accumulation or a Letter of
Intent (see "Investment and Withdrawal Programs" below). A group might
qualify to obtain quantity sales charge discounts (see "Investment and
Withdrawal Programs" below). Certain purchases of Class A shares may be
subject to a 1% CDSC instead of an initial sales charge, as described in
the Fund's 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. Class B and C shares
are generally subject to a CDSC, as described in the Fund's Prospectus.
WAIVER OF SALES CHARGES
In certain circumstances, the initial sales charge imposed upon purchases
of Class A shares and the CDSC imposed upon redemptions of Class A, B and C
shares are waived. These circumstances are described in Appendix A of this
Part II. 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, because the sales effort, if any, involved in making such
sales is negligible, or in the case of certain CDSC waivers, because the
circumstances surrounding the redemption of Fund shares were not
foreseeable or voluntary.
DEALER COMMISSIONS AND CONCESSIONS
MFD pays commission and provides concessions to dealers that sell Fund
shares. These dealer commissions and concessions are described in Appendix
B of this Part II.
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.
III 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 expense ratio to the extent the Fund's fixed costs are spread over a
larger net asset base. Also, an increase in net assets may lessen the
adverse 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.
In certain circumstances, the fees described below may not be imposed,
are being waived or do not apply to certain MFS Funds. Current distribution
and service fees for each Fund are reflected under the caption "Expense
Summary" in the Prospectus.
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,
Class B 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 in addition to the service fee described above 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. 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 expense and equipment. The amount of the distribution fee
paid by the Fund with respect to each class differs under the Distribution
Plan, as does the use by MFD of such distribution fees. Such amounts and
uses are described below in the discussion of the provisions of the
Distribution Plan relating to each Class of shares. While the amount of
compensation received by MFD in the form of distribution fees during any
year may be more or less than the expenses incurred by MFD under its
distribution agreement with the Fund, the Fund is not liable to MFD for any
losses MFD may incur in performing services under its distribution
agreement with the Fund.
OTHER COMMON FEATURES -- Fees payable under the Distribution Plan are
charged to, and therefore reduce, income allocated to shares of the
Designated Class. The provisions of the Distribution Plan relating to
operating policies as well as initial approval, renewal, amendment and
termination are substantially identical as they relate to each Class of
shares covered by the Distribution Plan.
The Distribution Plan remains in effect from year to year only if its
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" in Part I of this SAI). 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" in Part I of this
SAI) 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.
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). In
addition to the initial sales charge, the dealer also generally receives
the ongoing 0.25% per annum service fee, as discussed above.
No service fees will be paid: (i) to any dealer who is the holder or
dealer or 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.
In the case of a retirement plan (or multiple plans maintained by the
same plan sponsor) which has established accounts with MFSC, on or after
April 1, 2000 and is, at that time, a party to a retirement plan
recordkeeping or administrative services agreement with MFD or one of its
affiliates pursuant to which such services are provided with respect to at
least $10 million in plan assets, MFD may retain the service fee paid by
the fund with respect to shares purchased by such plan for the first year
after purchase. Dealers will become eligible to receive the ongoing
applicable service fee with respect to such shares commencing in the 13th
month following purchase.
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 (0.25% per annum for certain Funds). As
noted above, MFD may use the distribution fee to cover distribution-
related expenses incurred by it under its distribution agreement with the
Fund, including commissions to dealers and payments to wholesalers employed
by MFD (e.g., MFD pays commissions to dealers with respect to purchases of
$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). 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 (0.50% per annum for certain Funds), 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. 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.
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.
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).
CLASS C SHARES -- Class C shares are offered at net asset value without an
initial sales charge but subject to a CDSC of 1.00% upon redemption during
the first year. MFD will pay a commission to dealers of 1.00% of the
purchase price of Class C shares purchased through dealers at the time of
purchase. In compensation for this 1.00% commission paid by MFD to dealers,
MFD will retain the 1.00% per annum Class C distribution and service fees
paid by the Fund with respect to such shares for the first year after
purchase, and dealers will become eligible to receive from MFD the ongoing
1.00% per annum distribution and service fees paid by the Fund to MFD with
respect to such shares commencing in the thirteenth month following
purchase.
This ongoing 1.00% fee is comprised of the 0.25% per annum service fee
paid to MFD under the Distribution Plan (which MFD in turn pays to
dealers), as discussed above, and a distribution fee paid to MFD (which MFD
also in turn pays to dealers) under the Distribution Plan, equal, on an
annual basis, to 0.75% of the Fund's average daily net assets attributable
to Class C shares.
IV INVESTMENT TECHNIQUES, PRACTICES AND RISKS
Set forth in Appendix C of this Part II is a description of investment
techniques and practices which the MFS Funds may generally use in pursuing
their investment objectives and principal investment policies, and the
risks associated with these investment techniques and practices. The Fund
will engage only in certain of these investment techniques and practices,
as identified in Part I. Investment practices and techniques that are not
identified in Part I do not apply to the Fund.
V NET INCOME AND DISTRIBUTIONS
MONEY MARKET FUNDS
The net income attributable to each MFS Fund that is a money market fund is
determined each day during which the New York Stock Exchange is open for
trading (see "Determination of Net Asset Value" below for a list of days
the Exchange is closed).
For this purpose, the net income attributable to shares of a money market
fund (from the time of the immediately preceding determination thereof)
shall consist of (i) all interest income accrued on the portfolio assets of
the money market fund, (ii) less all actual and accrued expenses of the
money market 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 the
money market fund, if any. Interest income shall include discount earned
(including both original issue and market discount) on discount paper
accrued ratably to the date of maturity.
Since the net income is declared as a dividend each time the net income
is determined, the net asset value per share (i.e., the value of the net
assets of the money market fund divided by the number of shares
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, representing the reinvestment of dividend income,
is reflected by an increase in the number of shares in the shareholder's
account.
It is expected that the shares of the money market fund will have a
positive net income at the time of each determination thereof. If for any
reason the net income determined at any time is a negative amount, which
could occur, for instance, upon default by an issuer of a portfolio
security, the money market fund would first offset the negative amount with
respect to each shareholder account 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), the
money market fund could reduce the number of its outstanding shares by
treating each shareholder of the money market fund as having contributed to
its capital that number of full and fractional shares of the money market
fund in the account of such shareholder which represents its proportion of
such excess. Each shareholder of the money market fund will be deemed to
have agreed to such contribution in these circumstances by its investment
in the money market fund. This procedure would permit the net asset value
per share of the money market fund to be maintained at a constant $1.00 per
share.
OTHER FUNDS
Each MFS Fund other than the MFS money market funds intends to distribute
to its shareholders dividends equal to all of its net investment income
with such frequency as is disclosed in the Fund's prospectus. These Funds'
net investment income consists of non-capital gain income less expenses. In
addition, these Funds intend to distribute net realized short- and
long-term capital gains, if any, at least annually. Shareholders will be
informed of the tax consequences of such distributions, including whether
any portion represents a return of capital, after the end of each calendar
year.
VI TAX CONSIDERATIONS
The following discussion is a brief summary of some of the important
federal (and, where noted, state) income tax consequences affecting the
Fund and its shareholders. The discussion is very general, and therefore
prospective investors are urged to consult their tax advisors about the
impact an investment in the Fund may have on their own tax situations.
TAXATION OF THE FUND
FEDERAL TAXES -- The Fund (even if it is a fund in a Trust with multiple
series) is treated as a separate entity for federal income tax purposes
under the Internal Revenue Code of 1986, as amended (the "Code"). The Fund
has elected (or in the case of a new Fund, intends to elect) to be, and
intends to qualify to be treated 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 its distributions (as a percentage
of both its overall income and any tax-exempt income), and the composition
of its portfolio assets. As a regulated investment company, the Fund will
not be subject to any federal income or excise taxes on its net investment
income and net realized capital gains that it distributes to shareholders
in accordance with the timing requirements imposed by the Code. The Fund's
foreign-source income, if any, may be subject to foreign withholding taxes.
If the Fund failed to qualify as a "regulated investment company" in any
year, it would incur a regular federal corporate income tax on all of its
taxable income, whether or not distributed, and Fund distributions would
generally be taxable as ordinary dividend income to the shareholders.
MASSACHUSETTS TAXES -- 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.
TAXATION OF SHAREHOLDERS
TAX TREATMENT OF DISTRIBUTIONS -- Subject to the special rules discussed
below for Municipal Funds, shareholders of the Fund normally will have to
pay federal income tax and any state or local income taxes on the dividends
and capital gain distributions they receive from the Fund. Any
distributions from ordinary income and from net short-term capital gains
are taxable to shareholders as ordinary income for federal income tax
purposes whether paid in cash or reinvested in additional shares.
Distributions of net capital gain (i.e., the excess of net long-term
capital gain over net short-term capital loss), 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. Any Fund dividend that is
declared in October, November, or December of any calendar year, payable to
shareholders of record in such a month, and paid during 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, other than dividends that are declared by the Fund
on a daily basis, will have the effect of reducing the per share net asset
value of Fund shares by the amount of the distribution. Shareholders
purchasing shares shortly before the record date of any such distribution
(other than an exempt-interest dividend) may thus pay the full price for
the shares and then effectively receive a portion of the purchase price
back as a taxable distribution.
DIVIDENDS-RECEIVED DEDUCTION -- If the Fund receives dividend income from
U.S. corporations, 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.
DISPOSITION OF SHARES -- In general, any gain or loss realized upon a
disposition of Fund shares by a shareholder that holds such shares as a
capital asset will be treated as a long-term capital gain or loss if the
shares have been held for more than twelve months and otherwise as a
short-term capital gain or loss. However, any loss realized upon a
disposition of Fund shares 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 Fund shares held for 90 days or less followed by any purchase (including
purchases by exchange or by reinvestment) without payment of an additional
sales charge of Class A shares of the Fund or of any other shares of an MFS
Fund generally sold subject to a sales charge.
DISTRIBUTION/ACCOUNTING POLICIES -- The Fund's current distribution 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.
U.S. TAXATION OF NON-U.S. PERSONS -- Dividends and certain other payments
(but not including distributions of net capital gains) 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 at that rate on taxable dividends and other
payments to Non-U.S. Persons that are subject to such withholding. The Fund
may withhold at a lower rate permitted by an applicable treaty if the
shareholder provides the documentation required by the Fund. 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.
BACKUP WITHHOLDING -- The Fund is also required in certain circumstances to
apply backup withholding at the rate of 31% on taxable dividends and
capital gain distributions (and redemption proceeds, if applicable) paid to
any non-corporate 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.
FOREIGN INCOME TAXATION OF NON-U.S. PERSONS -- Distributions received from
the Fund by Non-U.S. Persons may also be subject to tax under the laws of
their own jurisdictions.
STATE AND LOCAL INCOME TAXES: U.S. GOVERNMENT SECURITIES -- Dividends paid
by the Fund that are derived from interest on obligations of the U.S.
Government and certain of its agencies and instrumentalities (but generally
not distributions of capital gains realized upon the disposition of such
obligations) may be exempt from state and local income taxes. The Fund
generally intends to advise shareholders of the extent, if any, to which
its dividends consist of such interest. Shareholders are urged to consult
their tax advisors regarding the possible exclusion of such portion of
their dividends for state and local income tax purposes.
CERTAIN SPECIFIC INVESTMENTS -- Any investment in zero coupon bonds,
deferred interest bonds, payment-in-kind bonds, certain stripped
securities, and certain securities purchased at a market discount will
cause the Fund to recognize income prior to the receipt of cash payments
with respect to those securities. To distribute this income (as well as
non-cash income described in the next two paragraphs) 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. Any investment in residual
interests of a CMO that has elected to be treated as a real estate mortgage
investment conduit, or "REMIC," can create complex tax problems, especially
if the Fund has state or local governments or other tax-exempt
organizations as shareholders.
OPTIONS, FUTURES CONTRACTS, AND FORWARD CONTRACTS -- 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, Forward Contracts, short sales
"against the box" and swaps and related transactions to the extent
necessary to meet the requirements of Subchapter M of the Code.
FOREIGN INVESTMENTS -- Special tax considerations apply with respect to
foreign investments by the Fund. Foreign exchange gains and losses realized
by the Fund may be treated as ordinary income and loss. Use of foreign
currencies for non-hedging purposes and investment by the Fund in certain
"passive foreign investment companies" may be limited in order to avoid a
tax on the Fund. The Fund may elect to mark to market any investments in
"passive foreign investment companies" on the last day of each year. This
election may cause the Fund to recognize income prior to the receipt of
cash payments with respect to those investments; in order to distribute
this income and avoid a tax on the Fund, the Fund may be required to
liquidate portfolio securities that it might otherwise have continued to
hold, potentially resulting in additional taxable gain or loss to the Fund.
FOREIGN INCOME TAXES -- Investment income received by the Fund and gains
with respect to foreign securities may be subject to foreign income taxes
withheld at the source. The United States has entered into tax treaties
with many foreign countries that may entitle the Fund to a reduced rate of
tax or an exemption from tax on such income; the Fund intends to qualify
for treaty reduced rates where available. It is not possible, however, to
determine the Fund's effective rate of foreign tax in advance, since the
amount of the Fund's assets to be invested within various countries is not
known.
If the Fund holds more than 50% of its assets in foreign stock and
securities at the close of its taxable year, it may elect to "pass through"
to its shareholders foreign income taxes paid by it. If the Fund so elects,
shareholders will be required to treat their pro rata portions of the
foreign income taxes paid by the Fund as part of the amounts distributed to
them by it and thus includable in their gross income for federal income tax
purposes. Shareholders who itemize deductions would then be allowed to
claim a deduction or credit (but not both) on their federal income tax
returns for such amounts, subject to certain limitations. Shareholders who
do not itemize deductions would (subject to such limitations) be able to
claim a credit but not a deduction. No deduction will be permitted to
individuals in computing their alternative minimum tax liability. If the
Fund is not eligible, or does not elect, to "pass through" to its
shareholders foreign income taxes it has paid, shareholders will not be
able to claim any deduction or credit for any part of the foreign taxes
paid by the Fund.
SPECIAL RULES FOR MUNICIPAL FUND DISTRIBUTIONS
The following special rules apply to shareholders of funds whose objective
is to invest primarily in obligations that pay interest that is exempt from
federal income tax ("Municipal Funds").
TAX EXEMPT DISTRIBUTIONS -- The portion of a Municipal 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. Except when the Fund provides actual monthly
percentage breakdowns, the percentage of income designated as tax-exempt
will be applied uniformly to all distributions by the Fund of net
investment income made during each 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.
TAXABLE DISTRIBUTIONS -- A Municipal Fund may also earn some income that is
taxable (including interest from any obligations that lose their federal
tax exemption) and may recognize capital gains and losses as a result of
the disposition of securities and from certain options and futures
transactions. Shareholders normally will have to pay federal income tax on
the non-exempt-interest dividends and capital gain distributions they
receive from the Fund, whether paid in cash or reinvested in additional
shares. However, the Fund does not expect that the non-tax-exempt portion
of its net investment income, if any, will be substantial. 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.
CONSEQUENCES OF DISTRIBUTIONS BY A MUNICIPAL FUND: EFFECT OF ACCRUED TAX-
EXEMPT INCOME -- Shareholders redeeming shares after tax-exempt income has
been accrued but not yet declared as a dividend should be aware that a
portion of the proceeds realized upon redemption of the shares will reflect
the existence of such accrued tax-exempt income and that this portion will
be subject to tax as a capital gain even though it would have been
tax-exempt had it been declared as a dividend prior to the redemption. For
this reason, if a shareholder wishes to redeem shares of a Municipal Fund
that does not declare dividends on a daily basis, the shareholder may wish
to consider whether he or she could obtain a better tax result by redeeming
immediately after the Fund declares dividends representing substantially
all the ordinary income (including tax-exempt income) accrued for that
month.
CERTAIN ADDITIONAL INFORMATION FOR MUNICIPAL FUND SHAREHOLDERS -- Interest
on indebtedness incurred by shareholders to purchase or carry Fund shares
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 advisors before purchasing Fund shares.
CONSEQUENCES OF REDEMPTION OF SHARES -- Any loss realized on a redemption
of Municipal Fund shares 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.
STATE AND LOCAL INCOME TAXES: MUNICIPAL OBLIGATIONS -- The exemption of
exempt-interest dividends for federal income tax purposes does not
necessarily result in exemption under the income tax laws of any state or
local taxing authority. Some states do exempt from tax that portion of an
exempt-interest dividend that represents interest received by a regulated
investment company on its holdings of securities issued by that state and
its political subdivisions and instrumentalities. Therefore, the Fund will
report annually to its shareholders the percentage of interest income
earned by it during the preceding year on Municipal Bonds and will
indicate, on a state-by-state basis only, the source of such income.
VII PORTFOLIO TRANSACTIONS AND BROKERAGE COMMISSIONS
Specific decisions to purchase or sell securities for the Fund are made by
persons affiliated with the Adviser. Any such person may serve other
clients of the Adviser, or any subsidiary of the Adviser in a similar
capacity. Changes in the Fund's investments are reviewed by the Trust's
Board of Trustees.
The primary consideration in placing portfolio security transactions is
execution at the most favorable prices. The Adviser has complete freedom as
to the markets in and broker-dealers through which it seeks this result. In
the U.S. and in some other countries debt securities are traded principally
in the over-the-counter market on a net basis through dealers acting for
their own account and not as brokers. In other countries both debt and
equity securities are traded on exchanges at fixed commission rates. The
cost of securities purchased from underwriters includes an underwriter's
commission or concession, and the prices at which securities are purchased
and sold from and to dealers include a dealer's mark-up or mark-down. The
Adviser normally seeks to deal directly with the primary market makers or
on major exchanges unless, in its opinion, better prices are available
elsewhere. Subject to the requirement of seeking execution at the best
available price, securities may, as authorized by the Advisory Agreement,
be bought from or sold to dealers who have furnished statistical, research
and other information or services to the Adviser. At present no
arrangements for the recapture of commission payments are in effect.
Consistent with the foregoing primary consideration, the Conduct Rules of
the National Association of Securities Dealers, Inc. ("NASD") and such
other policies as the Trustees may determine, the Adviser may consider
sales of shares of the Fund and of the other investment company clients of
MFD as a factor in the selection of broker-dealers to execute the Fund's
portfolio transactions.
Under the Advisory Agreement and as permitted by Section 28(e) of the
Securities Exchange Act of 1934, the Adviser may cause the Fund to pay a
broker-dealer which provides brokerage and research services to the
Adviser, an amount of commission for effecting a securities transaction for
the Fund in excess of the amount other broker-dealers would have charged
for the transaction, if the Adviser determines in good faith that the
greater commission is reasonable in relation to the value of the brokerage
and research services provided by the executing broker-dealer viewed in
terms of either a particular transaction or their respective overall
responsibilities to the Fund or to their other clients. Not all of such
services are useful or of value in advising the Fund.
The term "brokerage and research services" includes advice as to the
value of securities, the advisability of investing in, purchasing or
selling securities, and the availability of securities or of purchasers or
sellers of securities; furnishing analyses and reports concerning issues,
industries, securities, economic factors and trends, portfolio strategy and
the performance of accounts; and effecting securities transactions and
performing functions incidental thereto, such as clearance and settlement.
Although commissions paid on every transaction will, in the judgment of
the Adviser, be reasonable in relation to the value of the brokerage
services provided, commissions exceeding those which another broker might
charge may be paid to broker-dealers who were selected to execute
transactions on behalf 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 Adviser's investment management personnel attempt to evaluate the
quality of Research provided by brokers. The Adviser sometimes uses
evaluations resulting from this effort as a consideration in the selection
of brokers to execute portfolio transactions.
The management fee of the Adviser will not be reduced as a consequence of
the Adviser's receipt of brokerage and research service. To the extent the
Fund's portfolio transactions are used to obtain brokerage and research
services, the brokerage commissions paid by the Fund will exceed those that
might otherwise be paid for such portfolio transactions, or for such
portfolio transactions and research, 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.
The Fund has entered into an arrangement with State Street Brokerage
Services, Inc. ("SSB"), an affiliate of the Custodian, under which, with
respect to any brokerage transactions directed to SSB, the Fund receives,
on a trade-by-trade basis, a credit for part of the brokerage commission
paid, which is applied against other expenses of the Fund, including the
Fund's custodian fee. The Adviser receives no direct or indirect benefit
from this arrangement.
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.
VIII DETERMINATION OF NET ASSET VALUE
The net asset value per share of each class of the Fund is determined each
day during which the New York Stock 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 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.
MONEY MARKET FUNDS
Portfolio securities of each MFS Fund that is a money market fund are
valued at amortized cost, which the Board of Trustees which oversees the
money market fund has 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 Board of Trustees determines
that it does not constitute fair value for such purposes. Each money market
fund will limit its portfolio to those investments in U.S. dollar-
denominated instruments which its Board of Trustees determines present
minimal credit risks, and which are of high quality as determined by any
major rating service or, in the case of any instrument that is not so
rated, of comparable quality as determined by the Board of Trustees. Each
money market fund has also agreed to maintain a dollar-weighted average
maturity of 90 days or less and to invest only in securities maturing in 13
months or less. The Board of Trustees which oversees each money market fund
has established procedures designed to stabilize its net asset value per
share, as computed for the purposes of sales and redemptions, at $1.00 per
share. If the Board determines 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, it will take corrective
action it regards 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.
OTHER FUNDS
The following valuation techniques apply to each MFS Fund that is not a
money market fund.
Equity securities in the Fund's portfolio are valued at the last sale
price on the exchange on which they are primarily traded or on the Nasdaq
stock market system for unlisted national market issues, or at the last
quoted bid price for listed securities in which there were no sales during
the day or for unlisted securities not reported on the Nasdaq stock market
system. Bonds and other fixed income securities (other than short-term
obligations) of U.S. issuers in the Fund's portfolio are valued on the
basis of valuations furnished by a pricing service which utilizes both
dealer-supplied valuations and electronic data processing techniques which
take into account appropriate factors such as institutional-size trading in
similar groups of securities, yield, quality, coupon rate, maturity, type
of issue, trading characteristics and other market data without exclusive
reliance upon quoted prices or exchange or over-the-counter prices, since
such valuations are believed to reflect 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 services has been approved by the 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 system, in which case they are valued at the last sale price or, if
no sales occurred during the day, at the last quoted bid price. Short-term
obligations in the Fund's portfolio are valued at amortized cost, which
constitutes fair value as determined by the Board of Trustees. Short-term
obligations with a remaining maturity in excess of 60 days will be valued
upon dealer supplied valuations. Portfolio investments for which there are
no such quotations or valuations are valued at fair value as determined in
good faith by or at the direction of the Board of Trustees.
Generally, trading in foreign securities is substantially completed each
day at various times prior to the close of regular trading on the Exchange.
Occasionally, events affecting the values of such securities may occur
between the times at which they are determined and the close of regular
trading on the Exchange which will not be reflected in the computation of
the Fund's net asset value unless the Trustees deem that such event would
materially affect the net asset value in which case an adjustment would be
made.
All investments and assets are expressed in U.S. dollars based upon
current currency exchange rates. A share's net asset value is effective for
orders received by the dealer prior to its calculation and received by MFD
prior to the close of that business day.
IX PERFORMANCE INFORMATION
MONEY MARKET FUNDS
Each MFS Fund that is a money market fund will provide current annualized
and effective annualized yield quotations based on the daily dividends of
shares of the money market fund. These quotations may from time to time be
used in advertisements, shareholder reports or other communications to
shareholders.
Any current yield quotation of a money market fund which is used in such
a manner as to be subject to the provisions of Rule 482(d) under the 1933
Act 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 of that class 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 a money market 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. These
yield quotations should not be considered as representative of the yield of
a money market fund in the future since the yield will vary based on the
type, quality and maturities of the securities held in its portfolio,
fluctuations in short-term interest rates and changes in the money market
fund's expenses.
OTHER FUNDS
Each MFS Fund that is not a money market fund may quote the following
performance results.
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 any applicable CDSC 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 any applicable sales charge and/or (iii) total rates of return
which represent aggregate performance over a period or year-by-year
performance, and which may or may not reflect the effect of the maximum or
other sales charge or CDSC.
The Fund offers multiple classes of shares which were initially offered
for sale to, and purchased by, the public on different dates (the class
"inception date"). The calculation of total rate of return for a class of
shares which has a later class inception date than another class of shares
of the Fund is based both on (i) the performance of the Fund's newer class
from its inception date and (ii) the performance of the Fund's oldest class
from its inception date up to the class inception date of the newer class.
As discussed in the Prospectus, the sales charges, expenses and expense
ratios, and therefore the performance, of the Fund's classes of shares
differ. In calculating total rate of return for a newer class of shares in
accordance with certain formulas required by the SEC, the performance will
be adjusted to take into account the fact that the newer class is subject
to a different sales charge than the oldest class (e.g., if the newer class
is Class A shares, the total rate of return quoted will reflect the
deduction of the initial sales charge applicable to Class A shares; if the
newer class is Class B shares, the total rate of return quoted will reflect
the deduction of the CDSC applicable to Class B shares). However, the
performance will not be adjusted to take into account the fact that the
newer class of shares bears different class specific expenses than the
oldest 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).
Any total rate of return quotation provided by the Fund should not be
considered as representative of the performance of the Fund in the future
since the net asset value of shares of the Fund will vary based not only on
the type, quality and maturities of the securities held in the Fund's
portfolio, but also on changes in the current value of such securities and
on changes in the expenses of the Fund. These factors and possible
differences in the methods used to calculate total rates of return should
be considered when comparing the total rate of return of the Fund to total
rates of return published for other investment companies or other
investment vehicles. Total rate of return reflects the performance of both
principal and income. Current net asset value and account balance
information may be obtained by calling 1-800-MFS-TALK (637-8255).
YIELD -- Any yield quotation for a class of shares of the Fund is based on
the annualized net investment income per share of that class for the 30-
day period. The yield for each class of the Fund is calculated by dividing
the net investment income allocated to that class earned during the period
by the maximum offering price per share of that class of the Fund on the
last day of the period. The resulting figure is then annualized. Net
investment income per share of a class is determined by dividing (i) the
dividends and interest allocated to that class during the period, minus
accrued expense of that class for the period by (ii) the average number of
shares of the class entitled to receive dividends during the period
multiplied by the maximum offering price per share on the last day of the
period. The Fund's yield calculations assume a maximum sales charge of
5.75% in the case of Class A shares and no payment of any CDSC in the case
of Class B and Class C shares.
TAX-EQUIVALENT YIELD -- The tax-equivalent yield for a class of shares of a
Fund is calculated by determining the rate of return that would have to be
achieved on a fully taxable investment in such shares to produce the
after-tax equivalent of the yield of that class. In calculating tax-
equivalent yield, a Fund assumes certain federal tax brackets for
shareholders and does not take into account state taxes.
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 (i) annualizing the
distributions (excluding short-term capital gains) of the class for a
stated period; (ii) adding any short-term capital gains paid within the
immediately preceding twelve-month period; and (iii) dividing the result by
the maximum offering price or net asset value per share on the last day of
the period. 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 may be calculated over a different period of time. The Fund's current
distribution rate calculation for Class B shares and Class C shares assumes
no CDSC is paid.
GENERAL
From time to time the Fund may, as appropriate, quote Fund rankings or
reprint all or a portion of evaluations of fund performance and operations
appearing in various independent publications, including but not limited to
the following: Money, Fortune, U.S. News and World Report, Kiplinger's
Personal Finance, The Wall Street Journal, Barron's, Investors Business
Daily, Newsweek, Financial World, Financial Planning, Investment Advisor,
USA Today, Pensions and Investments, SmartMoney, Forbes, Global Finance,
Registered Representative, Institutional Investor, the Investment Company
Institute, Johnson's Charts, Morningstar, Lipper Analytical Securities
Corporation, 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 and use
charts and graphs to illustrate the past performance of various indices
such as those mentioned above and illustrations using hypothetical rates of
return to illustrate the effects of compounding and tax-deferral. 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.
From time to time, the Fund may discuss or quote its current portfolio
manager as well as other investment personnel, including such persons'
views on: the economy; securities markets; portfolio securities and their
issuers; investment philosophies, strategies, techniques and criteria used
in the selection of securities to be purchased or sold for the Fund; the
Fund's portfolio holdings; the investment research and analysis process;
the formulation and evaluation of investment recommendations; and the
assessment and evaluation of credit, interest rate, market and economic
risks, and similar or related matters.
The Fund may also use charts, graphs or other presentation formats to
illustrate the historical correlation of its performance to fund categories
established by Morningstar (or other nationally recognized statistical
ratings organizations) and to other MFS Funds.
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, including
issues concerning social security; 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; the history of the mutual fund
industry; investor behavior; and other similar or related matters.
From time to time, the Fund may also advertise annual returns showing the
cumulative value of an initial investment in the Fund in various amounts
over specified periods, with capital gain and dividend distributions
invested in additional shares or taken in cash, and with no adjustment for
any income taxes (if applicable) payable by shareholders.
MFS FIRSTS
MFS has a long history of innovations.
o 1924 -- Massachusetts Investors Trust is established as the first
open-end mutual fund in America.
o 1924 -- Massachusetts Investors Trust is the first mutual fund to make
full public disclosure of its operations in shareholder reports.
o 1932 -- One of the first internal research departments is established to
provide in-house analytical capability for an investment management
firm.
o 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").
o 1936 -- Massachusetts Investors Trust is the first mutual fund to allow
shareholders to take capital gain distributions either in additional
shares or in cash.
o 1976 -- MFS(R) Municipal Bond Fund is among the first municipal bond
funds established.
o 1979 -- Spectrum becomes the first combination fixed/ variable annuity
with no initial sales charge.
o 1981 -- MFS(R) Global Governments Fund is established as America's first
globally diversified fixed-income mutual fund.
o 1984 -- MFS(R) Municipal High Income Fund is the first open-end mutual
fund to seek high tax-free income from lower-rated municipal securities.
o 1986 -- MFS(R) Managed Sectors Fund becomes the first mutual fund to
target and shift investments among industry sectors for shareholders.
o 1986 -- MFS(R) Municipal Income Trust is the first closed-end, high-yield
municipal bond fund traded on the New York Stock Exchange.
o 1987 -- MFS(R) Multimarket Income Trust is the first closed-end,
multimarket high income fund listed on the New York Stock Exchange.
o 1989 -- MFS(R) Regatta becomes America's first non-qualified market value
adjusted fixed/variable annuity.
o 1990 -- MFS(R) Global Total Return Fund is the first global balanced
fund.
o 1993 -- MFS(R) Global Growth Fund is the first global emerging markets
fund to offer the expertise of two sub-advisers.
o 1993 -- MFS(R) becomes money manager of MFS(R) Union Standard(R) Equity
Fund, the first fund to invest principally 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.
X 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 programs are described
below and, in certain cases, in the Prospectus. The programs involve no
extra charge to shareholders (other than a sales charge in the case of
certain Class A share purchases) and may be changed or discontinued at any
time by a shareholder or the Fund.
LETTER OF INTENT -- If a shareholder (other than a group purchaser
described below) anticipates purchasing $50,000 or more of Class A shares
of the Fund alone or in combination with shares of any class of 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 Account Application
or filing a separate Letter of Intent application (available from MFSC)
within 90 days of the commencement of purchases. Subject to acceptance by
MFD and the conditions mentioned below, each purchase will be made at a
public offering price applicable to a single transaction of the dollar
amount specified in the Letter of Intent application. The shareholder or
his dealer must inform MFD that the Letter of Intent is in effect each time
shares are purchased. The shareholder makes no commitment to purchase
additional shares, but if his purchases within 13 months (or 36 months in
the case of purchases of $1 million or more) plus the value of shares
credited toward completion of the Letter of Intent do not total the sum
specified, he will pay the increased amount of the sales charge as
described below. Instructions for issuance of shares in the name of a
person other than the person signing the Letter of Intent application must
be accompanied by a written statement from the dealer stating that the
shares were paid for by the person signing such Letter. Neither income
dividends nor capital gain distributions taken in additional shares will
apply toward the completion of the Letter of Intent. Dividends and
distributions of other MFS Funds automatically reinvested in shares of the
Fund pursuant to the Distribution Investment Program will also not apply
toward completion of the Letter of Intent.
Out of the shareholder's initial purchase (or subsequent purchases if
necessary), 5% of the dollar amount specified in the Letter of Intent
application shall be held in escrow by MFSC 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, MFSC 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
MFSC. By completing and signing the Account Application or separate Letter
of Intent application, the shareholder irrevocably appoints MFSC his
attorney to surrender for redemption any or all escrowed shares with full
power of substitution in the premises.
RIGHT OF ACCUMULATION -- A shareholder qualifies for cumulative quantity
discounts on the purchase of Class A shares when his new investment,
together with the current offering price value of all holdings of Class A,
Class B and Class C shares of that shareholder in the MFS Funds or MFS
Fixed Fund reaches a discount level. See "Purchases" in the Prospectus for
the sales charges on quantity discounts. A shareholder must provide MFSC
(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 MFSC 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 MFSC 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. MFSC 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. MFSC
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 that 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 MFSC to send him (or
anyone he designates) regular periodic payments based upon the value of his
account. Each payment under a Systematic Withdrawal Plan ("SWP") must be at
least $100, except in certain limited circumstances. The aggregate
withdrawals of Class B and Class C shares in any year pursuant to a SWP
generally are limited to 10% of the value of the account at the time of
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) shares representing reinvested
distributions; (ii) shares representing undistributed capital gains and
income; and (iii) to the extent necessary, shares representing direct
investments subject to the lowest CDSC. 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 received in full and fractional shares of the
Fund at the net asset value in effect at the close of business on the
record date for such distributions. To initiate this service, shares having
an aggregate value of at least $5,000 either must be held on deposit by, or
certificates for such shares must be deposited with, MFSC. 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.
MFSC 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 MFSC 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 MFSC. 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 at
MFD's discretion as a single purchaser and, under the Right of Accumulation
(but not the 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 participate in the Automatic Exchange Plan. The
Automatic Exchange Plan provides for automatic exchanges of funds from the
shareholder's account in an MFS Fund for investment in the same class of
shares of other MFS Funds selected by the shareholder (if available for
sale). 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 transfer will occur after receipt and
processing by MFSC 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 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 the 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 MFSC 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 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 any of the MFS Funds (if shares of
the fund are available for sale) at net asset value (without a sales
charge). For shareholders who exercise this privilege after redeeming class
A or class C shares, if the redemption involved a CDSC, your account will
be credited with the appropriate amount of the CDSC you paid; however, your
new class A or class C shares (as applicable) will still be subject to a
CDSC for up to one year from the date you originally purchased the shares
redeemed.
Until December 31, 2001, shareholders who redeem class B shares and then
exercise their 90-day reinstatement privilege may reinvest their redemption
proceeds either in
o class B shares, in which case any applicable CDSC you paid on the
redemption will be credited to your account, and your new shares will
be subject to a CDSC which will be determined from the date you
originally purchased the shares redeemed, or
o class A shares, in which case the class A shares purchased will not be
subject to a CDSC, but if you paid a CDSC when you redeemed your class
B shares, your account will not be credited with the CDSC you paid.
After December 31, 2001, shareholders who exercise their 90-day
reinstatement privilege after redeeming class B shares may reinvest their
redemption proceeds only in class A shares as described as the second
option above.
In the case of proceeds reinvested in 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.
Although redemptions and repurchases of shares are taxable events, a
reinvestment within a certain period of time in the same fund may be
considered a "wash sale" and may result in the inability to recognize
currently all or a portion of a loss realized on the original redemption
for federal income tax purposes. Please see your tax adviser for further
information.
EXCHANGE PRIVILEGE
Subject to the requirements set forth below, some or all of the shares of
the same class in an account with the Fund for which payment has been
received by the Fund (i.e., an established account) may be exchanged for
shares of the same class of any of the other MFS Funds (if available for
sale and if the purchaser is eligible to purchase the Class of shares) at
net asset value. Exchanges will be made only after instructions in writing
or by telephone (an "Exchange Request") are received for an established
account by MFSC.
EXCHANGES AMONG MFS FUNDS (excluding exchanges from MFS money market funds)
-- No initial sales charge 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 "How to Purchase,
Exchange and Redeem Shares" 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 -- 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
MFS FUNDamental 401(k) Plan or another similar 401(k) recordkeeping system
made available by MFSC) or all the shares in the account. Each exchange
involves the redemption of the shares of the Fund to be exchanged and the
purchase 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 MFSC prior to the close of regular trading on the
Exchange the exchange usually will occur on that day if all the
requirements set forth above have been complied with at that time. However,
payment of the redemption proceeds by the Fund, and thus the purchase of
shares of the other MFS 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.
Additional information with respect to any of the MFS Funds, including a
copy of its current prospectus, may be obtained from investment dealers or
MFSC. A shareholder considering an exchange should obtain and read the
prospectus of the other fund and consider the differences in objectives and
policies before making any exchange.
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 imposed
from time to time at the discretion of the Funds in order to protect the
Funds.
TAX-DEFERRED RETIREMENT PLANS Shares of the Fund may be purchased by all
types of tax-deferred retirement plans. MFD makes available, through
investment dealers, plans and/or custody agreements, the following:
o Traditional Individual Retirement Accounts (IRAs) (for individuals who
desire to make limited contributions to a tax-deferred retirement
program and, if eligible, to receive a federal income tax deduction for
amounts contributed);
o Roth Individual Retirement Accounts (Roth IRAs) (for individuals who
desire to make limited contributions to a tax-favored retirement
program);
o Simplified Employee Pension (SEP-IRA) Plans;
o Retirement Plans Qualified under Section 401(k) of the Internal Revenue
Code of 1986, as amended (the "Code");
o 403(b) Plans (deferred compensation arrangements for employees of
public school systems and certain non-profit organizations); and
o Certain other qualified pension and profit-sharing plans.
The plan documents provided by MFD designate a trustee or custodian
(unless another trustee or custodian is designated by the individual or
group establishing the plan) and contain specific information about the
plans. Each plan provides that dividends and distributions will be
reinvested automatically. For further details with respect to any plan,
including fees charged by the trustee, custodian or MFD, tax consequences
and redemption information, see the specific documents for that plan. Plan
documents other than those provided by MFD may be used to establish any of
the plans described above. Third party administrative services, available
for some corporate plans, may limit or delay the processing of
transactions.
An investor should consult with his tax adviser before establishing any
of the tax-deferred retirement plans described above.
Class C shares are not currently available for purchase by any retirement
plan qualified under Internal Revenue Code Section 401(a) or 403(b) if the
retirement plan and/or the sponsoring organization subscribe to the MFS
FUNDamental 401(k) Plan or another similar Section 401(a) or 403(b)
recordkeeping program made available by MFSC.
XI 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 Declaration of
Trust further authorizes the Trustees to classify or reclassify any series
of shares into one or more classes. 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 a number of series and
additional classes of shares, in which case the shares of each class of a
series would participate equally in the earnings, dividends and assets
allocable to that class of the particular series.
Shareholders are entitled to one vote for each share held and may vote in
the election of Trustees and on other matters submitted to meetings of
shareholders. To the extent a shareholder of the Fund owns a controlling
percentage of the Fund's shares, such shareholder may affect the outcome of
such matters to a greater extent than other Fund shareholders. Although
Trustees are not elected annually by the shareholders, the Declaration of
Trust provides that a Trustee may be removed from office at a meeting of
shareholders by a vote of two-thirds of the outstanding shares of the
Trust. A meeting of shareholders will be called upon the request of
shareholders of record holding in the aggregate not less than 10% of the
outstanding voting securities of the Trust. No material amendment may be
made to the Declaration of Trust without the affirmative vote of a majority
of the Trust's outstanding shares (as defined in "Investment Restrictions"
in Part I of this SAI). The Trust or any series of the Trust may be
terminated (i) upon the merger or consolidation of the Trust or any series
of the Trust with another organization or upon the sale of 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 or the affected series' outstanding
shares voting as a single class, or of the affected series 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 or the
affected series' outstanding shares will be sufficient, or (ii) upon
liquidation and distribution of the assets of a Fund, if approved by the
vote of the holders of two-thirds of its outstanding shares of the Trust,
or (iii) by the Trustees by written notice to its shareholders. 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 Trust
property for any shareholder held personally liable for the obligations of
the Trust. The Declaration of Trust also provides that the Trust shall
maintain appropriate insurance (for example, fidelity bonding and errors
and omissions insurance) for the protection of the Trust and its
shareholders and the Trustees, officers, employees and agents of the Trust
covering possible tort and other liabilities. Thus, the risk of a
shareholder incurring financial loss on account of shareholder liability is
limited to circumstances in which both inadequate insurance existed and the
Trust itself was unable to meet its obligations.
The Declaration of Trust further provides that obligations of the Trust
are not binding upon the Trustees individually but only upon the property
of the Trust and that the Trustees will not be liable for any action or
failure to act, but nothing in the Declaration of Trust protects a Trustee
against any liability to which he would otherwise be subject by reason of
his willful misfeasance, bad faith, gross negligence, or reckless disregard
of the duties involved in the conduct of his office.
<PAGE>
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PART II - APPENDIX A
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WAIVERS OF SALES CHARGES
This Appendix sets forth the various circumstances in which all applicable
sales charges are waived (Section I), the initial sales charge and the
CDSC for Class A shares are waived (Section II), and the CDSC for Class B
and Class C shares is waived (Section III). Some of the following
information will not apply to certain funds in the MFS Family of Funds,
depending on which classes of shares are offered by such fund. As used in
this Appendix, the term "dealer" includes any broker, dealer, bank
(including bank trust departments), registered investment adviser,
financial planner and any other financial institutions having a selling
agreement or other similar agreement with MFD.
I WAIVERS OF ALL APPLICABLE SALES CHARGES
In the following circumstances, the initial sales charge imposed on
purchases of Class A shares and the CDSC imposed on certain redemptions of
Class A shares and on redemptions of Class B and Class C shares, as
applicable, are waived:
DIVIDEND REINVESTMENT
o Shares acquired through dividend or capital gain reinvestment; and
o 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.
CERTAIN ACQUISITIONS/LIQUIDATIONS
o Shares acquired on account of the acquisition or liquidation of assets
of other investment companies or personal holding companies.
AFFILIATES OF AN MFS FUND/CERTAIN DEALERS.
Shares acquired by:
o Officers, eligible directors, employees (including retired employees)
and agents of MFS, Sun Life or any of their subsidiary companies;
o Trustees and retired trustees of any investment company for which MFD
serves as distributor;
o Employees, directors, partners, officers and trustees of any sub-adviser
to any MFS Fund;
o Employees or registered representatives of dealers;
o Certain family members of any such individual and their spouses or
domestic partners 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
o Institutional Clients of MFS or MFS Institutional Advisors, Inc.
INVOLUNTARY REDEMPTIONS (CDSC WAIVER ONLY)
o 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.
RETIREMENT PLANS (CDSC WAIVER ONLY).
Shares redeemed on account of distributions made under the following
circumstances:
o Individual Retirement Accounts ("IRAs")
> Death or disability of the IRA owner.
o 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 Corporate Plan Services 401(k) Plan or another similar
recordkeeping system made available by MFSC (the "MFS Participant
Recordkeeping System");
> 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; and
> Shares purchased by certain retirement plans or trust accounts if: (i)
the plan is currently a party to a retirement plan recordkeeping or
administration services agreement with MFD or one of its affiliates
and (ii) the shares purchased or redeemed represent transfers from or
transfers to plan investments other than the MFS Funds for which
retirement plan recordkeeping services are provided under the terms of
such agreement.
o Section 403(b) Salary Reduction Only Plans ("SRO Plans")
> Death or disability of SRO Plan participant.
o Nonqualified deferred compensation plans (currently a party to a
retirement plan recordkeeping or administrative services agreement with
MFD or one of its affiliates)
> Eligible participant distributions, such as distributions due to
death, disability, financial hardship, retirement and termination of
employment.
CERTAIN TRANSFERS OF REGISTRATION (CDSC WAIVER ONLY).
Shares transferred:
o 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
o From a single account maintained for a 401(a) Plan to multiple accounts
maintained by MFSC on behalf of individual participants of such Plan,
provided that the Plan sponsor subscribes to the MFS Corporate Plan
Services 401(k) Plan or another similar recordkeeping system made
available by MFSC.
LOAN REPAYMENTS
o 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 Corporate Plan Services
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:
WRAP ACCOUNT AND FUND "SUPERMARKET" INVESTMENTS
o 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.
INVESTMENT BY INSURANCE COMPANY SEPARATE ACCOUNTS
o Shares acquired by insurance company separate accounts.
SECTION 529 PLANS
Shares acquired by college savings plans qualified under Section 529 of
the Internal Revenue Code whose sponsors or administrators have entered
into an agreement with MFD or one of its affiliates to perform certain
administrative or investment advisory services.
RETIREMENT PLANS
o 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.
o 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.
o Reinvestment of Redemption Proceeds from Class B Shares
> Shares acquired by a retirement plan whose sponsoring organization
subscribes to the MFS Participant Recordkeeping System where the
purchase represents the immediate reinvestment of proceeds from the
plan's redemption of its Class B shares of the MFS Funds and is equal
to or exceeds $500,000, either alone or in aggregate with the current
market value of the plan's existing Class A shares.
o Retirement Plan Recordkeeping Services Agreements
> Where the retirement plan is, at that time, a party to a retirement
plan recordkeeping or administrative services agreement with MFD or
one of its affiliates pursuant to which certain of those services are
provided by Benefit Services Corporation or any successor service
provider designated by MFD.
> Where the retirement plan has established an account with MFSC on or
after January 1, 2000 and is, at that time, a party to a retirement
plan recordkeeping or administrative services agreement with MFD or
one of its affiliates pursuant to which such services are provided
with respect to at least $10 million in plan assets.
o MFS Prototype IRAs
> Shares acquired by the IRA owner if: (i) the purchase represents the
immediate reinvestment of distribution proceeds from a retirement plan
or trust which is currently a party to a retirement plan recordkeeping
or administrative services agreement with MFD or one of its affiliates
and (ii) such distribution proceeds result from the redemption or
liquidation of plan investments other than the MFS Funds for which
retirement plan recordkeeping services are provided under the terms of
such agreement.
SHARES REDEEMED ON ACCOUNT OF DISTRIBUTIONS
MADE UNDER THE FOLLOWING CIRCUMSTANCES:
o 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.
o 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.
o 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.
o 401(a) Plans and ESP Plans
> where the retirement plan and/or sponsoring organization does not
subscribe to the MFS Participant Recordkeeping System; and
> where the retirement plan and/or sponsoring organization demonstrates
to the satisfaction of, and certifies to, MFSC 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
Family of 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 MFSC on
or after November 1, 1997, in the event that the plan makes a complete
redemption of all of its shares in the MFS Family of Funds, or (b) with
respect to plans which establish an account with MFSC prior to November 1,
1997, in the event that there is a change in law or regulations which
result 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.
PURCHASES OF AT LEAST $5 MILLION (CDSC WAIVER ONLY)
o 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.
BANK TRUST DEPARTMENTS AND LAW FIRMS
o Shares acquired by certain bank trust departments or law firms acting as
trustee or manager for trust accounts which have entered into an
administrative services agreement with MFD and are acquiring such shares
for the benefit of their trust account clients.
INVESTMENT OF PROCEEDS FROM CERTAIN REDEMPTIONS OF CLASS I SHARES.
o The initial sales charge imposed on purchases of Class A shares, and the
contingent deferred sales charge imposed on certain redemptions of Class
A shares, are waived with respect to Class A shares acquired of any of
the MFS Funds through the immediate reinvestment of the proceeds of a
redemption of Class I shares of any of the MFS Funds.
III WAIVERS OF CLASS B AND CLASS C SALES CHARGES
In addition to the waivers set forth in Section I above, in the following
circumstances the CDSC imposed on redemptions of Class B and Class C
shares is waived:
SYSTEMATIC WITHDRAWAL PLAN
o 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.
DEATH OF OWNER
o Shares redeemed on account of the death of the account owner (e.g.,
shares redeemed by the estate or any transferal of the shares from the
estate) if the shares were held solely in the deceased individual's
name, or for the benefit, of the deceased individual.
DISABILITY OF OWNER
o 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 MFSC).
RETIREMENT PLANS.
Shares redeemed on account of distributions made under the following
circumstances:
o 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 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.
o 401(a) and ESP Plans Only (Class B CDSC Waiver Only)
> By a retirement plan whose sponsoring organization subscribes to the
MFS Participant Recordkeeping System and which established an account
with MFSC between July 1, 1996 and December 31, 1998; 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.
> By a retirement plan whose sponsoring organization subscribes to the
MFS Recordkeeper Plus product and which established its account with
MFSC on or after January 1, 1999 (provided that the plan establishment
paperwork is received by MFSC in good order on or after November 15,
1998). A plan with a pre-existing account(s) with any MFS Fund which
switches to the MFS Recordkeeper Plus product will not become eligible
for this waiver category.
<PAGE>
--------------------
PART II - APPENDIX B
--------------------
DEALER COMMISSIONS AND CONCESSIONS
This Appendix describes the various commissions paid and concessions made
to dealers by MFD in connection with the sale of Fund shares. As used in
this Appendix, 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.
CLASS A SHARES
Purchases Subject to an Initial Sales Charge. For purchases of Class A
shares subject to an initial sales charge, MFD reallows a portion of the
initial sales charge to dealers (which are alike for all dealers), as
shown in Appendix D to Part I of this SAI. The difference between the
total amount invested and the sum of (a) the net proceeds to the Fund and
(b) the dealer reallowance, is the amount of the initial sales charge
retained by MFD (as shown in Appendix D to Part I of this SAI). Because of
rounding in the computation of offering price, the portion of the sales
charge retained by MFD 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.
Purchases Subject to a CDSC (but not an Initial Sales Charge). For
purchases of Class A shares subject to a CDSC, MFD pays commissions to
dealers on new investments made through such dealers as follows:
COMMISSION
PAID BY MFD
TO DEALERS CUMULATIVE PURCHASE AMOUNT
------------------------------------------------------
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
Except for those employer sponsored retirement plans described below,
for purposes of determining the level of commissions to be paid to dealers
with respect to a shareholder's new investment in Class A shares purchases
for each shareholder account (and certain other accounts for which the
shareholder is a record or beneficial holder) will be aggregated over a
12-month period (commencing from the date of the first such purchase).
In the case of employer sponsored retirement plans whose account
application or other account establishment paperwork is received in good
order after December 31, 1999, purchases will be aggregated as described
above but the cumulative purchase amount will not be re-set after the date
of the first such purchase.
CLASS B SHARES
For purchases of Class B shares, 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 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).
For purchases of Class B shares by a retirement plan whose sponsoring
organization subscribes to the MFS Participant Recordkeeping System and
which established its account with MFSC between July 1, 1996 and December
31, 1998, 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.
For purchases of Class B shares by a retirement plan whose sponsoring
organization subscribes to the MFS Recordkeeper Plus product and which has
established its account with MFSC on or after January 1, 1999 (provided
that the plan establishment paperwork is received by MFSC in good order on
or after November 15, 1998), MFD pays no up front commissions to dealers,
but instead pays an amount to dealers equal to 1% per annum of the average
daily net assets of the Fund attributable to plan assets, payable at the
rate of 0.25% at the end of each calendar quarter, in arrears. This
commission structure is not available with respect to a plan with a pre-
existing account(s) with any MFS Fund which seeks to switch to the MFS
Recordkeeper Plus product.
CLASS C SHARES
For purchases of Class C shares, 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.
ADDITIONAL DEALER COMMISSIONS/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 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 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 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.
For most of the MFS Funds:
o In lieu of the sales commission and service fees normally paid by MFD to
broker-dealers of record as described in the Prospectus, MFD has agreed
to pay Bear, Stearns & Co. Inc. the following amounts with respect to
Class A shares of the Fund purchased through a special retirement plan
program offered by a third party administrator: (i) an amount equal to
0.05% per annum of the average daily net assets invested in shares of
the Fund pursuant to such program, and (ii) an amount equal to 0.20% of
the net asset value of all net purchases of shares of the Fund made
through such program, subject to a refund in the event that such shares
are redeemed within 36 months.
o Until terminated by MFD, MFD will incur, on behalf of H. D. Vest
Investment Securities, Inc., the initial ticket charge of $15 with
respect to purchases of shares of any MFS fund made through VESTADVISOR
accounts. MFD will not incur such charge with respect to redemptions or
repurchases of fund shares, exchanges of fund shares, or shares
purchased or redeemed through systematic investment or withdrawal plans.
o The following provisions shall apply to any retirement plan (each a
"Merrill Lynch Daily K Plan") whose records are maintained on a daily
valuation basis by either Merrill Lynch, Pierce, Fenner & Smith
Incorporated ("Merrill Lynch"), or by an independent recordkeeper (an
"Independent Recordkeeper") whose services are provided through a
contract or alliance arrangement with Merrill Lynch, and with respect to
which the sponsor of such plan has entered into a recordkeeping service
agreement with Merrill Lynch (a "Merrill Lynch Recordkeeping
Agreement").
The initial sales charge imposed on purchases of Class A shares of the
Funds, and the contingent deferred sales charge ("CDSC") imposed on
certain redemptions of Class A shares of the Funds, is waived in the
following circumstances with respect to a Merrill Lynch Daily K Plan:
(i) if, on the date the Plan sponsor signs the Merrill Lynch
Recordkeeping Agreement, such Plan has $3 million or more in
assets invested in broker-dealer sold funds not advised or managed
by Merrill Lynch Asset Management L.P. ("MLAM") that are made
available pursuant to agreements between Merrill Lynch and such
funds' principal underwriters or distributors, and in funds
advised or managed by MLAM (collectively, the "Applicable
Investments"); or
(ii) if such Plan's records are maintained by an Independent
Recordkeeper and, on the date the Plan sponsor signs the Merrill
Lynch Recordkeeping Agreement, such Plan has $3 million or more in
assets, excluding money market funds, invested in Applicable
Investments; or
(iii) such Plan has 500 or more eligible employees, as determined by the
Merrill Lynch plan conversion manager on the date the Plan sponsor
signs the Merrill Lynch Recordkeeping Agreement.
The CDSC imposed on redemptions of Class B shares of the Fund is waived
in the following circumstances with respect to a Merrill Lynch Daily K
Plan:
(i) if, on the date the Plan sponsor signs the Merrill Lynch
Recordkeeping Agreement, such Plan has less than $3 million in
assets invested in Applicable Investments;
(ii) if such Plan's records are maintained by an independent
recordkeeper and, on the date the Plan sponsor signs the Merrill
Lynch Recordkeeping Agreement, such Plan has less than $3 million
dollars in assets, excluding money market funds, invested in
Applicable Investments; or
(iii) such Plan has fewer than 500 eligible employees, as determined by
the Merrill Lynch plan conversion manager on the date the Plan
sponsor signs the Merrill Lynch Recordkeeping Agreement.
No front-end commissions are paid with respect to any Class A or Class B
shares of the Fund purchased by any Merrill Lynch Daily K Plan.
o In lieu of the sales commission and service fees normally paid by MFD to
borker-dealers of record as described in the Prospectus, MFD has agreed
to pay Bear, Stearns & Co. Inc. the following amounts with respect to
Class A shares of the Fund purchased through a special retirement plan
program offered by a third party administrator: (i) an amount equal to
0.05% per annum of the average daily net assets invested in shares of
the Fund pursuant to such program, and (ii) an amount equal to 0.20% of
the net asset value of all net purchases of shares of the Fund made
through such program, subject to a refund in the event that such shares
are redeemed within 36 months.
For MFS Union Standard(R) Equity Fund:
o The initial sales charge on Class A shares will be waived on shares
purchased using redemption proceeds from a separate institutional
account of Connecticut General Life Insurance Company with respect to
which MFS Institutional Advisors, Inc. acts as investment adviser. No
commissions will be payable to any dealer, bank or other financial
intermediary with respect to shares purchased in this manner.
For MFS Emerging Growth Fund, MFS Research Fund, MFS Capital
Opportunities Fund and MFS Money Market Fund:
o Class A shares of the Fund may be purchased at net asset value by one or
more Chilean retirement plans, known as Administradores de Fondos de
Pensiones, which are clients of the 1850 K Street N.W., Washington D.C.
office of Dean Witter Reynolds, Inc. ("Dean Witter").
MFD will waive any applicable contingent deferred sales charges upon
redemption by such retirement plans on purchases of Class A shares over
$1 million, provided that (i) in lieu of the commissions otherwise
payable as specified in the prospectus, MFD will pay Dean Witter a
commission on such purchases equal to 1.00% (including amounts in excess
of $5 million) and (ii) if one or more such clients redeem all or a
portion of these shares within three years after the purchase thereof,
Dean Witter will reimburse MFD for the commission paid with respect to
such shares on a pro rata basis based on the remaining portion of such
three-year period.
<PAGE>
--------------------
PART II - APPENDIX C
--------------------
INVESTMENT TECHNIQUES, PRACTICES AND RISKS
Set forth below is a description of investment techniques and practices
which the MFS Funds may generally use in pursuing their investment
objectives and principal investment policies, and the risks associated with
these investment techniques and practices. The Fund will engage only in
certain of these investment techniques and practices, as identified in
Appendix A of the Fund's Prospectus. Investment practices and techniques
that are not identified in Appendix A of the Fund's Prospectus do not apply
to the Fund.
INVESTMENT TECHNIQUES AND PRACTICES
DEBT SECURITIES
To the extent the Fund invests in the following types of debt securities,
its net asset value may change as the general levels of interest rates
fluctuate. When interest rates decline, the value of debt securities can be
expected to rise. Conversely, when interest rates rise, the value of debt
securities can be expected to decline. The Fund's investment in debt
securities with longer terms to maturity are subject to greater volatility
than the Fund's shorter-term obligations. Debt securities may have all types
of interest rate payment and reset terms, including fixed rate, adjustable
rate, zero coupon, contingent, deferred, payment in kind and auction rate
features.
ASSET-BACKED SECURITIES: The Fund may purchase the following types of
asset-backed securities:
COLLATERALIZED MORTGAGE OBLIGATIONS AND MULTICLASS PASS-THROUGH
SECURITIES: The Fund may invest a portion of its assets in collateralized
mortgage obligations or "CMOs," which are debt obligations collateralized by
mortgage loans or mortgage pass-through securities (such collateral referred
to collectively as "Mortgage Assets"). Unless the context indicates
otherwise, all references herein to CMOs include multiclass pass-through
securities.
Interest is paid or accrues on all classes of the CMOs on a monthly,
quarterly or semi-annual basis. The principal of and interest on the
Mortgage Assets may be allocated among the several classes of a CMO in
innumerable ways. In a common structure, payments of principal, including
any principal prepayments, on the Mortgage Assets are applied to the classes
of a CMO in the order of their respective stated maturities or final
distribution dates, so that no payment of principal will be made on any
class of CMOs until all other classes having an earlier stated maturity or
final distribution date have been paid in full. Certain CMOs may be stripped
(securities which provide only the principal or interest factor of the
underlying security). See "Stripped Mortgage-Backed Securities" below for a
discussion of the risks of investing in these stripped securities and of
investing in classes consisting of interest payments or principal payments.
The Fund may also invest in parallel pay CMOs and Planned Amortization
Class CMOs ("PAC Bonds"). Parallel pay CMOs are structured to provide
payments of principal on each payment date to more than one class. These
simultaneous payments are taken into account in calculating the stated
maturity date or final distribution date of each class, which, as with other
CMO structures, must be retired by its stated maturity date or final
distribution date but may be retired earlier.
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. These 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. The underlying assets
(e.g., loans) are also subject to prepayments which shorten the securities'
weighted average life and may lower their return.
Corporate asset-backed securities are backed by a pool of assets
representing the obligations of a number of different parties. To lessen the
effect of failures by obligors on underlying assets to make payments, 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.
MORTGAGE PASS-THROUGH SECURITIES: The Fund may invest in mortgage
pass-through securities. Mortgage pass-through securities are securities
representing interests in "pools" of mortgage loans. Monthly payments of
interest and principal by the individual borrowers on mortgages are passed
through to the holders of the securities (net of fees paid to the issuer or
guarantor of the securities) as the mortgages in the underlying mortgage
pools are paid off. The average lives of mortgage pass-throughs are variable
when issued because their average lives depend on prepayment rates. The
average life of these securities is likely to be substantially shorter than
their stated final maturity as a result of unscheduled principal prepayment.
Prepayments on underlying mortgages result in a loss of anticipated
interest, and all or part of a premium if any has been paid, and the actual
yield (or total return) to the Fund may be different than the quoted yield
on the securities. Mortgage premiums generally increase with falling
interest rates and decrease with rising interest rates. Like other fixed
income securities, when interest rates rise the value of a mortgage
pass-through security generally will decline; however, when interest rates
are declining, the value of mortgage pass-through securities with prepayment
features may not increase as much as that of other fixed-income securities.
In the event of an increase in interest rates which results in a decline in
mortgage prepayments, the anticipated maturity of mortgage pass-through
securities held by the Fund may increase, effectively changing a security
which was considered short or intermediate-term at the time of purchase into
a long-term security. Long-term securities generally fluctuate more widely
in response to changes in interest rates than short or intermediate-term
securities.
Payment of principal and interest on some mortgage pass-through securities
(but not the market value of the securities themselves) may be guaranteed by
the full faith and credit of the U.S. Government (in the case of securities
guaranteed by the Government National Mortgage Association ("GNMA")); or
guaranteed by agencies or instrumentalities of the U.S. Government (such as
the Federal National Mortgage Association "FNMA") or the Federal Home Loan
Mortgage Corporation, ("FHLMC") which are supported only by the
discretionary authority of the U.S. Government to purchase the agency's
obligations). Mortgage pass-through securities may also be issued by
non-governmental issuers (such as commercial banks, savings and loan
institutions, private mortgage insurance companies, mortgage bankers and
other secondary market issuers). Some of these mortgage pass-through
securities may be supported by various forms of insurance or guarantees.
Interests in pools of mortgage-related securities differ from other forms
of debt securities, which normally provide for periodic payment of interest
in fixed amounts with principal payments at maturity or specified call
dates. Instead, these securities provide a monthly payment which consists of
both interest and principal payments. In effect, these payments are a
"pass-through" of the monthly payments made by the individual borrowers on
their mortgage loans, net of any fees paid to the issuer or guarantor of
such securities. Additional payments are caused by prepayments of principal
resulting from the sale, refinancing or foreclosure of the underlying
property, net of fees or costs which may be incurred. Some mortgage
pass-through securities (such as securities issued by the GNMA) are
described as "modified pass-through." These securities entitle the holder to
receive all interests and principal payments owed on the mortgages in the
mortgage pool, net of certain fees, at the scheduled payment dates
regardless of whether the mortgagor actually makes the payment.
The principal governmental guarantor of mortgage pass-through securities
is GNMA. GNMA is a wholly owned U.S. Government corporation within the
Department of Housing and Urban Development. GNMA is authorized to
guarantee, with the full faith and credit of the U.S. Government, the timely
payment of principal and interest on securities issued by institutions
approved by GNMA (such as savings and loan institutions, commercial banks
and mortgage bankers) and backed by pools of Federal Housing Administration
("FHA") insured or Veterans Administration ("VA") guaranteed mortgages.
These guarantees, however, do not apply to the market value or yield of
mortgage pass-through securities. GNMA securities are often purchased at a
premium over the maturity value of the underlying mortgages. This premium is
not guaranteed and will be lost if prepayment occurs.
Government-related guarantors (i.e., whose guarantees are not backed by
the full faith and credit of the U.S. Government) include FNMA and FHLMC.
FNMA is a government-sponsored corporation owned entirely by private
stockholders. It is subject to general regulation by the Secretary of
Housing and Urban Development. FNMA purchases conventional residential
mortgages (i.e., mortgages not insured or guaranteed by any governmental
agency) from a list of approved seller/servicers which include state and
federally chartered savings and loan associations, mutual savings banks,
commercial banks, credit unions and mortgage bankers. Pass-through
securities issued by FNMA are guaranteed as to timely payment by FNMA of
principal and interest.
FHLMC is also a government-sponsored corporation owned by private
stockholders. FHLMC issues Participation Certificates ("PCs") which
represent interests in conventional mortgages (i.e., not federally insured
or guaranteed) for FHLMC's national portfolio. FHLMC guarantees timely
payment of interest and ultimate collection of principal regardless of the
status of the underlying mortgage loans.
Commercial banks, savings and loan institutions, private mortgage
insurance companies, mortgage bankers and other secondary market issuers
also create pass through pools of mortgage loans. Such issuers may also be
the originators and/or servicers of the underlying mortgage-related
securities. Pools created by such non-governmental issuers generally offer a
higher rate of interest than government and government-related pools because
there are no direct or indirect government or agency guarantees of payments
in the former pools. However, timely payment of interest and principal of
mortgage loans in these pools may be supported by various forms of insurance
or guarantees, including individual loan, title, pool and hazard insurance
and letters of credit. The insurance and guarantees are issued by
governmental entities, private insurers and the mortgage poolers. There can
be no assurance that the private insurers or guarantors can meet their
obligations under the insurance policies or guarantee arrangements. The Fund
may also buy mortgage-related securities without insurance or guarantees.
STRIPPED MORTGAGE-BACKED SECURITIES: The Fund may invest a portion of its
assets in stripped mortgage-backed securities ("SMBS") which are derivative
multiclass mortgage securities issued by agencies or instrumentalities of
the U.S. Government, or by private originators of, or investors in, mortgage
loans, including savings and loan institutions, mortgage banks, commercial
banks and investment banks.
SMBS are usually structured with two classes that receive different
proportions of the interest and principal distributions from a pool of
mortgage assets. A common type of SMBS will have one class receiving some of
the interest and most of the principal from the Mortgage Assets, while the
other class will receive most of the interest and the remainder of the
principal. In the most extreme case, one class will receive all of the
interest (the interest-only or "I0" class) while the other class will
receive all of the principal (the principal-only or "P0" class). The yield
to maturity on an I0 is extremely sensitive to the rate of principal
payments, including prepayments on the related underlying Mortgage Assets,
and a rapid rate of principal payments may have a material adverse effect on
such security's yield to maturity. If the underlying Mortgage Assets
experience greater than anticipated prepayments of principal, the Fund may
fail to fully recoup its initial investment in these securities. The market
value of the class consisting primarily or entirely of principal payments
generally is unusually volatile in response to changes in interest rates.
Because SMBS were only recently introduced, established trading markets for
these securities have not yet developed, although the securities are traded
among institutional investors and investment banking firms.
CORPORATE SECURITIES: The Fund may invest in debt securities, such as
convertible and non-convertible bonds, notes and debentures, issued by
corporations, limited partnerships and other similar entities.
LOANS AND OTHER DIRECT INDEBTEDNESS: The Fund may purchase loans and other
direct indebtedness. In purchasing a loan, the Fund acquires some or all of
the interest of a bank or other lending institution in a loan to a
corporate, governmental or other borrower. Many such loans are secured,
although some may be unsecured. Such loans may be in default at the time of
purchase. Loans that are fully secured offer the Fund more protection than
an unsecured loan in the event of non-payment of scheduled interest or
principal. However, there is no assurance that the liquidation of collateral
from a secured loan would satisfy the corporate borrowers obligation, or
that the collateral can be liquidated.
These loans are made generally to finance internal growth, mergers,
acquisitions, stock repurchases, leveraged buy-outs and other corporate
activities. Such loans are typically made by a syndicate of lending
institutions, represented by an agent lending institution which has
negotiated and structured the loan and is responsible for collecting
interest, principal and other amounts due on its own behalf and on behalf of
the others in the syndicate, and for enforcing its and their other rights
against the borrower. Alternatively, such loans may be structured as a
novation, pursuant to which the Fund would assume all of the rights of the
lending institution in a loan or as an assignment, pursuant to which the
Fund would purchase an assignment of a portion of a lenders interest in a
loan either directly from the lender or through an intermediary. The Fund
may also purchase trade or other claims against companies, which generally
represent money owned by the company to a supplier of goods or services.
These claims may also be purchased at a time when the company is in default.
Certain of the loans and the other direct indebtedness acquired by the
Fund may involve revolving credit facilities or other standby financing
commitments which obligate the Fund to pay additional cash on a certain date
or on demand. These commitments may have the effect of requiring the Fund to
increase its investment in a company at a time when the Fund might not
otherwise decide to do so (including at a time when the company's financial
condition makes it unlikely that such amounts will be repaid). To the extent
that the Fund is committed to advance additional funds, it will at all times
hold and maintain in a segregated account cash or other high grade debt
obligations in an amount sufficient to meet such commitments.
The Fund's ability to receive payment of principal, interest and other
amounts due in connection with these investments will depend primarily on
the financial condition of the borrower. In selecting the loans and other
direct indebtedness which the Fund will purchase, the Adviser will rely upon
its own (and not the original lending institution's) credit analysis of the
borrower. As the Fund may be required to rely upon another lending
institution to collect and pass onto the Fund amounts payable with respect
to the loan and to enforce the Fund's rights under the loan and other direct
indebtedness, an insolvency, bankruptcy or reorganization of the lending
institution may delay or prevent the Fund from receiving such amounts. In
such cases, the Fund will evaluate as well the creditworthiness of the
lending institution and will treat both the borrower and the lending
institution as an "issuer" of the loan for purposes of certain investment
restrictions pertaining to the diversification of the Fund's portfolio
investments. The highly leveraged nature of many such loans and other direct
indebtedness may make such loans and other direct indebtedness especially
vulnerable to adverse changes in economic or market conditions. Investments
in such loans and other direct indebtedness may involve additional risk to
the Fund.
LOWER RATED BONDS: The Fund may invest in fixed income securities rated Ba
or lower by Moody's or BB or lower by S&P, Fitch or Duff & Phelps and
comparable unrated securities (commonly known as "junk bonds"). See Appendix
D for a description of bond ratings. No minimum rating standard is required
by the Fund. These securities are considered speculative and, while
generally providing greater income than investments in higher rated
securities, will involve greater risk of principal and income (including the
possibility of default or bankruptcy of the issuers of such securities) and
may involve greater volatility of price (especially during periods of
economic uncertainty or change) than securities in the higher rating
categories and because yields vary over time, no specific level of income
can ever be assured. These lower rated high yielding fixed income securities
generally tend to reflect economic changes (and the outlook for economic
growth), short-term corporate and industry developments and the market's
perception of their credit quality (especially during times of adverse
publicity) to a greater extent than higher rated securities which react
primarily to fluctuations in the general level of interest rates (although
these lower rated fixed income securities are also affected by changes in
interest rates). In the past, economic downturns or an increase in interest
rates have, under certain circumstances, caused a higher incidence of
default by the issuers of these securities and may do so in the future,
especially in the case of highly leveraged issuers. The prices for these
securities may be affected by legislative and regulatory developments. The
market for these lower rated fixed income securities may be less liquid than
the market for investment grade fixed income securities. Furthermore, the
liquidity of these lower rated securities may be affected by the market's
perception of their credit quality. Therefore, the Adviser's judgment may at
times play a greater role in valuing these securities than in the case of
investment grade fixed income securities, and it also may be more difficult
during times of certain adverse market conditions to sell these lower rated
securities to meet redemption requests or to respond to changes in the
market.
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 a Fund invests in these lower rated securities, the achievement of
its investment objectives may be a more dependent on the Adviser's own
credit analysis than in the case of a fund investing in higher quality fixed
income securities. These lower rated securities may also include zero coupon
bonds, deferred interest bonds and PIK bonds.
MUNICIPAL BONDS: The Fund may invest 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"). Municipal Bonds include debt securities which pay
interest income that is subject to the alternative minimum tax. The Fund may
invest in Municipal Bonds whose issuers pay interest on the Bonds from
revenues from projects such as multifamily housing, nursing homes, electric
utility systems, hospitals or life care facilities.
If a revenue bond is secured by payments generated from a project, and the
revenue bond is also secured by a lien on the real estate comprising the
project, foreclosure by the indenture trustee on the lien for the benefit of
the bondholders creates additional risks associated with owning real estate,
including environmental risks.
Housing revenue bonds typically are issued by a state, county or local
housing authority and are secured only by the revenues of mortgages
originated by the authority using the proceeds of the bond issue. Because of
the impossibility of precisely predicting demand for mortgages from the
proceeds of such an issue, there is a risk that the proceeds of the issue
will be in excess of demand, which would result in early retirement of the
bonds by the issuer. Moreover, such housing revenue bonds depend for their
repayment upon the cash flow from the underlying mortgages, which cannot be
precisely predicted when the bonds are issued. Any difference in the actual
cash flow from such mortgages from the assumed cash flow could have an
adverse impact upon the ability of the issuer to make scheduled payments of
principal and interest on the bonds, or could result in early retirement of
the bonds. Additionally, such bonds depend in part for scheduled payments of
principal and interest upon reserve funds established from the proceeds of
the bonds, assuming certain rates of return on investment of such reserve
funds. If the assumed rates of return are not realized because of changes in
interest rate levels or for other reasons, the actual cash flow for
scheduled payments of principal and interest on the bonds may be inadequate.
The financing of multi-family housing projects is affected by a variety of
factors, including satisfactory completion of construction within cost
constraints, the achievement and maintenance of a sufficient level of
occupancy, sound management of the developments, timely and adequate
increases in rents to cover increases in operating expenses, including
taxes, utility rates and maintenance costs, changes in applicable laws and
governmental regulations and social and economic trends.
Electric utilities face problems in financing large construction programs
in inflationary periods, cost increases and delay occasioned by
environmental considerations (particularly with respect to nuclear
facilities), difficulty in obtaining fuel at reasonable prices, the cost of
competing fuel sources, difficulty in obtaining sufficient rate increases
and other regulatory problems, the effect of energy conservation and
difficulty of the capital market to absorb utility debt.
Health care facilities include life care facilities, nursing homes and
hospitals. Life care facilities are alternative forms of long-term housing
for the elderly which offer residents the independence of condominium life
style and, if needed, the comprehensive care of nursing home services. Bonds
to finance these facilities have been issued by various state industrial
development authorities. Since the bonds are secured only by the revenues of
each facility and not by state or local government tax payments, they are
subject to a wide variety of risks. Primarily, the projects must maintain
adequate occupancy levels to be able to provide revenues adequate to
maintain debt service payments. Moreover, in the case of life care
facilities, since a portion of housing, medical care and other services may
be financed by an initial deposit, there may be risk if the facility does
not maintain adequate financial reserves to secure estimated actuarial
liabilities. The ability of management to accurately forecast inflationary
cost pressures weighs importantly in this process. The facilities may also
be affected by regulatory cost restrictions applied to health care delivery
in general, particularly state regulations or changes in Medicare and
Medicaid payments or qualifications, or restrictions imposed by medical
insurance companies. They may also face competition from alternative health
care or conventional housing facilities in the private or public sector.
Hospital bond ratings are often based on feasibility studies which contain
projections of expenses, revenues and occupancy levels. A hospital's gross
receipts and net income available to service its debt are influenced by
demand for hospital services, the ability of the hospital to provide the
services required, management capabilities, economic developments in the
service area, efforts by insurers and government agencies to limit rates and
expenses, confidence in the hospital, service area economic developments,
competition, availability and expense of malpractice insurance, Medicaid and
Medicare funding, and possible federal legislation limiting the rates of
increase of hospital charges.
The Fund may invest in municipal lease securities. These are undivided
interests in a portion of an obligation in the from 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. There are, of course, variations in
the security of municipal lease securities, both within a particular
classification and between classifications, depending on numerous factors.
The Fund may also invest in bonds for industrial and other projects, such
as sewage or solid waste disposal or hazardous waste treatment facilities.
Financing for such projects will be subject to inflation and other general
economic factors as well as construction risks including labor problems,
difficulties with construction sites and the ability of contractors to meet
specifications in a timely manner. Because some of the materials, processes
and wastes involved in these projects may include hazardous components,
there are risks associated with their production, handling and disposal.
SPECULATIVE BONDS: The Fund may invest in fixed income and convertible
securities rated Baa by Moody's or BBB by S&P, Fitch or Duff & Phelps and
comparable unrated securities. See Appendix D for a description of bond
ratings. 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 securities.
U.S. GOVERNMENT SECURITIES: The Fund may invest in U.S. Government
Securities including (i) U.S. Treasury obligations, all of which are backed
by the full faith and credit of the U.S. Government and (ii) U.S. Government
Securities, some of which are backed by the full faith and credit of the
U.S. Treasury, e.g., direct pass-through certificates of the GNMA; some of
which are backed only by the credit of the issuer itself, e.g., obligations
of the Student Loan Marketing Association; and some of which are supported
by the discretionary authority of the U.S. Government to purchase the
agency's obligations, e.g., obligations of the FNMA.
U.S. Government Securities also include interests in trust or other
entities representing interests in obligations that are issued or guaranteed
by the U.S. Government, its agencies, authorities or instrumentalities.
VARIABLE AND FLOATING RATE OBLIGATIONS: The Fund may invest in floating or
variable rate securities. Investments in floating or variable rate
securities normally will involve industrial development or revenue bonds
which provide that the rate of interest is set as a specific percentage of a
designated base rate, such as rates on Treasury Bonds or Bills or the prime
rate at a major commercial bank, and that a bondholder can demand payment of
the obligations on behalf of the Fund on short notice at par plus accrued
interest, which amount may be more or less than the amount the bondholder
paid for them. The maturity of floating or variable rate obligations
(including participation interests therein) is deemed to be the longer of
(i) the notice period required before the Fund is entitled to receive
payment of the obligation upon demand or (ii) the period remaining until the
obligation's next interest rate adjustment. If not redeemed by the Fund
through the demand feature, the obligations mature on a specified date which
may range up to thirty years from the date of issuance.
ZERO COUPON BONDS, DEFERRED INTEREST BONDS AND PIK BONDS: The Fund may
invest in zero coupon bonds, deferred interest bonds and bonds on which the
interest is payable in kind ("PIK bonds"). Zero coupon and deferred interest
bonds are debt obligations which are issued at a significant discount from
face value. The discount approximates the total amount of interest the bonds
will accrue and compound over the period until maturity or the first
interest payment date at a rate of interest reflecting the market rate of
the security at the time of issuance. While zero coupon bonds do not require
the periodic payment of interest, deferred interest bonds provide for a
period of delay before the regular payment of interest begins. PIK bonds are
debt obligations which provide that the issuer may, at its option, pay
interest on such bonds in cash or in the form of additional debt
obligations. Such investments benefit the issuer by mitigating its need for
cash to meet debt service, but also require a higher rate of return to
attract investors who are willing to defer receipt of such cash. Such
investments may experience greater volatility in market value than debt
obligations which make regular payments of interest. The Fund will accrue
income on such investments for tax and accounting purposes, 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.
EQUITY SECURITIES
The Fund may invest in all types of equity securities, including the
following: common stocks, preferred stocks and preference stocks; securities
such as bonds, warrants or rights that are convertible into stocks; and
depositary receipts for those securities. These securities may be listed on
securities exchanges, traded in various over-the-counter markets or have no
organized market.
FOREIGN SECURITIES EXPOSURE
The Fund may invest in various types of foreign securities, or securities
which provide the Fund with exposure to foreign securities or foreign
currencies, as discussed below:
BRADY BONDS: The Fund may invest in Brady Bonds, which are securities
created through the exchange of existing commercial bank loans to public and
private entities in certain emerging markets for new bonds in connection
with debt restructurings under a debt restructuring plan introduced by
former U.S. Secretary of the Treasury, Nicholas F. Brady (the "Brady Plan").
Brady Plan debt restructurings have been implemented to date in Argentina,
Brazil, Bulgaria, Costa Rica, Croatia, Dominican Republic, Ecuador, Jordan,
Mexico, Morocco, Nigeria, Panama, Peru, the Philippines, Poland, Slovenia,
Uruguay and Venezuela. Brady Bonds have been issued only recently, and for
that reason do not have a long payment history. Brady Bonds may be
collateralized or uncollateralized, are issued in various currencies (but
primarily the U.S. dollar) and are actively traded in over-the-counter
secondary markets. U.S. dollar-denominated, collateralized Brady Bonds,
which may be fixed rate bonds or floating-rate bonds, are generally
collateralized in full as to principal by U.S. Treasury zero coupon bonds
having the same maturity as the bonds. Brady Bonds are often viewed as
having three or four valuation components: the collateralized repayment of
principal at final maturity; the collateralized interest payments; the
uncollateralized interest payments; and any uncollateralized repayment of
principal at maturity (these uncollateralized amounts constituting the
"residual risk"). In light of the residual risk of Brady Bonds and the
history of defaults of countries issuing Brady Bonds with respect to
commercial bank loans by public and private entities, investments in Brady
Bonds may be viewed as speculative.
DEPOSITARY RECEIPTS: The Fund may invest in American Depositary Receipts
("ADRs"), Global Depositary Receipts ("GDRs") and other types of depositary
receipts. ADRs are certificates by a U.S. depositary (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. GDRs and other types of
depositary receipts are typically issued by foreign banks or trust companies
and evidence ownership of underlying securities issued by either a foreign
or a U.S. company. Generally, ADRs are in registered form and are designed
for use in U.S. securities markets and GDRs are in bearer form and are
designed for use in foreign securities markets. For the purposes of the
Fund's policy to invest a certain percentage of its assets in foreign
securities, the investments of the Fund in ADRs, GDRs and other types of
depositary receipts are deemed to be investments in the underlying
securities.
ADRs may be sponsored or unsponsored. A sponsored ADR is issued by a
depositary which has an exclusive relationship with the issuer of the
underlying security. An unsponsored ADR may be issued by any number of U.S.
depositories. Under the terms of most sponsored arrangements, depositories
agree to distribute notices of shareholder meetings and voting instructions,
and to provide shareholder communications and other information to the ADR
holders at the request of the issuer of the deposited securities. The
depository of an unsponsored ADR, on the other hand, is under no obligation
to distribute shareholder communications received from the issuer of the
deposited securities or to pass through voting rights to ADR holders in
respect of the deposited securities. The Fund may invest in either type of
ADR. Although the U.S. investor holds a substitute receipt of ownership
rather than direct stock certificates, the use of the depositary 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 depositary
of an ADR agent bank in 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, information available to a U.S. investor will be limited to the
information the foreign issuer is required to disclose in its 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 a foreign currency.
DOLLAR-DENOMINATED FOREIGN DEBT SECURITIES: The Fund may invest in
dollar-denominated foreign debt securities. Investing in dollar-denominated
foreign debt represents a greater degree of risk than investing in domestic
securities, due to less publicly available information, less securities
regulation, war or expropriation. Special considerations may include higher
brokerage costs and thinner trading markets. Investments in foreign
countries could be affected by other factors including extended settlement
periods.
EMERGING MARKETS: The Fund may invest in securities of government,
government-related, supranational and corporate issuers located in emerging
markets. Emerging markets include any country determined by the Adviser to
have an emerging market economy, taking into account a number of factors,
including whether the country has a low- to middle-income economy according
to the International Bank for Reconstruction and Development, the country's
foreign currency debt rating, its political and economic stability and the
development of its financial and capital markets. The Adviser determines
whether an issuer's principal activities are located in an emerging market
country by considering such factors as its country of organization, the
principal trading market for securities, the source of its revenues and the
location of its assets. Such investments entail significant risks as
described below.
o Company Debt -- Governments of many emerging market countries have
exercised and continue to exercise substantial influence over many
aspects of the private sector through the ownership or control of many
companies, including some of the largest in any given country. As a
result, government actions in the future could have a significant effect
on economic conditions in emerging markets, which in turn, may adversely
affect companies in the private sector, general market conditions and
prices and yields of certain of the securities in the Fund's portfolio.
Expropriation, confiscatory taxation, nationalization, political,
economic or social instability or other similar developments have
occurred frequently over the history of certain emerging markets and
could adversely affect the Fund's assets should these conditions recur.
o Default; Legal Recourse -- The Fund may have limited legal recourse in
the event of a default with respect to certain debt obligations it may
hold. If the issuer of a fixed income security owned by the Fund
defaults, the Fund may incur additional expenses to seek recovery. Debt
obligations issued by emerging market governments differ from debt
obligations of private entities; remedies from defaults on debt
obligations issued by emerging market governments, unlike those on
private debt, must be pursued in the courts of the defaulting party
itself. The Fund's ability to enforce its rights against private issuers
may be limited. The ability to attach assets to enforce a judgment may
be limited. Legal recourse is therefore somewhat diminished. Bankruptcy,
moratorium and other similar laws applicable to private issuers of debt
obligations may be substantially different from those of other
countries. The political context, expressed as an emerging market
governmental issuer's willingness to meet the terms of the debt
obligation, for example, is of considerable importance. In addition, no
assurance can be given that the holders of commercial bank debt may not
contest payments to the holders of debt obligations in the event of
default under commercial bank loan agreements.
o Foreign Currencies -- The securities in which the Fund invests may be
denominated in foreign currencies and international currency units and
the Fund may invest a portion of its assets directly in foreign
currencies. Accordingly, the weakening of these currencies and units
against the U.S. dollar may result in a decline in the Fund's asset
value.
Some emerging market countries also may have managed currencies, which
are not free floating against the U.S. dollar. In addition, there is
risk that certain emerging market countries may restrict the free
conversion of their currencies into other currencies. Further, certain
emerging market currencies may not be internationally traded. Certain of
these currencies have experienced a steep devaluation relative to the
U.S. dollar. Any devaluations in the currencies in which a Fund's
portfolio securities are denominated may have a detrimental impact on
the Fund's net asset value.
o Inflation -- Many emerging markets have experienced substantial, and in
some periods extremely high, rates of inflation for many years.
Inflation and rapid fluctuations in inflation rates have had and may
continue to have adverse effects on the economies and securities markets
of certain emerging market countries. In an attempt to control
inflation, wage and price controls have been imposed in certain
countries. Of these countries, some, in recent years, have begun to
control inflation through prudent economic policies.
o Liquidity; Trading Volume; Regulatory Oversight -- The securities
markets of emerging market countries are substantially smaller, less
developed, less liquid and more volatile than the major securities
markets in the U.S. Disclosure and regulatory standards are in many
respects less stringent than U.S. standards. Furthermore, there is a
lower level of monitoring and regulation of the markets and the
activities of investors in such markets.
The limited size of many emerging market securities markets and limited
trading volume in the securities of emerging market issuers compared to
volume of trading in the securities of U.S. issuers could cause prices
to be erratic for reasons apart from factors that affect the soundness
and competitiveness of the securities issuers. For example, limited
market size may cause prices to be unduly influenced by traders who
control large positions. Adverse publicity and investors' perceptions,
whether or not based on in-depth fundamental analysis, may decrease the
value and liquidity of portfolio securities.
The risk also exists that an emergency situation may arise in one or
more emerging markets, as a result of which trading of securities may
cease or may be substantially curtailed and prices for the Fund's
securities in such markets may not be readily available. The Fund may
suspend redemption of its shares for any period during which an
emergency exists, as determined by the Securities and Exchange
Commission (the "SEC"). Accordingly, if the Fund believes that
appropriate circumstances exist, it will promptly apply to the SEC for a
determination that an emergency is present. During the period commencing
from the Fund's identification of such condition until the date of the
SEC action, the Fund's securities in the affected markets will be valued
at fair value determined in good faith by or under the direction of the
Board of Trustees.
o Sovereign Debt -- Investment in sovereign debt can involve a high degree
of risk. The governmental entity that controls the repayment of
sovereign debt may not be able or willing to repay the principal and/or
interest when due in accordance with the terms of such debt. A
governmental entity's willingness or ability to repay principal and
interest due in a timely manner may be affected by, among other factors,
its cash flow situation, the extent of its foreign reserves, the
availability of sufficient foreign exchange on the date a payment is
due, the relative size of the debt service burden to the economy as a
whole, the governmental entity's policy towards the International
Monetary Fund and the political constraints to which a governmental
entity may be subject. Governmental entities may also be dependent on
expected disbursements from foreign governments, multilateral agencies
and others abroad to reduce principal and interest on their debt. The
commitment on the part of these governments, agencies and others to make
such disbursements may be conditioned on a governmental entity's
implementation of economic reforms and/or economic performance and the
timely service of such debtor's obligations. Failure to implement such
reforms, achieve such levels of economic performance or repay principal
or interest when due may result in the cancellation of such third
parties' commitments to lend funds to the governmental entity, which may
further impair such debtor's ability or willingness to service its debts
in a timely manner. Consequently, governmental entities may default on
their sovereign debt. Holders of sovereign debt (including the Fund) may
be requested to participate in the rescheduling of such debt and to
extend further loans to governmental entities. There is no bankruptcy
proceedings by which sovereign debt on which governmental entities have
defaulted may be collected in whole or in part.
Emerging market governmental issuers are among the largest debtors to
commercial banks, foreign governments, international financial
organizations and other financial institutions. Certain emerging market
governmental issuers have not been able to make payments of interest on
or principal of debt obligations as those payments have come due.
Obligations arising from past restructuring agreements may affect the
economic performance and political and social stability of those
issuers.
The ability of emerging market governmental issuers to make timely
payments on their obligations is likely to be influenced strongly by the
issuer's balance of payments, including export performance, and its
access to international credits and investments. An emerging market
whose exports are concentrated in a few commodities could be vulnerable
to a decline in the international prices of one or more of those
commodities. Increased protectionism on the part of an emerging market's
trading partners could also adversely affect the country's exports and
tarnish its trade account surplus, if any. To the extent that emerging
markets receive payment for their exports in currencies other than
dollars or non-emerging market currencies, its ability to make debt
payments denominated in dollars or non-emerging market currencies could
be affected.
To the extent that an emerging market country cannot generate a trade
surplus, it must depend on continuing loans from foreign governments,
multilateral organizations or private commercial banks, aid payments
from foreign governments and on inflows of foreign investment. The
access of emerging markets to these forms of external funding may not be
certain, and a withdrawal of external funding could adversely affect the
capacity of emerging market country governmental issuers to make
payments on their obligations. In addition, the cost of servicing
emerging market debt obligations can be affected by a change in
international interest rates since the majority of these obligations
carry interest rates that are adjusted periodically based upon
international rates.
Another factor bearing on the ability of emerging market countries to
repay debt obligations is the level of international reserves of the
country. Fluctuations in the level of these reserves affect the amount
of foreign exchange readily available for external debt payments and
thus could have a bearing on the capacity of emerging market countries
to make payments on these debt obligations.
o Withholding -- Income from securities held by the Fund could be reduced
by a withholding tax on the source or other taxes imposed by the
emerging market countries in which the Fund makes its investments. The
Fund's net asset value may also be affected by changes in the rates or
methods of taxation applicable to the Fund or to entities in which the
Fund has invested. The Adviser will consider the cost of any taxes in
determining whether to acquire any particular investments, but can
provide no assurance that the taxes will not be subject to change.
FOREIGN SECURITIES: The Fund may invest in dollar-denominated and non
dollar-denominated foreign securities. 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.
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,
securities settlement practices, 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. As a result
of its investments in foreign securities, the Fund may receive interest or
dividend payments, or the proceeds of the sale or redemption of such
securities, in the foreign currencies in which such securities are
denominated. Under certain circumstances, such as where the Adviser believes
that the applicable exchange rate is unfavorable at the time the currencies
are received or the Adviser anticipates, for any other reason, that the
exchange rate will improve, the Fund may hold such currencies for an
indefinite period of time. While the holding of currencies will permit the
Fund to take advantage of favorable movements in the applicable exchange
rate, such strategy also exposes the Fund to risk of loss if exchange rates
move in a direction adverse to the Fund's position. Such losses could reduce
any profits or increase any losses sustained by the Fund from the sale or
redemption of securities and could reduce the dollar value of interest or
dividend payments received. The Fund's investments in foreign securities may
also include "privatizations." Privatizations are situations where the
government in a given country, including emerging market countries, sells
part or all of its stakes in government owned or controlled enterprises. In
certain countries, the ability of foreign entities to participate in
privatizations may be limited by local law and the terms on which the
foreign entities may be permitted to participate may be less advantageous
than those afforded local investors.
FORWARD CONTRACTS
The Fund may enter into contracts for the purchase or sale of a specific
currency at a future date at a price set at the time the contract is entered
into (a "Forward Contract"), for hedging purposes (e.g., to protect its
current or intended investments from fluctuations in currency exchange
rates) as well as for non-hedging purposes.
A Forward Contract to sell a currency may be entered into where the Fund
seeks to protect against an anticipated increase in the exchange rate for a
specific currency which could reduce the dollar value of portfolio
securities denominated in such currency. Conversely, the Fund may enter into
a Forward Contract to purchase a given currency to protect against a
projected increase in the dollar value of securities denominated in such
currency which the Fund intends to acquire.
If a hedging transaction in Forward Contracts is successful, the decline
in the dollar value of portfolio securities or the increase in the dollar
cost of securities to be acquired may be offset, at least in part, by
profits on the Forward Contract. Nevertheless, by entering into such Forward
Contracts, the Fund may be required to forego all or a portion of the
benefits which otherwise could have been obtained from favorable movements
in exchange rates. The Fund does not presently intend to hold Forward
Contracts entered into until the value date, at which time it would be
required to deliver or accept delivery of the underlying currency, but will
seek in most instances to close out positions in such Contracts by entering
into offsetting transactions, which will serve to fix the Fund's profit or
loss based upon the value of the Contracts at the time the offsetting
transaction is executed.
The Fund will also enter into transactions in Forward Contracts for other
than hedging purposes, which presents greater profit potential but also
involves increased risk. For example, the Fund may purchase a given foreign
currency through a Forward Contract if, in the judgment of the Adviser, the
value of such currency is expected to rise relative to the U.S. dollar.
Conversely, the Fund may sell the currency through a Forward Contract if the
Adviser believes that its value will decline relative to the dollar.
The Fund will profit if the anticipated movements in foreign currency
exchange rates occur, 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 and could involve
significant risk of loss.
The use by the Fund of Forward Contracts also involves the risks described
under the caption "Special Risk Factors -- Options, Futures, Forwards, Swaps
and Other Derivative Transactions" in this Appendix.
FUTURES CONTRACTS
The Fund may purchase and sell futures contracts ("Futures Contracts") on
stock indices, foreign currencies, interest rates or interest-rate related
instruments, indices of foreign currencies or commodities. The Fund may also
purchase and sell Futures Contracts on foreign or domestic fixed income
securities or indices of such securities including municipal bond indices
and any other indices of foreign or domestic fixed income securities that
may become available for trading. Such investment strategies will be used
for hedging purposes and for non-hedging purposes, subject to 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, foreign
currency or commodity, 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 month in which, in
the case of the majority of commodities, interest rate and foreign currency
futures contracts, the underlying commodities, fixed income securities or
currency are delivered by the seller and paid for by the purchaser, or on
which, in the case of index futures contracts and certain interest rate and
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 "mark-to-market."
Purchases or sales of stock index futures contracts are 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.
Interest rate Futures Contracts may be purchased or sold to attempt to
protect against the effects of interest rate changes on the Fund's current
or intended investments in fixed income securities. For example, if the Fund
owned long-term bonds and interest rates were expected to increase, the Fund
might enter into interest rate futures contracts for the sale of debt
securities. Such a sale would have much the same effect as selling some of
the long-term bonds in the Fund's portfolio. If interest rates did increase,
the value of the debt securities in the portfolio would decline, but the
value of the Fund's interest rate futures contracts would increase at
approximately the same rate, subject to the correlation risks described
below, thereby keeping the net asset value of the Fund from declining as
much as it otherwise would have.
Similarly, if interest rates were expected to decline, interest rate
futures contracts may be purchased to hedge in anticipation of subsequent
purchases of long-term bonds at higher prices. Since the fluctuations in the
value of the interest rate futures contracts should be similar to that of
long-term bonds, the Fund could protect itself against the effects of the
anticipated rise in the value of long-term bonds without actually buying
them until the necessary cash became available or the market had stabilized.
At that time, the interest rate futures contracts could be liquidated and
the Fund's cash reserves could then be used to buy long-term bonds on the
cash market. 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, since the futures market may be
more liquid than the cash market in certain cases or at certain times, the
use of interest rate futures contracts as a hedging technique may allow the
Fund to hedge its interest rate risk without having to sell its portfolio
securities.
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 dollar 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, the 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.
The use by the Fund of Futures Contracts also involves the risks described
under the caption "Special Risk Factors -- Options, Futures, Forwards, Swaps
and Other Derivative Transactions" in this Appendix.
INDEXED SECURITIES
The Fund may purchase securities with principal and/or interest payments
whose prices are indexed to the prices of other securities, securities
indices, currencies, precious metals or other commodities, or other
financial indicators. Indexed securities typically, but not always, are debt
securities or deposits whose value at maturity or coupon rate is determined
by reference to a specific instrument or statistic. The Fund may also
purchase indexed deposits with similar characteristics. 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. Certain indexed securities may expose the Fund to the risk of
loss of all or a portion of the principal amount of its investment and/or
the interest that might otherwise have been earned on the amount invested.
The performance of indexed securities depends to a great extent on the
performance of the security, currency, or other instrument to which they are
indexed, and may also be influenced by interest rate changes in the U.S. and
abroad. At the same time, indexed securities are subject to the credit risks
associated with the issuer of the security, and their values may decline
substantially if the issuer's creditworthiness deteriorates. Recent issuers
of indexed securities have included banks, corporations, and certain U.S.
Government-sponsored entities.
INVERSE FLOATING RATE OBLIGATIONS
The Fund may invest in so-called "inverse floating rate obligations" or
"residual interest bonds" or other obligations or certificates relating
thereto structured to have similar features. In creating such an obligation,
a municipality issues a certain amount of debt and pays a fixed interest
rate. Half of the debt is issued as variable rate short term obligations,
the interest rate of which is reset at short intervals, typically 35 days.
The other half of the debt is issued as inverse floating rate obligations,
the interest rate of which is calculated based on the difference between a
multiple of (approximately two times) the interest paid by the issuer 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 as the comparable change in the market value of an equal principal
amount of long-term bonds which bear interest at the rate paid by the issuer
and have similar credit quality, redemption and maturity provisions.
INVESTMENT IN OTHER INVESTMENT COMPANIES
The Fund may invest in other investment companies. The total return on such
investment will be reduced by the operating expenses and fees of such other
investment companies, including advisory fees.
OPEN-END FUNDS. The Fund may invest in open-end investment companies.
CLOSED-END FUNDS. The Fund may invest in closed-end investment companies.
Such investment may involve the payment of substantial premiums above the
value of such investment companies' portfolio securities.
LENDING OF PORTFOLIO SECURITIES
The Fund may seek to increase its income by lending portfolio securities.
Such loans will usually be made only to member firms of the New York Stock
Exchange (the "Exchange") (and subsidiaries thereof) and member banks of the
Federal Reserve System, and would be required to be secured continuously by
collateral in cash, an irrevocable letter of credit or United States
("U.S.") Treasury securities 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 not usually exceed five
business days). For the duration of a loan, the Fund would continue to
receive the equivalent of the interest or dividends paid by the issuer on
the securities loaned. The Fund would also receive a fee from the borrower
or compensation from the investment of the collateral, less a fee paid to
the borrower (if the collateral is in the form of cash). The Fund would not,
however, have the right to vote any securities having voting rights during
the existence of the loan, but the Fund 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 can be earned currently from securities
loans of this type justifies the attendant risk.
LEVERAGING TRANSACTIONS
The Fund may engage in the types of transactions described below, which
involve "leverage" because in each case the Fund receives cash which it can
invest in portfolio securities and has a future obligation to make a
payment. The use of these transactions by the Fund will generally cause its
net asset value to increase or decrease at a greater rate than would
otherwise be the case. Any investment income or gains earned from the
portfolio securities purchased with the proceeds from these transactions
which is in excess of the expenses associated from these transactions can be
expected to cause the value of the Fund's shares and distributions on the
Fund's shares to rise more quickly than would otherwise be the case.
Conversely, if the investment income or gains earned from the portfolio
securities purchased with proceeds from these transactions fail to cover the
expenses associated with these transactions, the value of the Fund's shares
is likely to decrease more quickly than otherwise would be the case and
distributions thereon will be reduced or eliminated. Hence, these
transactions are speculative, involve leverage and increase the risk of
owning or investing in the shares of the Fund. These transactions also
increase the Fund's expenses because of interest and similar payments and
administrative expenses associated with them. Unless the appreciation and
income on assets purchased with proceeds from these transactions exceed the
costs associated with them, the use of these transactions by a Fund would
diminish the investment performance of the Fund compared with what it would
have been without using these transactions.
BANK BORROWINGS: The Fund may borrow money for investment purposes from
banks and invest the proceeds in accordance with its investment objectives
and policies.
MORTGAGE "DOLLAR ROLL" TRANSACTIONS: The Fund may enter into mortgage
"dollar roll" transactions pursuant to which it sells mortgage-backed
securities for delivery in the future and simultaneously contracts to
repurchase substantially similar securities on a specified future date.
During the roll period, the Fund foregoes principal and interest paid on the
mortgage-backed securities. The Fund is compensated for the lost interest by
the difference between the current sales price and the lower price for the
future purchase (often referred to as the "drop") as well as by the interest
earned on, and gains from, the investment of the cash proceeds of the
initial sale. The Fund may also be compensated by receipt of a commitment
fee.
If the income and capital gains from the Fund's investment of the cash
from the initial sale do not exceed the income, capital appreciation and
gain or loss that would have been realized on the securities sold as part of
the dollar roll, the use of this technique will diminish the investment
performance of the Fund compared with what the performance would have been
without the use of the dollar rolls. Dollar roll transactions involve the
risk that the market value of the securities the Fund is required to
purchase may decline below the agreed upon repurchase price of those
securities. If the broker/dealer to whom the Fund sells securities becomes
insolvent, the Fund's right to purchase or repurchase securities may be
restricted. Successful use of mortgage dollar rolls may depend upon the
Adviser's ability to correctly predict interest rates and prepayments. There
is no assurance that dollar rolls can be successfully employed.
REVERSE REPURCHASE AGREEMENTS: The Fund may enter into reverse repurchase
agreements. In a reverse repurchase agreement, the Fund will sell securities
and receive cash proceeds, subject to its agreement to repurchase the
securities at a later date for a fixed price reflecting a market rate of
interest. There is a risk that the counter party to a reverse repurchase
agreement will be unable or unwilling to complete the transaction as
scheduled, which may result in losses to the Fund. The Fund will invest the
proceeds received under a reverse repurchase agreement in accordance with
its investment objective and policies.
OPTIONS
The Fund may invest in the following types of options, which involve the
risks described under the caption "Special Risk Factors -- Options, Futures,
Forwards, Swaps and Other Derivative Transactions" in this Appendix:
OPTIONS ON FOREIGN CURRENCIES: The Fund may purchase and write options on
foreign currencies for hedging and non-hedging purposes in a manner similar
to that in which Futures Contracts on foreign currencies, or Forward
Contracts, will be utilized. For example, a decline in the dollar value of a
foreign currency in which portfolio securities are denominated will reduce
the dollar value of such securities, even if their value in the foreign
currency remains constant. In order to protect against such diminutions in
the value of portfolio securities, the Fund may purchase put options on the
foreign currency. If the value of the currency does decline, the Fund will
have the right to sell such currency for a fixed amount in dollars and will
thereby offset, in whole 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 effect of the
adverse movements in exchange rates. As in the case of other types of
options, however, the benefit to the Fund deriving from purchases of foreign
currency options will be reduced by the amount of the premium and related
transaction costs. In addition, where currency exchange rates do not move in
the direction or to the extent anticipated, the Fund could sustain losses on
transactions in foreign currency options which would require it to 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 could, instead of purchasing a put option, write a call
option on the relevant currency. If the expected decline occurs, the option
will most likely not be exercised, and the diminution in value of portfolio
securities will 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.
Similarly, instead of purchasing a call option to hedge against an
anticipated increase in the dollar cost of securities to be acquired, the
Fund could write a put option on the relevant currency which, if rates move
in the manner projected, will expire unexercised and allow the Fund to hedge
such increased cost up to the amount of the premium. Foreign currency
options written by the Fund will generally be covered in a manner similar to
the covering of other types of options. As in the case of other types of
options, however, the writing of a foreign currency option will constitute
only a partial hedge up to the amount of the premium, and only if rates move
in the expected direction. If this does not occur, the option may be
exercised and the Fund would be required to purchase or sell the underlying
currency at a loss which may not be offset by the amount of the premium.
Through the writing of options on foreign currencies, the Fund also may be
required to forego all or a portion of the benefits which might otherwise
have been obtained from favorable movements in exchange rates. The use of
foreign currency options for non-hedging purposes, like the use of other
types of derivatives for such purposes, presents greater profit potential
but also significant risk of loss and could be considered speculative.
OPTIONS ON FUTURES CONTRACTS: The Fund also may purchase and write options
to buy or sell those Futures Contracts in which it may invest ("Options on
Futures Contracts") as described above under "Futures Contracts." Such
investment strategies will be used 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. Upon
exercise of the option by the holder, the contract market clearinghouse
establishes a corresponding short position for the writer of the option, in
the case of a call option, or a corresponding long position in the case of a
put option. In the event that an option is exercised, the parties will be
subject to all the risks associated with the trading of Futures Contracts,
such as payment of initial and variation margin deposits. In addition, the
writer of an Option on a Futures Contract, unlike the holder, is subject to
initial and variation margin requirements on the option position.
A position in an Option on a Futures Contract may be terminated by the
purchaser or seller prior to expiration by effecting a closing purchase or
sale transaction, subject to the availability of a liquid secondary market,
which is the purchase or sale of an option of the same type (i.e., the same
exercise price and expiration date) as the option previously purchased or
sold. The difference between the premiums paid and received represents the
Fund's profit or loss on the transaction.
Options on Futures Contracts that are written or purchased by the Fund on
U.S. exchanges are traded on the same contract market as the underlying
Futures Contract, and, like Futures Contracts, are subject to regulation by
the Commodity Futures Trading Commission (the "CFTC") and the performance
guarantee of the exchange clearinghouse. In addition, Options on Futures
Contracts may be traded on foreign exchanges. 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 Fund owns liquid
and unencumbered assets equal to the difference. The Fund may cover the
writing of put Options on Futures Contracts (a) through sales of the
underlying Futures Contract, (b) through the ownership of liquid and
unencumbered assets 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 where the exercise price of the put
held (ii) is less than the exercise price of the put written if the Fund
owns liquid and unencumbered assets equal to the difference. Put and call
Options on Futures Contracts may also be 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. 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 writing of a call option on a Futures Contract for hedging purposes
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 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 the changes in the value of its
futures positions, the Fund's losses from existing Options on Futures
Contracts may to some extent be reduced or increased by changes in the value
of portfolio securities.
The Fund may purchase Options on Futures Contracts for hedging purposes
instead of 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 in 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.
OPTIONS ON SECURITIES: The Fund may write (sell) covered put and call
options, and purchase put and call options, on securities. Call and put
options written by the Fund may be covered in the manner set forth below.
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 that security without additional cash consideration (or for
additional cash consideration if the Fund owns liquid and unencumbered
assets equal to the amount of cash consideration) 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 Fund owns
liquid and unencumbered assets equal to the difference. A put option written
by the Fund is "covered" if the Fund owns liquid and unencumbered assets
with a value equal to the exercise price, or else holds a put on the same
security and in the same principal amount as the put written where the
exercise price of the put held is equal to or greater than the exercise
price of the put written or where the exercise price of the put held is less
than the exercise price of the put written if the Fund owns liquid and
unencumbered assets equal to the difference. 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. If the
writer's obligation is not so covered, it is subject to the risk of the full
change in value of the underlying security from the time the option is
written until exercise.
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 Fund owns liquid and unencumbered 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
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 repurchase 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. Buy-and-write transactions using in-the-money call options may be
used when it is expected that the price of the underlying security will
decline moderately during the option period. Buy-and-write transactions
using out-of-the-money call options may be used when it is expected that the
premiums received from writing the call option plus the appreciation in the
market price of the underlying security up to the exercise price will be
greater than the appreciation in the price of the underlying security alone.
If the call options are exercised in such transactions, the Fund's maximum
gain will be the premium received by it for writing the option, adjusted
upwards or downwards by the difference between the Fund's purchase price of
the security and the exercise price, less related transaction costs. If the
options are not exercised and the price of the underlying security declines,
the amount of such decline will be offset in part, or entirely, by the
premium received.
The writing of covered put options is similar in terms of risk/return
characteristics to buy-and-write transactions. If the market price of the
underlying security rises or otherwise is above the exercise price, the put
option will expire worthless and the Fund's gain will be limited to the
premium received, less related transaction costs. If the market price of the
underlying security declines or otherwise is below the exercise price, the
Fund may elect to close the position or retain the option until it is
exercised, at which time the Fund will be required to take delivery of the
security at the exercise price; the Fund's return will be the premium
received from the put option minus the amount by which the market price of
the security is below the exercise price, which could result in a loss.
Out-of-the-money, at-the-money and in-the-money 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 also write combinations of put and call options on the same
security, known as "straddles" with the same exercise price and expiration
date. 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 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 the
security remains stable and neither the call nor the put is exercised. In
those instances 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 not be undertaken by the Fund solely for hedging
purposes, 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 constitute only a partial hedge against
declines in the value of portfolio securities or against increases in the
value of securities to be acquired, up to the amount of the premium.
The Fund may also purchase options for hedging purposes or to increase its
return. Put options may be purchased to hedge against a decline in the value
of portfolio securities. If such decline occurs, the put options will permit
the Fund to sell the 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 by transaction costs.
The Fund may also purchase call options to hedge against an increase in
the price of securities that the Fund anticipates purchasing in the future.
If such increase occurs, the call option will permit the Fund to purchase
the securities at the exercise price, or to close out the options at a
profit. 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.
OPTIONS ON STOCK INDICES: The Fund may write (sell) covered call and put
options and purchase call and put options on stock indices. In contrast to
an option on a security, an option on a stock index provides the holder with
the right but not the obligation to make or receive a cash settlement upon
exercise of the option, rather than the right to purchase or sell a
security. The amount of this settlement is generally equal to (i) the
amount, if any, by which the fixed exercise price of the option exceeds (in
the case of a call) or is below (in the case of a put) the closing value of
the underlying index on the date of exercise, multiplied by (ii) a fixed
"index multiplier." The Fund may cover written 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 underlying index, or by having an
absolute and immediate right to acquire such securities without additional
cash consideration (or for additional cash consideration if the Fund owns
liquid and unencumbered assets equal to the amount of cash consideration)
upon conversion or exchange of other securities in its portfolio. 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 Fund owns liquid and unencumbered assets equal to the
difference. The Fund may cover put options on stock indices by owning liquid
and unencumbered assets with a value equal to the exercise price, or by
holding a put on the same stock index 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 Fund owns liquid and unencumbered
assets equal to the difference. Put and call options on stock indices 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 the 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 Fund may also 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.
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 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 index underlying a stock index option may be a "broad-based" index,
such as the Standard & Poor's 500 Index or the New York Stock Exchange
Composite Index, the changes in value of which ordinarily will reflect
movements in the stock market in general. In contrast, certain options may
be based on narrower market indices, such as the Standard & Poor's 100
Index, or on indices of securities of particular industry groups, such as
those of oil and gas or technology companies. A stock index assigns relative
values to the stocks included in the index and the index fluctuates with
changes in the market values of the stocks so included. The composition of
the index is changed periodically.
RESET OPTIONS:
In certain instances, the Fund may purchase or write options on U.S.
Treasury securities which provide for periodic adjustment of the strike
price and may also provide for the periodic adjustment of the premium during
the term of each such option. Like other types of options, these
transactions, which may be referred to as "reset" options or "adjustable
strike" options grant the purchaser the right to purchase (in the case of a
call) or sell (in the case of a put), a specified type of U.S. Treasury
security at any time up to a stated expiration date (or, in certain
instances, on such date). In contrast to other types of options, however,
the price at which the underlying security may be purchased or sold under a
"reset" option is determined at various intervals during the term of the
option, and such price fluctuates from interval to interval based on changes
in the market value of the underlying security. As a result, the strike
price of a "reset" option, at the time of exercise, may be less advantageous
than if the strike price had been fixed at the initiation of the option. In
addition, the premium paid for the purchase of the option may be determined
at the termination, rather than the initiation, of the option. If the
premium for a reset option written by the Fund is paid at termination, the
Fund assumes the risk that (i) the premium may be less than the premium
which would otherwise have been received at the initiation of the option
because of such factors as the volatility in yield of the underlying
Treasury security over the term of the option and adjustments made to the
strike price of the option, and (ii) the option purchaser may default on its
obligation to pay the premium at the termination of the option. Conversely,
where the Fund purchases a reset option, it could be required to pay a
higher premium than would have been the case at the initiation of the
option.
"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 owns liquid and unencumbered
assets sufficient to cover the Fund's net liability under the two options.
Therefore, the Fund's liability for such a covered option is generally
limited to the difference between the amount of the Fund's liability under
the option written by the Fund less the value of the option held by the
Fund. Yield curve options may also be covered in such other manner as may be
in accordance with the requirements of the counterparty with which the
option is traded and applicable laws and regulations. Yield curve options
are traded over-the-counter and because they have been only recently
introduced, established trading markets for these securities have not yet
developed.
REPURCHASE AGREEMENTS
The Fund may enter into repurchase agreements with sellers who are member
firms (or a subsidiary thereof) of the New York Stock 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 Government securities.
The repurchase agreement provides that in the event the seller fails to
pay the amount agreed upon on the agreed upon delivery date or upon demand,
as the case may be, the Fund will have the right to liquidate the
securities. If at the time the Fund is contractually entitled to exercise
its right to liquidate the securities, the seller is subject to a proceeding
under the bankruptcy laws or its assets are otherwise subject to a stay
order, the Fund's exercise of its right to liquidate the securities may be
delayed and result in certain losses and costs to the Fund. The Fund has
adopted and follows procedures which are intended to minimize the risks of
repurchase agreements. For example, the Fund only enters into repurchase
agreements after the Adviser has determined that the seller is creditworthy,
and the Adviser monitors that seller's creditworthiness on an ongoing basis.
Moreover, under such agreements, the value of the securities (which are
marked to market every business day) is required to be greater than the
repurchase price, and the Fund has the right to make margin calls at any
time if the value of the securities falls below the agreed upon collateral.
RESTRICTED SECURITIES
The Fund may purchase securities that are not registered under the
Securities Act of 1933, as amended ("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") and
commercial paper issued under Section 4(2) of the 1933 Act ("4(2) Paper"). A
determination is made, based upon a continuing review of the trading markets
for the Rule 144A security or 4(2) Paper, whether such security is liquid
and thus not subject to the Fund's limitation on investing 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 and 4(2) Paper. The Board, however, retains oversight of the
liquidity determinations focusing on factors such as valuation, liquidity
and availability of information. Investing in Rule 144A securities could
have the effect of decreasing the level of liquidity in the Fund to the
extent that qualified institutional buyers become for a time uninterested in
purchasing these Rule 144A securities held in the Fund's portfolio. Subject
to the Fund's 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.
SHORT SALES
The Fund may seek to hedge investments or realize additional gains through
short sales. The Fund may make short sales, which are transactions in which
the Fund sells a security it does not own, in anticipation of a decline in
the market value of that security. To complete such a transaction, the Fund
must borrow the security to make delivery to the buyer. The Fund then is
obligated to replace the security borrowed by purchasing it at the market
price at the time of replacement. The price at such time may be more or less
than the price at which the security was sold by the Fund. Until the
security is replaced, the Fund is required to repay the lender any dividends
or interest which accrue during the period of the loan. To borrow the
security, the Fund also may be required to pay a premium, which would
increase the cost of the security sold. The net proceeds of the short sale
will be retained by the broker, to the extent necessary to meet margin
requirements, until the short position is closed out. The Fund also will
incur transaction costs in effecting short sales.
The Fund will incur a loss as a result of the short sale if the price of
the security increases between the date of the short sale and the date on
which the Fund replaces the borrowed security. The Fund will realize a gain
if the price of the security declines between those dates. The amount of any
gain will be decreased, and the amount of any loss increased, by the amount
of the premium, dividends or interest the Fund may be required to pay in
connection with a short sale.
Whenever the Fund engages in short sales, it identifies liquid and
unencumbered assets in an amount that, when combined with the amount of
collateral deposited with the broker connection with the short sale, equals
the current market value of the security sold short.
SHORT SALES AGAINST THE BOX
The Fund may make short sales "against the box," i.e., when a security
identical to one owned by the Fund is borrowed and sold short. If the Fund
enters into a short sale against the box, it is required to segregate
securities equivalent in kind and amount to the securities sold short (or
securities convertible or exchangeable into such securities) and is required
to hold such securities while the short sale is outstanding. The Fund will
incur transaction costs, including interest, in connection with opening,
maintaining, and closing short sales against the box.
SHORT TERM INSTRUMENTS
The Fund may hold cash and invest in cash equivalents, such as short-term
U.S. Government Securities, commercial paper and bank instruments.
SWAPS AND RELATED DERIVATIVE INSTRUMENTS
The Fund may enter into interest rate swaps, currency swaps and other types
of available swap agreements, including swaps on securities, commodities and
indices, and related types of derivatives, such as caps, collars and floors.
A swap is an agreement between two parties pursuant to which each party
agrees to make one or more payments to the other on regularly scheduled
dates over a stated term, based on different interest rates, currency
exchange rates, security or commodity prices, the prices or rates of other
types of financial instruments or assets or the levels of specified indices.
Under a typical swap, one party may agree to pay a fixed rate or a floating
rate determined by reference to a specified instrument, rate or index,
multiplied in each case by a specified amount (the "notional amount"), while
the other party agrees to pay an amount equal to a different floating rate
multiplied by the same notional amount. On each payment date, the
obligations of parties are netted, with only the net amount paid by one
party to the other. All swap agreements entered into by the Fund with the
same counterparty are generally governed by a single master agreement, which
provides for the netting of all amounts owed by the parties under the
agreement upon the occurrence of an event of default, thereby reducing the
credit risk to which such party is exposed.
Swap agreements are typically individually negotiated and structured to
provide exposure to a variety of different types of investments or market
factors. Swap agreements may be entered into for hedging or non-hedging
purposes and therefore may increase or decrease the Fund's exposure to the
underlying instrument, rate, asset or index. Swap agreements can take many
different forms and are known by a variety of names. The Fund is not limited
to any particular form or variety of swap agreement if the Adviser
determines it is consistent with the Fund's investment objective and
policies.
For example, the Fund may enter into an interest rate swap in order to
protect against declines in the value of fixed income securities held by the
Fund. In such an instance, the Fund would agree with a counterparty to pay a
fixed rate (multiplied by a notional amount) and the counterparty would
agree to pay a floating rate multiplied by the same notional amount. If
interest rates rise, resulting in a diminution in the value of the Fund's
portfolio, the Fund would receive payments under the swap that would offset,
in whole or part, such diminution in value. The Fund may also enter into
swaps to modify its exposure to particular markets or instruments, such as a
currency swap between the U.S. dollar and another currency which would have
the effect of increasing or decreasing the Fund's exposure to each such
currency. The Fund might also enter into a swap on a particular security, or
a basket or index of securities, in order to gain exposure to the underlying
security or securities, as an alternative to purchasing such securities.
Such transactions could be more efficient or less costly in certain
instances than an actual purchase or sale of the securities.
The Fund may enter into other related types of over-the-counter
derivatives, such as "caps", "floors", "collars" and options on swaps, or
"swaptions", for the same types of hedging or non-hedging purposes. Caps and
floors are similar to swaps, except that one party pays a fee at the time
the transaction is entered into and has no further payment obligations,
while the other party is obligated to pay an amount equal to the amount by
which a specified fixed or floating rate exceeds or is below another rate
(multiplied by a notional amount). Caps and floors, therefore, are also
similar to options. A collar is in effect a combination of a cap and a
floor, with payments made only within or outside a specified range of prices
or rates. A swaption is an option to enter into a swap agreement. Like other
types of options, the buyer of a swaption pays a non-refundable premium for
the option and obtains the right, but not the obligation, to enter into the
underlying swap on the agreed-upon terms.
The Fund will maintain liquid and unencumbered assets to cover its current
obligations under swap and other over-the-counter derivative transactions.
If the Fund enters into a swap agreement on a net basis (i.e., the two
payment streams are netted out, with the Fund receiving or paying, as the
case may be, only the net amount of the two payments), the Fund will
maintain liquid and unencumbered assets with a daily value at least equal to
the excess, if any, of the Fund's accrued obligations under the swap
agreement over the accrued amount the Fund is entitled to receive under the
agreement. If the Fund enters into a swap agreement on other than a net
basis, it will maintain liquid and unencumbered assets with a value equal to
the full amount of the Fund's accrued obligations under the agreement.
The most significant factor in the performance of swaps, caps, floors and
collars is the change in the underlying price, rate or index level that
determines the amount of payments to be made under the arrangement. If the
Adviser is incorrect in its forecasts of such factors, the investment
performance of the Fund would be less than what it would have been if these
investment techniques had not been used. If a swap agreement calls for
payments by the Fund, the Fund must be prepared to make such payments when
due. In addition, if the counterparty's creditworthiness would decline, the
value of the swap agreement would be likely to decline, potentially
resulting in losses.
If the counterparty defaults, the Fund's risk of loss consists of the net
amount of payments that the Fund is contractually entitled to receive. The
Fund anticipates that it will be able to eliminate or reduce its exposure
under these arrangements by assignment or other disposition or by entering
into an offsetting agreement with the same or another counterparty, but
there can be no assurance that it will be able to do so.
The uses by the Fund of swaps and related derivative instruments also
involves the risks described under the caption "Special Risk Factors --
Options, Futures, Forwards, Swaps and Other Derivative Transactions" in
this Appendix.
TEMPORARY BORROWINGS
The Fund may borrow money for temporary purposes (e.g., to meet redemption
requests or settle outstanding purchases of portfolio securities).
TEMPORARY DEFENSIVE POSITIONS
During periods of unusual market conditions when the Adviser believes that
investing for temporary defensive purposes is appropriate, or in order to
meet anticipated redemption requests, a large portion or all of the assets
of the Fund may be invested in cash (including foreign currency) or cash
equivalents, including, but not limited to, obligations of banks (including
certificates of deposit, bankers' acceptances, time deposits and repurchase
agreements), commercial paper, short-term notes, U.S. Government Securities
and related repurchase agreements.
WARRANTS
The Fund may invest in warrants. Warrants are securities that give the Fund
the right to purchase equity securities from the issuer at a specific price
(the "strike price") for a limited period of time. The strike price of
warrants typically is much lower than the current market price of the
underlying securities, yet they are subject to similar price fluctuations.
As a result, warrants may be more volatile investments than the underlying
securities and may offer greater potential for capital appreciation as well
as capital loss. Warrants do not entitle a holder to dividends or voting
rights with respect to the underlying securities and do not represent any
rights in the assets of the issuing company. Also, the value of the warrant
does not necessarily change with the value of the underlying securities and
a warrant ceases to have value if it is not exercised prior to the
expiration date. These factors can make warrants more speculative than other
types of investments.
"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. In general, the Fund does not pay
for such 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, a Fund will identify liquid
and unencumbered assets equal to its forward delivery commitment.
SPECIAL RISK FACTORS -- OPTIONS, FUTURES, FORWARDS, SWAPS AND OTHER
DERIVATIVE TRANSACTIONS
RISK OF 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 derivatives, including options, Futures
Contracts, Options on Futures Contracts, Forward Contracts, swaps and other
types of derivatives depends 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. In the case of derivative
instruments based on an index, the portfolio will not duplicate the
components of the index, and in the case of derivative instruments on fixed
income securities, the portfolio securities which are being hedged may not
be the same type of obligation underlying such derivatives. The use of
derivatives for "cross hedging" purposes (such as a transaction in a Forward
Contract on one currency to hedge exposure to a different currency) may
involve greater correlation risks. Consequently, the Fund bears the risk
that the price of the portfolio securities being hedged will not move in the
same amount or direction as the underlying index or obligation.
If the Fund purchases a put option on an index and the index decreases
less than the value of the hedged securities, the Fund would experience a
loss which is not completely offset by the put option. It is also possible
that there may be a negative correlation between the index or obligation
underlying an option or Futures Contract in which the Fund has a position
and the portfolio securities the Fund is attempting to hedge, which could
result in a loss on both the portfolio and the hedging instrument. It should
be noted that stock index 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 based on a broad market index.
This is due to the fact that 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. Nevertheless, where the Fund enters into transactions
in options or futures on narrowly-based indices for hedging purposes,
movements in the value of the index should, if the hedge is successful,
correlate closely with the portion of the Fund's portfolio or the intended
acquisitions being hedged.
The trading of derivatives for hedging purposes entails the additional
risk of imperfect correlation between movements in the price of the
derivative 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 the derivatives markets. In this regard, trading by
speculators in derivatives has in the past occasionally resulted in market
distortions, which may be difficult or impossible to predict, particularly
near the expiration of such instruments.
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. The risk of imperfect correlation,
however, generally tends to diminish as the maturity date of the Futures
Contract or expiration date of the option approaches.
Further, with respect to options on securities, options on stock indices,
options on currencies 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. This could increase the
extent of any loss suffered by the Fund in connection with such
transactions.
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. For example, where
the Fund covers a call option written on a stock index through segregation
of securities, such securities may not match the composition of the index,
and the Fund may not be fully covered. As a result, the Fund could be
subject to risk of loss in the event of adverse market movements.
The writing of options on securities, options on stock indices or Options
on Futures Contracts constitutes only a partial hedge against fluctuations
in the value of the Fund's portfolio. When the Fund writes an option, it
will receive premium income in return for the holder's purchase of the right
to acquire or dispose of the underlying obligation. In the event that the
price of such obligation does not rise sufficiently above the exercise price
of the option, in the case of a call, or fall below the exercise price, in
the case of a put, the option will not be exercised and the Fund will retain
the amount of the premium, less related transaction costs, which will
constitute a partial hedge against any decline that may have occurred in the
Fund's portfolio holdings or any increase in the cost of the instruments to
be acquired.
Where the price of the underlying obligation moves sufficiently in favor
of the holder to warrant exercise of the option, however, and the option is
exercised, the Fund will incur a loss which may only be partially offset by
the amount of the premium it received. Moreover, by writing an option, the
Fund may be required to forego the benefits which might otherwise have been
obtained from an increase in the value of portfolio securities or other
assets or a decline in the value of securities or assets to be acquired. In
the event of the occurrence of any of the foregoing adverse market events,
the Fund's overall return may be lower than if it had not engaged in the
hedging transactions. Furthermore, the cost of using these techniques may
make it economically infeasible for the Fund to engage in such transactions.
RISKS OF NON-HEDGING TRANSACTIONS: The Fund may enter transactions in
derivatives for non-hedging purposes as well as hedging purposes. Non-
hedging transactions in such instruments 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 and unencumbered
assets necessary to satisfy an option exercise will be identified, unless
the option is 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. 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. The
Fund may also enter into futures, Forward Contracts or swaps for non-hedging
purposes. For example, the Fund may enter into such a transaction as an
alternative to purchasing or selling the underlying instrument or to obtain
desired exposure to an index or market. In such instances, the Fund will be
exposed to the same economic risks incurred in purchasing or selling the
underlying instrument or instruments. However, transactions in futures,
Forward Contracts or swaps may be leveraged, which could expose the Fund to
greater risk of loss than such purchases or sales. Entering into
transactions in derivatives for other than hedging purposes, therefore,
could expose the Fund to significant risk of loss if the prices, rates or
values of the underlying instruments or indices do not move in the direction
or to the extent anticipated.
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. Such
transactions, therefore, create an opportunity for increased return by
providing the Fund with two simultaneous premiums on the same security, but
involve additional risk, since the Fund may have an option exercised against
it regardless of whether the price of the security increases or decreases.
RISK OF A 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
contract 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 has insufficient cash available to meet margin
requirements, it will be necessary to liquidate portfolio securities or
other assets at a time when it is 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 portfolio, and could
result in trading losses.
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. Once the daily limit has been
reached in the contract, no trades may be entered into at a price beyond the
limit, thus preventing the liquidation of open futures or option positions
and requiring traders to make additional margin deposits. Prices have in the
past moved to the daily limit on a number of consecutive trading days.
The trading of Futures Contracts and options is also subject to the risk
of trading halts, suspensions, exchange or clearinghouse equipment failures,
government intervention, insolvency of a brokerage firm or clearinghouse 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 establishment
of a futures, forward or swap position (certain of which may require no
initial margin deposits) and the writing of an option, such transactions
involve substantial leverage. As a result, relatively small movements in the
price of the contract can result in substantial unrealized gains or losses.
Where the Fund enters into such transactions 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 or other assets held by the Fund or decreases in the prices of
securities or other assets the Fund intends to acquire. Where the Fund
enters into such transactions for other than hedging purposes, the margin
requirements associated with such transactions could expose the Fund to
greater risk.
POTENTIAL BANKRUPTCY OF A CLEARINGHOUSE OR BROKER: When the Fund enters into
transactions in exchange-traded futures or options, it is exposed to the
risk of the potential bankruptcy of the relevant exchange clearinghouse or
the broker through which the Fund has effected the transaction. In that
event, the Fund might not be able to recover amounts deposited as margin, or
amounts owed to the Fund in connection with its transactions, for an
indefinite period of time, and could sustain losses of a portion or all of
such amounts. Moreover, the performance guarantee of an exchange
clearinghouse generally extends only to its members and the Fund could
sustain losses, notwithstanding such guarantee, in the event of the
bankruptcy of its broker.
TRADING AND POSITION LIMITS: 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). Further, 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 portfolios of the Fund.
RISKS 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 security, index,
currency or Futures Contract.
RISKS OF TRANSACTIONS IN FOREIGN CURRENCIES AND OVER-THE-COUNTER DERIVATIVES
AND OTHER TRANSACTIONS NOT CONDUCTED ON U.S. EXCHANGES: Transactions in
Forward Contracts on foreign currencies, as well as futures and options on
foreign currencies and transactions executed on foreign exchanges, 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. Further, the value of such positions could be adversely affected
by a number of other complex political and economic factors applicable to
the countries issuing the underlying currencies.
Further, unlike trading in most other types of instruments, there is no
systematic reporting of last sale information with respect to the foreign
currencies underlying contracts thereon. As a result, the available
information on which trading systems will be based may not be as complete as
the comparable data on which the Fund makes investment and trading decisions
in connection with other transactions. Moreover, because the foreign
currency market is a global, 24-hour market, events could occur in that
market which will not be reflected in the forward, futures or options market
until the following day, thereby making it more difficult for the Fund to
respond to such events in a timely manner.
Settlements of exercises of over-the-counter Forward Contracts or foreign
currency options 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 U.S. or foreign
restrictions and regulations regarding the maintenance of foreign banking
relationships, fees, taxes or other charges.
Unlike transactions entered into by the Fund in Futures Contracts and
exchange-traded options, options on foreign currencies, Forward Contracts,
over-the-counter options on securities, swaps and other over-the-counter
derivatives are not traded on contract markets regulated by the CFTC or
(with the exception of certain foreign currency options) the SEC. To the
contrary, such instruments are traded through financial institutions acting
as market-makers, although foreign currency options are also traded on
certain national securities exchanges, such as the Philadelphia Stock
Exchange and the Chicago Board Options Exchange, subject to SEC regulation.
In an over-the-counter trading environment, many of the protections afforded
to exchange participants will not be available. For example, there are no
daily price fluctuation limits, and adverse market movements could therefore
continue to an unlimited extent over a period of time. Although the
purchaser of an option cannot lose more than the amount of the premium plus
related transaction costs, this entire amount could be lost. Moreover, the
option writer and a trader of Forward Contracts could lose amounts
substantially in excess of their initial investments, due to the margin and
collateral requirements associated with such positions.
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 or
swaps 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 guarantee of
an exchange clearinghouse, and the Fund will therefore be subject to the
risk of default by, or the bankruptcy of, the financial institution serving
as its counterparty. One or more of such institutions also may decide to
discontinue their role as market-makers in a particular currency or
security, thereby restricting the Fund's ability to enter into desired
hedging transactions. The Fund will enter into an over-the-counter
transaction only with parties whose creditworthiness has been reviewed and
found satisfactory by the Adviser.
Options on securities, options on stock indices, Futures Contracts,
Options on Futures Contracts and options on foreign currencies may be traded
on exchanges located in foreign countries. Such transactions may not be
conducted in the same manner as those entered into on U.S. exchanges, and
may be subject to different margin, exercise, settlement or expiration
procedures. As a result, many of the risks of over-the-counter trading may
be present in connection with such transactions.
Options on foreign currencies traded on national securities exchanges are
within the jurisdiction of the SEC, as are other securities traded on such
exchanges. As a result, many of the protections provided to traders on
organized exchanges will be available with respect to such transactions. In
particular, all foreign currency option positions entered into on a national
securities exchange are cleared and guaranteed by the Options Clearing
Corporation (the "OCC"), thereby reducing the risk of counterparty default.
Further, a liquid secondary market in options traded on a national
securities exchange may be more readily available than in the
over-the-counter market, potentially permitting the Fund to liquidate open
positions at a profit prior to exercise or expiration, or to limit losses in
the event of adverse market movements.
The purchase and sale of exchange-traded foreign currency options,
however, is subject to the risks of the availability of a liquid secondary
market described above, as well as the risks regarding adverse market
movements, margining of options written, the nature of the foreign currency
market, possible intervention by governmental authorities and the effects of
other political and economic events. In addition, exchange-traded options on
foreign currencies involve certain risks not presented by the
over-the-counter market. For example, exercise and settlement of such
options must be made exclusively through the OCC, which has established
banking relationships in applicable foreign countries for this purpose. As a
result, the OCC may, if it determines that foreign governmental restrictions
or taxes would prevent the orderly settlement of foreign currency option
exercises, or would result in undue burdens on the OCC or its clearing
member, impose special procedures on exercise and settlement, such as
technical changes in the mechanics of delivery of currency, the fixing of
dollar settlement prices or prohibitions on exercise.
POLICIES ON THE USE OF FUTURES AND OPTIONS ON 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 CFTC require that
the Fund enter into transactions in Futures Contracts, Options on Futures
Contracts and Options on Foreign Currencies traded on a CFTC-regulated
exchange only (i) for bona fide hedging purposes (as defined in CFTC
regulations), or (ii) for non-bona fide hedging purposes, provided that the
aggregate initial margin and premiums required to establish such non-bona
fide hedging positions does not exceed 5% of the liquidation value of the
Fund's assets, after taking into account unrealized profits and unrealized
losses on any such contracts the Fund has entered into, and excluding, in
computing such 5%, the in-the-money amount with respect to an option that is
in-the-money at the time of purchase.
<PAGE>
--------------------
PART II - APPENDIX D
--------------------
DESCRIPTION OF BOND RATINGS
The ratings of Moody's, S&P and Fitch represent their opinions as to the
quality of various debt instruments. It should be emphasized, however, that
ratings are not absolute standards of quality. Consequently, debt
instruments with the same maturity, coupon and rating may have different
yields while debt instruments of the same maturity and coupon with different
ratings may have the same yield.
MOODY'S INVESTORS SERVICE, INC.
Aaa: Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to
as "gilt edged." Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized
are most unlikely to impair the fundamentally strong position of such
issues.
Aa: Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally
known as high grade bonds. They are rated lower than the best bonds because
margins of protection may not be as large as in Aaa securities or
fluctuation of protective elements may be of greater amplitude or there may
be other elements present which make the long-term risk appear somewhat
larger than the Aaa securities.
A: Bonds which are rated A possess many favorable investment attributes and
are to be considered as upper-medium-grade obligations. Factors giving
security to principal and interest are considered adequate, but elements may
be present which suggest a susceptibility to impairment some time in the
future.
Baa: Bonds which are rated Baa are considered as medium-grade obligations,
(i.e., they are neither highly protected nor poorly secured). Interest
payments and principal security appear adequate for the present but certain
protective elements may be lacking or may be characteristically unreliable
over any great length of time. Such bonds lack outstanding investment
characteristics and in fact have speculative characteristics as well.
Ba: Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well-assured. Often the protection of
interest and principal payments may be very moderate, and thereby not well
safeguarded during both good and bad times over the future. Uncertainty of
position characterizes bonds in this class.
B: Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance
of other terms of the contract over any long period of time may be small.
Caa: Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to
principal or interest.
Ca: Bonds which are rated Ca represent obligations which are speculative
in a high degree. Such issues are often in default or have other marked
shortcomings.
C: Bonds which are rated C are the lowest rated class of bonds, and issues
so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.
STANDARD & POOR'S RATINGS SERVICES
AAA: An obligation rated AAA has the highest rating assigned by Standard &
Poor's. The obligor's capacity to meet its financial commitment on the
obligation is extremely strong.
AA: An obligation rated AA differs from the highest rated obligations only
in small degree. The obligor's capacity to meet its financial commitment on
the obligation is very strong.
A: An obligation rated A is somewhat more susceptible to the adverse effects
of changes in circumstances and economic conditions than obligations in
higher rated categories. However, the obligor's capacity to meet its
financial commitment on the obligation is still strong.
BBB: An obligation rated BBB exhibits adequate protection parameters.
However, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity of the obligor to meet its financial
commitment on the obligation.
Obligations rated BB, B, CCC, CC, and C are regarded as having significant
speculative characteristics. BB indicates the least degree of speculation
and C the highest. While such obligations will likely have some quality and
protective characteristics, these may be outweighed by large uncertainties
or major exposures to adverse conditions.
BB: An obligation rated BB is less vulnerable to nonpayment than other
speculative issues. However, it faces major ongoing uncertainties or
exposure to adverse business, financial, or economic conditions which could
lead to the obligor's inadequate capacity to meet its financial commitment
on the obligation.
B: An obligation rated B is more vulnerable to nonpayment than obligations
rated BB, but the obligor currently has the capacity to meet its financial
commitment on the obligation. Adverse business, financial, or economic
conditions will likely impair the obligor's capacity or willingness to meet
its financial commitment on the obligation.
CCC: An obligation rated CCC is currently vulnerable to nonpayment, and is
dependent upon favorable business, financial, and economic conditions for
the obligor to meet its financial commitment on the obligation. In the event
of adverse business, financial, or economic conditions the obligor is not
likely to have the capacity to meet its financial commitment on the
obligation.
CC: An obligation rated CC is currently highly vulnerable to nonpayment.
C: Subordinated debt or preferred stock obligation rated C is currently
highly vulnerable to nonpayment. The C rating may be used to cover a
situation where a bankruptcy petition has been filed or similar action has
been taken, but payments on this obligation are being continued. A "C"
rating will also be assigned to a preferred stock issue in arrears on
dividends or sinking fund payments, but that is currently paying.
D: An obligation rated D is in payment default. The D rating category is
used when payments on an obligation are not made on the date due even if the
applicable grace period has not expired, unless Standard & Poor's believes
that such payments will be made during such grace period. The D rating also
will be used upon the filing of a bankruptcy petition or the taking of a
similar action if payments on an obligation are jeopardized.
PLUS (+) OR MINUS (-) The ratings from "AA" to "CCC" may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
r: This symbol is attached to the ratings of instruments with significant
noncredit risks. It highlights risks to principal or volatility of expected
returns which are not addressed in the credit rating. Examples include:
obligations linked or indexed to equities, currencies, or commodities;
obligations exposed to severe prepayment risk -- such as interest-only or
principal-only mortgage securities; and obligations with unusually risky
interest terms, such as inverse floaters.
N.R. This indicates that no rating has been requested, that there is
insufficient information on which to base a rating, or that Standard &
Poor's does not rate a particular obligation as a matter of policy.
FITCH IBCA, DUFF & PHELPS
AAA: Highest credit quality. AAA ratings denote the lowest expectation of
credit risk. They are assigned only in case of exceptionally strong capacity
for timely payment of financial commitments. This capacity is highly
unlikely to be adversely affected by foreseeable events.
AA: Very high credit quality. AA ratings denote a very low expectation of
credit risk. They indicate very strong capacity for timely payment of
financial commitments. This capacity is not significantly vulnerable to
foreseeable events.
A: High credit quality. A ratings denote a low expectation of credit risk.
The capacity for timely payment of financial commitments is considered
strong. This capacity may, nevertheless, be more vulnerable to changes in
circumstances or in economic conditions than is the case for higher ratings.
BBB: Good credit quality. BBB ratings indicate that there is currently a low
expectation of credit risk. The capacity for timely payment of financial
commitments is considered adequate, but adverse changes in circumstances and
in economic conditions are more likely to impair this capacity. This is the
lowest investment-grade category.
Speculative Grade
BB: Speculative. BB ratings indicate that there is a possibility of credit
risk developing, particularly as the result of adverse economic change
over time; however, business or financial alternatives may be available to
allow financial commitments to be met. Securities rated in this category
are not investment grade.
B: Highly speculative. B ratings indicate that significant credit risk is
present, but a limited margin of safety remains. Financial commitments are
currently being met; however, capacity for continued payment is contingent
upon a sustained, favorable business and economic environment.
CCC, CC, C: High default risk. Default is a real possibility. Capacity for
meeting financial commitments is solely reliant upon sustained, favorable
business or economic developments. A CC rating indicates that default of
some kind appears probable. C ratings signal imminent default.
DDD, DD, D: Default. The ratings of obligations in this category are based
on their prospects for achieving partial or full recovery in a
reorganization or liquidation of the obligor. While expected recovery values
are highly speculative and cannot be estimated with any precision, the
following serve as general guidelines. DDD obligations have the highest
potential for recovery, around 90% - 100% of outstanding amounts and accrued
interest. DD indicates expected recoveries in the range of 50% - 90% and D
the lowest recovery potential, i.e. below 50%.
NOTES
"+" or "-" may be appended to a rating to denote relative status within
major rating categories. Such suffixes are not added to the "AAA" long-term
rating category, or to categorize below "CCC".
"NR" indicates that Fitch does not rate the issuer or issue in question.
"WITHDRAWN": A rating is withdrawn when Fitch deems the amount of
information available to be inadequate for rating purposes, or when an
obligation matures, is called, or refinanced.
<PAGE>
INVESTMENT ADVISER
MFS Investment Management(R)
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.
2 Avenue de Lafayette, Boston, MA 02111-1738
Toll free: (800) 225-2606
MAILING ADDRESS:
P.O. Box 2281, Boston, MA 02107-9906
[Logo] M F S (R)
INVESTMENT MANAGEMENT
WE INVENTED THE MUTUAL FUND(R)
500 Boylston Street, Boston, MA 02116
MFS-13P2 - 1/01
<PAGE>
--------------------------------------------------------------------------------
MFS(R) MUNICIPAL BOND FUND
--------------------------------------------------------------------------------
JANUARY 1, 2001
Prospectus
Class A Shares
Class B Shares
--------------------------------------------------------------------------------
This Prospectus describes the MFS(R) Municipal Bond Fund. 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 while seeking
protection of shareholders' capital.
The Securities and Exchange Commission has not approved or disapproved the
fund's shares or determined whether this prospectus is accurate or complete.
Anyone who tells you otherwise is committing a crime.
<PAGE>
--------------------------------------------------------------------------------
TABLE OF CONTENTS
--------------------------------------------------------------------------------
Page
I Risk Return Summary.............................................. 1
II Expense Summary.................................................. 6
III Certain Investment Strategies and Risks.......................... 8
IV Management of the Fund........................................... 9
V Description of Share Classes..................................... 11
VI How to Purchase, Exchange and Redeem Shares...................... 15
VII Investor Services and Programs................................... 19
VIII Other Information................................................ 21
IX Financial Highlights............................................. 24
Appendix A -- Investment Techniques and Practices................ A-1
Appendix B -- Taxable Equivalent Yield Table .................... B-1
<PAGE>
--------------------------------------------------------------------------------
I RISK RETURN SUMMARY
--------------------------------------------------------------------------------
o Investment Objective
The fund's investment objective is to provide as high a level of current
income exempt from federal income tax as is considered consistent with
prudent investing while seeking protection of shareholders' capital. The
fund's objective may be modified without shareholder approval.
o Principal Investment Policies
The fund invests, under normal market conditions, at least 80% of its
total assets in municipal securities and participation interests in
municipal securities issued by banks, the interest on which is exempt from
federal income tax. Municipal securities are bonds or other debt
obligations of a U.S. state or political subdivision, such as a county,
city, town, village, or authority. Participation interests in municipal
securities are interests in holdings of municipal obligations backed by a
letter of credit or guarantee from the issuing bank. The fund seeks to
invest in municipal securities whose income is exempt from federal income
tax. However, the interest income on certain of these municipal securities
may be subject to an alternative minimum tax.
While the fund focuses on municipal securities rated, or issued by issuers
who have securities that are rated, in one of the top three credit rating
by credit rating agencies, the fund may also invest in speculative
securities. These are securities rated in the lowest investment grade
category by credit rating agencies. The fund may also invest in tax-exempt
securities that are not rated but which, in the opinion of the fund's
investment adviser, Massachusetts Financial Services Company (referred to
as MFS or the adviser), are of at least comparable quality to the four
highest credit ratings.
In selecting fixed income investments for the fund, MFS considers the
views of its large group of fixed income portfolio managers and research
analysts. This group periodically assesses the three-month total return
outlook for various segments of the fixed income markets. This three-month
"horizon" outlook is used by the portfolio manager(s) of MFS' fixed income
oriented funds (including the fund) as a tool in making or adjusting a
fund's asset allocations to various segments of the fixed income markets.
In assessing the credit quality of fixed income securities, MFS does not
rely solely on the credit ratings assigned by credit rating agencies, but
rather performs its own independent credit analysis.
1
<PAGE>
o Principal Risks of an Investment
The principal risks of investing in the fund and the circumstances
reasonably likely to cause the value of your investment in the fund to
decline are described below. The share price of the fund generally changes
daily based on market conditions and other factors. Please note that there
are many circumstances which could cause the value of your investment in
the fund to decline, and which could prevent the fund from achieving its
objective, that are not described here.
The principal risks of investing in the fund are:
o Municipal Securities Risk:
o Interest Rate Risk: As with any fixed income security, the
prices of municipal securities in the fund's portfolio will
generally fall when interest rates rise. Conversely, when
interest rates fall, the prices of municipal securities in the
fund's portfolio will generally rise.
o Maturity Risk: Interest rate risk will generally affect the
price of a municipal security more if the security has a
longer maturity. Municipal securities with longer maturities
will therefore be more volatile than other fixed income
securities with shorter maturities. Conversely, municipal
securities with shorter maturities will be less volatile but
generally provide lower returns than municipal securities with
longer maturities. The average maturity of the fund's
municipal security investments will affect the volatility of
the fund's share price.
o Credit Risk: Credit risk is the risk that the issuer of a
municipal security will not be able to pay principal and
interest when due. Rating agencies assign credit ratings to
certain municipal securities to indicate their credit risk.
The price of a municipal security will generally fall if the
issuer defaults on its obligation to pay principal or
interest, the rating agencies downgrade the issuer's credit
rating or other news affects the market's perception of the
issuer's credit risk. A participation interest is also subject
to the risk of default by the issuing bank.
o General Obligations and Revenue Obligations Risk: The fund may
invest in municipal bonds that are general obligations backed
by the full faith and credit of the municipal issuer. The fund
may also invest in municipal bonds called revenue obligations
which are subject to a higher degree of credit risk than
general obligations. Revenue obligations finance specific
projects, such as building a hospital, and are not backed by
the full faith and credit of the municipal issuer. Because
revenue obligations are repaid from the revenues from a
facility, they are subject to a risk of default in payments of
principal and interest if the facility does not generate
enough income.
o Speculative Bonds Risk: Speculative bonds are subject to a higher
risk that the issuer will default on payments of principal and
interest than higher rated investment grade bonds. Although the
issuer's ability to make interest and principal payments appears
adequate, an adverse change in economic conditions or other
circumstances is more likely to cause a default by the issuer of a
speculative bond than the issuer of a higher rated investment grade
2
<PAGE>
bond. If a security purchased by the fund is downgraded below
investment grade, the security will be sold only if the Adviser
believes it is advantageous to do so.
o Liquidity Risk: The fixed income securities purchased by the fund
may be traded in the over-the-counter market rather than on an
organized exchange and are subject to liquidity risk. This means
that they may be harder to purchase or sell at a fair price. The
inability to purchase or sell these fixed income securities at a
fair price could have a negative impact on the fund's performance.
o As with any mutual fund, you could lose money on your investment in
the fund.
An investment in the fund is not a bank deposit and is not insured or
guaranteed by the Federal Deposit Insurance Corporation or any other
government agency.
3
<PAGE>
o Bar Chart and Performance Table
The bar chart and performance table below are intended to indicate some of
the risks of investing in the fund by showing changes in the fund's
performance over time. The performance table also shows how the fund's
performance over time compares with that of one or more broad measures of
market performance. The chart and table provide past performance
information. The fund's past performance does not necessarily indicate how
the fund will perform in the future. The performance information in the
chart and table is based upon calendar year periods, while the performance
information presented under the caption "Financial Highlights" and in the
fund's shareholder reports is based upon the fund's fiscal year.
Therefore, these performance results differ.
Bar Chart
The bar chart shows changes in the annual total returns of the fund's
class A shares. The chart and related notes do not take into account any
sales charges (loads) that you may be required to pay upon purchase or
redemption of the fund's shares, but do include the reinvestment of
distributions. Any sales charge will reduce your return. The return of the
fund's other classes of shares will differ from the class A returns shown
in the bar chart, depending upon the expenses of those classes.
[The following information was represented by
a bar chart in the printed material.]
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
6.29% 12.85% 9.38% 13.70% (6.50)% 17.38% 1.54% 8.93% 4.90% (3.52)%
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999
</TABLE>
The total return for the nine month period ended September 30, 2000 was
7.04%. During the period shown in the bar chart, the highest quarterly
return was 7.11% (for the calendar quarter ended March 31, 1995) and the
lowest quarterly return was (6.28)% (for the calendar quarter ended March
31, 1994).
4
<PAGE>
Performance Table
This table shows how the average annual total returns of each class of the
fund compare to a broad measure of market performance and various other
market indicators and assumes the reinvestment of distributions.
<TABLE>
<CAPTION>
Average Annual Total Returns as of December 31, 1999
--------------------------------------------------------------------------
1 Year 5 Year 10 Year
<S> <C> <C> <C>
Class A shares (8.11)% 4.59% 5.73%
Class B shares (7.90)% 4.37% 5.63%
Lehman Brothers Muni Bond Index+* (2.06)% 6.91% 6.89%
Lipper Average General Municipal Bond Index++## (4.63)% 5.76% 6.18%
</TABLE>
----------
+ Source: Standard & Poors, Micropal, Inc.
++ Source: Lipper Inc.
* The Lehman Brother Muni Bond Index is an unmanaged index comprised
of approximately 50,000 actual bonds (with no floating or zero
coupons) which are investment grade, fixed-rate, long-term
maturities (greater than two years). It is not possible to invest
directly in an index.
## The Lipper Mutual Fund Indices are unmanaged,
net-asset-value-weighted indices of the largest qualifying mutual
funds within their respective investment objectives, adjusted for
the reinvestment of capital gains distributions and income
dividends. It is not possible to invest directly in an index.
Class A share performance takes into account the deduction of the 4.75%
maximum sales charge. Class B share performance takes into account the
deduction of the applicable contingent deferred sales charge (referred to
as a CDSC), which declines over six years from 4% to 0%.
The fund commenced investment operations on December 16, 1976 with the
offering of class A shares and subsequently offered class B shares on
September 7, 1993. Class B share performance includes the performance of
the fund's class A shares for periods prior to the offering of class B
shares. This blended class B share performance has been adjusted to take
into account the CDSC applicable to class B shares, rather than the
initial sales charge (load) applicable to class A shares. This blended
performance has not been adjusted to take into account differences in
class specific operating expenses. Because operating expenses of class B
shares are higher than those of class A shares, this blended class B share
performance is higher than the performance of class B shares would have
been had class B shares been offered for the entire period. If you would
like the fund's current yield, contact the MFS Service Center at the toll
free number set forth on the back cover page.
If you would like the fund's current yield, contact the MFS Service Center
at the toll free number set forth on the back cover page.
5
<PAGE>
--------------------------------------------------------------------------------
II EXPENSE SUMMARY
--------------------------------------------------------------------------------
o Expense Table
This table describes the fees and expenses that you may pay when you buy,
redeem and hold shares of the fund.
Shareholder Fees (fees paid directly from your investment)
--------------------------------------------------------------------------
Class A Class B
Maximum Sales Charge (Load) Imposed on
Purchases (as a percentage of offering price) ..... 4.75% 0.00%
Maximum Deferred Sales Charge (Load)
(as a percentage of original purchase price or
redemption proceeds, whichever is less) ........... See Below(1) 4.00%
<TABLE>
<CAPTION>
Annual Fund Operating Expenses (expenses that are deducted from fund assets)
----------------------------------------------------------------------------
<S> <C> <C>
Management Fees ................................... 0.40% 0.40%
Distribution and Service (12b-1) Fees ............. 0.00% 0.78%(2)
Other Expenses .................................... 0.18% 0.18%
Total Annual Fund Operating Expenses(3) ........... 0.58% 1.36%
</TABLE>
----------
(1) An initial sales charge will not be deducted from your purchase if
you buy $1 million or more of class A shares, or if you are
investing through a retirement plan and your class A purchase meets
certain requirements. However, in either case, a contingent deferred
sales charge (referred to as a CDSC) of 1% may be deducted from your
redemption proceeds if you redeem your investment within 12 months.
(2) The fund adopted a distribution plan under Rule 12b-1 that permits
it to pay marketing and other fees to support the sale and
distribution of its class B shares and the services provided to you
by your financial adviser (referred to as distribution and service
fees). The class B service fee is not currently in effect, and may
equal up to 0.25% annually upon implementation by the board of
trustees which oversee the fund.
(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. The fund may enter
into other similar arrangements and directed brokerage arrangements,
which would also have the effect of reducing the fund's expenses.
"Other Expenses" do not take into account these expense reductions,
and are therefore higher than the actual expenses of the fund. Had
these fee reductions been taken into account, "Total Annual Fund
Operating Expenses" would be lower, and would equal 0.56% for class
A shares and 1.34% for class B shares.
6
<PAGE>
o Example of Expenses
These examples are intended to help you compare the cost of investing in
the fund with the cost of investing in other mutual funds.
The examples assume that:
o You invest $10,000 in the fund for the time periods indicated and
you redeem your shares at the end of the time periods;
o Your investment has a 5% return each year and dividends and other
distributions are reinvested; and
o The fund's operating expenses remain the same.
Although your actual costs may be higher or lower, under these assumptions
your costs would be:
<TABLE>
<CAPTION>
Share Class Year 1 Year 3 Year 5 Year 10
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Class A shares $531 $652 $783 $1,166
Class B shares(1)
Assuming redemption at end of period $538 $731 $945 $1,421
Assuming no redemption $138 $431 $745 $1,421
</TABLE>
----------
(1) Class B shares convert to Class A shares approximately eight years
after purchase; therefore, years nine and ten reflect Class A
expenses.
7
<PAGE>
--------------------------------------------------------------------------------
III CERTAIN INVESTMENT STRATEGIES AND RISKS
--------------------------------------------------------------------------------
o Further Information on Investment Strategies and Risks
The fund may invest in various types of securities and engage in various
investment techniques and practices which are not the principal focus of
the fund and therefore are not described in this Prospectus. The types of
securities and investment techniques and practices in which the fund may
engage, including the principal investment techniques and practices
described above, are identified in Appendix A to this Prospectus, and are
discussed, together with their risks, in the fund's Statement of
Additional Information (referred to as the SAI), which you may obtain by
contacting MFS Service Center, Inc. (see back cover for address and phone
number).
o Temporary Defensive Policies
In addition, the fund may depart from its principal investment strategies
by temporarily investing for defensive purposes when adverse market,
economic or political conditions exist. While the fund invests
defensively, it may not be able to pursue its investment objective. The
fund's defensive investment position may not be effective in protecting
its value.
8
<PAGE>
--------------------------------------------------------------------------------
IV MANAGEMENT OF THE FUND
--------------------------------------------------------------------------------
o Investment Adviser
Massachusetts Financial Services Company (referred to as MFS or the
adviser) is the fund's investment adviser. 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, Massachusetts Investors Trust. Net assets under the management of
the MFS organization were approximately $137.95 billion as of November 30,
2000.
MFS provides investment management and related administrative services and
facilities to the fund, including portfolio management and trade
execution. For these services the fund pays MFS an annual 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:
Annual Rate of Management Fee Annual Rate of Management Fee
Based on Average Daily Net Assets Based on Gross Income
---------------------------------- ----------------------------------
.220% of the first $200 million 4.12% of the first $16 million
.187% of average daily net assets in 3.51% of gross income in excess of
excess of $200 million $16 million
.168% of average daily net assets in 3.16% of gross income in excess of
excess of $2 billion $160 million
For the fiscal year ended August 31, 2000, the fund paid MFS an aggregate
management fee equal to 0.40% of the average daily net assets of the fund.
o Portfolio Manager
Geoffrey L. Schechter and Michael L. Dawson are the portfolio managers for
the fund. Mr. Schechter, a Vice President of MFS, has been a portfolio
manager of the fund since March, 1998 and has been employed in the
investment management area of MFS since June, 1993. Mr. Dawson, a Vice
President of MFS, became a portfolio manager of the fund on March 23, 2000
and has been employed in the investment management area of MFS since
September, 1998. Mr. Dawson was employed as a sales representative in the
Institutional Sales Group at Fidelity Capital Markets from March, 1997 to
May, 1998. From January, 1993 to March, 1997, Goldman Sachs & Co. employed
Mr. Dawson in the Institutional Sales -- Fixed Income Divisions.
o Administrator
MFS provides the fund with certain financial, legal, compliance,
shareholder communications and other administrative services. MFS is
reimbursed by the fund for a portion of the costs it incurs in providing
these services.
9
<PAGE>
o Distributor
MFS Fund Distributors, Inc. (referred to as MFD), a wholly owned
subsidiary of MFS, is the distributor of shares of the fund.
o Shareholder Servicing Agent
MFS Service Center, Inc. (referred to as MFSC), a wholly owned subsidiary
of MFS, performs transfer agency and certain other services for the fund,
for which it receives compensation from the fund.
10
<PAGE>
--------------------------------------------------------------------------------
V DESCRIPTION OF SHARE CLASSES
--------------------------------------------------------------------------------
The fund offers class A and B shares through this prospectus.
o Sales Charges
You may be subject to an initial sales charge when you purchase, or a CDSC
when you redeem, class A or B shares. These sales charges are described
below. In certain circumstances, these sales charges are waived. These
circumstances are described in the SAI. Special considerations concerning
the calculation of the CDSC that apply to each of these classes of shares
are described below under the heading "Calculation of CDSC."
If you purchase your fund shares through a financial adviser (such as a
broker or bank), the adviser may receive commissions or other concessions
which are paid from various sources, such as from the sales charges and
distribution and service fees, or from MFS or MFD. These commissions and
concessions are described in the SAI.
o Class A Shares
You may purchase class A shares at net asset value plus an initial sales
charge (referred to as the offering price), but in some cases you may
purchase class A shares without an initial sales charge but subject to a
1% CDSC upon redemption within one year.
Purchases Subject to an Initial Sales Charge. The amount of the initial
sales charge you pay when you buy class A shares differs depending upon
the amount you invest, as follows:
Sales Charge* as Percentage of:
-------------------------------
Offering Net Amount
Amount of Purchase Price Invested
Less than $100,000 4.75% 4.99%
$100,000 but less than $250,000 4.00 4.17
$250,000 but less than $500,000 2.95 3.04
$500,000 but less than $1,000,000 2.20 1.70
$1,000,000 or more None** None**
----------
* Because of rounding in the calculation of offering price, actual
sales charges you pay may be more or less than those calculated
using these percentages.
** A 1% CDSC will apply to such purchases, as discussed below.
Purchases Subject to a CDSC (but not an initial sales charge). You pay no
initial sales charge when you invest $1 million or more in class A shares.
However, a CDSC of 1% will be deducted from your redemption proceeds if
you redeem within 12 months of your purchase.
11
<PAGE>
In addition, purchases made under the following four categories are not
subject to an initial sales charge; however, a CDSC of 1% will be deducted
from redemption proceeds if the redemption is made within 12 months of
purchase:
o Investments in class A shares by certain retirement plans subject to
the Employee Retirement Income Security Act of 1974, as amended
(referred to as ERISA), if, prior to July 1, 1996
o the plan had established an account with MFSC; and
o the sponsoring organization had demonstrated to the
satisfaction of MFD that either;
+ the employer had at least 25 employees; or
+ the total purchases by the retirement plan of class A
shares of the MFS Family of Funds (referred to as the
MFS funds) would be in the amount of at least $250,000
within a reasonable period of time, as determined by MFD
in its sole discretion.
o Investments in class A shares by certain retirement plans subject to
ERISA, if
o the retirement plan and/or sponsoring organization
participates in the MFS Corporate Plan Services 401(k) Plan or
any similar recordkeeping system made available by MFSC
(referred to as the MFS participant recordkeeping system);
o the plan establishes an account with MFSC on or after July 1,
1996; and
o the total purchases by the retirement plan (or by multiple
plans maintained by the same plan sponsor) of class A shares
of the MFS funds will be in the amount of at least $500,000
within a reasonable period of time, as determined by MFD in
its sole discretion;
o Investments in class A shares by certain retirement plans subject to
ERISA, if
o the plan establishes an account with MFSC on or after July 1,
1996; and
o the plan has, at the time of purchase, either alone or in
aggregate with other plans maintained by the same sponsor, a
market value of $500,000 or more invested in shares of any
class or classes of the MFS funds.
The retirement plans will qualify under this category only if
the plans or their sponsoring organization inform MFSC prior
to the purchases that the plans have a market value of
$500,000 or more invested in shares of any class or classes of
the MFS funds; MFSC has no obligation independently to
determine whether such plans qualify under this category; and
12
<PAGE>
o Investments in class A shares by certain retirement plans subject to
ERISA, if
o the plan established an account with MFSC between July 1, 1997
and December 31, 1999;
o the plan records are maintained on a pooled basis by MFSC; and
o 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.
o Class B Shares
You may purchase class B shares at net asset value without an initial
sales charge, but if you redeem your shares within the first six years you
may be subject to a CDSC (declining from 4.00% during the first year to 0%
after six years). Class B shares have annual distribution and service fees
up to a maximum of 1.00% of net assets annually.
The CDSC is imposed according to the following schedule:
Contingent Deferred
Year of Redemption After Purchase Sales Charge
--------------------------------------------------------------------------
First 4%
Second 4%
Third 3%
Fourth 3%
Fifth 2%
Sixth 1%
Seventh and following 0%
If you hold class B shares for approximately eight years, they will
convert to class A shares of the fund. All class B shares you purchased
through the reinvestment of dividends and distributions will be held in a
separate sub-account. Each time any class B shares in your account convert
to class A shares, a proportionate number of the class B shares in the
sub-account will also convert to class A shares.
o Calculation of CDSC
As discussed above, certain investments in class A and B shares will be
subject to a CDSC. Three different aging schedules apply to the
calculation of the CDSC:
o Purchases of class A shares made on any day during a calendar month
will age one month on the last day of the month, and each subsequent
month.
o Purchases of class B shares on or after January 1, 1993, made on any
day during a calendar month will age one year at the close of
business on the last day of that month in the following calendar
year, and each subsequent year.
13
<PAGE>
o Purchases of class B shares prior to January 1, 1993 made on any day
during a calendar year will age one year at the close of business on
December 31 of that year, and each subsequent year.
No CDSC is assessed on the value of your account represented by appreciation or
additional shares acquired through the automatic reinvestment of dividends or
capital gain distributions. Therefore, when you redeem your shares, only the
value of the shares in excess of these amounts (i.e., your direct investment) is
subject to a CDSC.
The CDSC will be applied in a manner that results in the CDSC being imposed at
the lowest possible rate, which means that the CDSC will be applied against the
lesser of your direct investment or the total cost of your shares. The
applicability of a CDSC will not be affected by exchanges or transfers of
registration, except as described in the SAI.
o Distribution and Service Fees
The fund has adopted a plan under Rule 12b-1 that permits it to pay marketing
and other fees to support the sale and distribution of class B shares and the
services provided to you by your financial adviser. These annual distribution
and service fees for class B shares may equal up to 1.00% (a 0.75% distribution
fee and a 0.25% service fee), and are paid out of the assets of class B shares.
Over time, these fees will increase the cost of your shares and may cost you
more than paying other types of sales charges. 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
in the first year, payment of the class B service fee is currently not being
imposed and will be paid by the fund on such date as the Trustees of the fund
determine.
14
<PAGE>
--------------------------------------------------------------------------------
VI HOW TO PURCHASE, EXCHANGE AND REDEEM SHARES
--------------------------------------------------------------------------------
You may purchase, exchange and redeem class A and B shares of the fund in the
manner described below. In addition, you may be eligible to participate in
certain investor services and programs to purchase, exchange and redeem these
classes of shares, which are described in the next section under the caption
"Investor Services and Programs."
o How to Purchase Shares
Initial Purchase. You can establish an account by having your financial adviser
process your purchase. The minimum initial investment is $1,000. However, in the
following circumstances the minimum initial investment is only $50 per account:
o if you establish an automatic investment plan;
o if you establish an automatic exchange plan; or
o if you establish an account under either:
a tax-deferred retirement program (other than an IRA) where
investments are made by means of group remittal statements; or
an employer sponsored investment program.
The minimum initial investment for IRAs is $250 per account.
Adding to Your Account. There are several easy ways you can make additional
investments of at least $50 to your account:
o send a check with the returnable portion of your statement;
o ask your financial adviser to purchase shares on your behalf;
o wire additional investments through your bank (call MFSC first for
instructions); or
o authorize transfers by phone between your bank account and your MFS
account (the maximum purchase amount for this method is $100,000). You
must elect this privilege on your account application if you wish to use
it.
o How to Exchange Shares
You can exchange your shares for shares of the same class of certain other MFS
funds at net asset value by having your financial adviser process your exchange
request or by contacting MFSC directly. The minimum exchange amount is generally
$1,000 ($50 for exchanges made under the automatic exchange plan). Shares
otherwise subject to a CDSC will not be charged a CDSC in an exchange. However,
when you redeem the shares acquired through the exchange, the shares you redeem
may be subject to a CDSC, depending upon when you originally purchased the
shares you exchanged. For purposes of computing the CDSC, the length of time you
have owned your shares will be measured from the date of original purchase and
will not be affected by any exchange.
15
<PAGE>
Sales charges may apply to exchanges made from the MFS money market funds.
Certain qualified retirement plans may make exchanges between the MFS funds and
the MFS Fixed Fund, a bank collective investment fund, and sales charges may
also apply to these exchanges. Call MFSC for information concerning these sales
charges.
Exchanges may be subject to certain limitations and are subject to the MFS
funds' policies concerning excessive trading practices, which are policies
designed to protect the funds and their shareholders from the harmful effect of
frequent exchanges. These limitations and policies are described below under the
captions "Right to Reject or Restrict Purchase and Exchange Orders" and
"Excessive Trading Practices." You should read the prospectus of the MFS fund
into which you are exchanging and consider the differences in objectives,
policies and rules before making any exchange.
o How to Redeem Shares
You may redeem your shares either by having your financial adviser process your
redemption or by contacting MFSC directly. The fund sends out your redemption
proceeds within seven days after your request is received in good order. "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. In addition, you need to have your
signature guaranteed and/or submit additional documentation to redeem your
shares. See "Signature Guarantee/Additional Documentation" below, or contact
MFSC for details (see back cover page for address and phone number).
Under unusual circumstances such as when the New York Stock Exchange is closed,
trading on the Exchange is restricted or if there is an emergency, the fund may
suspend redemptions or postpone payment. If you purchased the shares you are
redeeming by check, the fund may delay the payment of the redemption proceeds
until the check has cleared, which may take up to 15 days from the purchase
date.
Redeeming Directly through MFSC.
o By telephone. You can call MFSC to have shares redeemed from your account
and the proceeds wired or mailed (depending on the amount redeemed)
directly to a pre-designated bank account. MFSC will request personal or
other information from you and will generally record the calls. MFSC will
be responsible for losses that result from unauthorized telephone
transactions if it does not follow reasonable procedures designed to
verify your identity. You must elect this privilege on your account
application if you wish to use it.
o By mail. To redeem shares by mail, you can send a letter to MFSC with the
name of your fund, your account number, and the number of shares or dollar
amount to be sold.
Redeeming through Your Financial Adviser. You can call your financial adviser to
process a redemption on your behalf. Your financial adviser will be responsible
for furnishing all necessary documents to MFSC and may charge for this service.
16
<PAGE>
Signature Guarantee/Additional Documentation. In order to protect against fraud,
the fund requires that your signature be guaranteed in order to redeem your
shares. Your signature may be guaranteed by an eligible bank, broker, dealer,
credit union, national securities exchange, registered securities association,
clearing agency, or savings association. MFSC may require additional
documentation for certain types of registrations and transactions. Signature
guarantees and this additional documentation shall be accepted in accordance
with policies established by MFSC, and MFSC may make certain de minimis
exceptions to these requirements.
o Other Considerations
Right to Reject or Restrict Purchase and Exchange Orders. Purchases and
exchanges should be made for investment purposes only. The MFS funds each
reserve the right to reject or restrict any specific purchase or exchange
request. Because an exchange request involves both a request to redeem shares of
one fund and to purchase shares of another fund, the MFS funds consider the
underlying redemption and purchase requests conditioned upon the acceptance of
each of these underlying requests. Therefore, in the event that the MFS funds
reject an exchange request, neither the redemption nor the purchase side of the
exchange will be processed. When a fund determines that the level of exchanges
on any day may be harmful to its remaining shareholders, the fund may delay the
payment of exchange proceeds for up to seven days to permit cash to be raised
through the orderly liquidation of its portfolio securities to pay the
redemption proceeds. In this case, the purchase side of the exchange will be
delayed until the exchange proceeds are paid by the redeeming fund.
Excessive Trading Practices. The MFS funds do not permit market-timing or other
excessive trading practices. Excessive, short-term (market-timing) trading
practices may disrupt portfolio management strategies and harm fund performance.
As noted above, the MFS funds reserve the right to reject or restrict any
purchase order (including exchanges) from any investor. To minimize harm to the
MFS funds and their shareholders, the MFS funds will exercise these rights if an
investor has a history of excessive trading or if an investor's trading, in the
judgment of the MFS funds, has been or may be disruptive to a fund. In making
this judgment, the MFS funds may consider trading done in multiple accounts
under common ownership or control.
Reinstatement Privilege. After you have redeemed shares, you have a one-time
right to reinvest the proceeds within 90 days of the redemption at the current
net asset value (without an initial sales charge).
For shareholders who exercise this privilege after redeeming class A shares, if
the redemption involved a CDSC, your account will be credited with the
appropriate amount of the CDSC you paid; however, your new class A shares will
still be subject to a CDSC for up to one year from the date you originally
purchased the shares redeemed.
Until December 31, 2001, shareholders who redeem class B shares and then
exercise their 90-day reinstatement privilege may reinvest their redemption
proceeds either in
o class B shares, in which case any applicable CDSC you paid on the
redemption will be credited to your account, and your new shares will be
subject to a CDSC which will be determined from the date you originally
purchased the shares redeemed, or
17
<PAGE>
o class A shares, in which case the class A shares purchased will not be
subject to an initial sales charge or a CDSC, but if you paid a CDSC when
you redeemed your class B shares, your account will not be credited with
the CDSC you paid.
After December 31, 2001, shareholders who exercise their 90-day reinstatement
privilege after redeeming class B shares may reinvest their redemption proceeds
only in class A shares as described as the second option above.
In-Kind Distributions. The MFS funds have reserved the right to pay redemption
proceeds by a distribution in-kind of portfolio securities (rather than cash).
In the event that the fund makes an in-kind distribution, you could incur the
brokerage and transaction charges when converting the securities to cash. The
fund does not expect to make in-kind distributions, and if it does, the fund
will pay, during any 90-day period, your redemption proceeds in cash up to
either $250,000 or 1% of the fund's net assets, whichever is less.
Involuntary Redemptions/Small Accounts. Because it is costly to maintain small
accounts, the MFS funds have generally reserved the right to automatically
redeem shares and close your account when it contains less than $500 due to your
redemptions or exchanges. Before making this automatic redemption, you will be
notified and given 60 days to make additional investments to avoid having your
shares redeemed.
18
<PAGE>
--------------------------------------------------------------------------------
VII INVESTOR SERVICES AND PROGRAMS
--------------------------------------------------------------------------------
As a shareholder of the fund, you have available to you a number of services and
investment programs. Some of these services and programs may not be available to
you if your shares are held in the name of your financial adviser or if your
investment in the fund is made through a retirement plan.
o Distribution Options
The following distribution options are generally available to all accounts and
you may change your distribution option as often as you desire by notifying
MFSC:
o Dividend distributions and capital gain distributions reinvested in
additional shares (this option will be assigned if no other option is
specified);
o Dividend distributions in cash; capital gain distributions reinvested in
additional shares; or
o Dividend 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 as of the
close of business on the record date. Distributions in amounts less than $10
will automatically be reinvested in additional shares of the fund. If you have
elected to receive distributions in cash, and the postal or other delivery
service is unable to deliver checks to your address of record, or you do not
respond to mailings from MFSC with regard to uncashed distribution checks, your
distribution option will automatically be converted to having all distributions
reinvested in additional shares. Your request to change a distribution option
must be received by MFSC by the record date for a distribution in order to be
effective for that distribution. No interest will accrue on amounts represented
by uncashed distribution or redemption checks.
o Purchase and Redemption Programs
For your convenience, the following purchase and redemption programs are made
available to you with respect to class A and B shares, without extra charge:
Automatic Investment Plan. You can make cash investments of $50 or more through
your checking account or savings account on any day of the month. If you do not
specify a date, the investment will automatically occur on the first business
day of the month.
Automatic Exchange Plan. If you have an account balance of at least $5,000 in
any MFS fund, you may participate in the automatic exchange plan, a dollar-cost
averaging program. This plan permits you to make automatic monthly or quarterly
exchanges from your account in an MFS fund for shares of the same class of
shares of other MFS funds. You may make exchanges of at least $50 to up to six
different funds under this plan. Exchanges will generally be made at net asset
value without any sales charges. If you exchange shares out of the MFS Money
Market Fund or MFS Government Money Market Fund, or if you exchange class A
shares out of
19
<PAGE>
the MFS Cash Reserve Fund, into class A shares of any other MFS fund, you will
pay the initial sales charge if you have not already paid this charge on these
shares.
Reinvest Without a Sales Charge. You can reinvest dividend and capital gain
distributions into your account without a sales charge to add to your investment
easily and automatically.
Distribution Investment Program. You may purchase shares of any MFS fund without
paying an initial sales charge or a CDSC upon redemption by automatically
reinvesting a minimum of $50 of dividend and capital gain distributions from the
same class of another MFS fund.
Letter of Intent (LOI). If you intend to invest $100,000 or more in the MFS
funds (including the MFS Fixed Fund) within 13 months, you may buy class A
shares of the funds at the reduced sales charge as though the total amount were
invested in class A shares in one lump sum. If you intend to invest $1 million
or more under this program, the time period is extended to 36 months. If the
intended purchases are not completed within the time period, shares will
automatically be redeemed from a special escrow account established with a
portion of your investment at the time of purchase to cover the higher sales
charge you would have paid had you not purchased your shares through this
program.
Right of Accumulation. You will qualify for a lower sales charge on your
purchases of class A shares when your new investment in class A shares, together
with the current (offering price) value of all your holdings in the MFS funds
(including the MFS Fixed Fund), reaches a reduced sales charge level.
Systematic Withdrawal Plan. You may elect to automatically receive (or designate
someone else to receive) regular periodic payments of at least $100. Each
payment under this systematic withdrawal is funded through the redemption of
your fund shares. For class B shares, you can receive up to 10% (15% for certain
IRA distributions) of the value of your account through these payments in any
one year (measured at the time you establish this plan). You will incur no CDSC
on class B shares redeemed under this plan. For class A shares, there is no
similar percentage limitation; however, you may incur the CDSC (if applicable)
when class A shares are redeemed under this plan.
Free Checkwriting. You may redeem your class A or class B shares by writing
checks against your account. Checks must be for at least $500 and investments
made by check must have been in your account for at least 15 days before you can
write checks against them. There is no charge for this service. To authorize
your account for checkwriting, contact MFSC (see back cover page for address and
phone number).
Shares in your account equal in value to the amount of the check plus the
applicable CDSC (if any) and any income tax required to be withheld (if any) are
redeemed to cover the amount of the check. If your account value is not great
enough to cover these amounts, your check will be dishonored.
20
<PAGE>
--------------------------------------------------------------------------------
VIII OTHER INFORMATION
--------------------------------------------------------------------------------
o Pricing of Fund Shares
The price of each class of the fund's shares is based on its net asset value.
The net asset value of each class of shares is determined at the close of
regular trading each day that the New York Stock Exchange is open for trading
(generally, 4:00 p.m., Eastern time) (referred to as the valuation time). The
New York Stock Exchange is closed on most national holidays and Good Friday. To
determine net asset value, the fund values its assets at current market values,
or at fair value as determined by the adviser under the direction of the Board
of Trustees that oversees the fund if current market values are unavailable.
Fair value pricing may be used by the fund when current market values are
unavailable or when an event occurs after the close of the exchange on which the
fund's portfolio securities are principally traded that is likely to have
changed the value of the securities. The use of fair value pricing by the fund
may cause the net asset value of its shares to differ significantly from the net
asset value that would be calculated using current market values.
You will receive the net asset value next calculated, after the deduction of
applicable sales charges and any required tax withholding, if your order is
complete (has all required information) and MFSC receives your order by:
o the valuation time, if placed directly by you (not through a financial
adviser such as a broker or bank) to MFSC; or
o MFSC's close of business, if placed through a financial adviser, so long
as the financial adviser (or its authorized designee) received your order
by the valuation time.
o Distributions
The fund intends to declare daily as dividends substantially all of its net
income (excluding any realized net capital gains) and to pay these dividends to
shareholders at least monthly. Any realized net capital gains are distributed at
least annually.
o Tax Considerations
The following discussion is very general. You are urged to consult your tax
adviser regarding the effect that an investment in the fund may have on your
particular tax situation.
Taxability of Distributions. As long as the fund qualifies for treatment as a
regulated investment company (which it has in the past and intends to do in the
future), it pays no federal income tax on the earnings it distributes to
shareholders.
You may receive three different types of distributions from the fund:
exempt-interest dividends, ordinary dividends and capital gain dividends. Most
distributions will be exempt-interest dividends, which are exempt from federal
income tax, but may be subject to state or local income taxes. Ordinary
dividends are normally subject to both federal income tax and any state or local
income taxes. Distributions designated as capital gain dividends are taxable as
long-term capital gains. Any taxes that you pay on a distribution will be the
same whether you take
21
<PAGE>
the distribution in cash or have it reinvested in additional shares of the fund.
Some dividends paid in January may be taxable as if they had been paid the
previous December.
The Form 1099 that is mailed to you every January details your distributions and
how they are treated for federal tax purposes.
Fund distributions of net capital gains or net short-term capital gains will
reduce the fund's net asset value per share. Therefore, if you buy shares
shortly before the record date of such a distribution, you may pay the full
price for the shares and then effectively receive a portion of the purchase
price back as a taxable distribution.
If you are neither a citizen nor a resident of the U.S., the fund will withhold
U.S. federal income tax at the rate of 30% on taxable dividends and other
payments that are subject to such withholding. You may be able to arrange for a
lower withholding rate under an applicable tax treaty if you supply the
appropriate documentation required by the fund. 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.
Taxability of Transactions. When you redeem, sell or exchange shares, it is
generally considered a taxable event for you. Depending on the purchase price
and the sale price of the shares you redeem, sell or exchange, you may have a
gain or a loss on the transaction. You are responsible for any tax liabilities
generated by your transaction.
Other Tax Issues. Exempt-interest dividends that you receive may affect your
alternative minimum tax calculation. Also, if you are receiving social security
or railroad retirement benefits, your exempt-interest dividends may increase the
tax on your benefits. If you borrow money to purchase or carry shares of the
fund, your deduction for interest paid on those borrowings will be limited.
o Unique Nature of Fund
MFS may serve as the investment adviser to other funds which have investment
goals and principal investment policies and risks similar to those of the fund,
and which may be managed by the fund's portfolio manager(s). While the fund may
have many similarities to these other funds, its investment performance will
differ from their investment performance. This is due to a number of differences
between the funds, including differences in sales charges, expense ratios and
cash flows.
22
<PAGE>
o Provision of Annual and Semiannual Reports and Prospectuses
The fund produces financial reports every six months and updates its prospectus
annually. To avoid sending duplicate copies of materials to households, only one
copy of the fund's annual and semiannual report and prospectus will be mailed to
shareholders having the same residential address on the fund's records. However,
any shareholder may contact MFSC (see back cover for address and phone number)
to request that copies of these reports and prospectuses be sent personally to
that shareholder.
23
<PAGE>
--------------------------------------------------------------------------------
IX FINANCIAL HIGHLIGHTS
--------------------------------------------------------------------------------
The financial highlights table is intended to help you understand the fund's
financial performance since the past 5 years. Certain information reflects
financial results for a single fund share. The total returns in the table
represent the rate by which an investor would have earned (or lost) on an
investment in the fund (assuming reinvestment of all distributions). This
information has been audited by the fund's independent auditors, whose report,
together with the fund's financial statements, are included in the fund's Annual
Report to shareholders. The fund's Annual Report is available upon request by
contacting MFSC (see back cover for address and telephone number). These
financial statements are incorporated by reference into the SAI. The fund's
independent auditors are Deloitte & Touche LLP.
Class A Shares
<TABLE>
<CAPTION>
Year Ended August 31,
-----------------------
2000 1999 1998 1997 1996
----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per share data (for a share outstanding
throughout each period):
Net asset value -- beginning of period ................ $ 10.35 $ 11.09 $ 10.99 $ 10.75 $ 10.83
--------- --------- --------- --------- ---------
Income from investment operations # --
Net investment income ............................... $ 0.54 $ 0.53 $ 0.54 $ 0.57 $ 0.59
Net realized and unrealized gain (loss) on
investments ....................................... 0.09 (0.64) 0.28 0.24 (0.09)
--------- --------- --------- --------- ---------
Total from investment operations ................ $ 0.63 $ (0.11) $ 0.82 $ 0.81 $ 0.50
--------- --------- --------- --------- ---------
Less distributions declared to shareholders --
From net investment income .......................... $ (0.54) $ (0.53) $ (0.54) $ (0.57) $ (0.58)
From net realized gain on investments ............... (0.06) (0.10) (0.18) -- --
In excess of net realized gain on
investments ....................................... (0.09) -- -- -- --
--------- --------- --------- --------- ---------
Total distributions declared to
shareholders .................................... $ (0.69) $ (0.63) $ (0.72) $ (0.57) $ (0.58)
--------- --------- --------- --------- ---------
Net asset value -- end of period ...................... $ 10.29 $ 10.35 $ 11.09 $ 10.99 $ 10.75
========= ========= ========= ========= =========
Total return++ ........................................ 6.51% (1.08)% 7.78% 7.75% 4.67%
Ratios (to average net assets)/
Supplemental data:
Expenses## .......................................... 0.58% 0.57% 0.60% 0.60% 0.60%
Net investment income ............................... 5.32% 4.87% 4.90% 5.29% 5.37%
Portfolio turnover .................................... 25% 30% 79% 91% 84%
Net assets at end of period
(000,000 Omitted) ................................... $ 1,257 $ 1,385 $ 1,639 $ 1,660 $ 1,798
</TABLE>
----------
# Per share data are based on average shares outstanding.
## Ratios do not reflect expense reductions from certain expense offset
arrangements.
++ 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.
24
<PAGE>
Class B Shares
<TABLE>
<CAPTION>
Year Ended August 31,
----------------------
2000 1999 1998 1997 1996
-----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per share data (for a share outstanding
throughout each period):
Net asset value -- beginning of period ............... $ 10.34 $ 11.08 $ 10.99 $ 10.74 $ 11.10
-------- -------- -------- -------- --------
Income from investment operations # --
Net investment income ............................... $ 0.46 $ 0.44 $ 0.45 $ 0.48 $ 0.49
Net realized and unrealized gain (loss) on
investments ........................................ 0.09 (0.64) 0.28 0.25 (0.37)
-------- -------- -------- -------- --------
Total from investment operations ................. $ 0.55 $ (0.20) $ 0.73 $ 0.73 $ 0.12
-------- -------- -------- -------- --------
Less distributions declared to shareholders --
From net investment income .......................... $ (0.46) $ (0.44) $ (0.46) $ (0.48) $ (0.48)
From net realized gain on investments ............... (0.06) (0.10) (0.18) -- --
In excess of net realized gain on
investments ....................................... (0.09) -- -- -- --
-------- -------- -------- -------- --------
Total distributions declared to
shareholders .................................... $ (0.61) $ (0.54) $ (0.64) $ (0.48) $ (0.48)
-------- -------- -------- -------- --------
Net asset value -- end of period ..................... $ 10.28 $ 10.34 $ 11.08 $ 10.99 $ 10.74
======== ======== ======== ======== ========
Total return ......................................... 5.70% (1.87)% 6.85% 6.84% 3.69%
Ratios (to average net assets)/
Supplemental data:
Expenses## ......................................... 1.37% 1.37% 1.40% 1.46% 1.55%
Net investment income .............................. 4.55% 4.07% 4.10% 4.42% 4.42%
Portfolio turnover ................................... 25% 30% 79% 91% 84%
Net assets at end of period
(000,000 Omitted) .................................. $ 70 $ 78 $ 81 $ 76 $ 71
</TABLE>
----------
# Per share data are based on average shares outstanding.
## Ratios do not reflect expense reductions from certain expense offset
arrangements.
25
<PAGE>
--------------------------------------------------------------------------------
Appendix A
--------------------------------------------------------------------------------
o Investment Techniques and Practices
In pursuing its investment objective, the fund may engage in the following
principal and non-principal investment techniques and practices. Investment
techniques and practices which are the principal focus of the fund are also
described, together with their risks, in the Risk Return Summary of the
Prospectus. Both principal and non-principal investment techniques and practices
are described, together with their risks, in the SAI.
Investment Techniques/Practices
--------------------------------------------------------------------------------
Symbols X permitted -- not permitted
--------------------------------------------------------------------------------
Debt Securities
Asset-Backed Securities
Collateralized Mortgage Obligations and Multiclass
Pass-Through Securities --
Corporate Asset-Backed Securities --
Mortgage Pass-Through Securities --
Stripped Mortgage-Backed Securities --
Corporate Securities --
Loans and Other Direct Indebtedness --
Lower Rated Bonds --
Municipal Bonds X
Speculative Bonds X
U.S. Government Securities X
Variable and Floating Rate Obligations X
Zero Coupon Bonds, Deferred Interest Bonds and PIK Bonds X
Equity Securities --
Foreign Securities Exposure
Brady Bonds --
Depositary Receipts --
Dollar-Denominated Foreign Debt Securities --
Emerging Markets --
Foreign Securities --
Forward Contracts X
Futures Contracts X
Indexed Securities X
Inverse Floating Rate Obligations X
A-1
<PAGE>
Investment Techniques/Practices (continued)
--------------------------------------------------------------------------------
Symbols X permitted -- not permitted
--------------------------------------------------------------------------------
Investment in Other Investment Companies --
Open-End Funds X
Closed-End Funds X
Lending of Portfolio Securities --*
Leveraging Transactions
Bank Borrowings --*
Mortgage "Dollar-Roll" Transactions **
Reverse Repurchase Agreements --*
Options
Options on Foreign Currencies --
Options on Futures Contracts X
Options on Securities X
Options on Stock Indices --
Reset Options --
"Yield Curve" Options X
Repurchase Agreements X
Restricted Securities X
Short Sales --*
Short Sales Against the Box X
Short Term Instruments X
Swaps and Related Derivative Instruments --
Temporary Borrowings X
Temporary Defensive Positions X
Warrants --
"When-issued" Securities X
----------
* May only be changed with shareholder approval
** The fund will only enter into "covered" mortgage dollar-roll transactions,
meaning that the fund segregates liquid securities equal in value to the
securities it will repurchase and does not use these transactions as a
form of leverage.
A-2
<PAGE>
--------------------------------------------------------------------------------
Appendix B
--------------------------------------------------------------------------------
MFS(R) Municipal Bond Fund
<TABLE>
<CAPTION>
Taxable Equivalent Yield Table
(Under Federal Income Tax Law and Rates for 2000)
Income TAX-EXEMPT YIELD
Single Taxable Income* Joint Tax ------------------------------------------------
1999 1999 Bracket** 3% 4% 5% 6% 7% 8%
------------------- ------------------- -------- ------ ------ ------ ----- ----- ------
Over Not Over Over Not Over EQUIVALENT TAXABLE YIELD
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$ 0 - $ 26,250 $ 0 - $ 43,850 15.0% 3.53% 4.71% 5.88% 7.06% 8.24% 9.41%
$ 26,250 - $ 63,550 $ 43,850 - $105,950 28.0% 4.17 5.56 6.94 8.33 9.72 11.11
$ 63,550 - $132,600 $105,950 - $161,450 31.0% 4.35 5.80 7.25 8.70 10.14 11.59
$132,600 - $288,350 $161,450 - $288,350 36.0% 4.69 6.25 7.81 9.38 10.94 12.50
$288,350 & Over $288,350 & Over 39.6% 4.97 6.62 8.28 9.93 11.59 13.25
</TABLE>
----------
* Net amount subject to Federal personal income tax after deductions and
exemptions.
** Effective Federal Tax Bracket.
B-1
<PAGE>
MFS(R) MUNICIPAL BOND FUND
If you want more information about the fund, the following documents are
available free upon request:
Annual/Semiannual Reports. These reports contain information about the fund's
actual investments. Annual reports discuss the effect of recent market
conditions and the fund's investment strategy on the fund's performance during
its last fiscal year.
Statement of Additional Information (SAI). The SAI, dated January 1, 2001,
provides more detailed information about the fund and is incorporated into this
prospectus by reference.
You can get free copies of the annual/semiannual reports, the SAI and other
information about the fund, and make inquiries about the fund, by contacting:
MFS Service Center, Inc.
2 Avenue de Lafayette
Boston, MA 02111-1738
Telephone: 1-800-225-2606
Internet: http://www.mfs.com
Information about the fund (including its prospectus, SAI and shareholder
reports) can be reviewed and copied at the:
Public Reference Room
Securities and Exchange Commission
Washington, D.C., 20549-0102
Information on the operation of the Public Reference Room may be obtained by
calling the Commission at 1-202-942-8090. Reports and other information about
the fund are available on the Commission's Internet website at
http://www.sec.gov, and copies of this information may be obtained, upon payment
of a duplicating fee, by electronic request at the following e-mail address:
[email protected], or by writing the Public Reference Section at the above
address.
The fund's Investment Company Act file number is 811-2594
MMB-1 12/00 323M 17/217
<PAGE>
--------------------------------------------------------------------------------
MFS(R) MUNICIPAL BOND FUND
--------------------------------------------------------------------------------
JANUARY 1, 2001
Statement of Additional Information
[MFS LOGO](R)
INVESTMENT MANAGEMENT
We invented the mutual fund(R)
A service of MFS Series Trust IV
500 Boylston Street, Boston, MA 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, 2001. This SAI should be read in conjunction with the Prospectus. The
Fund's financial statements are incorporated into this SAI by reference to the
Fund's most recent Annual Report to shareholders. A copy of the Annual Report
accompanies this SAI. You may obtain a copy of the Fund's Prospectus and Annual
Report without charge by contacting MFS Service Center, Inc. (see back cover of
Part II of this SAI for address and phone number).
This SAI is divided into two Parts -- Part I and Part II. Part I contains
information that is particular to the Fund, while Part II contains information
that generally applies to each of the funds in the MFS Family of Funds (the "MFS
Funds"). Each Part of the SAI has a variety of appendices which can be found at
the end of Part I and Part II, respectively.
This SAI is NOT a prospectus and is authorized for distribution to prospective
investors only if preceded or accompanied by a current prospectus.
MMB-13 12/00 1M 17/217
<PAGE>
Statement of Additional Information
PART I
Part I of this SAI contains information that is particular to the Fund.
--------------------------------------------------------------------------------
TABLE OF CONTENTS
--------------------------------------------------------------------------------
Page
I Definitions ......................................................... 1
II Management of the Fund .............................................. 1
The Fund ............................................................ 1
Trustees and Officers -- Identification and Background .............. 1
Trustee Compensation ................................................ 1
Affiliated Service Provider Compensation ............................ 1
III Sales Charges and Distribution Plan Payments ........................ 1
Sales Charges ....................................................... 1
Distribution Plan Payments .......................................... 1
IV Portfolio Transactions and Brokerage Commissions .................... 1
V Share Ownership ..................................................... 1
VI Performance Information ............................................. 1
VII Investment Techniques, Practices, Risks and Restrictions ............ 1
Investment Techniques, Practices and Risks .......................... 1
Investment Restrictions ............................................. 2
VIII Tax Considerations .................................................. 3
IX Independent Auditors and Financial Statements ....................... 3
Appendix A -- Trustees and Officers -- Identification
and Background ........................................ A-1
Appendix B -- Trustee Compensation .................................. B-1
Appendix C -- Affiliated Service Provider Compensation .............. C-1
Appendix D -- Sales Charges and Distribution Plan Payments .......... D-1
Appendix E -- Portfolio Transactions and Brokerage Commissions ...... E-1
Appendix F -- Share Ownership ....................................... F-1
Appendix G -- Performance Information ............................... G-1
<PAGE>
I DEFINITIONS
"Fund" -- MFS Municipal Bond Fund, a diversified series of the Trust.
"Trust" -- MFS Series Trust IV, a Massachusetts business Trust, organized
on September 8, 1975. 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" or "Distributor" -- MFS Fund Distributors, Inc., a Delaware
corporation.
"Prospectus" -- The Prospectus of the Fund, dated January 1, 2001, as
amended or supplemented from time to time.
II MANAGEMENT OF THE FUND
The Fund
The Fund is a diversified series of the Trust. This means that, with
respect to 75% of its total assets, the Fund may not (1) purchase more
than 10% of the outstanding voting securities of any one issuer, or (2)
purchase securities of any issuer if as a result more than 5% of the
Fund's total assets would be invested in that issuer's securities. This
limitation does not apply to obligations of the U.S. Government or its
agencies or instrumentalities. The Trust is an open-end management
investment company.
Each Fund and its Adviser have adopted a code of ethics as required under
the Investment Company Act of 1940 (the "1940 Act"). Subject to certain
conditions and restrictions, this code permits personnel subject to the
code to invest in securities for their own accounts, including securities
that may be purchased, held or sold by the Funds. Securities transactions
by some of these persons may be subject to prior approval of the Adviser's
or the Distributor's Compliance Department. Securities transactions of
certain personnel are subject to quarterly reporting and review
requirements. The code is on public file with, and is available from, the
SEC. See the back cover of the prospectus for information on obtaining a
copy.
Trustees and Officers - Identification and Background
The identification and background of the Trustees and officers of the
Trust are set forth in Appendix A of this Part I.
Trustee Compensation
Compensation paid to the non-interested Trustees and to Trustees who are
not officers of the Trust, for certain specified periods, is set forth in
Appendix B of this Part I.
Affiliated Service Provider Compensation
Compensation paid by the Fund to its affiliated service providers -- to
MFS, for investment advisory and administrative services, and to MFSC, for
transfer agency services -- for certain specified periods is set forth in
Appendix C to this Part I.
III SALES CHARGES AND DISTRIBUTION PLAN PAYMENTS
Sales Charges
Sales charges paid in connection with the purchase and sale of Fund shares
for certain specified periods are set forth in Appendix D to this Part I,
together with the Fund's schedule of dealer reallowances.
Distribution Plan Payments
Payments made by the Fund under the Distribution Plan for its most recent
fiscal year end are set forth in Appendix D to this Part I.
IV PORTFOLIO TRANSACTIONS AND BROKERAGE COMMISSIONS
Brokerage commissions paid by the Fund for certain specified periods, and
information concerning purchases by the Fund of securities issued by its
regular broker-dealers for its most recent fiscal year, are set forth in
Appendix E to this Part I.
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 Trustees (together with the Trustees of certain
other MFS Funds) have directed the Adviser to allocate a total of $43,800
of commission business from certain MFS Funds (including the Fund) to the
Pershing Division of Donaldson Lufkin & Jenrette as consideration for the
annual renewal of certain publications provided by Lipper Inc. (which
provides information useful to the Trustees in reviewing the relationship
between the Fund and the Adviser).
V SHARE OWNERSHIP
Information concerning the ownership of Fund shares by Trustees and
officers of the Trust as a group, by investors who control the Fund, if
any, and by investors who own 5% or more of any class of Fund shares, if
any, is set forth in Appendix F to this Part I.
VI PERFORMANCE INFORMATION
Performance information, as quoted by the Fund in sales literature and
marketing materials, is set forth in Appendix G to this Part I.
VII INVESTMENT TECHNIQUES, PRACTICES, RISKS AND RESTRICTIONS
Investment Techniques, Practices and Risks
The investment objective and principal investment policies of the Fund are
described in the Prospectus. In pursuing its investment objective and
principal investment policies, the Fund may engage in a number of
investment techniques and
Part I -- 1
<PAGE>
practices, which involve certain risks. These investment techniques and
practices, which may be changed without shareholder approval unless
indicated otherwise, are identified in Appendix A to the Prospectus, and
are more fully described, together with their associated risks, in Part II
of this SAI. The following percentage limitations apply to these
investment techniques and practices:
o Speculative Securities may not exceed 40% of net assets.
o Unrated Securities may not exceed 10% of net assets.
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 the Fund or class, as applicable, or
(ii) 67% or more of the outstanding shares of the Trust or the Fund or
class, as applicable, present at a meeting at which holders of more than
50% of the outstanding shares of the Trust or the Fund or class, as
applicable, are represented in person or by proxy). Except with respect to
the Fund's policy on borrowing and 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. In the event of
a violation of non-fundamental policy (1), the Fund will reduce the
percentage of its assets invested in illiquid investments in due course,
taking into account the best interest of shareholders.
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 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.
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) if more than 15% of
Part I -- 2
<PAGE>
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. Securities that are
determined to be liquid by the Trust's Board of Trustees (or its
delegee), will not be subject to this 15% limitation;
(2) invest 25% or more of the market value of its total assets in
securities of issuers in any one industry.
VIII TAX CONSIDERATIONS
For a discussion of tax considerations, see Part II of this SAI.
IX INDEPENDENT AUDITORS AND FINANCIAL STATEMENTS
Deloitte & Touche LLP are the Fund's independent auditors, providing audit
services, tax services, and assistance and consultation with respect to
the preparation of filings with the Securities and Exchange Commission.
The Portfolio of Investments and the Statement of Assets and Liabilities
at August 31, 2000, the Statement of Operations for the year ended August
31, 2000, the Statement of Changes in Net Assets for the two years ended
August 31, 1999 and August 31, 2000, the Notes to Financial Statements and
the Report of the Independent Auditors, each of which is included in the
Annual Report to Shareholders of the Fund, are incorporated by reference
into this SAI in reliance upon the report of Deloitte & Touche LLP,
independent auditors, given upon their authority as experts in accounting
and auditing. A copy of the Annual Report accompanies this SAI.
Part I -- 3
<PAGE>
--------------------------------------------------------------------------------
PART I -- APPENDIX A
--------------------------------------------------------------------------------
TRUSTEES AND OFFICERS -- IDENTIFICATION AND BACKGROUND
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
JEFFREY L. SHAMES* Chairman and President (born 6/2/55)
Massachusetts Financial Services Company, Chairman and Chief Executive Officer
J. ATWOOD IVES (born 5/1/36)
Private Investor; Eastern Enterprises (diversified services company), Chairman,
Trustee and Chief Executive Officer (until November 2000); KeySpan Corporation
(energy related services), Director
Address: Weston, Massachusetts
LAWRENCE T. PERERA (born 6/23/35)
Hemenway & Barnes (attorneys), Partner
Address: Boston, Massachusetts
WILLIAM J. POORVU (born 4/10/35)
Harvard University Graduate School of Business Administration, Adjunct
Professor; CBL & Associates Properties, Inc. (real estate investment trust),
Director; The Baupost Fund (a mutual fund), Vice Chairman and Trustee
Address: Cambridge, Massachusetts
CHARLES W. SCHMIDT (born 3/18/28)
Private Investor; IT Group Inc. (diversified environmental and consulting)
Address: Weston, Massachusetts
ARNOLD D. SCOTT* (born 12/16/42)
Massachusetts Financial Services Company, Senior Executive Vice President
and Director
ELAINE R. SMITH (born 4/25/46)
Independent Consultant
Address: Weston, Massachusetts
DAVID B. STONE (born 9/2/27)
North American Management Corp. (investment adviser), Chairman and Director
Address: Boston Massachusetts
Officers
GEOFFREY L. KURINSKY,* Vice President (born 7/7/53)
Massachusetts Financial Services Company, Senior Vice President
STEPHEN E. CAVAN,* Clerk and Secretary (born 1/16/53)
Massachusetts Financial Services Company, Senior Vice President, General Counsel
and Secretary
JAMES R. BORDEWICK, JR.,* Assistant Clerk and Secretary (born 3/6/59)
Massachusetts Financial Services Company, Senior Vice President and Associate
General Counsel
JAMES O. YOST,* Treasurer (born 6/12/60)
Massachusetts Financial Services Company, Senior 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)
ELLEN 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)
LAURA HEALY,* Assistant Treasurer (born 3/20/64)
Massachusetts Financial Services Company, Vice President (since December 1996);
State Street Bank Fund Administration Group, Assistant Vice President (prior to
December 1996)
ROBERT R. FLAHERTY,* Assistant Treasurer (born 9/18/63)
Massachusetts Financial Services Company, Vice President (since August 2000);
UAM Fund Services, Senior Vice President (since 1996); Chase Global Fund
Services, Vice President (1995 to 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. Messrs. Shames and Scott, Directors of MFD,
and Mr. Cavan, the Secretary of MFD, hold similar positions with certain other
MFS affiliates.
Part I -- A-1
<PAGE>
--------------------------------------------------------------------------------
PART I -- APPENDIX B
--------------------------------------------------------------------------------
TRUSTEE COMPENSATION
The Fund pays the compensation of non-interested Trustees and of Trustees who
are not officers of the Trust, who currently receive a fee of $3,250 per year
plus $165 per meeting and $130 per committee meeting attended, together with
such Trustee's out-of-pocket expenses. In addition, the Trust has a retirement
plan for these Trustees as described under the caption "Management of the Fund
-- Trustee Retirement Plan" in Part II. The Retirement Age under the plan is 73.
<TABLE>
<CAPTION>
Trustee Compensation Table
----------------------------------------------------------------------------------------------------------
Retirement Benefit Total Trustee
Trustee Fees Accrued as Part Estimated Credited Fees from Fund
Trustee from Fund(1) of Fund Expense(1) Years of Service(2) and Fund Complex(3)
----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Jeffrey L. Shames $ 0 $ 0 N/A $ 0
J. Atwood Ives 6,233 3,091 17 132,623
Lawrence T. Perera 6,433 3,520 26 144,098
William Poorvu 6,598 3,525 25 141,338
Charles W. Schmidt 6,318 3,410 20 137,678
Arnold D. Scott 0 0 N/A 0
Elaine R. Smith 6,858 3,357 27 144,098
David B. Stone 7,622 3,850 11 151,418
</TABLE>
----------
(1) For the fiscal year ended August 31, 2000.
(2) Based upon normal retirement age of 73 (age 74 for Mr. Stone).
(3) Information provided is for calendar year 1999. All Trustees receiving
compensation served as Trustees of 34 funds within the MFS fund complex
(having aggregate net assets at December 31, 1999, of approximately $ 58.6
billion).
Estimated Annual Benefits Payable by Fund Upon Retirement(4)
--------------------------------------------------------------------------------
Years of Service
Average
Trustee Fees 3 5 7 10 or more
--------------------------------------------------------------------------------
$5,610 $ 841 $1,402 $1,963 $2,805
6,165 925 1,541 2,158 3,082
6,720 1,008 1,680 2,352 3,360
7,274 1,091 1,819 2,546 3,637
7,829 1,174 1,957 2,740 3,915
8,384 1,258 2,096 2,934 4,192
----------
(4) Other funds in the MFS Fund complex provide similar retirement benefits to
the Trustees.
Part I -- B-1
<PAGE>
--------------------------------------------------------------------------------
PART I -- APPENDIX C
--------------------------------------------------------------------------------
AFFILIATED SERVICE PROVIDER COMPENSATION
--------------------------------------------------------------------------------
The Fund paid compensation to its affiliated service providers over the
specified periods as follows:
<TABLE>
<CAPTION>
Paid to MFS Amount Paid to MFS for Paid To MFSC Amount Aggregate
for Advisory Waived Administrative for Transfer Waived Amount Paid
Fiscal Year Ended Services by MFS Services Agency Services by MFSC to MFS and MFSC
----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
August 31, 2000 $5,490,909 N/A $182,621 $1,346,513 N/A $7,020,043
August 31, 1999 6,186,761 N/A 187,013 1,717,758 N/A 8,091,532
August 31, 1998 6,706,665 N/A 225,937 2,040,832 N/A 8,973,434
</TABLE>
Part I -- C-1
<PAGE>
--------------------------------------------------------------------------------
PART I -- APPENDIX D
--------------------------------------------------------------------------------
SALES CHARGES AND DISTRIBUTION PLAN PAYMENTS
Sales Charges
--------------------------------------------------------------------------------
The following sales charges were paid during the specified periods:
Class A Initial Sales Charges: CDSC Paid to MFD on:
Retained Reallowed Class A Class B
Fiscal Year End Total By MFD to Dealers Shares Shares
--------------------------------------------------------------------------------
August 31, 2000 $ 699,687 $122,107 $ 577,580 $ 22 $181,862
August 31, 1999 1,193,348 211,969 981,379 17,822 234,623
August 31, 1998 1,286,480 235,283 1,051,197 14,689 188,693
Dealer Reallowances
--------------------------------------------------------------------------------
As shown above, MFD pays (or "reallows") a portion of the Class A initial sales
charge to dealers. The dealer reallowance as expressed as a percentage of the
Class A shares' offering price is:
Dealer Reallowance as a
Amount of Purchase percent of Offering Price
Less than $100,000 4.00%
$100,000 but less than $250,000 3.20%
$250,000 but less than $500,000 2.25%
$500,000 but less than $1,000,000 1.70%
$1,000,000 or more None*
----------
* A CDSC will apply to such purchase.
Distribution Plan Payments
--------------------------------------------------------------------------------
During the fiscal year ended August 31, 2000, the Fund made the following
Distribution Plan payments:
Amount of Distribution and Service Fees:
Class of Shares Paid By Fund Retained By MFD Paid To Dealers
--------------------------------------------------------------------------------
Class B Shares $562,966 $536,917 $26,049
Distribution plan payments retained by MFD are used to compensate MFD for
commissions advanced by MFD to dealers upon sale of fund shares.
Part I -- D-1
<PAGE>
--------------------------------------------------------------------------------
PART I -- APPENDIX E
--------------------------------------------------------------------------------
PORTFOLIO TRANSACTIONS AND BROKERAGE COMMISSIONS
Brokerage Commissions
--------------------------------------------------------------------------------
The following brokerage commissions were paid by the Fund during the specified
time periods:
Brokerage Commissions
Fiscal Year Fund Paid by Fund
--------------------------------------------------------------------------------
August 31, 2000 None
August 31, 1999 None
August 31, 1998 None
Securities Issued By Regular Broker-Dealers
--------------------------------------------------------------------------------
During the fiscal year ended August 31, 2000, the Fund purchased securities
issued by the following regular broker-dealers of the Fund, which had the
following values as of August 31, 2000:
Value of Securities
Broker-Dealer as of August 31, 2000
--------------------------------------------------------------------------------
None
Part I -- E-1
<PAGE>
--------------------------------------------------------------------------------
PART I -- APPENDIX F
--------------------------------------------------------------------------------
SHARE OWNERSHIP
Ownership By Trustees and Officers
As of November 30, 2000, the Trustees and officers of the Trust as a group owned
less than 1% of the Fund's shares.
25% or Greater Ownership
The following table identifies those investors who own 25% or more of the Fund's
shares (all share classes taken together) as of November 30, 2000, and are
therefore presumed to control the Fund:
Jurisdiction of Organization
Name and Address of Investor (If a Company) Percentage Ownership
--------------------------------------------------------------------------------
None
5% or Greater Ownership of Share Class
The following table identifies those investors who own 5% or more of any class
of the Fund's shares as of November 30, 2000:
Name and Address of Investor Ownership Percentage
--------------------------------------------------------------------------------
MLPF&S for the Sole Benefit of its Customers 9.70% of Class B shares
Attn: Fund Administration 97CD0
4800 Deer Lake Drive E--3rd FL
Jacksonville, FL 32246-6484
Part I -- F-1
<PAGE>
--------------------------------------------------------------------------------
PART I -- APPENDIX G
--------------------------------------------------------------------------------
PERFORMANCE INFORMATION
--------------------------------------------------------------------------------
All performance quotations are as of August 31, 2000.
<TABLE>
<CAPTION>
Actual
Actual 30-Day
30-Day Yield
Average Annual Total Returns Yield (Without
---------------------------- (Including Any
1 Year 5 Years 10 Years Any Waivers) Waivers)
-----------------------------------------------------
<S> <C> <C> <C> <C> <C>
Class A Shares, with initial sales charge
(4.75%) 1.45% 4.06% 6.41% 4.90% 4.90%
Class A Shares, at net asset value 6.51% 5.07% 6.93% N/A N/A
Class B Shares, with CDSC (declining
over 6 years from 4% to 0%) 1.72% 3.86% 6.26% N/A N/A
Class B Shares, at net asset value 5.70% 4.19% 6.26% 4.38% 4.38%
<CAPTION>
Tax-Equivalent Tax-Equivalent
30-Day 30-Day
Yield (Including Yield (Without
Any Waivers) Any Waivers) Current
---------------- -------------- Distribution
Tax Brackets: Tax Brackets: Rate+
28% 31% 28% 31%
-----------------------------------------------
<S> <C> <C> <C> <C> <C>
Class A Shares, with initial sales charge
(4.75%) 6.81% 7.10% 6.81% 7.10% 5.09%
Class A Shares, at net asset value N/A N/A N/A N/A N/A
Class B Shares, with CDSC (declining
over 6 years from 4% to 0%) N/A N/A N/A N/A N/A
Class B Shares, at net asset value 6.08% 6.35% 6.08% 6.35% 4.57%
</TABLE>
The Fund commenced investment operations on December 16, 1976, with the offering
of class A shares, and subsequently offered class B shares on September 7, 1993.
Class B share performance includes the performance of the Fund's class A shares
for periods prior to the offering of class B shares. This blended class B share
performance has been adjusted to take into account the CDSC applicable to class
B shares, rather than the initial sales charge (load) applicable to class A
shares. This blended performance has not been adjusted to take into account
differences in class specific operating expenses. Because operating expenses of
class B shares are higher than those of class A shares, this blended class B
share performance is higher than the performance of class B shares would have
been had class B shares been offered for the entire period. If you would like
the Fund's current yield, contact the MFS Service Center at the toll free number
set forth on the back cover page of Part II of this SAI.
Performance results include any applicable expense subsidies and waivers, which
may cause the results to be more favorable.
Part I -- G-1
<PAGE>
Investment Adviser
MFS Investment Management(R)
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.
2 Avenue de LaFayette
Boston, MA 02111-1738
Telephone: 1-800-225-2606
Mailing Address:
P.O. Box 2281, Boston, MA 02107-9906
[MFS LOGO](R)
INVESTMENT MANAGEMENT
We invented the mutual fund(R)
500 Boylston Street, Boston, MA 02116
<PAGE>
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
PART II
Part II of this SAI describes policies and practices that apply to each of the
Funds in the MFS Family of Funds. References in this Part II to a "Fund" means
each Fund in the MFS Family of Funds, unless noted otherwise. References in
this Part II to a "Trust" means the Massachusetts business trust of which the
Fund is a series, or, if the Fund is not a series of a Massachusetts business
trust, references to a "Trust" shall mean the Fund.
-----------------
TABLE OF CONTENTS
-----------------
PAGE
I Management of the Fund ............................................ 1
Trustees/Officers ................................................. 1
Investment Adviser ................................................ 1
Administrator ..................................................... 2
Custodian ......................................................... 2
Shareholder Servicing Agent ....................................... 2
Distributor ....................................................... 2
Code of Ethics .................................................... 2
II Principal Share Characteristics ................................... 2
Class A Shares .................................................... 2
Class B Shares, Class C Shares and Class I Shares ................. 3
Waiver of Sales Charges ........................................... 3
Dealer Commissions and Concessions ................................ 3
General ........................................................... 3
III Distribution Plan ................................................. 3
Features Common to Each Class of Shares ........................... 3
Features Unique to Each Class of Shares ........................... 4
IV Investment Techniques, Practices and Risks ........................ 5
V Net Income and Distributions ...................................... 5
Money Market Funds ................................................ 5
Other Funds ....................................................... 6
VI Tax Considerations ................................................ 6
Taxation of the Fund .............................................. 6
Taxation of Shareholders .......................................... 6
Special Rules for Municipal Fund Distributions .................... 8
VII Portfolio Transactions and Brokerage Commissions .................. 8
VIII Determination of Net Asset Value .................................. 10
Money Market Funds ................................................ 10
Other Funds ....................................................... 10
IX Performance Information ........................................... 11
Money Market Funds ................................................ 11
Other Funds ....................................................... 11
General ........................................................... 12
MFS Firsts ........................................................ 13
X Shareholder Services .............................................. 13
Investment and Withdrawal Programs ................................ 13
Exchange Privilege ................................................ 16
Tax-Deferred Retirement Plans ..................................... 17
XI Description of Shares, Voting Rights and Liabilities .............. 17
Appendix A -- Waivers of Sales Charges ............................ A-1
Appendix B -- Dealer Commissions and Concessions .................. B-1
Appendix C -- Investment Techniques, Practices and Risks .......... C-1
Appendix D -- Description of Bond Ratings ......................... D-1
I MANAGEMENT OF THE FUND
TRUSTEES/OFFICERS
BOARD OVERSIGHT -- The Board of Trustees which oversees the Fund provides
broad supervision over the affairs of the Fund. The Adviser is responsible
for the investment management of the Fund's assets, and the officers of the
Trust are responsible for its operations.
TRUSTEE RETIREMENT PLAN -- Each Trust (except MFS Series Trust XI) has a
retirement plan for Trustees who are non-interested Trustees and Trustees
who are not officers of the Trust. Under this plan, a Trustee will retire
upon reaching a specified age (see Part I -- "Appendix B ") ("Retirement
Age") 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 his Retirement Age 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. The Fund will
accrue its allocable portion of compensation expenses under the retirement
plan each year to cover the current year's service and amortize past
service cost.
INDEMNIFICATION OF TRUSTEES AND OFFICERS -- The Declaration of Trust of the
Trust provides that the Trust will indemnify its Trustees and officers
against liabilities and expenses incurred in connection with litigation in
which they may be involved because of their offices with the Trust, unless,
as to liabilities of the Trust or its shareholders, it is determined that
they engaged in willful misfeasance, bad faith, gross negligence or
reckless disregard of the duties involved in their offices, or with respect
to any matter, unless it is adjudicated that they did not act in good faith
in the reasonable belief that their actions were in the best 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 they have not engaged in willful misfeasance, bad faith, gross
negligence or reckless disregard of their duties.
INVESTMENT ADVISER
The Trust has retained Massachusetts Financial Services Company ("MFS" or
the "Adviser") as the Fund's investment adviser. MFS and its predecessor
organizations have a history of money management dating from 1924. MFS is a
subsidiary of Sun Life of Canada (U.S.) Financial Services Holdings, Inc.,
which in turn is an indirect wholly owned subsidiary of Sun Life of Canada
(an insurance company).
MFS has retained, on behalf of certain MFS Funds, sub-investment advisers
to assist MFS in the management of the Fund's assets. A description of
these sub-advisers, the services they provide and their compensation is
provided under the caption "Management of the Fund -- Sub-Adviser" in Part
I of this SAI for Funds which use sub-advisers.
INVESTMENT ADVISORY AGREEMENT -- The Adviser manages the Fund pursuant to
an Investment Advisory Agreement (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 an annual management fee, computed and
paid monthly, as disclosed in the Prospectus under the heading "Management
of the Fund[s]."
The Adviser pays the compensation of the Trust's officers and of any
Trustee who is an officer 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 Fund's
investments and effecting its portfolio transactions.
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: advisory and administrative services;
governmental fees; interest charges; taxes; membership dues in the
Investment Company Institute allocable to the Fund; fees and expenses of
independent auditors, of legal counsel, and of any transfer agent,
registrar or dividend disbursing agent of the Fund; expenses of
repurchasing and redeeming shares and servicing shareholder accounts;
expenses of preparing, printing and mailing prospectuses, 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
Fund's custodian, for all services to the Fund, including safekeeping of
funds and securities and maintaining required books and accounts; expenses
of calculating the net asset value of shares of the Fund; and expenses of
shareholder meetings. Expenses relating to the issuance, registration and
qualification of shares of the Fund and the preparation, printing and
mailing of prospectuses are borne by the Fund except that the Distribution
Agreement with MFD requires MFD to pay for prospectuses that are to be used
for sales purposes. Expenses of the Trust which are not attributable to a
specific series are allocated between the series in a manner believed by
management of the Trust to be fair and equitable.
The Advisory Agreement has an initial two year term and continues in
effect thereafter only if such continuance is specifically approved at
least annually by the Board of Trustees or by vote of a majority of the
Fund's shares (as defined in "Investment Restrictions" in Part I of this
SAI) 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" in Part I of this SAI), or by either
party on not more than 60 days" nor less than 30 days" written notice. The
Advisory Agreement provides that if MFS ceases to serve as the Adviser to
the Fund, the Fund will change its name so as to delete the initials "MFS"
and that MFS may render services to others and may permit other fund
clients to use the initials "MFS" in their names. The Advisory Agreement
also provides that neither the Adviser nor its personnel shall be liable
for any error of judgment or mistake of law or for any loss arising out of
any investment or for any act or omission in the execution and 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. Under this Agreement, the Fund
pays MFS an administrative fee of up to 0.0175% on the first $2.0 billion;
0.0130% on the next $2.5 billion; 0.0005% on the next $2.5 billion; and
0.0% on amounts in excess of $7.0 billion, 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.
CUSTODIAN
State Street Bank and Trust Company (the "Custodian") is the custodian of
the Fund's assets. The Custodian's responsibilities include safekeeping and
controlling the Fund's cash and securities, handling the receipt and
delivery of securities, determining income and collecting interest and
dividends on the Fund's investments, maintaining books of original entry
for portfolio and fund accounting and other required books and accounts,
and calculating the daily net asset value of each class of shares of the
Fund. The Custodian does not determine the investment policies of the Fund
or decide which securities the Fund will buy or sell. The Fund may,
however, invest in securities of the Custodian and may deal with the
Custodian as principal in securities transactions. The Custodian also acts
as the dividend disbursing agent of the Fund.
SHAREHOLDER SERVICING AGENT
MFS Service Center, Inc. ("MFSC"), a wholly owned subsidiary of MFS, is the
Fund's shareholder servicing agent, pursuant to an Amended and Restated
Shareholder Servicing Agreement (the "Agency Agreement"). The Shareholder
Servicing Agent's responsibilities under the Agency Agreement include
administering and performing transfer agent functions and the keeping of
records in connection with the issuance, transfer and redemption of each
class of shares of the Fund. For these services, MFSC will receive a fee
calculated as a percentage of the average daily net assets of the Fund at
an effective annual rate of up to 0.1125%. In addition, MFSC will be
reimbursed by the Fund for certain expenses incurred by MFSC on behalf of
the Fund. The Custodian has contracted with MFSC to perform certain
dividend disbursing agent functions for the Fund.
DISTRIBUTOR
MFS Fund Distributors, Inc. ("MFD"), a wholly owned subsidiary of MFS,
serves as distributor for the continuous offering of shares of the Fund
pursuant to an Amended and Restated Distribution Agreement (the
"Distribution Agreement"). The Distribution Agreement has an initial two
year term and continues in effect thereafter only if such continuance is
specifically approved at least annually by the Board of Trustees or by vote
of a majority of the Fund's shares (as defined in "Investment Restrictions"
in Part I of this SAI) 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.
CODE OF ETHICS
The Fund and its Adviser and Distributor have adopted a code of ethics as
required under the Investment Company Act of 1940 ("the 1940 Act"). Subject
to certain conditions and restrictions, this code permits personnel subject
to the code to invest in securities for their own accounts, including
securities that may be purchased, held or sold by the Fund. Securities
transactions by some of these persons may be subject to prior approval of
the Adviser's Compliance Department. Securities transactions of certain
personnel are subject to quarterly reporting and review requirements. The
code is on public file with, and is available from, the SEC. See the back
cover of the prospectus for information on obtaining a copy.
II PRINCIPAL SHARE CHARACTERISTICS
Set forth below is a description of Class A, B, C and I shares offered by
the MFS Family of Funds. Some MFS Funds may not offer each class of shares
-- see the Prospectus of the Fund to determine which classes of shares the
Fund offers.
CLASS A SHARES
MFD acts as agent in selling Class A shares of the Fund to dealers. The
public offering price of Class A shares of the Fund is their net asset
value next computed after the sale plus a sales charge which varies based
upon the quantity purchased. The public offering price of a Class A share
of the Fund is calculated by dividing the net asset value of a Class A
share by the difference (expressed as a decimal) between 100% and the sales
charge percentage of offering price applicable to the purchase (see "How to
Purchase, Exchange and Redeem Shares" 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 and other funds (as noted under
Right of Accumulation) by any person, including members of a family unit
(e.g., husband, wife and minor children) and bona fide trustees, and also
applies to purchases made under the Right of Accumulation or a Letter of
Intent (see "Investment and Withdrawal Programs" below). A group might
qualify to obtain quantity sales charge discounts (see "Investment and
Withdrawal Programs" below). Certain purchases of Class A shares may be
subject to a 1% CDSC instead of an initial sales charge, as described in
the Fund's 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. Class B and C shares
are generally subject to a CDSC, as described in the Fund's Prospectus.
WAIVER OF SALES CHARGES
In certain circumstances, the initial sales charge imposed upon purchases
of Class A shares and the CDSC imposed upon redemptions of Class A, B and C
shares are waived. These circumstances are described in Appendix A of this
Part II. 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, because the sales effort, if any, involved in making such
sales is negligible, or in the case of certain CDSC waivers, because the
circumstances surrounding the redemption of Fund shares were not
foreseeable or voluntary.
DEALER COMMISSIONS AND CONCESSIONS
MFD pays commission and provides concessions to dealers that sell Fund
shares. These dealer commissions and concessions are described in Appendix
B of this Part II.
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.
III 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 expense ratio to the extent the Fund's fixed costs are spread over a
larger net asset base. Also, an increase in net assets may lessen the
adverse 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.
In certain circumstances, the fees described below may not be imposed,
are being waived or do not apply to certain MFS Funds. Current distribution
and service fees for each Fund are reflected under the caption "Expense
Summary" in the Prospectus.
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,
Class B 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 in addition to the service fee described above 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. 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 expense and equipment. The amount of the distribution fee
paid by the Fund with respect to each class differs under the Distribution
Plan, as does the use by MFD of such distribution fees. Such amounts and
uses are described below in the discussion of the provisions of the
Distribution Plan relating to each Class of shares. While the amount of
compensation received by MFD in the form of distribution fees during any
year may be more or less than the expenses incurred by MFD under its
distribution agreement with the Fund, the Fund is not liable to MFD for any
losses MFD may incur in performing services under its distribution
agreement with the Fund.
OTHER COMMON FEATURES -- Fees payable under the Distribution Plan are
charged to, and therefore reduce, income allocated to shares of the
Designated Class. The provisions of the Distribution Plan relating to
operating policies as well as initial approval, renewal, amendment and
termination are substantially identical as they relate to each Class of
shares covered by the Distribution Plan.
The Distribution Plan remains in effect from year to year only if its
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" in Part I of this SAI). 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" in Part I of this
SAI) 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.
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). In
addition to the initial sales charge, the dealer also generally receives
the ongoing 0.25% per annum service fee, as discussed above.
No service fees will be paid: (i) to any dealer who is the holder or
dealer or 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.
In the case of a retirement plan (or multiple plans maintained by the
same plan sponsor) which has established accounts with MFSC, on or after
April 1, 2000 and is, at that time, a party to a retirement plan
recordkeeping or administrative services agreement with MFD or one of its
affiliates pursuant to which such services are provided with respect to at
least $10 million in plan assets, MFD may retain the service fee paid by
the fund with respect to shares purchased by such plan for the first year
after purchase. Dealers will become eligible to receive the ongoing
applicable service fee with respect to such shares commencing in the 13th
month following purchase.
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 (0.25% per annum for certain Funds). As
noted above, MFD may use the distribution fee to cover distribution-
related expenses incurred by it under its distribution agreement with the
Fund, including commissions to dealers and payments to wholesalers employed
by MFD (e.g., MFD pays commissions to dealers with respect to purchases of
$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). 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 (0.50% per annum for certain Funds), 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. 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.
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.
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).
CLASS C SHARES -- Class C shares are offered at net asset value without an
initial sales charge but subject to a CDSC of 1.00% upon redemption during
the first year. MFD will pay a commission to dealers of 1.00% of the
purchase price of Class C shares purchased through dealers at the time of
purchase. In compensation for this 1.00% commission paid by MFD to dealers,
MFD will retain the 1.00% per annum Class C distribution and service fees
paid by the Fund with respect to such shares for the first year after
purchase, and dealers will become eligible to receive from MFD the ongoing
1.00% per annum distribution and service fees paid by the Fund to MFD with
respect to such shares commencing in the thirteenth month following
purchase.
This ongoing 1.00% fee is comprised of the 0.25% per annum service fee
paid to MFD under the Distribution Plan (which MFD in turn pays to
dealers), as discussed above, and a distribution fee paid to MFD (which MFD
also in turn pays to dealers) under the Distribution Plan, equal, on an
annual basis, to 0.75% of the Fund's average daily net assets attributable
to Class C shares.
IV INVESTMENT TECHNIQUES, PRACTICES AND RISKS
Set forth in Appendix C of this Part II is a description of investment
techniques and practices which the MFS Funds may generally use in pursuing
their investment objectives and principal investment policies, and the
risks associated with these investment techniques and practices. The Fund
will engage only in certain of these investment techniques and practices,
as identified in Part I. Investment practices and techniques that are not
identified in Part I do not apply to the Fund.
V NET INCOME AND DISTRIBUTIONS
MONEY MARKET FUNDS
The net income attributable to each MFS Fund that is a money market fund is
determined each day during which the New York Stock Exchange is open for
trading (see "Determination of Net Asset Value" below for a list of days
the Exchange is closed).
For this purpose, the net income attributable to shares of a money market
fund (from the time of the immediately preceding determination thereof)
shall consist of (i) all interest income accrued on the portfolio assets of
the money market fund, (ii) less all actual and accrued expenses of the
money market 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 the
money market fund, if any. Interest income shall include discount earned
(including both original issue and market discount) on discount paper
accrued ratably to the date of maturity.
Since the net income is declared as a dividend each time the net income
is determined, the net asset value per share (i.e., the value of the net
assets of the money market fund divided by the number of shares
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, representing the reinvestment of dividend income,
is reflected by an increase in the number of shares in the shareholder's
account.
It is expected that the shares of the money market fund will have a
positive net income at the time of each determination thereof. If for any
reason the net income determined at any time is a negative amount, which
could occur, for instance, upon default by an issuer of a portfolio
security, the money market fund would first offset the negative amount with
respect to each shareholder account 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), the
money market fund could reduce the number of its outstanding shares by
treating each shareholder of the money market fund as having contributed to
its capital that number of full and fractional shares of the money market
fund in the account of such shareholder which represents its proportion of
such excess. Each shareholder of the money market fund will be deemed to
have agreed to such contribution in these circumstances by its investment
in the money market fund. This procedure would permit the net asset value
per share of the money market fund to be maintained at a constant $1.00 per
share.
OTHER FUNDS
Each MFS Fund other than the MFS money market funds intends to distribute
to its shareholders dividends equal to all of its net investment income
with such frequency as is disclosed in the Fund's prospectus. These Funds'
net investment income consists of non-capital gain income less expenses. In
addition, these Funds intend to distribute net realized short- and
long-term capital gains, if any, at least annually. Shareholders will be
informed of the tax consequences of such distributions, including whether
any portion represents a return of capital, after the end of each calendar
year.
VI TAX CONSIDERATIONS
The following discussion is a brief summary of some of the important
federal (and, where noted, state) income tax consequences affecting the
Fund and its shareholders. The discussion is very general, and therefore
prospective investors are urged to consult their tax advisors about the
impact an investment in the Fund may have on their own tax situations.
TAXATION OF THE FUND
FEDERAL TAXES -- The Fund (even if it is a fund in a Trust with multiple
series) is treated as a separate entity for federal income tax purposes
under the Internal Revenue Code of 1986, as amended (the "Code"). The Fund
has elected (or in the case of a new Fund, intends to elect) to be, and
intends to qualify to be treated 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 its distributions (as a percentage
of both its overall income and any tax-exempt income), and the composition
of its portfolio assets. As a regulated investment company, the Fund will
not be subject to any federal income or excise taxes on its net investment
income and net realized capital gains that it distributes to shareholders
in accordance with the timing requirements imposed by the Code. The Fund's
foreign-source income, if any, may be subject to foreign withholding taxes.
If the Fund failed to qualify as a "regulated investment company" in any
year, it would incur a regular federal corporate income tax on all of its
taxable income, whether or not distributed, and Fund distributions would
generally be taxable as ordinary dividend income to the shareholders.
MASSACHUSETTS TAXES -- 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.
TAXATION OF SHAREHOLDERS
TAX TREATMENT OF DISTRIBUTIONS -- Subject to the special rules discussed
below for Municipal Funds, shareholders of the Fund normally will have to
pay federal income tax and any state or local income taxes on the dividends
and capital gain distributions they receive from the Fund. Any
distributions from ordinary income and from net short-term capital gains
are taxable to shareholders as ordinary income for federal income tax
purposes whether paid in cash or reinvested in additional shares.
Distributions of net capital gain (i.e., the excess of net long-term
capital gain over net short-term capital loss), 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. Any Fund dividend that is
declared in October, November, or December of any calendar year, payable to
shareholders of record in such a month, and paid during 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, other than dividends that are declared by the Fund
on a daily basis, will have the effect of reducing the per share net asset
value of Fund shares by the amount of the distribution. Shareholders
purchasing shares shortly before the record date of any such distribution
(other than an exempt-interest dividend) may thus pay the full price for
the shares and then effectively receive a portion of the purchase price
back as a taxable distribution.
DIVIDENDS-RECEIVED DEDUCTION -- If the Fund receives dividend income from
U.S. corporations, 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.
DISPOSITION OF SHARES -- In general, any gain or loss realized upon a
disposition of Fund shares by a shareholder that holds such shares as a
capital asset will be treated as a long-term capital gain or loss if the
shares have been held for more than twelve months and otherwise as a
short-term capital gain or loss. However, any loss realized upon a
disposition of Fund shares 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 Fund shares held for 90 days or less followed by any purchase (including
purchases by exchange or by reinvestment) without payment of an additional
sales charge of Class A shares of the Fund or of any other shares of an MFS
Fund generally sold subject to a sales charge.
DISTRIBUTION/ACCOUNTING POLICIES -- The Fund's current distribution 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.
U.S. TAXATION OF NON-U.S. PERSONS -- Dividends and certain other payments
(but not including distributions of net capital gains) 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 at that rate on taxable dividends and other
payments to Non-U.S. Persons that are subject to such withholding. The Fund
may withhold at a lower rate permitted by an applicable treaty if the
shareholder provides the documentation required by the Fund. 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.
BACKUP WITHHOLDING -- The Fund is also required in certain circumstances to
apply backup withholding at the rate of 31% on taxable dividends and
capital gain distributions (and redemption proceeds, if applicable) paid to
any non-corporate 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.
FOREIGN INCOME TAXATION OF NON-U.S. PERSONS -- Distributions received from
the Fund by Non-U.S. Persons may also be subject to tax under the laws of
their own jurisdictions.
STATE AND LOCAL INCOME TAXES: U.S. GOVERNMENT SECURITIES -- Dividends paid
by the Fund that are derived from interest on obligations of the U.S.
Government and certain of its agencies and instrumentalities (but generally
not distributions of capital gains realized upon the disposition of such
obligations) may be exempt from state and local income taxes. The Fund
generally intends to advise shareholders of the extent, if any, to which
its dividends consist of such interest. Shareholders are urged to consult
their tax advisors regarding the possible exclusion of such portion of
their dividends for state and local income tax purposes.
CERTAIN SPECIFIC INVESTMENTS -- Any investment in zero coupon bonds,
deferred interest bonds, payment-in-kind bonds, certain stripped
securities, and certain securities purchased at a market discount will
cause the Fund to recognize income prior to the receipt of cash payments
with respect to those securities. To distribute this income (as well as
non-cash income described in the next two paragraphs) 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. Any investment in residual
interests of a CMO that has elected to be treated as a real estate mortgage
investment conduit, or "REMIC," can create complex tax problems, especially
if the Fund has state or local governments or other tax-exempt
organizations as shareholders.
OPTIONS, FUTURES CONTRACTS, AND FORWARD CONTRACTS -- 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, Forward Contracts, short sales
"against the box" and swaps and related transactions to the extent
necessary to meet the requirements of Subchapter M of the Code.
FOREIGN INVESTMENTS -- Special tax considerations apply with respect to
foreign investments by the Fund. Foreign exchange gains and losses realized
by the Fund may be treated as ordinary income and loss. Use of foreign
currencies for non-hedging purposes and investment by the Fund in certain
"passive foreign investment companies" may be limited in order to avoid a
tax on the Fund. The Fund may elect to mark to market any investments in
"passive foreign investment companies" on the last day of each year. This
election may cause the Fund to recognize income prior to the receipt of
cash payments with respect to those investments; in order to distribute
this income and avoid a tax on the Fund, the Fund may be required to
liquidate portfolio securities that it might otherwise have continued to
hold, potentially resulting in additional taxable gain or loss to the Fund.
FOREIGN INCOME TAXES -- Investment income received by the Fund and gains
with respect to foreign securities may be subject to foreign income taxes
withheld at the source. The United States has entered into tax treaties
with many foreign countries that may entitle the Fund to a reduced rate of
tax or an exemption from tax on such income; the Fund intends to qualify
for treaty reduced rates where available. It is not possible, however, to
determine the Fund's effective rate of foreign tax in advance, since the
amount of the Fund's assets to be invested within various countries is not
known.
If the Fund holds more than 50% of its assets in foreign stock and
securities at the close of its taxable year, it may elect to "pass through"
to its shareholders foreign income taxes paid by it. If the Fund so elects,
shareholders will be required to treat their pro rata portions of the
foreign income taxes paid by the Fund as part of the amounts distributed to
them by it and thus includable in their gross income for federal income tax
purposes. Shareholders who itemize deductions would then be allowed to
claim a deduction or credit (but not both) on their federal income tax
returns for such amounts, subject to certain limitations. Shareholders who
do not itemize deductions would (subject to such limitations) be able to
claim a credit but not a deduction. No deduction will be permitted to
individuals in computing their alternative minimum tax liability. If the
Fund is not eligible, or does not elect, to "pass through" to its
shareholders foreign income taxes it has paid, shareholders will not be
able to claim any deduction or credit for any part of the foreign taxes
paid by the Fund.
SPECIAL RULES FOR MUNICIPAL FUND DISTRIBUTIONS
The following special rules apply to shareholders of funds whose objective
is to invest primarily in obligations that pay interest that is exempt from
federal income tax ("Municipal Funds").
TAX EXEMPT DISTRIBUTIONS -- The portion of a Municipal 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. Except when the Fund provides actual monthly
percentage breakdowns, the percentage of income designated as tax-exempt
will be applied uniformly to all distributions by the Fund of net
investment income made during each 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.
TAXABLE DISTRIBUTIONS -- A Municipal Fund may also earn some income that is
taxable (including interest from any obligations that lose their federal
tax exemption) and may recognize capital gains and losses as a result of
the disposition of securities and from certain options and futures
transactions. Shareholders normally will have to pay federal income tax on
the non-exempt-interest dividends and capital gain distributions they
receive from the Fund, whether paid in cash or reinvested in additional
shares. However, the Fund does not expect that the non-tax-exempt portion
of its net investment income, if any, will be substantial. 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.
CONSEQUENCES OF DISTRIBUTIONS BY A MUNICIPAL FUND: EFFECT OF ACCRUED TAX-
EXEMPT INCOME -- Shareholders redeeming shares after tax-exempt income has
been accrued but not yet declared as a dividend should be aware that a
portion of the proceeds realized upon redemption of the shares will reflect
the existence of such accrued tax-exempt income and that this portion will
be subject to tax as a capital gain even though it would have been
tax-exempt had it been declared as a dividend prior to the redemption. For
this reason, if a shareholder wishes to redeem shares of a Municipal Fund
that does not declare dividends on a daily basis, the shareholder may wish
to consider whether he or she could obtain a better tax result by redeeming
immediately after the Fund declares dividends representing substantially
all the ordinary income (including tax-exempt income) accrued for that
month.
CERTAIN ADDITIONAL INFORMATION FOR MUNICIPAL FUND SHAREHOLDERS -- Interest
on indebtedness incurred by shareholders to purchase or carry Fund shares
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 advisors before purchasing Fund shares.
CONSEQUENCES OF REDEMPTION OF SHARES -- Any loss realized on a redemption
of Municipal Fund shares 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.
STATE AND LOCAL INCOME TAXES: MUNICIPAL OBLIGATIONS -- The exemption of
exempt-interest dividends for federal income tax purposes does not
necessarily result in exemption under the income tax laws of any state or
local taxing authority. Some states do exempt from tax that portion of an
exempt-interest dividend that represents interest received by a regulated
investment company on its holdings of securities issued by that state and
its political subdivisions and instrumentalities. Therefore, the Fund will
report annually to its shareholders the percentage of interest income
earned by it during the preceding year on Municipal Bonds and will
indicate, on a state-by-state basis only, the source of such income.
VII PORTFOLIO TRANSACTIONS AND BROKERAGE COMMISSIONS
Specific decisions to purchase or sell securities for the Fund are made by
persons affiliated with the Adviser. Any such person may serve other
clients of the Adviser, or any subsidiary of the Adviser in a similar
capacity. Changes in the Fund's investments are reviewed by the Trust's
Board of Trustees.
The primary consideration in placing portfolio security transactions is
execution at the most favorable prices. The Adviser has complete freedom as
to the markets in and broker-dealers through which it seeks this result. In
the U.S. and in some other countries debt securities are traded principally
in the over-the-counter market on a net basis through dealers acting for
their own account and not as brokers. In other countries both debt and
equity securities are traded on exchanges at fixed commission rates. The
cost of securities purchased from underwriters includes an underwriter's
commission or concession, and the prices at which securities are purchased
and sold from and to dealers include a dealer's mark-up or mark-down. The
Adviser normally seeks to deal directly with the primary market makers or
on major exchanges unless, in its opinion, better prices are available
elsewhere. Subject to the requirement of seeking execution at the best
available price, securities may, as authorized by the Advisory Agreement,
be bought from or sold to dealers who have furnished statistical, research
and other information or services to the Adviser. At present no
arrangements for the recapture of commission payments are in effect.
Consistent with the foregoing primary consideration, the Conduct Rules of
the National Association of Securities Dealers, Inc. ("NASD") and such
other policies as the Trustees may determine, the Adviser may consider
sales of shares of the Fund and of the other investment company clients of
MFD as a factor in the selection of broker-dealers to execute the Fund's
portfolio transactions.
Under the Advisory Agreement and as permitted by Section 28(e) of the
Securities Exchange Act of 1934, the Adviser may cause the Fund to pay a
broker-dealer which provides brokerage and research services to the
Adviser, an amount of commission for effecting a securities transaction for
the Fund in excess of the amount other broker-dealers would have charged
for the transaction, if the Adviser determines in good faith that the
greater commission is reasonable in relation to the value of the brokerage
and research services provided by the executing broker-dealer viewed in
terms of either a particular transaction or their respective overall
responsibilities to the Fund or to their other clients. Not all of such
services are useful or of value in advising the Fund.
The term "brokerage and research services" includes advice as to the
value of securities, the advisability of investing in, purchasing or
selling securities, and the availability of securities or of purchasers or
sellers of securities; furnishing analyses and reports concerning issues,
industries, securities, economic factors and trends, portfolio strategy and
the performance of accounts; and effecting securities transactions and
performing functions incidental thereto, such as clearance and settlement.
Although commissions paid on every transaction will, in the judgment of
the Adviser, be reasonable in relation to the value of the brokerage
services provided, commissions exceeding those which another broker might
charge may be paid to broker-dealers who were selected to execute
transactions on behalf 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 Adviser's investment management personnel attempt to evaluate the
quality of Research provided by brokers. The Adviser sometimes uses
evaluations resulting from this effort as a consideration in the selection
of brokers to execute portfolio transactions.
The management fee of the Adviser will not be reduced as a consequence of
the Adviser's receipt of brokerage and research service. To the extent the
Fund's portfolio transactions are used to obtain brokerage and research
services, the brokerage commissions paid by the Fund will exceed those that
might otherwise be paid for such portfolio transactions, or for such
portfolio transactions and research, 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.
The Fund has entered into an arrangement with State Street Brokerage
Services, Inc. ("SSB"), an affiliate of the Custodian, under which, with
respect to any brokerage transactions directed to SSB, the Fund receives,
on a trade-by-trade basis, a credit for part of the brokerage commission
paid, which is applied against other expenses of the Fund, including the
Fund's custodian fee. The Adviser receives no direct or indirect benefit
from this arrangement.
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.
VIII DETERMINATION OF NET ASSET VALUE
The net asset value per share of each class of the Fund is determined each
day during which the New York Stock 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 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.
MONEY MARKET FUNDS
Portfolio securities of each MFS Fund that is a money market fund are
valued at amortized cost, which the Board of Trustees which oversees the
money market fund has 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 Board of Trustees determines
that it does not constitute fair value for such purposes. Each money market
fund will limit its portfolio to those investments in U.S. dollar-
denominated instruments which its Board of Trustees determines present
minimal credit risks, and which are of high quality as determined by any
major rating service or, in the case of any instrument that is not so
rated, of comparable quality as determined by the Board of Trustees. Each
money market fund has also agreed to maintain a dollar-weighted average
maturity of 90 days or less and to invest only in securities maturing in 13
months or less. The Board of Trustees which oversees each money market fund
has established procedures designed to stabilize its net asset value per
share, as computed for the purposes of sales and redemptions, at $1.00 per
share. If the Board determines 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, it will take corrective
action it regards 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.
OTHER FUNDS
The following valuation techniques apply to each MFS Fund that is not a
money market fund.
Equity securities in the Fund's portfolio are valued at the last sale
price on the exchange on which they are primarily traded or on the Nasdaq
stock market system for unlisted national market issues, or at the last
quoted bid price for listed securities in which there were no sales during
the day or for unlisted securities not reported on the Nasdaq stock market
system. Bonds and other fixed income securities (other than short-term
obligations) of U.S. issuers in the Fund's portfolio are valued on the
basis of valuations furnished by a pricing service which utilizes both
dealer-supplied valuations and electronic data processing techniques which
take into account appropriate factors such as institutional-size trading in
similar groups of securities, yield, quality, coupon rate, maturity, type
of issue, trading characteristics and other market data without exclusive
reliance upon quoted prices or exchange or over-the-counter prices, since
such valuations are believed to reflect 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 services has been approved by the 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 system, in which case they are valued at the last sale price or, if
no sales occurred during the day, at the last quoted bid price. Short-term
obligations in the Fund's portfolio are valued at amortized cost, which
constitutes fair value as determined by the Board of Trustees. Short-term
obligations with a remaining maturity in excess of 60 days will be valued
upon dealer supplied valuations. Portfolio investments for which there are
no such quotations or valuations are valued at fair value as determined in
good faith by or at the direction of the Board of Trustees.
Generally, trading in foreign securities is substantially completed each
day at various times prior to the close of regular trading on the Exchange.
Occasionally, events affecting the values of such securities may occur
between the times at which they are determined and the close of regular
trading on the Exchange which will not be reflected in the computation of
the Fund's net asset value unless the Trustees deem that such event would
materially affect the net asset value in which case an adjustment would be
made.
All investments and assets are expressed in U.S. dollars based upon
current currency exchange rates. A share's net asset value is effective for
orders received by the dealer prior to its calculation and received by MFD
prior to the close of that business day.
IX PERFORMANCE INFORMATION
MONEY MARKET FUNDS
Each MFS Fund that is a money market fund will provide current annualized
and effective annualized yield quotations based on the daily dividends of
shares of the money market fund. These quotations may from time to time be
used in advertisements, shareholder reports or other communications to
shareholders.
Any current yield quotation of a money market fund which is used in such
a manner as to be subject to the provisions of Rule 482(d) under the 1933
Act 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 of that class 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 a money market 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. These
yield quotations should not be considered as representative of the yield of
a money market fund in the future since the yield will vary based on the
type, quality and maturities of the securities held in its portfolio,
fluctuations in short-term interest rates and changes in the money market
fund's expenses.
OTHER FUNDS
Each MFS Fund that is not a money market fund may quote the following
performance results.
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 any applicable CDSC 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 any applicable sales charge and/or (iii) total rates of return
which represent aggregate performance over a period or year-by-year
performance, and which may or may not reflect the effect of the maximum or
other sales charge or CDSC.
The Fund offers multiple classes of shares which were initially offered
for sale to, and purchased by, the public on different dates (the class
"inception date"). The calculation of total rate of return for a class of
shares which has a later class inception date than another class of shares
of the Fund is based both on (i) the performance of the Fund's newer class
from its inception date and (ii) the performance of the Fund's oldest class
from its inception date up to the class inception date of the newer class.
As discussed in the Prospectus, the sales charges, expenses and expense
ratios, and therefore the performance, of the Fund's classes of shares
differ. In calculating total rate of return for a newer class of shares in
accordance with certain formulas required by the SEC, the performance will
be adjusted to take into account the fact that the newer class is subject
to a different sales charge than the oldest class (e.g., if the newer class
is Class A shares, the total rate of return quoted will reflect the
deduction of the initial sales charge applicable to Class A shares; if the
newer class is Class B shares, the total rate of return quoted will reflect
the deduction of the CDSC applicable to Class B shares). However, the
performance will not be adjusted to take into account the fact that the
newer class of shares bears different class specific expenses than the
oldest 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).
Any total rate of return quotation provided by the Fund should not be
considered as representative of the performance of the Fund in the future
since the net asset value of shares of the Fund will vary based not only on
the type, quality and maturities of the securities held in the Fund's
portfolio, but also on changes in the current value of such securities and
on changes in the expenses of the Fund. These factors and possible
differences in the methods used to calculate total rates of return should
be considered when comparing the total rate of return of the Fund to total
rates of return published for other investment companies or other
investment vehicles. Total rate of return reflects the performance of both
principal and income. Current net asset value and account balance
information may be obtained by calling 1-800-MFS-TALK (637-8255).
YIELD -- Any yield quotation for a class of shares of the Fund is based on
the annualized net investment income per share of that class for the 30-
day period. The yield for each class of the Fund is calculated by dividing
the net investment income allocated to that class earned during the period
by the maximum offering price per share of that class of the Fund on the
last day of the period. The resulting figure is then annualized. Net
investment income per share of a class is determined by dividing (i) the
dividends and interest allocated to that class during the period, minus
accrued expense of that class for the period by (ii) the average number of
shares of the class entitled to receive dividends during the period
multiplied by the maximum offering price per share on the last day of the
period. The Fund's yield calculations assume a maximum sales charge of
5.75% in the case of Class A shares and no payment of any CDSC in the case
of Class B and Class C shares.
TAX-EQUIVALENT YIELD -- The tax-equivalent yield for a class of shares of a
Fund is calculated by determining the rate of return that would have to be
achieved on a fully taxable investment in such shares to produce the
after-tax equivalent of the yield of that class. In calculating tax-
equivalent yield, a Fund assumes certain federal tax brackets for
shareholders and does not take into account state taxes.
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 (i) annualizing the
distributions (excluding short-term capital gains) of the class for a
stated period; (ii) adding any short-term capital gains paid within the
immediately preceding twelve-month period; and (iii) dividing the result by
the maximum offering price or net asset value per share on the last day of
the period. 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 may be calculated over a different period of time. The Fund's current
distribution rate calculation for Class B shares and Class C shares assumes
no CDSC is paid.
GENERAL
From time to time the Fund may, as appropriate, quote Fund rankings or
reprint all or a portion of evaluations of fund performance and operations
appearing in various independent publications, including but not limited to
the following: Money, Fortune, U.S. News and World Report, Kiplinger's
Personal Finance, The Wall Street Journal, Barron's, Investors Business
Daily, Newsweek, Financial World, Financial Planning, Investment Advisor,
USA Today, Pensions and Investments, SmartMoney, Forbes, Global Finance,
Registered Representative, Institutional Investor, the Investment Company
Institute, Johnson's Charts, Morningstar, Lipper Analytical Securities
Corporation, 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 and use
charts and graphs to illustrate the past performance of various indices
such as those mentioned above and illustrations using hypothetical rates of
return to illustrate the effects of compounding and tax-deferral. 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.
From time to time, the Fund may discuss or quote its current portfolio
manager as well as other investment personnel, including such persons'
views on: the economy; securities markets; portfolio securities and their
issuers; investment philosophies, strategies, techniques and criteria used
in the selection of securities to be purchased or sold for the Fund; the
Fund's portfolio holdings; the investment research and analysis process;
the formulation and evaluation of investment recommendations; and the
assessment and evaluation of credit, interest rate, market and economic
risks, and similar or related matters.
The Fund may also use charts, graphs or other presentation formats to
illustrate the historical correlation of its performance to fund categories
established by Morningstar (or other nationally recognized statistical
ratings organizations) and to other MFS Funds.
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, including
issues concerning social security; 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; the history of the mutual fund
industry; investor behavior; and other similar or related matters.
From time to time, the Fund may also advertise annual returns showing the
cumulative value of an initial investment in the Fund in various amounts
over specified periods, with capital gain and dividend distributions
invested in additional shares or taken in cash, and with no adjustment for
any income taxes (if applicable) payable by shareholders.
MFS FIRSTS
MFS has a long history of innovations.
o 1924 -- Massachusetts Investors Trust is established as the first
open-end mutual fund in America.
o 1924 -- Massachusetts Investors Trust is the first mutual fund to make
full public disclosure of its operations in shareholder reports.
o 1932 -- One of the first internal research departments is established to
provide in-house analytical capability for an investment management
firm.
o 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").
o 1936 -- Massachusetts Investors Trust is the first mutual fund to allow
shareholders to take capital gain distributions either in additional
shares or in cash.
o 1976 -- MFS(R) Municipal Bond Fund is among the first municipal bond
funds established.
o 1979 -- Spectrum becomes the first combination fixed/ variable annuity
with no initial sales charge.
o 1981 -- MFS(R) Global Governments Fund is established as America's first
globally diversified fixed-income mutual fund.
o 1984 -- MFS(R) Municipal High Income Fund is the first open-end mutual
fund to seek high tax-free income from lower-rated municipal securities.
o 1986 -- MFS(R) Managed Sectors Fund becomes the first mutual fund to
target and shift investments among industry sectors for shareholders.
o 1986 -- MFS(R) Municipal Income Trust is the first closed-end, high-yield
municipal bond fund traded on the New York Stock Exchange.
o 1987 -- MFS(R) Multimarket Income Trust is the first closed-end,
multimarket high income fund listed on the New York Stock Exchange.
o 1989 -- MFS(R) Regatta becomes America's first non-qualified market value
adjusted fixed/variable annuity.
o 1990 -- MFS(R) Global Total Return Fund is the first global balanced
fund.
o 1993 -- MFS(R) Global Growth Fund is the first global emerging markets
fund to offer the expertise of two sub-advisers.
o 1993 -- MFS(R) becomes money manager of MFS(R) Union Standard(R) Equity
Fund, the first fund to invest principally 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.
X 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 programs are described
below and, in certain cases, in the Prospectus. The programs involve no
extra charge to shareholders (other than a sales charge in the case of
certain Class A share purchases) and may be changed or discontinued at any
time by a shareholder or the Fund.
LETTER OF INTENT -- If a shareholder (other than a group purchaser
described below) anticipates purchasing $50,000 or more of Class A shares
of the Fund alone or in combination with shares of any class of 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 Account Application
or filing a separate Letter of Intent application (available from MFSC)
within 90 days of the commencement of purchases. Subject to acceptance by
MFD and the conditions mentioned below, each purchase will be made at a
public offering price applicable to a single transaction of the dollar
amount specified in the Letter of Intent application. The shareholder or
his dealer must inform MFD that the Letter of Intent is in effect each time
shares are purchased. The shareholder makes no commitment to purchase
additional shares, but if his purchases within 13 months (or 36 months in
the case of purchases of $1 million or more) plus the value of shares
credited toward completion of the Letter of Intent do not total the sum
specified, he will pay the increased amount of the sales charge as
described below. Instructions for issuance of shares in the name of a
person other than the person signing the Letter of Intent application must
be accompanied by a written statement from the dealer stating that the
shares were paid for by the person signing such Letter. Neither income
dividends nor capital gain distributions taken in additional shares will
apply toward the completion of the Letter of Intent. Dividends and
distributions of other MFS Funds automatically reinvested in shares of the
Fund pursuant to the Distribution Investment Program will also not apply
toward completion of the Letter of Intent.
Out of the shareholder's initial purchase (or subsequent purchases if
necessary), 5% of the dollar amount specified in the Letter of Intent
application shall be held in escrow by MFSC 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, MFSC 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
MFSC. By completing and signing the Account Application or separate Letter
of Intent application, the shareholder irrevocably appoints MFSC his
attorney to surrender for redemption any or all escrowed shares with full
power of substitution in the premises.
RIGHT OF ACCUMULATION -- A shareholder qualifies for cumulative quantity
discounts on the purchase of Class A shares when his new investment,
together with the current offering price value of all holdings of Class A,
Class B and Class C shares of that shareholder in the MFS Funds or MFS
Fixed Fund reaches a discount level. See "Purchases" in the Prospectus for
the sales charges on quantity discounts. A shareholder must provide MFSC
(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 MFSC 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 MFSC 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. MFSC 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. MFSC
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 that 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 MFSC to send him (or
anyone he designates) regular periodic payments based upon the value of his
account. Each payment under a Systematic Withdrawal Plan ("SWP") must be at
least $100, except in certain limited circumstances. The aggregate
withdrawals of Class B and Class C shares in any year pursuant to a SWP
generally are limited to 10% of the value of the account at the time of
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) shares representing reinvested
distributions; (ii) shares representing undistributed capital gains and
income; and (iii) to the extent necessary, shares representing direct
investments subject to the lowest CDSC. 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 received in full and fractional shares of the
Fund at the net asset value in effect at the close of business on the
record date for such distributions. To initiate this service, shares having
an aggregate value of at least $5,000 either must be held on deposit by, or
certificates for such shares must be deposited with, MFSC. 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.
MFSC 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 MFSC 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 MFSC. 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 at
MFD's discretion as a single purchaser and, under the Right of Accumulation
(but not the 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 participate in the Automatic Exchange Plan. The
Automatic Exchange Plan provides for automatic exchanges of funds from the
shareholder's account in an MFS Fund for investment in the same class of
shares of other MFS Funds selected by the shareholder (if available for
sale). 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 transfer will occur after receipt and
processing by MFSC 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 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 the 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 MFSC 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 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 any of the MFS Funds (if shares of
the fund are available for sale) at net asset value (without a sales
charge). For shareholders who exercise this privilege after redeeming class
A or class C shares, if the redemption involved a CDSC, your account will
be credited with the appropriate amount of the CDSC you paid; however, your
new class A or class C shares (as applicable) will still be subject to a
CDSC for up to one year from the date you originally purchased the shares
redeemed.
Until December 31, 2001, shareholders who redeem class B shares and then
exercise their 90-day reinstatement privilege may reinvest their redemption
proceeds either in
o class B shares, in which case any applicable CDSC you paid on the
redemption will be credited to your account, and your new shares will
be subject to a CDSC which will be determined from the date you
originally purchased the shares redeemed, or
o class A shares, in which case the class A shares purchased will not be
subject to a CDSC, but if you paid a CDSC when you redeemed your class
B shares, your account will not be credited with the CDSC you paid.
After December 31, 2001, shareholders who exercise their 90-day
reinstatement privilege after redeeming class B shares may reinvest their
redemption proceeds only in class A shares as described as the second
option above.
In the case of proceeds reinvested in 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.
Although redemptions and repurchases of shares are taxable events, a
reinvestment within a certain period of time in the same fund may be
considered a "wash sale" and may result in the inability to recognize
currently all or a portion of a loss realized on the original redemption
for federal income tax purposes. Please see your tax adviser for further
information.
EXCHANGE PRIVILEGE
Subject to the requirements set forth below, some or all of the shares of
the same class in an account with the Fund for which payment has been
received by the Fund (i.e., an established account) may be exchanged for
shares of the same class of any of the other MFS Funds (if available for
sale and if the purchaser is eligible to purchase the Class of shares) at
net asset value. Exchanges will be made only after instructions in writing
or by telephone (an "Exchange Request") are received for an established
account by MFSC.
EXCHANGES AMONG MFS FUNDS (excluding exchanges from MFS money market funds)
-- No initial sales charge 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 "How to Purchase,
Exchange and Redeem Shares" 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 -- 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
MFS FUNDamental 401(k) Plan or another similar 401(k) recordkeeping system
made available by MFSC) or all the shares in the account. Each exchange
involves the redemption of the shares of the Fund to be exchanged and the
purchase 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 MFSC prior to the close of regular trading on the
Exchange the exchange usually will occur on that day if all the
requirements set forth above have been complied with at that time. However,
payment of the redemption proceeds by the Fund, and thus the purchase of
shares of the other MFS 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.
Additional information with respect to any of the MFS Funds, including a
copy of its current prospectus, may be obtained from investment dealers or
MFSC. A shareholder considering an exchange should obtain and read the
prospectus of the other fund and consider the differences in objectives and
policies before making any exchange.
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 imposed
from time to time at the discretion of the Funds in order to protect the
Funds.
TAX-DEFERRED RETIREMENT PLANS Shares of the Fund may be purchased by all
types of tax-deferred retirement plans. MFD makes available, through
investment dealers, plans and/or custody agreements, the following:
o Traditional Individual Retirement Accounts (IRAs) (for individuals who
desire to make limited contributions to a tax-deferred retirement
program and, if eligible, to receive a federal income tax deduction for
amounts contributed);
o Roth Individual Retirement Accounts (Roth IRAs) (for individuals who
desire to make limited contributions to a tax-favored retirement
program);
o Simplified Employee Pension (SEP-IRA) Plans;
o Retirement Plans Qualified under Section 401(k) of the Internal Revenue
Code of 1986, as amended (the "Code");
o 403(b) Plans (deferred compensation arrangements for employees of
public school systems and certain non-profit organizations); and
o Certain other qualified pension and profit-sharing plans.
The plan documents provided by MFD designate a trustee or custodian
(unless another trustee or custodian is designated by the individual or
group establishing the plan) and contain specific information about the
plans. Each plan provides that dividends and distributions will be
reinvested automatically. For further details with respect to any plan,
including fees charged by the trustee, custodian or MFD, tax consequences
and redemption information, see the specific documents for that plan. Plan
documents other than those provided by MFD may be used to establish any of
the plans described above. Third party administrative services, available
for some corporate plans, may limit or delay the processing of
transactions.
An investor should consult with his tax adviser before establishing any
of the tax-deferred retirement plans described above.
Class C shares are not currently available for purchase by any retirement
plan qualified under Internal Revenue Code Section 401(a) or 403(b) if the
retirement plan and/or the sponsoring organization subscribe to the MFS
FUNDamental 401(k) Plan or another similar Section 401(a) or 403(b)
recordkeeping program made available by MFSC.
XI 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 Declaration of
Trust further authorizes the Trustees to classify or reclassify any series
of shares into one or more classes. 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 a number of series and
additional classes of shares, in which case the shares of each class of a
series would participate equally in the earnings, dividends and assets
allocable to that class of the particular series.
Shareholders are entitled to one vote for each share held and may vote in
the election of Trustees and on other matters submitted to meetings of
shareholders. To the extent a shareholder of the Fund owns a controlling
percentage of the Fund's shares, such shareholder may affect the outcome of
such matters to a greater extent than other Fund shareholders. Although
Trustees are not elected annually by the shareholders, the Declaration of
Trust provides that a Trustee may be removed from office at a meeting of
shareholders by a vote of two-thirds of the outstanding shares of the
Trust. A meeting of shareholders will be called upon the request of
shareholders of record holding in the aggregate not less than 10% of the
outstanding voting securities of the Trust. No material amendment may be
made to the Declaration of Trust without the affirmative vote of a majority
of the Trust's outstanding shares (as defined in "Investment Restrictions"
in Part I of this SAI). The Trust or any series of the Trust may be
terminated (i) upon the merger or consolidation of the Trust or any series
of the Trust with another organization or upon the sale of 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 or the affected series' outstanding
shares voting as a single class, or of the affected series 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 or the
affected series' outstanding shares will be sufficient, or (ii) upon
liquidation and distribution of the assets of a Fund, if approved by the
vote of the holders of two-thirds of its outstanding shares of the Trust,
or (iii) by the Trustees by written notice to its shareholders. 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 Trust
property for any shareholder held personally liable for the obligations of
the Trust. The Declaration of Trust also provides that the Trust shall
maintain appropriate insurance (for example, fidelity bonding and errors
and omissions insurance) for the protection of the Trust and its
shareholders and the Trustees, officers, employees and agents of the Trust
covering possible tort and other liabilities. Thus, the risk of a
shareholder incurring financial loss on account of shareholder liability is
limited to circumstances in which both inadequate insurance existed and the
Trust itself was unable to meet its obligations.
The Declaration of Trust further provides that obligations of the Trust
are not binding upon the Trustees individually but only upon the property
of the Trust and that the Trustees will not be liable for any action or
failure to act, but nothing in the Declaration of Trust protects a Trustee
against any liability to which he would otherwise be subject by reason of
his willful misfeasance, bad faith, gross negligence, or reckless disregard
of the duties involved in the conduct of his office.
<PAGE>
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PART II - APPENDIX A
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WAIVERS OF SALES CHARGES
This Appendix sets forth the various circumstances in which all applicable
sales charges are waived (Section I), the initial sales charge and the
CDSC for Class A shares are waived (Section II), and the CDSC for Class B
and Class C shares is waived (Section III). Some of the following
information will not apply to certain funds in the MFS Family of Funds,
depending on which classes of shares are offered by such fund. As used in
this Appendix, the term "dealer" includes any broker, dealer, bank
(including bank trust departments), registered investment adviser,
financial planner and any other financial institutions having a selling
agreement or other similar agreement with MFD.
I WAIVERS OF ALL APPLICABLE SALES CHARGES
In the following circumstances, the initial sales charge imposed on
purchases of Class A shares and the CDSC imposed on certain redemptions of
Class A shares and on redemptions of Class B and Class C shares, as
applicable, are waived:
DIVIDEND REINVESTMENT
o Shares acquired through dividend or capital gain reinvestment; and
o 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.
CERTAIN ACQUISITIONS/LIQUIDATIONS
o Shares acquired on account of the acquisition or liquidation of assets
of other investment companies or personal holding companies.
AFFILIATES OF AN MFS FUND/CERTAIN DEALERS.
Shares acquired by:
o Officers, eligible directors, employees (including retired employees)
and agents of MFS, Sun Life or any of their subsidiary companies;
o Trustees and retired trustees of any investment company for which MFD
serves as distributor;
o Employees, directors, partners, officers and trustees of any sub-adviser
to any MFS Fund;
o Employees or registered representatives of dealers;
o Certain family members of any such individual and their spouses or
domestic partners 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
o Institutional Clients of MFS or MFS Institutional Advisors, Inc.
INVOLUNTARY REDEMPTIONS (CDSC WAIVER ONLY)
o 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.
RETIREMENT PLANS (CDSC WAIVER ONLY).
Shares redeemed on account of distributions made under the following
circumstances:
o Individual Retirement Accounts ("IRAs")
> Death or disability of the IRA owner.
o 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 Corporate Plan Services 401(k) Plan or another similar
recordkeeping system made available by MFSC (the "MFS Participant
Recordkeeping System");
> 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; and
> Shares purchased by certain retirement plans or trust accounts if: (i)
the plan is currently a party to a retirement plan recordkeeping or
administration services agreement with MFD or one of its affiliates
and (ii) the shares purchased or redeemed represent transfers from or
transfers to plan investments other than the MFS Funds for which
retirement plan recordkeeping services are provided under the terms of
such agreement.
o Section 403(b) Salary Reduction Only Plans ("SRO Plans")
> Death or disability of SRO Plan participant.
o Nonqualified deferred compensation plans (currently a party to a
retirement plan recordkeeping or administrative services agreement with
MFD or one of its affiliates)
> Eligible participant distributions, such as distributions due to
death, disability, financial hardship, retirement and termination of
employment.
CERTAIN TRANSFERS OF REGISTRATION (CDSC WAIVER ONLY).
Shares transferred:
o 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
o From a single account maintained for a 401(a) Plan to multiple accounts
maintained by MFSC on behalf of individual participants of such Plan,
provided that the Plan sponsor subscribes to the MFS Corporate Plan
Services 401(k) Plan or another similar recordkeeping system made
available by MFSC.
LOAN REPAYMENTS
o 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 Corporate Plan Services
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:
WRAP ACCOUNT AND FUND "SUPERMARKET" INVESTMENTS
o 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.
INVESTMENT BY INSURANCE COMPANY SEPARATE ACCOUNTS
o Shares acquired by insurance company separate accounts.
SECTION 529 PLANS
Shares acquired by college savings plans qualified under Section 529 of
the Internal Revenue Code whose sponsors or administrators have entered
into an agreement with MFD or one of its affiliates to perform certain
administrative or investment advisory services.
RETIREMENT PLANS
o 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.
o 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.
o Reinvestment of Redemption Proceeds from Class B Shares
> Shares acquired by a retirement plan whose sponsoring organization
subscribes to the MFS Participant Recordkeeping System where the
purchase represents the immediate reinvestment of proceeds from the
plan's redemption of its Class B shares of the MFS Funds and is equal
to or exceeds $500,000, either alone or in aggregate with the current
market value of the plan's existing Class A shares.
o Retirement Plan Recordkeeping Services Agreements
> Where the retirement plan is, at that time, a party to a retirement
plan recordkeeping or administrative services agreement with MFD or
one of its affiliates pursuant to which certain of those services are
provided by Benefit Services Corporation or any successor service
provider designated by MFD.
> Where the retirement plan has established an account with MFSC on or
after January 1, 2000 and is, at that time, a party to a retirement
plan recordkeeping or administrative services agreement with MFD or
one of its affiliates pursuant to which such services are provided
with respect to at least $10 million in plan assets.
o MFS Prototype IRAs
> Shares acquired by the IRA owner if: (i) the purchase represents the
immediate reinvestment of distribution proceeds from a retirement plan
or trust which is currently a party to a retirement plan recordkeeping
or administrative services agreement with MFD or one of its affiliates
and (ii) such distribution proceeds result from the redemption or
liquidation of plan investments other than the MFS Funds for which
retirement plan recordkeeping services are provided under the terms of
such agreement.
SHARES REDEEMED ON ACCOUNT OF DISTRIBUTIONS
MADE UNDER THE FOLLOWING CIRCUMSTANCES:
o 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.
o 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.
o 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.
o 401(a) Plans and ESP Plans
> where the retirement plan and/or sponsoring organization does not
subscribe to the MFS Participant Recordkeeping System; and
> where the retirement plan and/or sponsoring organization demonstrates
to the satisfaction of, and certifies to, MFSC 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
Family of 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 MFSC on
or after November 1, 1997, in the event that the plan makes a complete
redemption of all of its shares in the MFS Family of Funds, or (b) with
respect to plans which establish an account with MFSC prior to November 1,
1997, in the event that there is a change in law or regulations which
result 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.
PURCHASES OF AT LEAST $5 MILLION (CDSC WAIVER ONLY)
o 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.
BANK TRUST DEPARTMENTS AND LAW FIRMS
o Shares acquired by certain bank trust departments or law firms acting as
trustee or manager for trust accounts which have entered into an
administrative services agreement with MFD and are acquiring such shares
for the benefit of their trust account clients.
INVESTMENT OF PROCEEDS FROM CERTAIN REDEMPTIONS OF CLASS I SHARES.
o The initial sales charge imposed on purchases of Class A shares, and the
contingent deferred sales charge imposed on certain redemptions of Class
A shares, are waived with respect to Class A shares acquired of any of
the MFS Funds through the immediate reinvestment of the proceeds of a
redemption of Class I shares of any of the MFS Funds.
III WAIVERS OF CLASS B AND CLASS C SALES CHARGES
In addition to the waivers set forth in Section I above, in the following
circumstances the CDSC imposed on redemptions of Class B and Class C
shares is waived:
SYSTEMATIC WITHDRAWAL PLAN
o 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.
DEATH OF OWNER
o Shares redeemed on account of the death of the account owner (e.g.,
shares redeemed by the estate or any transferal of the shares from the
estate) if the shares were held solely in the deceased individual's
name, or for the benefit, of the deceased individual.
DISABILITY OF OWNER
o 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 MFSC).
RETIREMENT PLANS.
Shares redeemed on account of distributions made under the following
circumstances:
o 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 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.
o 401(a) and ESP Plans Only (Class B CDSC Waiver Only)
> By a retirement plan whose sponsoring organization subscribes to the
MFS Participant Recordkeeping System and which established an account
with MFSC between July 1, 1996 and December 31, 1998; 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.
> By a retirement plan whose sponsoring organization subscribes to the
MFS Recordkeeper Plus product and which established its account with
MFSC on or after January 1, 1999 (provided that the plan establishment
paperwork is received by MFSC in good order on or after November 15,
1998). A plan with a pre-existing account(s) with any MFS Fund which
switches to the MFS Recordkeeper Plus product will not become eligible
for this waiver category.
<PAGE>
--------------------
PART II - APPENDIX B
--------------------
DEALER COMMISSIONS AND CONCESSIONS
This Appendix describes the various commissions paid and concessions made
to dealers by MFD in connection with the sale of Fund shares. As used in
this Appendix, 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.
CLASS A SHARES
Purchases Subject to an Initial Sales Charge. For purchases of Class A
shares subject to an initial sales charge, MFD reallows a portion of the
initial sales charge to dealers (which are alike for all dealers), as
shown in Appendix D to Part I of this SAI. The difference between the
total amount invested and the sum of (a) the net proceeds to the Fund and
(b) the dealer reallowance, is the amount of the initial sales charge
retained by MFD (as shown in Appendix D to Part I of this SAI). Because of
rounding in the computation of offering price, the portion of the sales
charge retained by MFD 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.
Purchases Subject to a CDSC (but not an Initial Sales Charge). For
purchases of Class A shares subject to a CDSC, MFD pays commissions to
dealers on new investments made through such dealers as follows:
COMMISSION
PAID BY MFD
TO DEALERS CUMULATIVE PURCHASE AMOUNT
------------------------------------------------------
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
Except for those employer sponsored retirement plans described below,
for purposes of determining the level of commissions to be paid to dealers
with respect to a shareholder's new investment in Class A shares purchases
for each shareholder account (and certain other accounts for which the
shareholder is a record or beneficial holder) will be aggregated over a
12-month period (commencing from the date of the first such purchase).
In the case of employer sponsored retirement plans whose account
application or other account establishment paperwork is received in good
order after December 31, 1999, purchases will be aggregated as described
above but the cumulative purchase amount will not be re-set after the date
of the first such purchase.
CLASS B SHARES
For purchases of Class B shares, 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 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).
For purchases of Class B shares by a retirement plan whose sponsoring
organization subscribes to the MFS Participant Recordkeeping System and
which established its account with MFSC between July 1, 1996 and December
31, 1998, 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.
For purchases of Class B shares by a retirement plan whose sponsoring
organization subscribes to the MFS Recordkeeper Plus product and which has
established its account with MFSC on or after January 1, 1999 (provided
that the plan establishment paperwork is received by MFSC in good order on
or after November 15, 1998), MFD pays no up front commissions to dealers,
but instead pays an amount to dealers equal to 1% per annum of the average
daily net assets of the Fund attributable to plan assets, payable at the
rate of 0.25% at the end of each calendar quarter, in arrears. This
commission structure is not available with respect to a plan with a pre-
existing account(s) with any MFS Fund which seeks to switch to the MFS
Recordkeeper Plus product.
CLASS C SHARES
For purchases of Class C shares, 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.
ADDITIONAL DEALER COMMISSIONS/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 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 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 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.
For most of the MFS Funds:
o In lieu of the sales commission and service fees normally paid by MFD to
broker-dealers of record as described in the Prospectus, MFD has agreed
to pay Bear, Stearns & Co. Inc. the following amounts with respect to
Class A shares of the Fund purchased through a special retirement plan
program offered by a third party administrator: (i) an amount equal to
0.05% per annum of the average daily net assets invested in shares of
the Fund pursuant to such program, and (ii) an amount equal to 0.20% of
the net asset value of all net purchases of shares of the Fund made
through such program, subject to a refund in the event that such shares
are redeemed within 36 months.
o Until terminated by MFD, MFD will incur, on behalf of H. D. Vest
Investment Securities, Inc., the initial ticket charge of $15 with
respect to purchases of shares of any MFS fund made through VESTADVISOR
accounts. MFD will not incur such charge with respect to redemptions or
repurchases of fund shares, exchanges of fund shares, or shares
purchased or redeemed through systematic investment or withdrawal plans.
o The following provisions shall apply to any retirement plan (each a
"Merrill Lynch Daily K Plan") whose records are maintained on a daily
valuation basis by either Merrill Lynch, Pierce, Fenner & Smith
Incorporated ("Merrill Lynch"), or by an independent recordkeeper (an
"Independent Recordkeeper") whose services are provided through a
contract or alliance arrangement with Merrill Lynch, and with respect to
which the sponsor of such plan has entered into a recordkeeping service
agreement with Merrill Lynch (a "Merrill Lynch Recordkeeping
Agreement").
The initial sales charge imposed on purchases of Class A shares of the
Funds, and the contingent deferred sales charge ("CDSC") imposed on
certain redemptions of Class A shares of the Funds, is waived in the
following circumstances with respect to a Merrill Lynch Daily K Plan:
(i) if, on the date the Plan sponsor signs the Merrill Lynch
Recordkeeping Agreement, such Plan has $3 million or more in
assets invested in broker-dealer sold funds not advised or managed
by Merrill Lynch Asset Management L.P. ("MLAM") that are made
available pursuant to agreements between Merrill Lynch and such
funds' principal underwriters or distributors, and in funds
advised or managed by MLAM (collectively, the "Applicable
Investments"); or
(ii) if such Plan's records are maintained by an Independent
Recordkeeper and, on the date the Plan sponsor signs the Merrill
Lynch Recordkeeping Agreement, such Plan has $3 million or more in
assets, excluding money market funds, invested in Applicable
Investments; or
(iii) such Plan has 500 or more eligible employees, as determined by the
Merrill Lynch plan conversion manager on the date the Plan sponsor
signs the Merrill Lynch Recordkeeping Agreement.
The CDSC imposed on redemptions of Class B shares of the Fund is waived
in the following circumstances with respect to a Merrill Lynch Daily K
Plan:
(i) if, on the date the Plan sponsor signs the Merrill Lynch
Recordkeeping Agreement, such Plan has less than $3 million in
assets invested in Applicable Investments;
(ii) if such Plan's records are maintained by an independent
recordkeeper and, on the date the Plan sponsor signs the Merrill
Lynch Recordkeeping Agreement, such Plan has less than $3 million
dollars in assets, excluding money market funds, invested in
Applicable Investments; or
(iii) such Plan has fewer than 500 eligible employees, as determined by
the Merrill Lynch plan conversion manager on the date the Plan
sponsor signs the Merrill Lynch Recordkeeping Agreement.
No front-end commissions are paid with respect to any Class A or Class B
shares of the Fund purchased by any Merrill Lynch Daily K Plan.
o In lieu of the sales commission and service fees normally paid by MFD to
borker-dealers of record as described in the Prospectus, MFD has agreed
to pay Bear, Stearns & Co. Inc. the following amounts with respect to
Class A shares of the Fund purchased through a special retirement plan
program offered by a third party administrator: (i) an amount equal to
0.05% per annum of the average daily net assets invested in shares of
the Fund pursuant to such program, and (ii) an amount equal to 0.20% of
the net asset value of all net purchases of shares of the Fund made
through such program, subject to a refund in the event that such shares
are redeemed within 36 months.
For MFS Union Standard(R) Equity Fund:
o The initial sales charge on Class A shares will be waived on shares
purchased using redemption proceeds from a separate institutional
account of Connecticut General Life Insurance Company with respect to
which MFS Institutional Advisors, Inc. acts as investment adviser. No
commissions will be payable to any dealer, bank or other financial
intermediary with respect to shares purchased in this manner.
For MFS Emerging Growth Fund, MFS Research Fund, MFS Capital
Opportunities Fund and MFS Money Market Fund:
o Class A shares of the Fund may be purchased at net asset value by one or
more Chilean retirement plans, known as Administradores de Fondos de
Pensiones, which are clients of the 1850 K Street N.W., Washington D.C.
office of Dean Witter Reynolds, Inc. ("Dean Witter").
MFD will waive any applicable contingent deferred sales charges upon
redemption by such retirement plans on purchases of Class A shares over
$1 million, provided that (i) in lieu of the commissions otherwise
payable as specified in the prospectus, MFD will pay Dean Witter a
commission on such purchases equal to 1.00% (including amounts in excess
of $5 million) and (ii) if one or more such clients redeem all or a
portion of these shares within three years after the purchase thereof,
Dean Witter will reimburse MFD for the commission paid with respect to
such shares on a pro rata basis based on the remaining portion of such
three-year period.
<PAGE>
--------------------
PART II - APPENDIX C
--------------------
INVESTMENT TECHNIQUES, PRACTICES AND RISKS
Set forth below is a description of investment techniques and practices
which the MFS Funds may generally use in pursuing their investment
objectives and principal investment policies, and the risks associated with
these investment techniques and practices. The Fund will engage only in
certain of these investment techniques and practices, as identified in
Appendix A of the Fund's Prospectus. Investment practices and techniques
that are not identified in Appendix A of the Fund's Prospectus do not apply
to the Fund.
INVESTMENT TECHNIQUES AND PRACTICES
DEBT SECURITIES
To the extent the Fund invests in the following types of debt securities,
its net asset value may change as the general levels of interest rates
fluctuate. When interest rates decline, the value of debt securities can be
expected to rise. Conversely, when interest rates rise, the value of debt
securities can be expected to decline. The Fund's investment in debt
securities with longer terms to maturity are subject to greater volatility
than the Fund's shorter-term obligations. Debt securities may have all types
of interest rate payment and reset terms, including fixed rate, adjustable
rate, zero coupon, contingent, deferred, payment in kind and auction rate
features.
ASSET-BACKED SECURITIES: The Fund may purchase the following types of
asset-backed securities:
COLLATERALIZED MORTGAGE OBLIGATIONS AND MULTICLASS PASS-THROUGH
SECURITIES: The Fund may invest a portion of its assets in collateralized
mortgage obligations or "CMOs," which are debt obligations collateralized by
mortgage loans or mortgage pass-through securities (such collateral referred
to collectively as "Mortgage Assets"). Unless the context indicates
otherwise, all references herein to CMOs include multiclass pass-through
securities.
Interest is paid or accrues on all classes of the CMOs on a monthly,
quarterly or semi-annual basis. The principal of and interest on the
Mortgage Assets may be allocated among the several classes of a CMO in
innumerable ways. In a common structure, payments of principal, including
any principal prepayments, on the Mortgage Assets are applied to the classes
of a CMO in the order of their respective stated maturities or final
distribution dates, so that no payment of principal will be made on any
class of CMOs until all other classes having an earlier stated maturity or
final distribution date have been paid in full. Certain CMOs may be stripped
(securities which provide only the principal or interest factor of the
underlying security). See "Stripped Mortgage-Backed Securities" below for a
discussion of the risks of investing in these stripped securities and of
investing in classes consisting of interest payments or principal payments.
The Fund may also invest in parallel pay CMOs and Planned Amortization
Class CMOs ("PAC Bonds"). Parallel pay CMOs are structured to provide
payments of principal on each payment date to more than one class. These
simultaneous payments are taken into account in calculating the stated
maturity date or final distribution date of each class, which, as with other
CMO structures, must be retired by its stated maturity date or final
distribution date but may be retired earlier.
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. These 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. The underlying assets
(e.g., loans) are also subject to prepayments which shorten the securities'
weighted average life and may lower their return.
Corporate asset-backed securities are backed by a pool of assets
representing the obligations of a number of different parties. To lessen the
effect of failures by obligors on underlying assets to make payments, 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.
MORTGAGE PASS-THROUGH SECURITIES: The Fund may invest in mortgage
pass-through securities. Mortgage pass-through securities are securities
representing interests in "pools" of mortgage loans. Monthly payments of
interest and principal by the individual borrowers on mortgages are passed
through to the holders of the securities (net of fees paid to the issuer or
guarantor of the securities) as the mortgages in the underlying mortgage
pools are paid off. The average lives of mortgage pass-throughs are variable
when issued because their average lives depend on prepayment rates. The
average life of these securities is likely to be substantially shorter than
their stated final maturity as a result of unscheduled principal prepayment.
Prepayments on underlying mortgages result in a loss of anticipated
interest, and all or part of a premium if any has been paid, and the actual
yield (or total return) to the Fund may be different than the quoted yield
on the securities. Mortgage premiums generally increase with falling
interest rates and decrease with rising interest rates. Like other fixed
income securities, when interest rates rise the value of a mortgage
pass-through security generally will decline; however, when interest rates
are declining, the value of mortgage pass-through securities with prepayment
features may not increase as much as that of other fixed-income securities.
In the event of an increase in interest rates which results in a decline in
mortgage prepayments, the anticipated maturity of mortgage pass-through
securities held by the Fund may increase, effectively changing a security
which was considered short or intermediate-term at the time of purchase into
a long-term security. Long-term securities generally fluctuate more widely
in response to changes in interest rates than short or intermediate-term
securities.
Payment of principal and interest on some mortgage pass-through securities
(but not the market value of the securities themselves) may be guaranteed by
the full faith and credit of the U.S. Government (in the case of securities
guaranteed by the Government National Mortgage Association ("GNMA")); or
guaranteed by agencies or instrumentalities of the U.S. Government (such as
the Federal National Mortgage Association "FNMA") or the Federal Home Loan
Mortgage Corporation, ("FHLMC") which are supported only by the
discretionary authority of the U.S. Government to purchase the agency's
obligations). Mortgage pass-through securities may also be issued by
non-governmental issuers (such as commercial banks, savings and loan
institutions, private mortgage insurance companies, mortgage bankers and
other secondary market issuers). Some of these mortgage pass-through
securities may be supported by various forms of insurance or guarantees.
Interests in pools of mortgage-related securities differ from other forms
of debt securities, which normally provide for periodic payment of interest
in fixed amounts with principal payments at maturity or specified call
dates. Instead, these securities provide a monthly payment which consists of
both interest and principal payments. In effect, these payments are a
"pass-through" of the monthly payments made by the individual borrowers on
their mortgage loans, net of any fees paid to the issuer or guarantor of
such securities. Additional payments are caused by prepayments of principal
resulting from the sale, refinancing or foreclosure of the underlying
property, net of fees or costs which may be incurred. Some mortgage
pass-through securities (such as securities issued by the GNMA) are
described as "modified pass-through." These securities entitle the holder to
receive all interests and principal payments owed on the mortgages in the
mortgage pool, net of certain fees, at the scheduled payment dates
regardless of whether the mortgagor actually makes the payment.
The principal governmental guarantor of mortgage pass-through securities
is GNMA. GNMA is a wholly owned U.S. Government corporation within the
Department of Housing and Urban Development. GNMA is authorized to
guarantee, with the full faith and credit of the U.S. Government, the timely
payment of principal and interest on securities issued by institutions
approved by GNMA (such as savings and loan institutions, commercial banks
and mortgage bankers) and backed by pools of Federal Housing Administration
("FHA") insured or Veterans Administration ("VA") guaranteed mortgages.
These guarantees, however, do not apply to the market value or yield of
mortgage pass-through securities. GNMA securities are often purchased at a
premium over the maturity value of the underlying mortgages. This premium is
not guaranteed and will be lost if prepayment occurs.
Government-related guarantors (i.e., whose guarantees are not backed by
the full faith and credit of the U.S. Government) include FNMA and FHLMC.
FNMA is a government-sponsored corporation owned entirely by private
stockholders. It is subject to general regulation by the Secretary of
Housing and Urban Development. FNMA purchases conventional residential
mortgages (i.e., mortgages not insured or guaranteed by any governmental
agency) from a list of approved seller/servicers which include state and
federally chartered savings and loan associations, mutual savings banks,
commercial banks, credit unions and mortgage bankers. Pass-through
securities issued by FNMA are guaranteed as to timely payment by FNMA of
principal and interest.
FHLMC is also a government-sponsored corporation owned by private
stockholders. FHLMC issues Participation Certificates ("PCs") which
represent interests in conventional mortgages (i.e., not federally insured
or guaranteed) for FHLMC's national portfolio. FHLMC guarantees timely
payment of interest and ultimate collection of principal regardless of the
status of the underlying mortgage loans.
Commercial banks, savings and loan institutions, private mortgage
insurance companies, mortgage bankers and other secondary market issuers
also create pass through pools of mortgage loans. Such issuers may also be
the originators and/or servicers of the underlying mortgage-related
securities. Pools created by such non-governmental issuers generally offer a
higher rate of interest than government and government-related pools because
there are no direct or indirect government or agency guarantees of payments
in the former pools. However, timely payment of interest and principal of
mortgage loans in these pools may be supported by various forms of insurance
or guarantees, including individual loan, title, pool and hazard insurance
and letters of credit. The insurance and guarantees are issued by
governmental entities, private insurers and the mortgage poolers. There can
be no assurance that the private insurers or guarantors can meet their
obligations under the insurance policies or guarantee arrangements. The Fund
may also buy mortgage-related securities without insurance or guarantees.
STRIPPED MORTGAGE-BACKED SECURITIES: The Fund may invest a portion of its
assets in stripped mortgage-backed securities ("SMBS") which are derivative
multiclass mortgage securities issued by agencies or instrumentalities of
the U.S. Government, or by private originators of, or investors in, mortgage
loans, including savings and loan institutions, mortgage banks, commercial
banks and investment banks.
SMBS are usually structured with two classes that receive different
proportions of the interest and principal distributions from a pool of
mortgage assets. A common type of SMBS will have one class receiving some of
the interest and most of the principal from the Mortgage Assets, while the
other class will receive most of the interest and the remainder of the
principal. In the most extreme case, one class will receive all of the
interest (the interest-only or "I0" class) while the other class will
receive all of the principal (the principal-only or "P0" class). The yield
to maturity on an I0 is extremely sensitive to the rate of principal
payments, including prepayments on the related underlying Mortgage Assets,
and a rapid rate of principal payments may have a material adverse effect on
such security's yield to maturity. If the underlying Mortgage Assets
experience greater than anticipated prepayments of principal, the Fund may
fail to fully recoup its initial investment in these securities. The market
value of the class consisting primarily or entirely of principal payments
generally is unusually volatile in response to changes in interest rates.
Because SMBS were only recently introduced, established trading markets for
these securities have not yet developed, although the securities are traded
among institutional investors and investment banking firms.
CORPORATE SECURITIES: The Fund may invest in debt securities, such as
convertible and non-convertible bonds, notes and debentures, issued by
corporations, limited partnerships and other similar entities.
LOANS AND OTHER DIRECT INDEBTEDNESS: The Fund may purchase loans and other
direct indebtedness. In purchasing a loan, the Fund acquires some or all of
the interest of a bank or other lending institution in a loan to a
corporate, governmental or other borrower. Many such loans are secured,
although some may be unsecured. Such loans may be in default at the time of
purchase. Loans that are fully secured offer the Fund more protection than
an unsecured loan in the event of non-payment of scheduled interest or
principal. However, there is no assurance that the liquidation of collateral
from a secured loan would satisfy the corporate borrowers obligation, or
that the collateral can be liquidated.
These loans are made generally to finance internal growth, mergers,
acquisitions, stock repurchases, leveraged buy-outs and other corporate
activities. Such loans are typically made by a syndicate of lending
institutions, represented by an agent lending institution which has
negotiated and structured the loan and is responsible for collecting
interest, principal and other amounts due on its own behalf and on behalf of
the others in the syndicate, and for enforcing its and their other rights
against the borrower. Alternatively, such loans may be structured as a
novation, pursuant to which the Fund would assume all of the rights of the
lending institution in a loan or as an assignment, pursuant to which the
Fund would purchase an assignment of a portion of a lenders interest in a
loan either directly from the lender or through an intermediary. The Fund
may also purchase trade or other claims against companies, which generally
represent money owned by the company to a supplier of goods or services.
These claims may also be purchased at a time when the company is in default.
Certain of the loans and the other direct indebtedness acquired by the
Fund may involve revolving credit facilities or other standby financing
commitments which obligate the Fund to pay additional cash on a certain date
or on demand. These commitments may have the effect of requiring the Fund to
increase its investment in a company at a time when the Fund might not
otherwise decide to do so (including at a time when the company's financial
condition makes it unlikely that such amounts will be repaid). To the extent
that the Fund is committed to advance additional funds, it will at all times
hold and maintain in a segregated account cash or other high grade debt
obligations in an amount sufficient to meet such commitments.
The Fund's ability to receive payment of principal, interest and other
amounts due in connection with these investments will depend primarily on
the financial condition of the borrower. In selecting the loans and other
direct indebtedness which the Fund will purchase, the Adviser will rely upon
its own (and not the original lending institution's) credit analysis of the
borrower. As the Fund may be required to rely upon another lending
institution to collect and pass onto the Fund amounts payable with respect
to the loan and to enforce the Fund's rights under the loan and other direct
indebtedness, an insolvency, bankruptcy or reorganization of the lending
institution may delay or prevent the Fund from receiving such amounts. In
such cases, the Fund will evaluate as well the creditworthiness of the
lending institution and will treat both the borrower and the lending
institution as an "issuer" of the loan for purposes of certain investment
restrictions pertaining to the diversification of the Fund's portfolio
investments. The highly leveraged nature of many such loans and other direct
indebtedness may make such loans and other direct indebtedness especially
vulnerable to adverse changes in economic or market conditions. Investments
in such loans and other direct indebtedness may involve additional risk to
the Fund.
LOWER RATED BONDS: The Fund may invest in fixed income securities rated Ba
or lower by Moody's or BB or lower by S&P, Fitch or Duff & Phelps and
comparable unrated securities (commonly known as "junk bonds"). See Appendix
D for a description of bond ratings. No minimum rating standard is required
by the Fund. These securities are considered speculative and, while
generally providing greater income than investments in higher rated
securities, will involve greater risk of principal and income (including the
possibility of default or bankruptcy of the issuers of such securities) and
may involve greater volatility of price (especially during periods of
economic uncertainty or change) than securities in the higher rating
categories and because yields vary over time, no specific level of income
can ever be assured. These lower rated high yielding fixed income securities
generally tend to reflect economic changes (and the outlook for economic
growth), short-term corporate and industry developments and the market's
perception of their credit quality (especially during times of adverse
publicity) to a greater extent than higher rated securities which react
primarily to fluctuations in the general level of interest rates (although
these lower rated fixed income securities are also affected by changes in
interest rates). In the past, economic downturns or an increase in interest
rates have, under certain circumstances, caused a higher incidence of
default by the issuers of these securities and may do so in the future,
especially in the case of highly leveraged issuers. The prices for these
securities may be affected by legislative and regulatory developments. The
market for these lower rated fixed income securities may be less liquid than
the market for investment grade fixed income securities. Furthermore, the
liquidity of these lower rated securities may be affected by the market's
perception of their credit quality. Therefore, the Adviser's judgment may at
times play a greater role in valuing these securities than in the case of
investment grade fixed income securities, and it also may be more difficult
during times of certain adverse market conditions to sell these lower rated
securities to meet redemption requests or to respond to changes in the
market.
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 a Fund invests in these lower rated securities, the achievement of
its investment objectives may be a more dependent on the Adviser's own
credit analysis than in the case of a fund investing in higher quality fixed
income securities. These lower rated securities may also include zero coupon
bonds, deferred interest bonds and PIK bonds.
MUNICIPAL BONDS: The Fund may invest 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"). Municipal Bonds include debt securities which pay
interest income that is subject to the alternative minimum tax. The Fund may
invest in Municipal Bonds whose issuers pay interest on the Bonds from
revenues from projects such as multifamily housing, nursing homes, electric
utility systems, hospitals or life care facilities.
If a revenue bond is secured by payments generated from a project, and the
revenue bond is also secured by a lien on the real estate comprising the
project, foreclosure by the indenture trustee on the lien for the benefit of
the bondholders creates additional risks associated with owning real estate,
including environmental risks.
Housing revenue bonds typically are issued by a state, county or local
housing authority and are secured only by the revenues of mortgages
originated by the authority using the proceeds of the bond issue. Because of
the impossibility of precisely predicting demand for mortgages from the
proceeds of such an issue, there is a risk that the proceeds of the issue
will be in excess of demand, which would result in early retirement of the
bonds by the issuer. Moreover, such housing revenue bonds depend for their
repayment upon the cash flow from the underlying mortgages, which cannot be
precisely predicted when the bonds are issued. Any difference in the actual
cash flow from such mortgages from the assumed cash flow could have an
adverse impact upon the ability of the issuer to make scheduled payments of
principal and interest on the bonds, or could result in early retirement of
the bonds. Additionally, such bonds depend in part for scheduled payments of
principal and interest upon reserve funds established from the proceeds of
the bonds, assuming certain rates of return on investment of such reserve
funds. If the assumed rates of return are not realized because of changes in
interest rate levels or for other reasons, the actual cash flow for
scheduled payments of principal and interest on the bonds may be inadequate.
The financing of multi-family housing projects is affected by a variety of
factors, including satisfactory completion of construction within cost
constraints, the achievement and maintenance of a sufficient level of
occupancy, sound management of the developments, timely and adequate
increases in rents to cover increases in operating expenses, including
taxes, utility rates and maintenance costs, changes in applicable laws and
governmental regulations and social and economic trends.
Electric utilities face problems in financing large construction programs
in inflationary periods, cost increases and delay occasioned by
environmental considerations (particularly with respect to nuclear
facilities), difficulty in obtaining fuel at reasonable prices, the cost of
competing fuel sources, difficulty in obtaining sufficient rate increases
and other regulatory problems, the effect of energy conservation and
difficulty of the capital market to absorb utility debt.
Health care facilities include life care facilities, nursing homes and
hospitals. Life care facilities are alternative forms of long-term housing
for the elderly which offer residents the independence of condominium life
style and, if needed, the comprehensive care of nursing home services. Bonds
to finance these facilities have been issued by various state industrial
development authorities. Since the bonds are secured only by the revenues of
each facility and not by state or local government tax payments, they are
subject to a wide variety of risks. Primarily, the projects must maintain
adequate occupancy levels to be able to provide revenues adequate to
maintain debt service payments. Moreover, in the case of life care
facilities, since a portion of housing, medical care and other services may
be financed by an initial deposit, there may be risk if the facility does
not maintain adequate financial reserves to secure estimated actuarial
liabilities. The ability of management to accurately forecast inflationary
cost pressures weighs importantly in this process. The facilities may also
be affected by regulatory cost restrictions applied to health care delivery
in general, particularly state regulations or changes in Medicare and
Medicaid payments or qualifications, or restrictions imposed by medical
insurance companies. They may also face competition from alternative health
care or conventional housing facilities in the private or public sector.
Hospital bond ratings are often based on feasibility studies which contain
projections of expenses, revenues and occupancy levels. A hospital's gross
receipts and net income available to service its debt are influenced by
demand for hospital services, the ability of the hospital to provide the
services required, management capabilities, economic developments in the
service area, efforts by insurers and government agencies to limit rates and
expenses, confidence in the hospital, service area economic developments,
competition, availability and expense of malpractice insurance, Medicaid and
Medicare funding, and possible federal legislation limiting the rates of
increase of hospital charges.
The Fund may invest in municipal lease securities. These are undivided
interests in a portion of an obligation in the from 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. There are, of course, variations in
the security of municipal lease securities, both within a particular
classification and between classifications, depending on numerous factors.
The Fund may also invest in bonds for industrial and other projects, such
as sewage or solid waste disposal or hazardous waste treatment facilities.
Financing for such projects will be subject to inflation and other general
economic factors as well as construction risks including labor problems,
difficulties with construction sites and the ability of contractors to meet
specifications in a timely manner. Because some of the materials, processes
and wastes involved in these projects may include hazardous components,
there are risks associated with their production, handling and disposal.
SPECULATIVE BONDS: The Fund may invest in fixed income and convertible
securities rated Baa by Moody's or BBB by S&P, Fitch or Duff & Phelps and
comparable unrated securities. See Appendix D for a description of bond
ratings. 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 securities.
U.S. GOVERNMENT SECURITIES: The Fund may invest in U.S. Government
Securities including (i) U.S. Treasury obligations, all of which are backed
by the full faith and credit of the U.S. Government and (ii) U.S. Government
Securities, some of which are backed by the full faith and credit of the
U.S. Treasury, e.g., direct pass-through certificates of the GNMA; some of
which are backed only by the credit of the issuer itself, e.g., obligations
of the Student Loan Marketing Association; and some of which are supported
by the discretionary authority of the U.S. Government to purchase the
agency's obligations, e.g., obligations of the FNMA.
U.S. Government Securities also include interests in trust or other
entities representing interests in obligations that are issued or guaranteed
by the U.S. Government, its agencies, authorities or instrumentalities.
VARIABLE AND FLOATING RATE OBLIGATIONS: The Fund may invest in floating or
variable rate securities. Investments in floating or variable rate
securities normally will involve industrial development or revenue bonds
which provide that the rate of interest is set as a specific percentage of a
designated base rate, such as rates on Treasury Bonds or Bills or the prime
rate at a major commercial bank, and that a bondholder can demand payment of
the obligations on behalf of the Fund on short notice at par plus accrued
interest, which amount may be more or less than the amount the bondholder
paid for them. The maturity of floating or variable rate obligations
(including participation interests therein) is deemed to be the longer of
(i) the notice period required before the Fund is entitled to receive
payment of the obligation upon demand or (ii) the period remaining until the
obligation's next interest rate adjustment. If not redeemed by the Fund
through the demand feature, the obligations mature on a specified date which
may range up to thirty years from the date of issuance.
ZERO COUPON BONDS, DEFERRED INTEREST BONDS AND PIK BONDS: The Fund may
invest in zero coupon bonds, deferred interest bonds and bonds on which the
interest is payable in kind ("PIK bonds"). Zero coupon and deferred interest
bonds are debt obligations which are issued at a significant discount from
face value. The discount approximates the total amount of interest the bonds
will accrue and compound over the period until maturity or the first
interest payment date at a rate of interest reflecting the market rate of
the security at the time of issuance. While zero coupon bonds do not require
the periodic payment of interest, deferred interest bonds provide for a
period of delay before the regular payment of interest begins. PIK bonds are
debt obligations which provide that the issuer may, at its option, pay
interest on such bonds in cash or in the form of additional debt
obligations. Such investments benefit the issuer by mitigating its need for
cash to meet debt service, but also require a higher rate of return to
attract investors who are willing to defer receipt of such cash. Such
investments may experience greater volatility in market value than debt
obligations which make regular payments of interest. The Fund will accrue
income on such investments for tax and accounting purposes, 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.
EQUITY SECURITIES
The Fund may invest in all types of equity securities, including the
following: common stocks, preferred stocks and preference stocks; securities
such as bonds, warrants or rights that are convertible into stocks; and
depositary receipts for those securities. These securities may be listed on
securities exchanges, traded in various over-the-counter markets or have no
organized market.
FOREIGN SECURITIES EXPOSURE
The Fund may invest in various types of foreign securities, or securities
which provide the Fund with exposure to foreign securities or foreign
currencies, as discussed below:
BRADY BONDS: The Fund may invest in Brady Bonds, which are securities
created through the exchange of existing commercial bank loans to public and
private entities in certain emerging markets for new bonds in connection
with debt restructurings under a debt restructuring plan introduced by
former U.S. Secretary of the Treasury, Nicholas F. Brady (the "Brady Plan").
Brady Plan debt restructurings have been implemented to date in Argentina,
Brazil, Bulgaria, Costa Rica, Croatia, Dominican Republic, Ecuador, Jordan,
Mexico, Morocco, Nigeria, Panama, Peru, the Philippines, Poland, Slovenia,
Uruguay and Venezuela. Brady Bonds have been issued only recently, and for
that reason do not have a long payment history. Brady Bonds may be
collateralized or uncollateralized, are issued in various currencies (but
primarily the U.S. dollar) and are actively traded in over-the-counter
secondary markets. U.S. dollar-denominated, collateralized Brady Bonds,
which may be fixed rate bonds or floating-rate bonds, are generally
collateralized in full as to principal by U.S. Treasury zero coupon bonds
having the same maturity as the bonds. Brady Bonds are often viewed as
having three or four valuation components: the collateralized repayment of
principal at final maturity; the collateralized interest payments; the
uncollateralized interest payments; and any uncollateralized repayment of
principal at maturity (these uncollateralized amounts constituting the
"residual risk"). In light of the residual risk of Brady Bonds and the
history of defaults of countries issuing Brady Bonds with respect to
commercial bank loans by public and private entities, investments in Brady
Bonds may be viewed as speculative.
DEPOSITARY RECEIPTS: The Fund may invest in American Depositary Receipts
("ADRs"), Global Depositary Receipts ("GDRs") and other types of depositary
receipts. ADRs are certificates by a U.S. depositary (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. GDRs and other types of
depositary receipts are typically issued by foreign banks or trust companies
and evidence ownership of underlying securities issued by either a foreign
or a U.S. company. Generally, ADRs are in registered form and are designed
for use in U.S. securities markets and GDRs are in bearer form and are
designed for use in foreign securities markets. For the purposes of the
Fund's policy to invest a certain percentage of its assets in foreign
securities, the investments of the Fund in ADRs, GDRs and other types of
depositary receipts are deemed to be investments in the underlying
securities.
ADRs may be sponsored or unsponsored. A sponsored ADR is issued by a
depositary which has an exclusive relationship with the issuer of the
underlying security. An unsponsored ADR may be issued by any number of U.S.
depositories. Under the terms of most sponsored arrangements, depositories
agree to distribute notices of shareholder meetings and voting instructions,
and to provide shareholder communications and other information to the ADR
holders at the request of the issuer of the deposited securities. The
depository of an unsponsored ADR, on the other hand, is under no obligation
to distribute shareholder communications received from the issuer of the
deposited securities or to pass through voting rights to ADR holders in
respect of the deposited securities. The Fund may invest in either type of
ADR. Although the U.S. investor holds a substitute receipt of ownership
rather than direct stock certificates, the use of the depositary 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 depositary
of an ADR agent bank in 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, information available to a U.S. investor will be limited to the
information the foreign issuer is required to disclose in its 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 a foreign currency.
DOLLAR-DENOMINATED FOREIGN DEBT SECURITIES: The Fund may invest in
dollar-denominated foreign debt securities. Investing in dollar-denominated
foreign debt represents a greater degree of risk than investing in domestic
securities, due to less publicly available information, less securities
regulation, war or expropriation. Special considerations may include higher
brokerage costs and thinner trading markets. Investments in foreign
countries could be affected by other factors including extended settlement
periods.
EMERGING MARKETS: The Fund may invest in securities of government,
government-related, supranational and corporate issuers located in emerging
markets. Emerging markets include any country determined by the Adviser to
have an emerging market economy, taking into account a number of factors,
including whether the country has a low- to middle-income economy according
to the International Bank for Reconstruction and Development, the country's
foreign currency debt rating, its political and economic stability and the
development of its financial and capital markets. The Adviser determines
whether an issuer's principal activities are located in an emerging market
country by considering such factors as its country of organization, the
principal trading market for securities, the source of its revenues and the
location of its assets. Such investments entail significant risks as
described below.
o Company Debt -- Governments of many emerging market countries have
exercised and continue to exercise substantial influence over many
aspects of the private sector through the ownership or control of many
companies, including some of the largest in any given country. As a
result, government actions in the future could have a significant effect
on economic conditions in emerging markets, which in turn, may adversely
affect companies in the private sector, general market conditions and
prices and yields of certain of the securities in the Fund's portfolio.
Expropriation, confiscatory taxation, nationalization, political,
economic or social instability or other similar developments have
occurred frequently over the history of certain emerging markets and
could adversely affect the Fund's assets should these conditions recur.
o Default; Legal Recourse -- The Fund may have limited legal recourse in
the event of a default with respect to certain debt obligations it may
hold. If the issuer of a fixed income security owned by the Fund
defaults, the Fund may incur additional expenses to seek recovery. Debt
obligations issued by emerging market governments differ from debt
obligations of private entities; remedies from defaults on debt
obligations issued by emerging market governments, unlike those on
private debt, must be pursued in the courts of the defaulting party
itself. The Fund's ability to enforce its rights against private issuers
may be limited. The ability to attach assets to enforce a judgment may
be limited. Legal recourse is therefore somewhat diminished. Bankruptcy,
moratorium and other similar laws applicable to private issuers of debt
obligations may be substantially different from those of other
countries. The political context, expressed as an emerging market
governmental issuer's willingness to meet the terms of the debt
obligation, for example, is of considerable importance. In addition, no
assurance can be given that the holders of commercial bank debt may not
contest payments to the holders of debt obligations in the event of
default under commercial bank loan agreements.
o Foreign Currencies -- The securities in which the Fund invests may be
denominated in foreign currencies and international currency units and
the Fund may invest a portion of its assets directly in foreign
currencies. Accordingly, the weakening of these currencies and units
against the U.S. dollar may result in a decline in the Fund's asset
value.
Some emerging market countries also may have managed currencies, which
are not free floating against the U.S. dollar. In addition, there is
risk that certain emerging market countries may restrict the free
conversion of their currencies into other currencies. Further, certain
emerging market currencies may not be internationally traded. Certain of
these currencies have experienced a steep devaluation relative to the
U.S. dollar. Any devaluations in the currencies in which a Fund's
portfolio securities are denominated may have a detrimental impact on
the Fund's net asset value.
o Inflation -- Many emerging markets have experienced substantial, and in
some periods extremely high, rates of inflation for many years.
Inflation and rapid fluctuations in inflation rates have had and may
continue to have adverse effects on the economies and securities markets
of certain emerging market countries. In an attempt to control
inflation, wage and price controls have been imposed in certain
countries. Of these countries, some, in recent years, have begun to
control inflation through prudent economic policies.
o Liquidity; Trading Volume; Regulatory Oversight -- The securities
markets of emerging market countries are substantially smaller, less
developed, less liquid and more volatile than the major securities
markets in the U.S. Disclosure and regulatory standards are in many
respects less stringent than U.S. standards. Furthermore, there is a
lower level of monitoring and regulation of the markets and the
activities of investors in such markets.
The limited size of many emerging market securities markets and limited
trading volume in the securities of emerging market issuers compared to
volume of trading in the securities of U.S. issuers could cause prices
to be erratic for reasons apart from factors that affect the soundness
and competitiveness of the securities issuers. For example, limited
market size may cause prices to be unduly influenced by traders who
control large positions. Adverse publicity and investors' perceptions,
whether or not based on in-depth fundamental analysis, may decrease the
value and liquidity of portfolio securities.
The risk also exists that an emergency situation may arise in one or
more emerging markets, as a result of which trading of securities may
cease or may be substantially curtailed and prices for the Fund's
securities in such markets may not be readily available. The Fund may
suspend redemption of its shares for any period during which an
emergency exists, as determined by the Securities and Exchange
Commission (the "SEC"). Accordingly, if the Fund believes that
appropriate circumstances exist, it will promptly apply to the SEC for a
determination that an emergency is present. During the period commencing
from the Fund's identification of such condition until the date of the
SEC action, the Fund's securities in the affected markets will be valued
at fair value determined in good faith by or under the direction of the
Board of Trustees.
o Sovereign Debt -- Investment in sovereign debt can involve a high degree
of risk. The governmental entity that controls the repayment of
sovereign debt may not be able or willing to repay the principal and/or
interest when due in accordance with the terms of such debt. A
governmental entity's willingness or ability to repay principal and
interest due in a timely manner may be affected by, among other factors,
its cash flow situation, the extent of its foreign reserves, the
availability of sufficient foreign exchange on the date a payment is
due, the relative size of the debt service burden to the economy as a
whole, the governmental entity's policy towards the International
Monetary Fund and the political constraints to which a governmental
entity may be subject. Governmental entities may also be dependent on
expected disbursements from foreign governments, multilateral agencies
and others abroad to reduce principal and interest on their debt. The
commitment on the part of these governments, agencies and others to make
such disbursements may be conditioned on a governmental entity's
implementation of economic reforms and/or economic performance and the
timely service of such debtor's obligations. Failure to implement such
reforms, achieve such levels of economic performance or repay principal
or interest when due may result in the cancellation of such third
parties' commitments to lend funds to the governmental entity, which may
further impair such debtor's ability or willingness to service its debts
in a timely manner. Consequently, governmental entities may default on
their sovereign debt. Holders of sovereign debt (including the Fund) may
be requested to participate in the rescheduling of such debt and to
extend further loans to governmental entities. There is no bankruptcy
proceedings by which sovereign debt on which governmental entities have
defaulted may be collected in whole or in part.
Emerging market governmental issuers are among the largest debtors to
commercial banks, foreign governments, international financial
organizations and other financial institutions. Certain emerging market
governmental issuers have not been able to make payments of interest on
or principal of debt obligations as those payments have come due.
Obligations arising from past restructuring agreements may affect the
economic performance and political and social stability of those
issuers.
The ability of emerging market governmental issuers to make timely
payments on their obligations is likely to be influenced strongly by the
issuer's balance of payments, including export performance, and its
access to international credits and investments. An emerging market
whose exports are concentrated in a few commodities could be vulnerable
to a decline in the international prices of one or more of those
commodities. Increased protectionism on the part of an emerging market's
trading partners could also adversely affect the country's exports and
tarnish its trade account surplus, if any. To the extent that emerging
markets receive payment for their exports in currencies other than
dollars or non-emerging market currencies, its ability to make debt
payments denominated in dollars or non-emerging market currencies could
be affected.
To the extent that an emerging market country cannot generate a trade
surplus, it must depend on continuing loans from foreign governments,
multilateral organizations or private commercial banks, aid payments
from foreign governments and on inflows of foreign investment. The
access of emerging markets to these forms of external funding may not be
certain, and a withdrawal of external funding could adversely affect the
capacity of emerging market country governmental issuers to make
payments on their obligations. In addition, the cost of servicing
emerging market debt obligations can be affected by a change in
international interest rates since the majority of these obligations
carry interest rates that are adjusted periodically based upon
international rates.
Another factor bearing on the ability of emerging market countries to
repay debt obligations is the level of international reserves of the
country. Fluctuations in the level of these reserves affect the amount
of foreign exchange readily available for external debt payments and
thus could have a bearing on the capacity of emerging market countries
to make payments on these debt obligations.
o Withholding -- Income from securities held by the Fund could be reduced
by a withholding tax on the source or other taxes imposed by the
emerging market countries in which the Fund makes its investments. The
Fund's net asset value may also be affected by changes in the rates or
methods of taxation applicable to the Fund or to entities in which the
Fund has invested. The Adviser will consider the cost of any taxes in
determining whether to acquire any particular investments, but can
provide no assurance that the taxes will not be subject to change.
FOREIGN SECURITIES: The Fund may invest in dollar-denominated and non
dollar-denominated foreign securities. 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.
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,
securities settlement practices, 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. As a result
of its investments in foreign securities, the Fund may receive interest or
dividend payments, or the proceeds of the sale or redemption of such
securities, in the foreign currencies in which such securities are
denominated. Under certain circumstances, such as where the Adviser believes
that the applicable exchange rate is unfavorable at the time the currencies
are received or the Adviser anticipates, for any other reason, that the
exchange rate will improve, the Fund may hold such currencies for an
indefinite period of time. While the holding of currencies will permit the
Fund to take advantage of favorable movements in the applicable exchange
rate, such strategy also exposes the Fund to risk of loss if exchange rates
move in a direction adverse to the Fund's position. Such losses could reduce
any profits or increase any losses sustained by the Fund from the sale or
redemption of securities and could reduce the dollar value of interest or
dividend payments received. The Fund's investments in foreign securities may
also include "privatizations." Privatizations are situations where the
government in a given country, including emerging market countries, sells
part or all of its stakes in government owned or controlled enterprises. In
certain countries, the ability of foreign entities to participate in
privatizations may be limited by local law and the terms on which the
foreign entities may be permitted to participate may be less advantageous
than those afforded local investors.
FORWARD CONTRACTS
The Fund may enter into contracts for the purchase or sale of a specific
currency at a future date at a price set at the time the contract is entered
into (a "Forward Contract"), for hedging purposes (e.g., to protect its
current or intended investments from fluctuations in currency exchange
rates) as well as for non-hedging purposes.
A Forward Contract to sell a currency may be entered into where the Fund
seeks to protect against an anticipated increase in the exchange rate for a
specific currency which could reduce the dollar value of portfolio
securities denominated in such currency. Conversely, the Fund may enter into
a Forward Contract to purchase a given currency to protect against a
projected increase in the dollar value of securities denominated in such
currency which the Fund intends to acquire.
If a hedging transaction in Forward Contracts is successful, the decline
in the dollar value of portfolio securities or the increase in the dollar
cost of securities to be acquired may be offset, at least in part, by
profits on the Forward Contract. Nevertheless, by entering into such Forward
Contracts, the Fund may be required to forego all or a portion of the
benefits which otherwise could have been obtained from favorable movements
in exchange rates. The Fund does not presently intend to hold Forward
Contracts entered into until the value date, at which time it would be
required to deliver or accept delivery of the underlying currency, but will
seek in most instances to close out positions in such Contracts by entering
into offsetting transactions, which will serve to fix the Fund's profit or
loss based upon the value of the Contracts at the time the offsetting
transaction is executed.
The Fund will also enter into transactions in Forward Contracts for other
than hedging purposes, which presents greater profit potential but also
involves increased risk. For example, the Fund may purchase a given foreign
currency through a Forward Contract if, in the judgment of the Adviser, the
value of such currency is expected to rise relative to the U.S. dollar.
Conversely, the Fund may sell the currency through a Forward Contract if the
Adviser believes that its value will decline relative to the dollar.
The Fund will profit if the anticipated movements in foreign currency
exchange rates occur, 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 and could involve
significant risk of loss.
The use by the Fund of Forward Contracts also involves the risks described
under the caption "Special Risk Factors -- Options, Futures, Forwards, Swaps
and Other Derivative Transactions" in this Appendix.
FUTURES CONTRACTS
The Fund may purchase and sell futures contracts ("Futures Contracts") on
stock indices, foreign currencies, interest rates or interest-rate related
instruments, indices of foreign currencies or commodities. The Fund may also
purchase and sell Futures Contracts on foreign or domestic fixed income
securities or indices of such securities including municipal bond indices
and any other indices of foreign or domestic fixed income securities that
may become available for trading. Such investment strategies will be used
for hedging purposes and for non-hedging purposes, subject to 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, foreign
currency or commodity, 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 month in which, in
the case of the majority of commodities, interest rate and foreign currency
futures contracts, the underlying commodities, fixed income securities or
currency are delivered by the seller and paid for by the purchaser, or on
which, in the case of index futures contracts and certain interest rate and
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 "mark-to-market."
Purchases or sales of stock index futures contracts are 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.
Interest rate Futures Contracts may be purchased or sold to attempt to
protect against the effects of interest rate changes on the Fund's current
or intended investments in fixed income securities. For example, if the Fund
owned long-term bonds and interest rates were expected to increase, the Fund
might enter into interest rate futures contracts for the sale of debt
securities. Such a sale would have much the same effect as selling some of
the long-term bonds in the Fund's portfolio. If interest rates did increase,
the value of the debt securities in the portfolio would decline, but the
value of the Fund's interest rate futures contracts would increase at
approximately the same rate, subject to the correlation risks described
below, thereby keeping the net asset value of the Fund from declining as
much as it otherwise would have.
Similarly, if interest rates were expected to decline, interest rate
futures contracts may be purchased to hedge in anticipation of subsequent
purchases of long-term bonds at higher prices. Since the fluctuations in the
value of the interest rate futures contracts should be similar to that of
long-term bonds, the Fund could protect itself against the effects of the
anticipated rise in the value of long-term bonds without actually buying
them until the necessary cash became available or the market had stabilized.
At that time, the interest rate futures contracts could be liquidated and
the Fund's cash reserves could then be used to buy long-term bonds on the
cash market. 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, since the futures market may be
more liquid than the cash market in certain cases or at certain times, the
use of interest rate futures contracts as a hedging technique may allow the
Fund to hedge its interest rate risk without having to sell its portfolio
securities.
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 dollar 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, the 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.
The use by the Fund of Futures Contracts also involves the risks described
under the caption "Special Risk Factors -- Options, Futures, Forwards, Swaps
and Other Derivative Transactions" in this Appendix.
INDEXED SECURITIES
The Fund may purchase securities with principal and/or interest payments
whose prices are indexed to the prices of other securities, securities
indices, currencies, precious metals or other commodities, or other
financial indicators. Indexed securities typically, but not always, are debt
securities or deposits whose value at maturity or coupon rate is determined
by reference to a specific instrument or statistic. The Fund may also
purchase indexed deposits with similar characteristics. 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. Certain indexed securities may expose the Fund to the risk of
loss of all or a portion of the principal amount of its investment and/or
the interest that might otherwise have been earned on the amount invested.
The performance of indexed securities depends to a great extent on the
performance of the security, currency, or other instrument to which they are
indexed, and may also be influenced by interest rate changes in the U.S. and
abroad. At the same time, indexed securities are subject to the credit risks
associated with the issuer of the security, and their values may decline
substantially if the issuer's creditworthiness deteriorates. Recent issuers
of indexed securities have included banks, corporations, and certain U.S.
Government-sponsored entities.
INVERSE FLOATING RATE OBLIGATIONS
The Fund may invest in so-called "inverse floating rate obligations" or
"residual interest bonds" or other obligations or certificates relating
thereto structured to have similar features. In creating such an obligation,
a municipality issues a certain amount of debt and pays a fixed interest
rate. Half of the debt is issued as variable rate short term obligations,
the interest rate of which is reset at short intervals, typically 35 days.
The other half of the debt is issued as inverse floating rate obligations,
the interest rate of which is calculated based on the difference between a
multiple of (approximately two times) the interest paid by the issuer 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 as the comparable change in the market value of an equal principal
amount of long-term bonds which bear interest at the rate paid by the issuer
and have similar credit quality, redemption and maturity provisions.
INVESTMENT IN OTHER INVESTMENT COMPANIES
The Fund may invest in other investment companies. The total return on such
investment will be reduced by the operating expenses and fees of such other
investment companies, including advisory fees.
OPEN-END FUNDS. The Fund may invest in open-end investment companies.
CLOSED-END FUNDS. The Fund may invest in closed-end investment companies.
Such investment may involve the payment of substantial premiums above the
value of such investment companies' portfolio securities.
LENDING OF PORTFOLIO SECURITIES
The Fund may seek to increase its income by lending portfolio securities.
Such loans will usually be made only to member firms of the New York Stock
Exchange (the "Exchange") (and subsidiaries thereof) and member banks of the
Federal Reserve System, and would be required to be secured continuously by
collateral in cash, an irrevocable letter of credit or United States
("U.S.") Treasury securities 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 not usually exceed five
business days). For the duration of a loan, the Fund would continue to
receive the equivalent of the interest or dividends paid by the issuer on
the securities loaned. The Fund would also receive a fee from the borrower
or compensation from the investment of the collateral, less a fee paid to
the borrower (if the collateral is in the form of cash). The Fund would not,
however, have the right to vote any securities having voting rights during
the existence of the loan, but the Fund 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 can be earned currently from securities
loans of this type justifies the attendant risk.
LEVERAGING TRANSACTIONS
The Fund may engage in the types of transactions described below, which
involve "leverage" because in each case the Fund receives cash which it can
invest in portfolio securities and has a future obligation to make a
payment. The use of these transactions by the Fund will generally cause its
net asset value to increase or decrease at a greater rate than would
otherwise be the case. Any investment income or gains earned from the
portfolio securities purchased with the proceeds from these transactions
which is in excess of the expenses associated from these transactions can be
expected to cause the value of the Fund's shares and distributions on the
Fund's shares to rise more quickly than would otherwise be the case.
Conversely, if the investment income or gains earned from the portfolio
securities purchased with proceeds from these transactions fail to cover the
expenses associated with these transactions, the value of the Fund's shares
is likely to decrease more quickly than otherwise would be the case and
distributions thereon will be reduced or eliminated. Hence, these
transactions are speculative, involve leverage and increase the risk of
owning or investing in the shares of the Fund. These transactions also
increase the Fund's expenses because of interest and similar payments and
administrative expenses associated with them. Unless the appreciation and
income on assets purchased with proceeds from these transactions exceed the
costs associated with them, the use of these transactions by a Fund would
diminish the investment performance of the Fund compared with what it would
have been without using these transactions.
BANK BORROWINGS: The Fund may borrow money for investment purposes from
banks and invest the proceeds in accordance with its investment objectives
and policies.
MORTGAGE "DOLLAR ROLL" TRANSACTIONS: The Fund may enter into mortgage
"dollar roll" transactions pursuant to which it sells mortgage-backed
securities for delivery in the future and simultaneously contracts to
repurchase substantially similar securities on a specified future date.
During the roll period, the Fund foregoes principal and interest paid on the
mortgage-backed securities. The Fund is compensated for the lost interest by
the difference between the current sales price and the lower price for the
future purchase (often referred to as the "drop") as well as by the interest
earned on, and gains from, the investment of the cash proceeds of the
initial sale. The Fund may also be compensated by receipt of a commitment
fee.
If the income and capital gains from the Fund's investment of the cash
from the initial sale do not exceed the income, capital appreciation and
gain or loss that would have been realized on the securities sold as part of
the dollar roll, the use of this technique will diminish the investment
performance of the Fund compared with what the performance would have been
without the use of the dollar rolls. Dollar roll transactions involve the
risk that the market value of the securities the Fund is required to
purchase may decline below the agreed upon repurchase price of those
securities. If the broker/dealer to whom the Fund sells securities becomes
insolvent, the Fund's right to purchase or repurchase securities may be
restricted. Successful use of mortgage dollar rolls may depend upon the
Adviser's ability to correctly predict interest rates and prepayments. There
is no assurance that dollar rolls can be successfully employed.
REVERSE REPURCHASE AGREEMENTS: The Fund may enter into reverse repurchase
agreements. In a reverse repurchase agreement, the Fund will sell securities
and receive cash proceeds, subject to its agreement to repurchase the
securities at a later date for a fixed price reflecting a market rate of
interest. There is a risk that the counter party to a reverse repurchase
agreement will be unable or unwilling to complete the transaction as
scheduled, which may result in losses to the Fund. The Fund will invest the
proceeds received under a reverse repurchase agreement in accordance with
its investment objective and policies.
OPTIONS
The Fund may invest in the following types of options, which involve the
risks described under the caption "Special Risk Factors -- Options, Futures,
Forwards, Swaps and Other Derivative Transactions" in this Appendix:
OPTIONS ON FOREIGN CURRENCIES: The Fund may purchase and write options on
foreign currencies for hedging and non-hedging purposes in a manner similar
to that in which Futures Contracts on foreign currencies, or Forward
Contracts, will be utilized. For example, a decline in the dollar value of a
foreign currency in which portfolio securities are denominated will reduce
the dollar value of such securities, even if their value in the foreign
currency remains constant. In order to protect against such diminutions in
the value of portfolio securities, the Fund may purchase put options on the
foreign currency. If the value of the currency does decline, the Fund will
have the right to sell such currency for a fixed amount in dollars and will
thereby offset, in whole 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 effect of the
adverse movements in exchange rates. As in the case of other types of
options, however, the benefit to the Fund deriving from purchases of foreign
currency options will be reduced by the amount of the premium and related
transaction costs. In addition, where currency exchange rates do not move in
the direction or to the extent anticipated, the Fund could sustain losses on
transactions in foreign currency options which would require it to 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 could, instead of purchasing a put option, write a call
option on the relevant currency. If the expected decline occurs, the option
will most likely not be exercised, and the diminution in value of portfolio
securities will 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.
Similarly, instead of purchasing a call option to hedge against an
anticipated increase in the dollar cost of securities to be acquired, the
Fund could write a put option on the relevant currency which, if rates move
in the manner projected, will expire unexercised and allow the Fund to hedge
such increased cost up to the amount of the premium. Foreign currency
options written by the Fund will generally be covered in a manner similar to
the covering of other types of options. As in the case of other types of
options, however, the writing of a foreign currency option will constitute
only a partial hedge up to the amount of the premium, and only if rates move
in the expected direction. If this does not occur, the option may be
exercised and the Fund would be required to purchase or sell the underlying
currency at a loss which may not be offset by the amount of the premium.
Through the writing of options on foreign currencies, the Fund also may be
required to forego all or a portion of the benefits which might otherwise
have been obtained from favorable movements in exchange rates. The use of
foreign currency options for non-hedging purposes, like the use of other
types of derivatives for such purposes, presents greater profit potential
but also significant risk of loss and could be considered speculative.
OPTIONS ON FUTURES CONTRACTS: The Fund also may purchase and write options
to buy or sell those Futures Contracts in which it may invest ("Options on
Futures Contracts") as described above under "Futures Contracts." Such
investment strategies will be used 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. Upon
exercise of the option by the holder, the contract market clearinghouse
establishes a corresponding short position for the writer of the option, in
the case of a call option, or a corresponding long position in the case of a
put option. In the event that an option is exercised, the parties will be
subject to all the risks associated with the trading of Futures Contracts,
such as payment of initial and variation margin deposits. In addition, the
writer of an Option on a Futures Contract, unlike the holder, is subject to
initial and variation margin requirements on the option position.
A position in an Option on a Futures Contract may be terminated by the
purchaser or seller prior to expiration by effecting a closing purchase or
sale transaction, subject to the availability of a liquid secondary market,
which is the purchase or sale of an option of the same type (i.e., the same
exercise price and expiration date) as the option previously purchased or
sold. The difference between the premiums paid and received represents the
Fund's profit or loss on the transaction.
Options on Futures Contracts that are written or purchased by the Fund on
U.S. exchanges are traded on the same contract market as the underlying
Futures Contract, and, like Futures Contracts, are subject to regulation by
the Commodity Futures Trading Commission (the "CFTC") and the performance
guarantee of the exchange clearinghouse. In addition, Options on Futures
Contracts may be traded on foreign exchanges. 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 Fund owns liquid
and unencumbered assets equal to the difference. The Fund may cover the
writing of put Options on Futures Contracts (a) through sales of the
underlying Futures Contract, (b) through the ownership of liquid and
unencumbered assets 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 where the exercise price of the put
held (ii) is less than the exercise price of the put written if the Fund
owns liquid and unencumbered assets equal to the difference. Put and call
Options on Futures Contracts may also be 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. 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 writing of a call option on a Futures Contract for hedging purposes
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 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 the changes in the value of its
futures positions, the Fund's losses from existing Options on Futures
Contracts may to some extent be reduced or increased by changes in the value
of portfolio securities.
The Fund may purchase Options on Futures Contracts for hedging purposes
instead of 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 in 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.
OPTIONS ON SECURITIES: The Fund may write (sell) covered put and call
options, and purchase put and call options, on securities. Call and put
options written by the Fund may be covered in the manner set forth below.
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 that security without additional cash consideration (or for
additional cash consideration if the Fund owns liquid and unencumbered
assets equal to the amount of cash consideration) 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 Fund owns
liquid and unencumbered assets equal to the difference. A put option written
by the Fund is "covered" if the Fund owns liquid and unencumbered assets
with a value equal to the exercise price, or else holds a put on the same
security and in the same principal amount as the put written where the
exercise price of the put held is equal to or greater than the exercise
price of the put written or where the exercise price of the put held is less
than the exercise price of the put written if the Fund owns liquid and
unencumbered assets equal to the difference. 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. If the
writer's obligation is not so covered, it is subject to the risk of the full
change in value of the underlying security from the time the option is
written until exercise.
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 Fund owns liquid and unencumbered 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
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 repurchase 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. Buy-and-write transactions using in-the-money call options may be
used when it is expected that the price of the underlying security will
decline moderately during the option period. Buy-and-write transactions
using out-of-the-money call options may be used when it is expected that the
premiums received from writing the call option plus the appreciation in the
market price of the underlying security up to the exercise price will be
greater than the appreciation in the price of the underlying security alone.
If the call options are exercised in such transactions, the Fund's maximum
gain will be the premium received by it for writing the option, adjusted
upwards or downwards by the difference between the Fund's purchase price of
the security and the exercise price, less related transaction costs. If the
options are not exercised and the price of the underlying security declines,
the amount of such decline will be offset in part, or entirely, by the
premium received.
The writing of covered put options is similar in terms of risk/return
characteristics to buy-and-write transactions. If the market price of the
underlying security rises or otherwise is above the exercise price, the put
option will expire worthless and the Fund's gain will be limited to the
premium received, less related transaction costs. If the market price of the
underlying security declines or otherwise is below the exercise price, the
Fund may elect to close the position or retain the option until it is
exercised, at which time the Fund will be required to take delivery of the
security at the exercise price; the Fund's return will be the premium
received from the put option minus the amount by which the market price of
the security is below the exercise price, which could result in a loss.
Out-of-the-money, at-the-money and in-the-money 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 also write combinations of put and call options on the same
security, known as "straddles" with the same exercise price and expiration
date. 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 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 the
security remains stable and neither the call nor the put is exercised. In
those instances 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 not be undertaken by the Fund solely for hedging
purposes, 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 constitute only a partial hedge against
declines in the value of portfolio securities or against increases in the
value of securities to be acquired, up to the amount of the premium.
The Fund may also purchase options for hedging purposes or to increase its
return. Put options may be purchased to hedge against a decline in the value
of portfolio securities. If such decline occurs, the put options will permit
the Fund to sell the 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 by transaction costs.
The Fund may also purchase call options to hedge against an increase in
the price of securities that the Fund anticipates purchasing in the future.
If such increase occurs, the call option will permit the Fund to purchase
the securities at the exercise price, or to close out the options at a
profit. 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.
OPTIONS ON STOCK INDICES: The Fund may write (sell) covered call and put
options and purchase call and put options on stock indices. In contrast to
an option on a security, an option on a stock index provides the holder with
the right but not the obligation to make or receive a cash settlement upon
exercise of the option, rather than the right to purchase or sell a
security. The amount of this settlement is generally equal to (i) the
amount, if any, by which the fixed exercise price of the option exceeds (in
the case of a call) or is below (in the case of a put) the closing value of
the underlying index on the date of exercise, multiplied by (ii) a fixed
"index multiplier." The Fund may cover written 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 underlying index, or by having an
absolute and immediate right to acquire such securities without additional
cash consideration (or for additional cash consideration if the Fund owns
liquid and unencumbered assets equal to the amount of cash consideration)
upon conversion or exchange of other securities in its portfolio. 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 Fund owns liquid and unencumbered assets equal to the
difference. The Fund may cover put options on stock indices by owning liquid
and unencumbered assets with a value equal to the exercise price, or by
holding a put on the same stock index 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 Fund owns liquid and unencumbered
assets equal to the difference. Put and call options on stock indices 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 the 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 Fund may also 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.
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 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 index underlying a stock index option may be a "broad-based" index,
such as the Standard & Poor's 500 Index or the New York Stock Exchange
Composite Index, the changes in value of which ordinarily will reflect
movements in the stock market in general. In contrast, certain options may
be based on narrower market indices, such as the Standard & Poor's 100
Index, or on indices of securities of particular industry groups, such as
those of oil and gas or technology companies. A stock index assigns relative
values to the stocks included in the index and the index fluctuates with
changes in the market values of the stocks so included. The composition of
the index is changed periodically.
RESET OPTIONS:
In certain instances, the Fund may purchase or write options on U.S.
Treasury securities which provide for periodic adjustment of the strike
price and may also provide for the periodic adjustment of the premium during
the term of each such option. Like other types of options, these
transactions, which may be referred to as "reset" options or "adjustable
strike" options grant the purchaser the right to purchase (in the case of a
call) or sell (in the case of a put), a specified type of U.S. Treasury
security at any time up to a stated expiration date (or, in certain
instances, on such date). In contrast to other types of options, however,
the price at which the underlying security may be purchased or sold under a
"reset" option is determined at various intervals during the term of the
option, and such price fluctuates from interval to interval based on changes
in the market value of the underlying security. As a result, the strike
price of a "reset" option, at the time of exercise, may be less advantageous
than if the strike price had been fixed at the initiation of the option. In
addition, the premium paid for the purchase of the option may be determined
at the termination, rather than the initiation, of the option. If the
premium for a reset option written by the Fund is paid at termination, the
Fund assumes the risk that (i) the premium may be less than the premium
which would otherwise have been received at the initiation of the option
because of such factors as the volatility in yield of the underlying
Treasury security over the term of the option and adjustments made to the
strike price of the option, and (ii) the option purchaser may default on its
obligation to pay the premium at the termination of the option. Conversely,
where the Fund purchases a reset option, it could be required to pay a
higher premium than would have been the case at the initiation of the
option.
"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 owns liquid and unencumbered
assets sufficient to cover the Fund's net liability under the two options.
Therefore, the Fund's liability for such a covered option is generally
limited to the difference between the amount of the Fund's liability under
the option written by the Fund less the value of the option held by the
Fund. Yield curve options may also be covered in such other manner as may be
in accordance with the requirements of the counterparty with which the
option is traded and applicable laws and regulations. Yield curve options
are traded over-the-counter and because they have been only recently
introduced, established trading markets for these securities have not yet
developed.
REPURCHASE AGREEMENTS
The Fund may enter into repurchase agreements with sellers who are member
firms (or a subsidiary thereof) of the New York Stock 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 Government securities.
The repurchase agreement provides that in the event the seller fails to
pay the amount agreed upon on the agreed upon delivery date or upon demand,
as the case may be, the Fund will have the right to liquidate the
securities. If at the time the Fund is contractually entitled to exercise
its right to liquidate the securities, the seller is subject to a proceeding
under the bankruptcy laws or its assets are otherwise subject to a stay
order, the Fund's exercise of its right to liquidate the securities may be
delayed and result in certain losses and costs to the Fund. The Fund has
adopted and follows procedures which are intended to minimize the risks of
repurchase agreements. For example, the Fund only enters into repurchase
agreements after the Adviser has determined that the seller is creditworthy,
and the Adviser monitors that seller's creditworthiness on an ongoing basis.
Moreover, under such agreements, the value of the securities (which are
marked to market every business day) is required to be greater than the
repurchase price, and the Fund has the right to make margin calls at any
time if the value of the securities falls below the agreed upon collateral.
RESTRICTED SECURITIES
The Fund may purchase securities that are not registered under the
Securities Act of 1933, as amended ("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") and
commercial paper issued under Section 4(2) of the 1933 Act ("4(2) Paper"). A
determination is made, based upon a continuing review of the trading markets
for the Rule 144A security or 4(2) Paper, whether such security is liquid
and thus not subject to the Fund's limitation on investing 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 and 4(2) Paper. The Board, however, retains oversight of the
liquidity determinations focusing on factors such as valuation, liquidity
and availability of information. Investing in Rule 144A securities could
have the effect of decreasing the level of liquidity in the Fund to the
extent that qualified institutional buyers become for a time uninterested in
purchasing these Rule 144A securities held in the Fund's portfolio. Subject
to the Fund's 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.
SHORT SALES
The Fund may seek to hedge investments or realize additional gains through
short sales. The Fund may make short sales, which are transactions in which
the Fund sells a security it does not own, in anticipation of a decline in
the market value of that security. To complete such a transaction, the Fund
must borrow the security to make delivery to the buyer. The Fund then is
obligated to replace the security borrowed by purchasing it at the market
price at the time of replacement. The price at such time may be more or less
than the price at which the security was sold by the Fund. Until the
security is replaced, the Fund is required to repay the lender any dividends
or interest which accrue during the period of the loan. To borrow the
security, the Fund also may be required to pay a premium, which would
increase the cost of the security sold. The net proceeds of the short sale
will be retained by the broker, to the extent necessary to meet margin
requirements, until the short position is closed out. The Fund also will
incur transaction costs in effecting short sales.
The Fund will incur a loss as a result of the short sale if the price of
the security increases between the date of the short sale and the date on
which the Fund replaces the borrowed security. The Fund will realize a gain
if the price of the security declines between those dates. The amount of any
gain will be decreased, and the amount of any loss increased, by the amount
of the premium, dividends or interest the Fund may be required to pay in
connection with a short sale.
Whenever the Fund engages in short sales, it identifies liquid and
unencumbered assets in an amount that, when combined with the amount of
collateral deposited with the broker connection with the short sale, equals
the current market value of the security sold short.
SHORT SALES AGAINST THE BOX
The Fund may make short sales "against the box," i.e., when a security
identical to one owned by the Fund is borrowed and sold short. If the Fund
enters into a short sale against the box, it is required to segregate
securities equivalent in kind and amount to the securities sold short (or
securities convertible or exchangeable into such securities) and is required
to hold such securities while the short sale is outstanding. The Fund will
incur transaction costs, including interest, in connection with opening,
maintaining, and closing short sales against the box.
SHORT TERM INSTRUMENTS
The Fund may hold cash and invest in cash equivalents, such as short-term
U.S. Government Securities, commercial paper and bank instruments.
SWAPS AND RELATED DERIVATIVE INSTRUMENTS
The Fund may enter into interest rate swaps, currency swaps and other types
of available swap agreements, including swaps on securities, commodities and
indices, and related types of derivatives, such as caps, collars and floors.
A swap is an agreement between two parties pursuant to which each party
agrees to make one or more payments to the other on regularly scheduled
dates over a stated term, based on different interest rates, currency
exchange rates, security or commodity prices, the prices or rates of other
types of financial instruments or assets or the levels of specified indices.
Under a typical swap, one party may agree to pay a fixed rate or a floating
rate determined by reference to a specified instrument, rate or index,
multiplied in each case by a specified amount (the "notional amount"), while
the other party agrees to pay an amount equal to a different floating rate
multiplied by the same notional amount. On each payment date, the
obligations of parties are netted, with only the net amount paid by one
party to the other. All swap agreements entered into by the Fund with the
same counterparty are generally governed by a single master agreement, which
provides for the netting of all amounts owed by the parties under the
agreement upon the occurrence of an event of default, thereby reducing the
credit risk to which such party is exposed.
Swap agreements are typically individually negotiated and structured to
provide exposure to a variety of different types of investments or market
factors. Swap agreements may be entered into for hedging or non-hedging
purposes and therefore may increase or decrease the Fund's exposure to the
underlying instrument, rate, asset or index. Swap agreements can take many
different forms and are known by a variety of names. The Fund is not limited
to any particular form or variety of swap agreement if the Adviser
determines it is consistent with the Fund's investment objective and
policies.
For example, the Fund may enter into an interest rate swap in order to
protect against declines in the value of fixed income securities held by the
Fund. In such an instance, the Fund would agree with a counterparty to pay a
fixed rate (multiplied by a notional amount) and the counterparty would
agree to pay a floating rate multiplied by the same notional amount. If
interest rates rise, resulting in a diminution in the value of the Fund's
portfolio, the Fund would receive payments under the swap that would offset,
in whole or part, such diminution in value. The Fund may also enter into
swaps to modify its exposure to particular markets or instruments, such as a
currency swap between the U.S. dollar and another currency which would have
the effect of increasing or decreasing the Fund's exposure to each such
currency. The Fund might also enter into a swap on a particular security, or
a basket or index of securities, in order to gain exposure to the underlying
security or securities, as an alternative to purchasing such securities.
Such transactions could be more efficient or less costly in certain
instances than an actual purchase or sale of the securities.
The Fund may enter into other related types of over-the-counter
derivatives, such as "caps", "floors", "collars" and options on swaps, or
"swaptions", for the same types of hedging or non-hedging purposes. Caps and
floors are similar to swaps, except that one party pays a fee at the time
the transaction is entered into and has no further payment obligations,
while the other party is obligated to pay an amount equal to the amount by
which a specified fixed or floating rate exceeds or is below another rate
(multiplied by a notional amount). Caps and floors, therefore, are also
similar to options. A collar is in effect a combination of a cap and a
floor, with payments made only within or outside a specified range of prices
or rates. A swaption is an option to enter into a swap agreement. Like other
types of options, the buyer of a swaption pays a non-refundable premium for
the option and obtains the right, but not the obligation, to enter into the
underlying swap on the agreed-upon terms.
The Fund will maintain liquid and unencumbered assets to cover its current
obligations under swap and other over-the-counter derivative transactions.
If the Fund enters into a swap agreement on a net basis (i.e., the two
payment streams are netted out, with the Fund receiving or paying, as the
case may be, only the net amount of the two payments), the Fund will
maintain liquid and unencumbered assets with a daily value at least equal to
the excess, if any, of the Fund's accrued obligations under the swap
agreement over the accrued amount the Fund is entitled to receive under the
agreement. If the Fund enters into a swap agreement on other than a net
basis, it will maintain liquid and unencumbered assets with a value equal to
the full amount of the Fund's accrued obligations under the agreement.
The most significant factor in the performance of swaps, caps, floors and
collars is the change in the underlying price, rate or index level that
determines the amount of payments to be made under the arrangement. If the
Adviser is incorrect in its forecasts of such factors, the investment
performance of the Fund would be less than what it would have been if these
investment techniques had not been used. If a swap agreement calls for
payments by the Fund, the Fund must be prepared to make such payments when
due. In addition, if the counterparty's creditworthiness would decline, the
value of the swap agreement would be likely to decline, potentially
resulting in losses.
If the counterparty defaults, the Fund's risk of loss consists of the net
amount of payments that the Fund is contractually entitled to receive. The
Fund anticipates that it will be able to eliminate or reduce its exposure
under these arrangements by assignment or other disposition or by entering
into an offsetting agreement with the same or another counterparty, but
there can be no assurance that it will be able to do so.
The uses by the Fund of swaps and related derivative instruments also
involves the risks described under the caption "Special Risk Factors --
Options, Futures, Forwards, Swaps and Other Derivative Transactions" in
this Appendix.
TEMPORARY BORROWINGS
The Fund may borrow money for temporary purposes (e.g., to meet redemption
requests or settle outstanding purchases of portfolio securities).
TEMPORARY DEFENSIVE POSITIONS
During periods of unusual market conditions when the Adviser believes that
investing for temporary defensive purposes is appropriate, or in order to
meet anticipated redemption requests, a large portion or all of the assets
of the Fund may be invested in cash (including foreign currency) or cash
equivalents, including, but not limited to, obligations of banks (including
certificates of deposit, bankers' acceptances, time deposits and repurchase
agreements), commercial paper, short-term notes, U.S. Government Securities
and related repurchase agreements.
WARRANTS
The Fund may invest in warrants. Warrants are securities that give the Fund
the right to purchase equity securities from the issuer at a specific price
(the "strike price") for a limited period of time. The strike price of
warrants typically is much lower than the current market price of the
underlying securities, yet they are subject to similar price fluctuations.
As a result, warrants may be more volatile investments than the underlying
securities and may offer greater potential for capital appreciation as well
as capital loss. Warrants do not entitle a holder to dividends or voting
rights with respect to the underlying securities and do not represent any
rights in the assets of the issuing company. Also, the value of the warrant
does not necessarily change with the value of the underlying securities and
a warrant ceases to have value if it is not exercised prior to the
expiration date. These factors can make warrants more speculative than other
types of investments.
"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. In general, the Fund does not pay
for such 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, a Fund will identify liquid
and unencumbered assets equal to its forward delivery commitment.
SPECIAL RISK FACTORS -- OPTIONS, FUTURES, FORWARDS, SWAPS AND OTHER
DERIVATIVE TRANSACTIONS
RISK OF 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 derivatives, including options, Futures
Contracts, Options on Futures Contracts, Forward Contracts, swaps and other
types of derivatives depends 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. In the case of derivative
instruments based on an index, the portfolio will not duplicate the
components of the index, and in the case of derivative instruments on fixed
income securities, the portfolio securities which are being hedged may not
be the same type of obligation underlying such derivatives. The use of
derivatives for "cross hedging" purposes (such as a transaction in a Forward
Contract on one currency to hedge exposure to a different currency) may
involve greater correlation risks. Consequently, the Fund bears the risk
that the price of the portfolio securities being hedged will not move in the
same amount or direction as the underlying index or obligation.
If the Fund purchases a put option on an index and the index decreases
less than the value of the hedged securities, the Fund would experience a
loss which is not completely offset by the put option. It is also possible
that there may be a negative correlation between the index or obligation
underlying an option or Futures Contract in which the Fund has a position
and the portfolio securities the Fund is attempting to hedge, which could
result in a loss on both the portfolio and the hedging instrument. It should
be noted that stock index 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 based on a broad market index.
This is due to the fact that 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. Nevertheless, where the Fund enters into transactions
in options or futures on narrowly-based indices for hedging purposes,
movements in the value of the index should, if the hedge is successful,
correlate closely with the portion of the Fund's portfolio or the intended
acquisitions being hedged.
The trading of derivatives for hedging purposes entails the additional
risk of imperfect correlation between movements in the price of the
derivative 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 the derivatives markets. In this regard, trading by
speculators in derivatives has in the past occasionally resulted in market
distortions, which may be difficult or impossible to predict, particularly
near the expiration of such instruments.
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. The risk of imperfect correlation,
however, generally tends to diminish as the maturity date of the Futures
Contract or expiration date of the option approaches.
Further, with respect to options on securities, options on stock indices,
options on currencies 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. This could increase the
extent of any loss suffered by the Fund in connection with such
transactions.
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. For example, where
the Fund covers a call option written on a stock index through segregation
of securities, such securities may not match the composition of the index,
and the Fund may not be fully covered. As a result, the Fund could be
subject to risk of loss in the event of adverse market movements.
The writing of options on securities, options on stock indices or Options
on Futures Contracts constitutes only a partial hedge against fluctuations
in the value of the Fund's portfolio. When the Fund writes an option, it
will receive premium income in return for the holder's purchase of the right
to acquire or dispose of the underlying obligation. In the event that the
price of such obligation does not rise sufficiently above the exercise price
of the option, in the case of a call, or fall below the exercise price, in
the case of a put, the option will not be exercised and the Fund will retain
the amount of the premium, less related transaction costs, which will
constitute a partial hedge against any decline that may have occurred in the
Fund's portfolio holdings or any increase in the cost of the instruments to
be acquired.
Where the price of the underlying obligation moves sufficiently in favor
of the holder to warrant exercise of the option, however, and the option is
exercised, the Fund will incur a loss which may only be partially offset by
the amount of the premium it received. Moreover, by writing an option, the
Fund may be required to forego the benefits which might otherwise have been
obtained from an increase in the value of portfolio securities or other
assets or a decline in the value of securities or assets to be acquired. In
the event of the occurrence of any of the foregoing adverse market events,
the Fund's overall return may be lower than if it had not engaged in the
hedging transactions. Furthermore, the cost of using these techniques may
make it economically infeasible for the Fund to engage in such transactions.
RISKS OF NON-HEDGING TRANSACTIONS: The Fund may enter transactions in
derivatives for non-hedging purposes as well as hedging purposes. Non-
hedging transactions in such instruments 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 and unencumbered
assets necessary to satisfy an option exercise will be identified, unless
the option is 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. 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. The
Fund may also enter into futures, Forward Contracts or swaps for non-hedging
purposes. For example, the Fund may enter into such a transaction as an
alternative to purchasing or selling the underlying instrument or to obtain
desired exposure to an index or market. In such instances, the Fund will be
exposed to the same economic risks incurred in purchasing or selling the
underlying instrument or instruments. However, transactions in futures,
Forward Contracts or swaps may be leveraged, which could expose the Fund to
greater risk of loss than such purchases or sales. Entering into
transactions in derivatives for other than hedging purposes, therefore,
could expose the Fund to significant risk of loss if the prices, rates or
values of the underlying instruments or indices do not move in the direction
or to the extent anticipated.
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. Such
transactions, therefore, create an opportunity for increased return by
providing the Fund with two simultaneous premiums on the same security, but
involve additional risk, since the Fund may have an option exercised against
it regardless of whether the price of the security increases or decreases.
RISK OF A 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
contract 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 has insufficient cash available to meet margin
requirements, it will be necessary to liquidate portfolio securities or
other assets at a time when it is 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 portfolio, and could
result in trading losses.
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. Once the daily limit has been
reached in the contract, no trades may be entered into at a price beyond the
limit, thus preventing the liquidation of open futures or option positions
and requiring traders to make additional margin deposits. Prices have in the
past moved to the daily limit on a number of consecutive trading days.
The trading of Futures Contracts and options is also subject to the risk
of trading halts, suspensions, exchange or clearinghouse equipment failures,
government intervention, insolvency of a brokerage firm or clearinghouse 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 establishment
of a futures, forward or swap position (certain of which may require no
initial margin deposits) and the writing of an option, such transactions
involve substantial leverage. As a result, relatively small movements in the
price of the contract can result in substantial unrealized gains or losses.
Where the Fund enters into such transactions 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 or other assets held by the Fund or decreases in the prices of
securities or other assets the Fund intends to acquire. Where the Fund
enters into such transactions for other than hedging purposes, the margin
requirements associated with such transactions could expose the Fund to
greater risk.
POTENTIAL BANKRUPTCY OF A CLEARINGHOUSE OR BROKER: When the Fund enters into
transactions in exchange-traded futures or options, it is exposed to the
risk of the potential bankruptcy of the relevant exchange clearinghouse or
the broker through which the Fund has effected the transaction. In that
event, the Fund might not be able to recover amounts deposited as margin, or
amounts owed to the Fund in connection with its transactions, for an
indefinite period of time, and could sustain losses of a portion or all of
such amounts. Moreover, the performance guarantee of an exchange
clearinghouse generally extends only to its members and the Fund could
sustain losses, notwithstanding such guarantee, in the event of the
bankruptcy of its broker.
TRADING AND POSITION LIMITS: 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). Further, 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 portfolios of the Fund.
RISKS 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 security, index,
currency or Futures Contract.
RISKS OF TRANSACTIONS IN FOREIGN CURRENCIES AND OVER-THE-COUNTER DERIVATIVES
AND OTHER TRANSACTIONS NOT CONDUCTED ON U.S. EXCHANGES: Transactions in
Forward Contracts on foreign currencies, as well as futures and options on
foreign currencies and transactions executed on foreign exchanges, 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. Further, the value of such positions could be adversely affected
by a number of other complex political and economic factors applicable to
the countries issuing the underlying currencies.
Further, unlike trading in most other types of instruments, there is no
systematic reporting of last sale information with respect to the foreign
currencies underlying contracts thereon. As a result, the available
information on which trading systems will be based may not be as complete as
the comparable data on which the Fund makes investment and trading decisions
in connection with other transactions. Moreover, because the foreign
currency market is a global, 24-hour market, events could occur in that
market which will not be reflected in the forward, futures or options market
until the following day, thereby making it more difficult for the Fund to
respond to such events in a timely manner.
Settlements of exercises of over-the-counter Forward Contracts or foreign
currency options 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 U.S. or foreign
restrictions and regulations regarding the maintenance of foreign banking
relationships, fees, taxes or other charges.
Unlike transactions entered into by the Fund in Futures Contracts and
exchange-traded options, options on foreign currencies, Forward Contracts,
over-the-counter options on securities, swaps and other over-the-counter
derivatives are not traded on contract markets regulated by the CFTC or
(with the exception of certain foreign currency options) the SEC. To the
contrary, such instruments are traded through financial institutions acting
as market-makers, although foreign currency options are also traded on
certain national securities exchanges, such as the Philadelphia Stock
Exchange and the Chicago Board Options Exchange, subject to SEC regulation.
In an over-the-counter trading environment, many of the protections afforded
to exchange participants will not be available. For example, there are no
daily price fluctuation limits, and adverse market movements could therefore
continue to an unlimited extent over a period of time. Although the
purchaser of an option cannot lose more than the amount of the premium plus
related transaction costs, this entire amount could be lost. Moreover, the
option writer and a trader of Forward Contracts could lose amounts
substantially in excess of their initial investments, due to the margin and
collateral requirements associated with such positions.
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 or
swaps 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 guarantee of
an exchange clearinghouse, and the Fund will therefore be subject to the
risk of default by, or the bankruptcy of, the financial institution serving
as its counterparty. One or more of such institutions also may decide to
discontinue their role as market-makers in a particular currency or
security, thereby restricting the Fund's ability to enter into desired
hedging transactions. The Fund will enter into an over-the-counter
transaction only with parties whose creditworthiness has been reviewed and
found satisfactory by the Adviser.
Options on securities, options on stock indices, Futures Contracts,
Options on Futures Contracts and options on foreign currencies may be traded
on exchanges located in foreign countries. Such transactions may not be
conducted in the same manner as those entered into on U.S. exchanges, and
may be subject to different margin, exercise, settlement or expiration
procedures. As a result, many of the risks of over-the-counter trading may
be present in connection with such transactions.
Options on foreign currencies traded on national securities exchanges are
within the jurisdiction of the SEC, as are other securities traded on such
exchanges. As a result, many of the protections provided to traders on
organized exchanges will be available with respect to such transactions. In
particular, all foreign currency option positions entered into on a national
securities exchange are cleared and guaranteed by the Options Clearing
Corporation (the "OCC"), thereby reducing the risk of counterparty default.
Further, a liquid secondary market in options traded on a national
securities exchange may be more readily available than in the
over-the-counter market, potentially permitting the Fund to liquidate open
positions at a profit prior to exercise or expiration, or to limit losses in
the event of adverse market movements.
The purchase and sale of exchange-traded foreign currency options,
however, is subject to the risks of the availability of a liquid secondary
market described above, as well as the risks regarding adverse market
movements, margining of options written, the nature of the foreign currency
market, possible intervention by governmental authorities and the effects of
other political and economic events. In addition, exchange-traded options on
foreign currencies involve certain risks not presented by the
over-the-counter market. For example, exercise and settlement of such
options must be made exclusively through the OCC, which has established
banking relationships in applicable foreign countries for this purpose. As a
result, the OCC may, if it determines that foreign governmental restrictions
or taxes would prevent the orderly settlement of foreign currency option
exercises, or would result in undue burdens on the OCC or its clearing
member, impose special procedures on exercise and settlement, such as
technical changes in the mechanics of delivery of currency, the fixing of
dollar settlement prices or prohibitions on exercise.
POLICIES ON THE USE OF FUTURES AND OPTIONS ON 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 CFTC require that
the Fund enter into transactions in Futures Contracts, Options on Futures
Contracts and Options on Foreign Currencies traded on a CFTC-regulated
exchange only (i) for bona fide hedging purposes (as defined in CFTC
regulations), or (ii) for non-bona fide hedging purposes, provided that the
aggregate initial margin and premiums required to establish such non-bona
fide hedging positions does not exceed 5% of the liquidation value of the
Fund's assets, after taking into account unrealized profits and unrealized
losses on any such contracts the Fund has entered into, and excluding, in
computing such 5%, the in-the-money amount with respect to an option that is
in-the-money at the time of purchase.
<PAGE>
--------------------
PART II - APPENDIX D
--------------------
DESCRIPTION OF BOND RATINGS
The ratings of Moody's, S&P and Fitch represent their opinions as to the
quality of various debt instruments. It should be emphasized, however, that
ratings are not absolute standards of quality. Consequently, debt
instruments with the same maturity, coupon and rating may have different
yields while debt instruments of the same maturity and coupon with different
ratings may have the same yield.
MOODY'S INVESTORS SERVICE, INC.
Aaa: Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to
as "gilt edged." Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized
are most unlikely to impair the fundamentally strong position of such
issues.
Aa: Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally
known as high grade bonds. They are rated lower than the best bonds because
margins of protection may not be as large as in Aaa securities or
fluctuation of protective elements may be of greater amplitude or there may
be other elements present which make the long-term risk appear somewhat
larger than the Aaa securities.
A: Bonds which are rated A possess many favorable investment attributes and
are to be considered as upper-medium-grade obligations. Factors giving
security to principal and interest are considered adequate, but elements may
be present which suggest a susceptibility to impairment some time in the
future.
Baa: Bonds which are rated Baa are considered as medium-grade obligations,
(i.e., they are neither highly protected nor poorly secured). Interest
payments and principal security appear adequate for the present but certain
protective elements may be lacking or may be characteristically unreliable
over any great length of time. Such bonds lack outstanding investment
characteristics and in fact have speculative characteristics as well.
Ba: Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well-assured. Often the protection of
interest and principal payments may be very moderate, and thereby not well
safeguarded during both good and bad times over the future. Uncertainty of
position characterizes bonds in this class.
B: Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance
of other terms of the contract over any long period of time may be small.
Caa: Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to
principal or interest.
Ca: Bonds which are rated Ca represent obligations which are speculative
in a high degree. Such issues are often in default or have other marked
shortcomings.
C: Bonds which are rated C are the lowest rated class of bonds, and issues
so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.
STANDARD & POOR'S RATINGS SERVICES
AAA: An obligation rated AAA has the highest rating assigned by Standard &
Poor's. The obligor's capacity to meet its financial commitment on the
obligation is extremely strong.
AA: An obligation rated AA differs from the highest rated obligations only
in small degree. The obligor's capacity to meet its financial commitment on
the obligation is very strong.
A: An obligation rated A is somewhat more susceptible to the adverse effects
of changes in circumstances and economic conditions than obligations in
higher rated categories. However, the obligor's capacity to meet its
financial commitment on the obligation is still strong.
BBB: An obligation rated BBB exhibits adequate protection parameters.
However, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity of the obligor to meet its financial
commitment on the obligation.
Obligations rated BB, B, CCC, CC, and C are regarded as having significant
speculative characteristics. BB indicates the least degree of speculation
and C the highest. While such obligations will likely have some quality and
protective characteristics, these may be outweighed by large uncertainties
or major exposures to adverse conditions.
BB: An obligation rated BB is less vulnerable to nonpayment than other
speculative issues. However, it faces major ongoing uncertainties or
exposure to adverse business, financial, or economic conditions which could
lead to the obligor's inadequate capacity to meet its financial commitment
on the obligation.
B: An obligation rated B is more vulnerable to nonpayment than obligations
rated BB, but the obligor currently has the capacity to meet its financial
commitment on the obligation. Adverse business, financial, or economic
conditions will likely impair the obligor's capacity or willingness to meet
its financial commitment on the obligation.
CCC: An obligation rated CCC is currently vulnerable to nonpayment, and is
dependent upon favorable business, financial, and economic conditions for
the obligor to meet its financial commitment on the obligation. In the event
of adverse business, financial, or economic conditions the obligor is not
likely to have the capacity to meet its financial commitment on the
obligation.
CC: An obligation rated CC is currently highly vulnerable to nonpayment.
C: Subordinated debt or preferred stock obligation rated C is currently
highly vulnerable to nonpayment. The C rating may be used to cover a
situation where a bankruptcy petition has been filed or similar action has
been taken, but payments on this obligation are being continued. A "C"
rating will also be assigned to a preferred stock issue in arrears on
dividends or sinking fund payments, but that is currently paying.
D: An obligation rated D is in payment default. The D rating category is
used when payments on an obligation are not made on the date due even if the
applicable grace period has not expired, unless Standard & Poor's believes
that such payments will be made during such grace period. The D rating also
will be used upon the filing of a bankruptcy petition or the taking of a
similar action if payments on an obligation are jeopardized.
PLUS (+) OR MINUS (-) The ratings from "AA" to "CCC" may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
r: This symbol is attached to the ratings of instruments with significant
noncredit risks. It highlights risks to principal or volatility of expected
returns which are not addressed in the credit rating. Examples include:
obligations linked or indexed to equities, currencies, or commodities;
obligations exposed to severe prepayment risk -- such as interest-only or
principal-only mortgage securities; and obligations with unusually risky
interest terms, such as inverse floaters.
N.R. This indicates that no rating has been requested, that there is
insufficient information on which to base a rating, or that Standard &
Poor's does not rate a particular obligation as a matter of policy.
FITCH IBCA, DUFF & PHELPS
AAA: Highest credit quality. AAA ratings denote the lowest expectation of
credit risk. They are assigned only in case of exceptionally strong capacity
for timely payment of financial commitments. This capacity is highly
unlikely to be adversely affected by foreseeable events.
AA: Very high credit quality. AA ratings denote a very low expectation of
credit risk. They indicate very strong capacity for timely payment of
financial commitments. This capacity is not significantly vulnerable to
foreseeable events.
A: High credit quality. A ratings denote a low expectation of credit risk.
The capacity for timely payment of financial commitments is considered
strong. This capacity may, nevertheless, be more vulnerable to changes in
circumstances or in economic conditions than is the case for higher ratings.
BBB: Good credit quality. BBB ratings indicate that there is currently a low
expectation of credit risk. The capacity for timely payment of financial
commitments is considered adequate, but adverse changes in circumstances and
in economic conditions are more likely to impair this capacity. This is the
lowest investment-grade category.
Speculative Grade
BB: Speculative. BB ratings indicate that there is a possibility of credit
risk developing, particularly as the result of adverse economic change
over time; however, business or financial alternatives may be available to
allow financial commitments to be met. Securities rated in this category
are not investment grade.
B: Highly speculative. B ratings indicate that significant credit risk is
present, but a limited margin of safety remains. Financial commitments are
currently being met; however, capacity for continued payment is contingent
upon a sustained, favorable business and economic environment.
CCC, CC, C: High default risk. Default is a real possibility. Capacity for
meeting financial commitments is solely reliant upon sustained, favorable
business or economic developments. A CC rating indicates that default of
some kind appears probable. C ratings signal imminent default.
DDD, DD, D: Default. The ratings of obligations in this category are based
on their prospects for achieving partial or full recovery in a
reorganization or liquidation of the obligor. While expected recovery values
are highly speculative and cannot be estimated with any precision, the
following serve as general guidelines. DDD obligations have the highest
potential for recovery, around 90% - 100% of outstanding amounts and accrued
interest. DD indicates expected recoveries in the range of 50% - 90% and D
the lowest recovery potential, i.e. below 50%.
NOTES
"+" or "-" may be appended to a rating to denote relative status within
major rating categories. Such suffixes are not added to the "AAA" long-term
rating category, or to categorize below "CCC".
"NR" indicates that Fitch does not rate the issuer or issue in question.
"WITHDRAWN": A rating is withdrawn when Fitch deems the amount of
information available to be inadequate for rating purposes, or when an
obligation matures, is called, or refinanced.
<PAGE>
INVESTMENT ADVISER
MFS Investment Management(R)
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.
2 Avenue de Lafayette, Boston, MA 02111-1738
Toll free: (800) 225-2606
MAILING ADDRESS:
P.O. Box 2281, Boston, MA 02107-9906
[Logo] M F S (R)
INVESTMENT MANAGEMENT
WE INVENTED THE MUTUAL FUND(R)
500 Boylston Street, Boston, MA 02116
MFS-13P2 - 1/01
<PAGE>
MFS(R) MID CAP GROWTH FUND
Supplement dated January 1, 2001 to the Current Prospectus
This Supplement describes the fund's class I shares, and it supplements certain
information in the fund's Prospectus dated January 1, 2001. The caption headings
used in this Supplement correspond with the caption headings used in the
Prospectus.
You may purchase class I shares only if you are an eligible institutional
investor, as described under the caption "Description of Share Classes" below.
1. RISK RETURN SUMMARY
Performance Table. The "Performance Table" is intended to indicate some of
the risks of investing in the fund by showing changes in the fund's
performance over time. The table is supplemented as follows:
Average Annual Total Returns as of December 31, 1999:
1 Year 5 Years Life#
------ ------- -----
Class I shares 78.85% 28.66% 24.86%
Russell Midcap Growth Index+* 51.29% 28.02% 22.87%
Average mid-cap growth fund++ 72.86% 27.32% 22.40%
---------------------------------
# Fund performance figures are for the period from the commencement of the
fund's investment operations on December 1, 1993 through December 31,
1999. Index and Lipper average returns are from December 1, 1993.
+ Standard & Poor's Micropal, Inc.
++ Source: Lipper Inc.
* The Russell Midcap Growth Index is a broad based, unmanaged index which
measures the performance of the smallest growth companies in the Russell
1000 Index. It is not possible to invest directly in an index.
The fund commenced investment operations on December 1, 1993 with the offering
of class A and class B shares, and subsequently offered class I shares on
January 2, 1997. Class I share performance includes the performance of the
fund's class A shares for periods prior to the offering of class I shares. This
blended class I share performance has been adjusted to take into account the
fact that class I shares have no initial sales charge (load). This blended
performance has not been adjusted to take into account differences in class
specific operating expenses. Because operating expenses of class I shares are
lower than those of class A shares, this blended class I share performance is
lower than the performance of class I shares would have been had class I shares
been offered for the entire period.
2. EXPENSE SUMMARY
Expense Table. The "Expense Table" describes the fees and expenses that
you may pay when you buy, redeem and hold shares of the fund. The table is
supplemented as follows:
Annual Fund Operating Expenses (expenses that are deducted from fund
assets):
Management Fees............................. 0.75%
Distribution and Service (12b-1) Fees....... None
Other Expenses.............................. 0.24%
-----
Total Annual Fund Operating Expenses(1)..... 0.99%
--------------------------
(1) The fund has an expense offset arrangement which reduces the fund's
custodian fee based upon the amount of cash maintained by the fund with
its custodian and dividend disbursing agent, and may enter into other such
arrangements and directed brokerage arrangements (which would also have
the effect of reducing the fund's expenses). Any such fee reductions are
not reflected under "Other Expenses."
<PAGE>
3. EXAMPLE OF EXPENSES
The "Example of Expenses" table is intended to help you compare the cost of
investing in the fund with the cost of investing in other mutual funds.
These examples assume that:
o You invest $10,000 in the fund for the time periods indicated and
you redeem your shares at the end of the time periods;
o Your investment has a 5% return each year and dividends and other
distributions are reinvested; and
o The fund's operating expenses remain the same.
Although your actual costs may be higher or lower, under these assumptions your
costs would be:
Share Class Year 1 Year 3 Year 5 Year 10
----------- ------ ------ ------ -------
Class I shares $101 $315 $547 $1,213
4. DESCRIPTION OF SHARE CLASSES
The "Description of Share Classes" is supplemented as follows:
If you are an eligible institutional investor (as described below), you may
purchase class I shares at net asset value without an initial sales charge or
CDSC upon redemption. Class I shares do not have annual distribution and service
fees, and do not convert to any other class of shares of the fund.
The following eligible institutional investors may purchase class I shares:
o certain retirement plans established for the benefit of employees of
MFS and employees of MFS' affiliates;
o any fund distributed by MFD, if the fund seeks to achieve its
investment objective by investing primarily in shares of the fund
and other MFS funds:
o any retirement plan, endowment or foundation which:
=> has, at the time of purchase of class I shares, aggregate
assets of at least $100 million, and
=> 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 (additional investments may be made
in any amount).
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;
o bank trust departments or law firms acting as trustee or manager for
trust accounts which, on behalf of their clients (i) initially
invest at least $100,000 in class I shares of the fund or (ii) have,
at the time of purchase of class I shares, aggregate assets of at
least $10 million invested in class I shares of the fund either
alone or in combination with investments in class I shares of other
MFS Funds. MFD may accept purchases that do not meet these dollar
qualification requirements if it believes, in its sole discretion,
that these requirements will be met within a reasonable period of
time. Additional investments may be made in any amount; and
o certain retirement plans offered, administered or sponsored by
insurance companies, provided that these plans and insurance
companies meet certain criteria established by MFD from time to
time.
5. HOW TO PURCHASE, EXCHANGE AND REDEEM SHARES
The discussion of "How to Purchase, Exchange and Redeem Shares" is supplemented
as follows:
You may purchase, redeem and exchange class I shares only through your MFD
representative or by contacting MFSC (see the back cover of the Prospectus for
address and phone number). You may exchange your class I shares for class I
shares of another MFS Fund (if you are eligible to purchase them) and for shares
of the MFS Money Market Fund at net asset value.
<PAGE>
6. FINANCIAL HIGHLIGHTS
The "Financial Highlights" table is intended to help you understand the fund's
financial performance. It is supplemented as follows:
Financial Statements - Class I shares
<TABLE>
<CAPTION>
Year Ended August 31 Period Ended
2000 1999 1998 8/31/97*
---- ---- ---- --------
<S> <C> <C> <C> <C>
Per share data (for a share outstanding throughout each period):#
Net asset value - beginning of period $ 11.37 $ 7.73 $ 9.44 $ 8.50
------- ------- ------- -------
Income from investment operations -
Net investment loss $ (0.07) $ (0.04) $ (0.08) $ (0.05)
Net realized and unrealized gain (loss) on investments
and foreign currency 10.12 5.04 (1.32) 0.99
------- ------- ------- -------
Total from investment operations $ 10.05 $ 5.00 $ (1.40) $ 0.94
------- ------- ------- -------
Less distributions declared to shareholders from net realized
gain on investments and foreign currency transactions $ (1.69) $ (1.36) $ (0.31) $ --
------- ------- ------- -------
Net asset value - end of period $ 19.73 $ 11.37 $ 7.73 $ 9.44
------- ------- ------- -------
Total return 95.21% 69.03% (15.23)% 11.06%++
Ratios (to average net assets)/Supplemental data:
Expenses## 0.99% 1.07% 1.18% 1.03%+
Net investment loss (0.36)% (0.44)% (0.82)% (0.74)%+
Portfolio turnover 132% 158% 168% 170%
Net assets at end of period (000 omitted) $23,539 $ 1,841 $ 925 $ 1,384
</TABLE>
--------------------------
* For the period from the inception of class I, January 2, 1997 through
August 31, 1997.
+ Annualized.
++ Not annualized.
# Per share data are based on average shares outstanding.
## Ratios do not reflect reductions from certain expense offset arrangements.
The date of this Supplement is January 1, 2001.
<PAGE>
--------------------------------------------------------------------------------
MFS(R) MID CAP GROWTH FUND
--------------------------------------------------------------------------------
JANUARY 1, 2001
Prospectus
Class A Shares
Class B Shares
Class C Shares
--------------------------------------------------------------------------------
This Prospectus describes the MFS(R) Mid Cap Growth Fund. The fund's investment
objective is long-term growth of capital.
The Securities and Exchange Commission has not approved or disapproved the
fund's shares or determined whether this prospectus is accurate or complete.
Anyone who tells you otherwise is committing a crime.
El presente Prospecto tambien se encuentra disponible en espanol. Solicite un
ejemplar a un representante de servicio de MFS llamando al 1-800-225-2606. En el
caso de discrepancias entre las versiones en ingles y en espanol, se considerara
valida la version en ingles.
<PAGE>
--------------------------------------------------------------------------------
TABLE OF CONTENTS
--------------------------------------------------------------------------------
Page
I Risk Return Summary ................................................. 1
II Expense Summary ..................................................... 6
III Certain Investment Strategies and Risks ............................. 8
IV Management of the Fund .............................................. 9
V Description of Share Classes ........................................ 10
VI How to Purchase, Exchange and Redeem Shares ......................... 14
VII Investor Services and Programs ...................................... 18
VIII Other Information ................................................... 20
IX Financial Highlights ................................................ 22
Appendix A -- Investment Techniques and Practices ................... A-1
<PAGE>
--------------------------------------------------------------------------------
I RISK RETURN SUMMARY
--------------------------------------------------------------------------------
o Investment Objective
The fund's investment objective is long-term growth of capital. The fund's
objective may be changed without shareholder approval.
o Principal Investment Policies
The fund invests, under normal market conditions, at least 65% of its
total assets in common stocks and related securities, such as preferred
stocks, convertible securities and depositary receipts for those
securities, of companies with medium market capitalizations which the
fund's investment adviser, Massachusetts Financial Services Company
(referred to as MFS or the adviser), believes have above-average growth
potential.
Medium market capitalization companies are defined by the fund as
companies with market capitalizations equaling or exceeding $250 million
but not exceeding the top of the Russell Midcap(TM) Growth Index range at
the time of the fund's investment. This Index is a widely recognized,
unmanaged index of mid-cap common stock prices. Companies whose market
capitalizations fall below $250 million or exceed the top of the Russell
Midcap(TM) Growth Index range after purchase continue to be considered
medium-capitalization companies for purposes of the fund's 65% investment
policy. As of November 30, 2000, the top of the Russell Midcap(TM) Growth
Index range was $20 billion. The fund's investments may include securities
listed on a securities exchange or traded in the over-the-counter markets.
MFS uses a bottom-up, as opposed to a top-down, investment style in
managing the equity-oriented funds (such as the fund) it advises. This
means that securities are selected based upon fundamental analysis (such
as an analysis of earnings, cash flows, competitive position and
management's abilities) performed by the fund's portfolio manager and MFS'
large group of equity research analysts.
The fund is a non-diversified mutual fund. This means that the fund may
invest a relatively high percentage of its assets in a small number of
issuers.
The fund may invest in foreign securities (including emerging markets
securities) through which it may have exposure to foreign currencies.
The fund has engaged and may engage in active and frequent trading to
achieve its principal investment policies.
o Principal Risks of an Investment
The principal risks of investing in the fund and the circumstances
reasonably likely to cause the value of your investment in the fund to
decline are described below. The share price of the fund generally changes
daily based on market conditions and other factors. Please note that there
are many circumstances which could cause the value of your investment in
the fund to decline, and which could prevent the fund from achieving its
objective, that are not described here.
1
<PAGE>
The principal risks of investing in the fund are:
o Mid-Cap Growth Company Risk: Prices of growth company securities
held by the fund may decline due to changing economic, political or
market conditions, or due to the financial condition of the company
which issued the security, and may decline to a greater extent than
the overall equity markets (e.g., as represented by the Standard and
Poor's Composite 500 Index). Investments in medium capitalization
companies can be riskier and more volatile than investments in
companies with larger market capitalizations.
o Over-the-Counter Risk: Over-the-counter (OTC) transactions involve
risks in addition to those associated with transactions in
securities traded on exchanges. OTC-listed companies may have
limited product lines, markets or financial resources. Many OTC
stocks trade less frequently and in smaller volume than
exchange-listed stocks. The values of these stocks may be more
volatile than exchange-listed stocks, and the fund may experience
difficulty in buying and selling in these stocks at prevailing
market prices.
o Foreign Markets Risk: Investing in foreign securities involves risks
relating to political, social and economic developments abroad, as
well as risks resulting from the differences between the regulations
to which U.S. and foreign issuers and markets are subject:
o These risks may include the seizure by the government of
company assets, excessive taxation, withholding taxes on
dividends and interest, limitations on the use or transfer of
portfolio assets, and political or social instability.
o Enforcing legal rights may be difficult, costly and slow in
foreign countries, and there may be special problems enforcing
claims against foreign governments.
o Foreign companies may not be subject to accounting standards
or governmental supervision comparable to U.S. companies, and
there may be less public information about their operations.
o Foreign markets may be less liquid and more volatile than U.S.
markets.
o Foreign securities often trade in currencies other than the
U.S. dollar, and the fund may directly hold foreign currencies
and purchase and sell foreign currencies through forward
exchange contracts. Changes in currency exchange rates will
affect the fund's net asset value, the value of dividends and
interest earned, and gains and losses realized on the sale of
securities. An increase in the strength of the U.S. dollar
relative to these other currencies may cause the value of the
fund to decline. Certain foreign currencies may be
particularly volatile, and foreign governments may intervene
in the currency markets, causing a decline in value or
liquidity in the fund's foreign currency holdings. By entering
into forward foreign currency exchange contracts, 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 the purpose of increasing return, the fund may
sustain losses which will reduce its gross income. Forward
foreign currency exchange contracts involve the risk that the
party with which the fund enters the contract may fail to
perform its obligations to the fund.
2
<PAGE>
o Emerging Markets Risk: Emerging markets are generally defined as
countries in the initial stages of their industrialization cycles
with low per capita income. Emerging markets are generally more
volatile than the markets of developed countries with more mature
economies. All of the risks of investing in foreign securities
described above are heightened by investing in emerging markets
countries.
o Non-Diversified Status Risk: Because the fund may invest its assets
in a small number of issuers, the fund is more susceptible to any
single economic, political or regulatory event affecting those
issuers than is a diversified fund.
o Active or Frequent Trading Risk: The fund has engaged and may engage
in active and frequent trading to achieve its principal investment
strategies. This may result in the realization and distribution to
shareholders of higher capital gains as compared to a fund with less
active trading policies, which would increase your tax liability.
Frequent trading also increases transaction costs, which could
detract from the fund's performance.
o As with any mutual fund, you could lose money on your investment in
the fund.
An investment in the fund is not a bank deposit and is not insured or
guaranteed by the Federal Deposit Insurance Corporation or any other
government agency.
3
<PAGE>
o Bar Chart and Performance Table
The bar chart and performance table below are intended to indicate some of
the risks of investing in the fund by showing changes in the fund's
performance over time. The performance table also shows how the fund's
performance over time compares with that of a broad measure of market
performance. The chart and table provide past performance information. The
fund's past performance does not necessarily indicate how the fund will
perform in the future. The performance information in the chart and table
is based upon calendar year periods, while the performance information
presented under the caption "Financial Highlights" and in the fund's
shareholder reports is based upon the fund's fiscal year. Therefore, these
performance results differ.
Bar Chart
The bar chart shows changes in the annual total returns of the fund's
class B shares. The chart and related notes do not take into account any
sales charges (loads) that you may be required to pay upon purchase or
redemption of the fund's shares, but do include the reinvestment of
distributions. Any sales charge will reduce your return. The return of the
fund's other classes of shares will differ from the class B returns shown
in the bar chart, depending upon the expenses of those classes.
[The following information was represented by
a bar chart in the printed material.]
3.00% 21.19% 18.78% 10.63% 19.50% 77.09%
1994 1995 1996 1997 1998 1999
The total return for the nine month period ended September 30, 2000 was
20.85%. During the period shown in the bar chart, the highest quarterly
return was 39.49% (for the calendar quarter ended December 31, 1999) and
the lowest quarterly return was (16.63)% (for the calendar quarter ended
September 30, 1998).
4
<PAGE>
Performance Table
This table shows how the average annual total returns of each class of the
fund compare to a broad measure of market performance and other market
indicators and assumes the reinvestment of distributions.
Average Annual Total Returns as of December 31, 1999
--------------------------------------------------------------------------
1 Year 5 Year Life*
Class A shares 68.34% 26.99% 23.52%
Class B shares 73.09% 27.35% 23.61%
Class C shares 76.13% 27.53% 23.69%
Russell Midcap Growth Index+** 51.29% 28.02% 22.87%
Average mid cap growth fund++ 72.86% 27.32% 22.40%
----------
+ Standard & Poor's Micropal, Inc.
++ Source: Lipper Inc.
* Fund performance figures are for the period from the commencement of
the fund's investment operations on December 1, 1993 through
December 31, 1999. Index and Lipper average returns are from
December 1, 1993.
** The Russell Midcap Growth Index is a broad based, unmanaged index
which measures the performance of the smallest growth companies in
the Russell 1000 Index. It is not possible to invest directly in an
index.
Class A share performance takes into account the deduction of the 5.75%
maximum sales charge. Class B share performance takes into account the
deduction of the applicable contingent deferred sales charge (referred to
as a CDSC), which declines over six years from 4% to 0%. Class C share
performance takes into account the deduction of the 1% CDSC.
The fund commenced investment operations on December 1, 1993 with the
offering of class A and class B shares and subsequently offered class C
shares on August 1, 1994. Class C share performance include the
performance of the fund's class B shares for periods prior to the offering
of class C shares. This blended class C share performance has been
adjusted to take into account the CDSC applicable to class C shares,
rather than the CDSC applicable to class B shares. Because operating
expenses of class B and C shares are similar, this blended class C share
performance is also similar to what the performance of class C shares
would have been had class C shares been offered for the entire period.
5
<PAGE>
--------------------------------------------------------------------------------
II EXPENSE SUMMARY
--------------------------------------------------------------------------------
o Expense Table
This table describes the fees and expenses that you may pay when you buy,
redeem and hold shares of the fund.
<TABLE>
<CAPTION>
Shareholder Fees (fees paid directly from your investment)
-----------------------------------------------------------------------------------
Class A Class B Class C
<S> <C> <C> <C>
Maximum Sales Charge (Load) Imposed on
Purchases (as a percentage of offering price) ... 5.75%(1) 0.00% 0.00%
Maximum Deferred Sales Charge (Load)
(as a percentage of original purchase price or
redemption proceeds, whichever is less) ......... See Below(1) 4.00% 1.00%
<CAPTION>
Annual Fund Operating Expenses (expenses that are deducted from fund assets)
-----------------------------------------------------------------------------------
<S> <C> <C> <C>
Management Fees ................................. 0.75% 0.75% 0.75%
Distribution and Service (12b-1) Fees(2) ........ 0.25% 1.00% 1.00%
Other Expenses .................................. 0.24% 0.24% 0.24%
Total Annual Fund Operating Expenses(3) ......... 1.24% 1.99% 1.99%
</TABLE>
----------
(1) An initial sales charge will not be deducted from your purchase if
you buy $1 million or more of class A shares, or if you are
investing through a retirement plan and your class A purchase meets
certain requirements. However, in either case, a contingent deferred
sales charge (referred to as a CDSC) of 1% may be deducted from your
redemption proceeds if you redeem your investment within 12 months.
(2) The fund adopted a distribution plan under Rule 12b-1 that permits
it to pay marketing and other fees to support the sale and
distribution of class A, B and C shares and the services provided to
you by your financial adviser (referred to as distribution and
service fees). The class A distribution fee is not currently in
effect, and may equal up to 0.10% annually upon implementation by
the board of trustees which oversees the fund.
(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. The fund may enter
into other similar arrangements and directed brokerage arrangements,
which would also have the effect of reducing the fund's expenses.
"Other Expenses" do not take into account these expense reductions,
and are therefore higher than the actual expenses of the fund.
6
<PAGE>
o Example of Expenses
These examples are intended to help you compare the cost of investing in
the fund with the cost of investing in other mutual funds.
The examples assume that:
o You invest $10,000 in the fund for the time periods indicated and
you redeem your shares at the end of the time periods;
o Your investment has a 5% return each year and dividends and other
distributions are reinvested; and
o The fund's operating expenses remain the same.
Although your actual costs may be higher or lower, under these assumptions
your costs would be:
Share Class Year 1 Year 3 Year 5 Year 10
--------------------------------------------------------------------------
Class A shares $694 $946 $1,217 $1,989
Class B shares(1)
Assuming redemption at end of period $602 $924 $1,273 $2,123
Assuming no redemption $202 $624 $1,073 $2,123
Class C shares
Assuming redemption at end of period $302 $624 $1,073 $2,317
Assuming no redemption $202 $624 $1,073 $2,317
----------
(1) Class B shares convert to Class A shares approximately eight years
after purchase; therefore, years nine and ten reflect Class A
expenses.
7
<PAGE>
--------------------------------------------------------------------------------
III CERTAIN INVESTMENT STRATEGIES AND RISKS
--------------------------------------------------------------------------------
o Further Information on Investment Strategies and Risks
The fund may invest in various types of securities and engage in various
investment techniques and practices which are not the principal focus of
the fund and therefore are not described in this Prospectus. The types of
securities and investment techniques and practices in which the fund may
engage, including the principal investment techniques and practices
described above, are identified in Appendix A to this Prospectus, and are
discussed, together with their risks, in the fund's Statement of
Additional Information (referred to as the SAI), which you may obtain by
contacting MFS Service Center, Inc. (see back cover for address and phone
number).
o Temporary Defensive Policies
In addition, the fund may depart from its principal investment strategies
by temporarily investing for defensive purposes when adverse market,
economic or political conditions exist. While the fund invests
defensively, it may not be able to pursue its investment objective. The
fund's defensive investment position may not be effective in protecting
its value.
8
<PAGE>
--------------------------------------------------------------------------------
IV MANAGEMENT OF THE FUND
--------------------------------------------------------------------------------
o Investment Adviser
Massachusetts Financial Services Company (referred to as MFS or the
adviser) is the fund's investment adviser. 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, Massachusetts Investors Trust. Net assets under the management of
the MFS organization were approximately $137.95 billion as of November 30,
2000.
MFS provides investment management and related administrative services and
facilities to the fund, including portfolio management and trade
execution. For the fiscal year ended August 31, 2000 the fund paid MFS an
aggregate management fee equal to the management fee ratio as set forth in
the "Expense Summary" above.
o Portfolio Manager
Mark Regan, a Senior Vice President of MFS, has been employed in the
investment management area of MFS since 1989 and has been the portfolio
manager of the fund since the fund's inception in December 1993. David E.
Sette-Ducatti, a Vice President of MFS, has been employed in the
investment management area of the adviser since 1995. Mr. Sette-Ducatti
became a portfolio manager of the fund effective May 1, 2000.
o Administrator
MFS provides the fund with certain financial, legal, compliance,
shareholder communications and other administrative services. MFS is
reimbursed by the fund for a portion of the costs it incurs in providing
these services.
o Distributor
MFS Fund Distributors, Inc. (referred to as MFD), a wholly owned
subsidiary of MFS, is the distributor of shares of the fund.
o Shareholder Servicing Agent
MFS Service Center, Inc. (referred to as MFSC), a wholly owned subsidiary
of MFS, performs transfer agency and certain other services for the fund,
for which it receives compensation from the fund.
9
<PAGE>
--------------------------------------------------------------------------------
V DESCRIPTION OF SHARE CLASSES
--------------------------------------------------------------------------------
The fund offers class A, B and C shares through this prospectus. The fund
also offers an additional class of shares, class I shares, exclusively to
certain institutional investors. Class I shares are made available through
a separate prospectus supplement provided to institutional investors
eligible to purchase them.
o Sales Charges
You may be subject to an initial sales charge when you purchase, or a CDSC
when you redeem, class A, B or C shares. These sales charges are described
below. In certain circumstances, these sales charges are waived. These
circumstances are described in the SAI. Special considerations concerning
the calculation of the CDSC that apply to each of these classes of shares
are described below under the heading "Calculation of CDSC."
If you purchase your fund shares through a financial adviser (such as a
broker or bank), the adviser may receive commissions or other concessions
which are paid from various sources, such as from the sales charges and
distribution and service fees, or from MFS or MFD. These commissions and
concessions are described in the SAI.
o Class A Shares
You may purchase class A shares at net asset value plus an initial sales
charge (referred to as the offering price), but in some cases you may
purchase class A shares without an initial sales charge but subject to a
1% CDSC upon redemption within one year. Class A shares have annual
distribution and service fees up to a maximum of 0.35% of net assets
annually.
Purchases Subject to an Initial Sales Charge. The amount of the initial
sales charge you pay when you buy class A shares differs depending upon
the amount you invest, as follows:
Sales Charge* as Percentage of:
-------------------------------
Offering Net Amount
Amount of Purchase Price Invested
Less than $50,000 5.75% 6.10
$50,000 but less than $100,000 4.75 4.99
$100,000 but less than $250,000 4.00 4.17
$250,000 but less than $500,000 2.95 3.04
$500,000 but less than $1,000,000 2.20 2.25
$1,000,000 or more None** None**
----------
* Because of rounding in the calculation of offering price, actual
sales charges you pay may be more or less than those calculated
using these percentages.
** A 1% CDSC will apply to such purchases, as discussed below.
10
<PAGE>
Purchases Subject to a CDSC (but not an initial sales charge). You pay no
initial sales charge when you invest $1 million or more in class A shares.
However, a CDSC of 1% will be deducted from your redemption proceeds if
you redeem within 12 months of your purchase.
In addition, purchases made under the following four categories are not
subject to an initial sales charge; however, a CDSC of 1% will be deducted
from redemption proceeds if the redemption is made within 12 months of
purchase:
o Investments in class A shares by certain retirement plans subject to
the Employee Retirement Income Security Act of 1974, as amended
(referred to as ERISA), if, prior to July 1, 1996
o the plan had established an account with MFSC; and
o the sponsoring organization had demonstrated to the
satisfaction of MFD that either;
+ the employer had at least 25 employees; or
+ the total purchases by the retirement plan of class A
shares of the MFS Family of Funds (referred to as the
MFS funds) would be in the amount of at least $250,000
within a reasonable period of time, as determined by MFD
in its sole discretion.
o Investments in class A shares by certain retirement plans subject to
ERISA, if
o the retirement plan and/or sponsoring organization
participates in the MFS Corporate Plan Services 401(k) Plan or
any similar recordkeeping system made available by MFSC
(referred to as the MFS participant recordkeeping system);
o the plan establishes an account with MFSC on or after July 1,
1996; and
o the total purchases by the retirement plan (or by multiple
plans maintained by the same plan sponsor) of class A shares
of the MFS funds will be in the amount of at least $500,000
within a reasonable period of time, as determined by MFD in
its sole discretion.
o Investments in class A shares by certain retirement plans subject to
ERISA, if
o the plan establishes an account with MFSC on or after July 1,
1996; and
o the plan has, at the time of purchase, either alone or in
aggregate with other plans maintained by the same plan
sponsor, a market value of $500,000 or more invested in shares
of any class or classes of the MFS funds.
The retirement plans will qualify under this category only if
their plans or their sponsoring organization informs MFSC
prior to the purchases that the plans have a market value of
$500,000 or more invested in shares of any class or classes of
the MFS funds; MFSC has no obligation independently to
determine whether such plans qualify under this category; and
11
<PAGE>
o Investments in class A shares by certain retirement plans subject to
ERISA, if
o the plan established an account with MFSC between July 1, 1997
and December 31, 1999;
o the plan records are maintained on a pooled basis by MFSC; and
o 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.
o Class B Shares
You may purchase class B shares at net asset value without an initial
sales charge, but if you redeem your shares within the first six years you
may be subject to a CDSC (declining from 4.00% during the first year to 0%
after six years). Class B shares have annual distribution and service fees
up to a maximum of 1.00% of net assets annually.
The CDSC is imposed according to the following schedule:
Contingent Deferred
Year of Redemption After Purchase Sales Charge
--------------------------------------------------------------------------
First 4%
Second 4%
Third 3%
Fourth 3%
Fifth 2%
Sixth 1%
Seventh and following 0%
If you hold class B shares for approximately eight years, they will
convert to class A shares of the fund. All class B shares you purchased
through the reinvestment of dividends and distributions will be held in a
separate sub-account. Each time any class B shares in your account convert
to class A shares, a proportionate number of the class B shares in the
sub-account will also convert to class A shares.
o Class C Shares
You may purchase class C shares at net asset value without an initial
sales charge, but if you redeem your shares within the first year you may
be subject to a CDSC of 1.00%. Class C shares have annual distribution and
service fees up to a maximum of 1.00% of net assets annually. Class C
shares do not convert to any other class of shares of the fund.
12
<PAGE>
o Calculation of CDSC
As discussed above, certain investments in class A, B and C shares will be
subject to a CDSC. Three different aging schedules apply to the
calculation of the CDSC:
o Purchases of class A shares made on any day during a calendar month
will age one month on the last day of the month, and each subsequent
month.
o Purchases of class C shares, and purchases of class B shares on or
after January 1, 1993, made on any day during a calendar month will
age one year at the close of business on the last day of that month
in the following calendar year, and each subsequent year.
o Purchases of class B shares prior to January 1, 1993 made on any day
during a calendar year will age one year at the close of business on
December 31 of that year, and each subsequent year.
No CDSC is assessed on the value of your account represented by
appreciation or additional shares acquired through the automatic
reinvestment of dividends or capital gain distributions. Therefore, when
you redeem your shares, only the value of the shares in excess of these
amounts (i.e., your direct investment) is subject to a CDSC.
The CDSC will be applied in a manner that results in the CDSC being
imposed at the lowest possible rate, which means that the CDSC will be
applied against the lesser of your direct investment or the total cost of
your shares. The applicability of a CDSC will not be affected by exchanges
or transfers of registration, except as described in the SAI.
o Distribution and Service Fees
The fund has adopted a plan under Rule 12b-1 that permits it to pay
marketing and other fees to support the sale and distribution of class A,
B and C shares and the services provided to you by your financial adviser.
These annual distribution and service fees may equal up to 0.35% for class
A shares (0.10% distribution fee and 0.25% service fee) and 1.00% for each
of class B and class C shares (a 0.75% distribution fee and a 0.25%
service fee), and are paid out of the assets of these classes. Over time,
these fees will increase the cost of your shares and may cost you more
than paying other types of sales charges. The 0.10% per annum class A
distribution fee is currently not being imposed and will be paid by the
fund when the Trustees of the fund approve the fee.
13
<PAGE>
--------------------------------------------------------------------------------
VI HOW TO PURCHASE, EXCHANGE AND REDEEM SHARES
--------------------------------------------------------------------------------
You may purchase, exchange and redeem class A, B and C shares of the fund
in the manner described below. In addition, you may be eligible to
participate in certain investor services and programs to purchase,
exchange and redeem these classes of shares, which are described in the
next section under the caption "Investor Services and Programs."
o How to Purchase Shares
Initial Purchase. You can establish an account by having your financial
adviser process your purchase. The minimum initial investment is $1,000.
However, in the following circumstances the minimum initial investment is
only $50 per account:
o if you establish an automatic investment plan;
o if you establish an automatic exchange plan; or
o if you establish an account under either:
o a tax-deferred retirement program (other than IRA) where
investments are made by means of group remittal statements; or
o an employer sponsored investment program.
The minimum initial investment for IRAs is $250 per account. The maximum
investment in class C shares is $1,000,000 per transaction. Class C shares
are not available for purchase by any retirement plan qualified under
Section 401(a)or 403(b)of the Internal Revenue Code if the plan or its
sponsor subscribes to certain recordkeeping services made available by
MFSC, such as the MFS Corporate Plan Services 401(k) Plan.
Adding to Your Account. There are several easy ways you can make
additional investments of at least $50 to your account:
o send a check with the returnable portion of your statement;
o ask your financial adviser to purchase shares on your behalf;
o wire additional investments through your bank (call MFSC first for
instructions); or
o authorize transfers by phone between your bank account and your MFS
account (the maximum purchase amount for this method is $100,000).
You must elect this privilege on your account application if you
wish to use it.
o How to Exchange Shares
You can exchange your shares for shares of the same class of certain other
MFS funds at net asset value by having your financial adviser process your
exchange request or by contacting MFSC directly. The minimum exchange
amount is generally $1,000 ($50 for exchanges made under the automatic
exchange plan). Shares otherwise subject to a CDSC will not be charged a
CDSC in an exchange. However, when you redeem the shares acquired through
the exchange,
14
<PAGE>
the shares you redeem may be subject to a CDSC, depending upon when you
originally purchased the shares you exchanged. For purposes of computing
the CDSC, the length of time you have owned your shares will be measured
from the date of original purchase and will not be affected by any
exchange.
Sales charges may apply to exchanges made from the MFS money market funds.
Certain qualified retirement plans may make exchanges between the MFS
funds and the MFS Fixed Fund, a bank collective investment fund, and sales
charges may also apply to these exchanges. Call MFSC for information
concerning these sales charges.
Exchanges may be subject to certain limitations and are subject to the MFS
funds' policies which are policies designed to protect the funds and their
shareholders from the adverse effect of frequent exchanges. These
limitations and market timing policies are described below under the
captions "Right to Reject or Restrict Purchase and Exchange Orders" and
"Excessive Trading Practices." You should read the prospectus of the MFS
fund into which you are exchanging and consider the differences in
objectives, policies and rules before making any exchange.
o How to Redeem Shares
You may redeem your shares either by having your financial adviser process
your redemption or by contacting MFSC directly. The fund sends out your
redemption proceeds within seven days after your request is received in
good order. "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. In
addition, you need to have your signature guaranteed and/or submit
additional documentation to redeem your shares. See "Signature Guarantee
Additional Documentation" below, or contact MFSC for details (see back
cover page for address and phone number).
Under unusual circumstances such as when the New York Stock Exchange is
closed, trading on the Exchange is restricted or if there is an emergency,
the fund may suspend redemptions or postpone payment. If you purchased the
shares you are redeeming by check, the fund may delay the payment of the
redemption proceeds until the check has cleared, which may take up to 15
days from the purchase date.
Redeeming Directly Through MFSC
o By telephone. You can call MFSC to have shares redeemed from your
account and the proceeds wired or mailed (depending on the amount
redeemed) directly to a pre-designated bank account. MFSC will
request personal or other information from you and will generally
record the calls. MFSC will be responsible for losses that result
from unauthorized telephone transactions if it does not follow
reasonable procedures designed to verify your identity. You must
elect this privilege on your account application if you wish to use
it.
o By mail. To redeem shares by mail, you can send a letter to MFSC
with the name of your fund, your account number, and the number of
shares or dollar amount to be sold.
15
<PAGE>
Redeeming through Your Financial Adviser. You can call your financial
adviser to process a redemption on your behalf. Your financial adviser
will be responsible for furnishing all necessary documents to MFSC and may
charge you for this service.
Signature Guarantee/Additional Documentation. In order to protect against
fraud, the fund requires that your signature be guaranteed in order to
redeem your shares. Your signature may be guaranteed by an eligible bank,
broker, dealer, credit union, national securities exchange, registered
securities association, clearing agency, or savings association. MFSC may
require additional documentation for certain types of registrations and
transactions. Signature guarantees and this additional documentation shall
be accepted in accordance with policies established by MFSC, and MFSC may
make certain de minimis exceptions to these requirements.
o Other Considerations
Right to Reject or Restrict Purchase and Exchange Orders. Purchases and
exchanges should be made for investment purposes only. The MFS funds each
reserve the right to reject or restrict any specific purchase or exchange
request. Because an exchange request involves both a request to redeem
shares of one fund and to purchase shares of another fund, the MFS funds
consider the underlying redemption and purchase requests conditioned upon
the acceptance of each of these underlying requests. Therefore, in the
event that the MFS funds reject an exchange request, neither the
redemption nor the purchase side of the exchange will be processed. When a
fund determines that the level of exchanges on any day may be harmful to
its remaining shareholders, the fund may delay the payment of exchange
proceeds for up to seven days to permit cash to be raised through the
orderly liquidation of its portfolio securities to pay the redemption
proceeds. In this case, the purchase side of the exchange will be delayed
until the exchange proceeds are paid by the redeeming fund.
Excessive Trading Practices. The MFS funds do not permit market-timing or
other excessive trading practices. Excessive, short-term (market-timing)
trading practices may disrupt portfolio management strategies and harm
fund performance. As noted above, the MFS funds reserve the right to
reject or restrict any purchase order (including exchanges) from any
investor. To minimize harm to the MFS funds and their shareholders, the
MFS funds will exercise these rights if an investor has a history of
excessive trading or if an investor's trading, in the judgment of the MFS
funds, has been or may be disruptive to a fund. In making this judgment,
the MFS funds may consider trading done in multiple accounts under common
ownership or control.
Reinstatement Privilege. After you have redeemed shares, you have a
one-time right to reinvest the proceeds within 90 days of the redemption
at the current net asset value (without an initial sales charge).
For shareholders who exercise this privilege after redeeming class A or
class C shares, if the redemption involved a CDSC, your account will be
credited with the appropriate amount of the CDSC you paid; however, your
new class A or class C shares (as applicable) will still be subject to a
CDSC for up to one year from the date you originally purchased the shares
redeemed.
16
<PAGE>
Until December 31, 2001, shareholders who redeem class B shares and then
exercise their 90-day reinstatement privilege may reinvest their
redemption proceeds either in
o class B shares, in which case any applicable CDSC you paid on the
redemption will be credited to your account, and your new shares
will be subject to a CDSC which will be determined from the date you
originally purchased the shares redeemed, or
o class A shares, in which case the class A shares purchased will not
be subject to an initial sales charge or a CDSC, but if you paid a
CDSC when you redeemed your class B shares, your account will not be
credited with the CDSC you paid.
After December 31, 2001, shareholders who exercise their 90-day
reinstatement privilege after redeeming class B shares may reinvest their
redemption proceeds only in class A shares as described as the second
option above.
In-Kind Distributions. The MFS funds have reserved the right to pay
redemption proceeds by a distribution in-kind of portfolio securities
(rather than cash). In the event that the fund makes an in-kind
distribution, you could incur the brokerage and transaction charges when
converting the securities to cash. The fund does not expect to make
in-kind distributions, and if it does, the fund will pay, during any
90-day period, your redemption proceeds in cash up to either $250,000 or
1% of the fund's net assets, whichever is less.
Involuntary Redemptions/Small Accounts. Because it is costly to maintain
small accounts, the MFS funds have generally reserved the right to
automatically redeem shares and close your account when it contains less
than $500 due to your redemptions or exchanges. Before making this
automatic redemption, you will be notified and given 60 days to make
additional investments to avoid having your shares redeemed.
17
<PAGE>
--------------------------------------------------------------------------------
VII INVESTOR SERVICES AND PROGRAMS
--------------------------------------------------------------------------------
As a shareholder of the fund, you have available to you a number of
services and investment programs. Some of these services and programs may
not be available to you if your shares are held in the name of your
financial adviser or if your investment in the fund is made through a
retirement plan.
o Distribution Options
The following distribution options are generally available to all accounts
and you may change your distribution option as often as you desire by
notifying MFSC:
o Dividend and capital gain distributions reinvested in additional
shares (this option will be assigned if no other option is
specified);
o Dividend distributions in cash; capital gain distributions
reinvested in additional shares; or
o Dividend 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
as of the close of business on the record date. Distributions in amounts
less than $10 will automatically be reinvested in additional shares of the
fund. If you have elected to receive distributions in cash, and the postal
or other delivery service is unable to deliver checks to your address of
record, or you do not respond to mailings from MFSC with regard to
uncashed distribution checks, your distribution option will automatically
be converted to having all distributions reinvested in additional shares.
Your request to change a distribution option must be received by MFSC by
the record date for a distribution in order to be effective for that
distribution. No interest will accrue on amounts represented by uncashed
distribution or redemption checks.
o Purchase and Redemption Programs
For your convenience, the following purchase and redemption programs are
made available to you with respect to class A, B and C shares, without
extra charge:
Automatic Investment Plan. You can make cash investments of $50 or more
through your checking account or savings account on any day of the month.
If you do not specify a date, the investment will automatically occur on
the first business day of the month.
Automatic Exchange Plan. If you have an account balance of at least $5,000
in any MFS fund, you may participate in the automatic exchange plan, a
dollar-cost averaging program. This plan permits you to make automatic
monthly or quarterly exchanges from your account in an MFS fund for shares
of the same class of shares of other MFS funds. You may make exchanges of
at least $50 to up to six different funds under this plan. Exchanges will
generally be made at net asset value without any sales charges. If you
exchange shares out of the MFS Money Market Fund or MFS Government Money
Market Fund, or if you exchange class A shares out of
18
<PAGE>
the MFS Cash Reserve Fund, into class A shares of any other MFS fund, you
will pay the initial sales charge if you have not already paid this charge
on these shares.
Reinvest Without a Sales Charge. You can reinvest dividend and capital
gain distributions into your account without a sales charge to add to your
investment easily and automatically.
Distribution Investment Program. You may purchase shares of any MFS fund
without paying an initial sales charge or a CDSC upon redemption by
automatically reinvesting a minimum of $50 of dividend and capital gain
distributions from the same class of another MFS fund.
Letter of Intent (LOI). If you intend to invest $50,000 or more in the MFS
funds (including the MFS Fixed Fund) within 13 months, you may buy class A
shares of the funds at the reduced sales charge as though the total amount
were invested in class A shares in one lump sum. If you intend to invest
$1 million or more under this program, the time period is extended to 36
months. If the intended purchases are not completed within the time
period, shares will automatically be redeemed from a special escrow
account established with a portion of your investment at the time of
purchase to cover the higher sales charge you would have paid had you not
purchased your shares through this program.
Right of Accumulation. You will qualify for a lower sales charge on your
purchases of class A shares when your new investment in class A shares,
together with the current (offering price) value of all your holdings in
the MFS funds (including the MFS Fixed Fund), reaches a reduced sales
charge level.
Systematic Withdrawal Plan. You may elect to automatically receive (or
designate someone else to receive) regular periodic payments of at least
$100. Each payment under this systematic withdrawal is funded through the
redemption of your fund shares. For class B and C shares, you can receive
up to 10% (15% for certain IRA distributions) of the value of your account
through these payments in any one year (measured at the time you establish
this plan). You will incur no CDSC on class B and C shares redeemed under
this plan. For class A shares, there is no similar percentage limitation;
however, you may incur the CDSC (if applicable) when class A shares are
redeemed under this plan.
19
<PAGE>
--------------------------------------------------------------------------------
VIII OTHER INFORMATION
--------------------------------------------------------------------------------
o Pricing of Fund Shares
The price of each class of the fund's shares is based on its net asset
value. The net asset value of each class of shares is determined at the
close of regular trading each day that the New York Stock Exchange
("NYSE") is open for trading (generally, 4:00 p.m., Eastern time)
(referred to as the valuation time). The NYSE is closed on most national
holidays and Good Friday. To determine net asset value, the fund values
its assets at current market values, or at fair value as determined by the
adviser under the direction of the Board of Trustees that oversees the
fund if current market values are unavailable. Fair value pricing may be
used by the fund when current market values are unavailable or when an
event occurs after the close of the exchange on which the fund's portfolio
securities are principally traded that is likely to have changed the value
of the securities. The use of fair value pricing by the fund may cause the
net asset value of its shares to differ significantly from the net asset
value that would be calculated using current market values.
You will receive the net asset value next calculated, after the deduction
of applicable sales charges and any required tax withholding, if your
order is complete (has all required information) and MFSC receives your
order by:
o the valuation time, if placed directly by you (not through a
financial adviser such as a broker or bank) to MFSC; or
o MFSC's close of business, if placed through a financial adviser, so
long as the financial adviser (or its authorized designee) received
your order by the valuation time.
The fund invests in certain securities which are primarily listed on
foreign exchanges that trade on weekends and other days when the fund does
not price its shares. Therefore, the value of the fund's shares may change
on days when you will not be able to purchase or redeem the fund's shares.
o Distributions
The fund intends to pay substantially all of its net income (including any
realized net capital gains) to shareholders as dividends at least
annually.
o Tax Considerations
The following discussion is very general. You are urged to consult your
tax adviser regarding the effect that an investment in the fund may have
on your particular tax situation.
Taxability of Distributions. As long as the fund qualifies for treatment
as a regulated investment company (which it has in the past and intends to
do in the future), it pays no federal income tax on the earnings it
distributes to shareholders.
20
<PAGE>
You will normally have to pay federal income taxes, and any state or local
taxes, on the distributions you receive from the fund, whether you take
the distributions in cash or reinvest them in additional shares.
Distributions designated as capital gain dividends are taxable as
long-term capital gains. Other distributions are generally taxable as
ordinary income. Some dividends paid in January may be taxable as if they
had been paid the previous December.
The Form 1099 that is mailed to you every January details your
distributions and how they are treated for federal tax purposes.
Fund distributions will reduce the fund's net asset value per share.
Therefore, if you buy shares shortly before the record date of a
distribution, you may pay the full price for the shares and then
effectively receive a portion of the purchase price back as a taxable
distribution.
If you are neither a citizen nor a resident of the U.S., the fund will
withhold U.S. federal income tax at the rate of 30% on taxable dividends
and other payments that are subject to such withholding. You may be able
to arrange for a lower withholding rate under an applicable tax treaty if
you supply the appropriate documentation required by the fund. 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.
Taxability of Transactions. When you redeem, sell or exchange shares, it
is generally considered a taxable event for you. Depending on the purchase
price and the sale price of the shares you redeem, sell or exchange, you
may have a gain or a loss on the transaction. You are responsible for any
tax liabilities generated by your transaction.
o Unique Nature of Fund
MFS may serve as the investment adviser to other funds which have
investment goals and principal investment policies and risks similar to
those of the fund, and which may be managed by the fund's portfolio
manager(s). While the fund may have many similarities to these other
funds, its investment performance will differ from their investment
performance. This is due to a number of differences between the funds,
including differences in sales charges, expense ratios and cash flows.
o Provision of Annual and Semiannual Reports and Prospectuses
The fund produces financial reports every six months and updates its
prospectus annually. To avoid sending duplicate copies of materials to
households, only one copy of the fund's annual and semiannual and
prospectus report will be mailed to shareholders having the same
residential address on the fund's records. However, any shareholder may
contact MFSC (see back cover for address and phone number) to request that
copies of these reports and prospectus be sent personally to that
shareholder.
21
<PAGE>
--------------------------------------------------------------------------------
IX FINANCIAL HIGHLIGHTS
--------------------------------------------------------------------------------
The financial highlights table is intended to help you understand the fund's
financial performance for the past 5 years. Certain information reflects
financial results for a single fund share. The total returns in the table
represent the rate by which an investor would have earned (or lost) on an
investment in the fund (assuming reinvestment of all distributions). This
information has been audited by the fund's independent auditors, whose report,
together with the fund's financial statements, are included in the fund's Annual
Report to shareholders. The fund's Annual Report is available upon request by
contacting MFSC (see back cover for address and telephone number). These
financial statements are incorporated by reference into the SAI. The fund's
independent auditors are Deloitte & Touche LLP.
<TABLE>
<CAPTION>
Class A Shares
----------------------------------------------------------------------------------------------------------
Year Ended August 31,
---------------------
2000 1999 1998 1997 1996
----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per share data (for a share outstanding
throughout each period):
Net asset value -- beginning of period $ 11.34 $ 7.71 $ 9.42 $ 9.06 $ 10.08
-------- -------- -------- -------- --------
Income from investment operations# --
Net investment loss $ (0.10) $ (0.07) $ (0.11) $ (0.09) $ (0.10)
Net realized and unrealized gain (loss)
on investments and foreign currency 10.11 5.04 (1.31) 1.77 0.96
-------- -------- -------- -------- --------
Total from investment operations $ 10.01 $ 4.97 $ (1.42) $ 1.68 $ 0.86
-------- -------- -------- -------- --------
Less distributions declared to shareholders
from net realized gain on investments and
foreign currency transactions $ (1.68) $ (1.34) $ (0.29) $ (1.32) $ (1.88)
-------- -------- -------- -------- --------
Net asset value -- end of period $ 19.67 $ 11.34 $ 7.71 $ 9.42 $ 9.06
======== ======== ======== ======== ========
Total return++ 94.75% 68.83% (15.44)% 20.26% 10.55%
Ratios (to average net assets)/
Supplemental data:
Expenses## 1.24% 1.32% 1.43% 1.41% 1.28%
Net investment loss (0.61)% (0.69)% (1.07)% (1.09)% (1.08)%
Portfolio turnover 132% 158% 168% 170% 157%
Net assets at end of period
(000 omitted) $526,748 $ 83,238 $ 36,413 $ 41,737 $ 35,098
</TABLE>
----------
# Per share data are based on average shares outstanding.
## Ratios do not reflect reductions from certain expense offset
arrangements.
++ 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.
22
<PAGE>
<TABLE>
<CAPTION>
Class B Shares
-----------------------------------------------------------------------------------------------------------
Year Ended August 31,
---------------------
2000 1999 1998 1997 1996
-----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per share data (for a share outstanding
throughout each period):
Net asset value -- beginning of period $ 11.16 $ 7.60 $ 9.27 $ 8.93 $ 9.94
-------- -------- -------- -------- --------
Income from investment operations# --
Net investment loss $ (0.22) $ (0.14) $ (0.18) $ (0.16) $ (0.17)
Net realized and unrealized gain (loss) on
investments and foreign currency 9.92 4.97 (1.28) 1.75 0.95
-------- -------- -------- -------- --------
Total from investment operations $ 9.70 $ 4.83 $ (1.46) $ 1.59 $ 0.78
-------- -------- -------- -------- --------
Less distributions declared to shareholders
from net realized gain on investments and
foreign currency transactions $ (1.62) $ (1.27) $ (0.21) $ (1.25) $ (1.79)
-------- -------- -------- -------- --------
Net asset value -- end of period $ 19.24 $ 11.16 $ 7.60 $ 9.27 $ 8.93
======== ======== ======== ======== ========
Total return 93.37% 67.41% (16.05)% 19.36% 9.67%
Ratios (to average net assets)/
Supplemental data:
Expenses## 1.99% 2.07% 2.18% 2.20% 2.13%
Net investment loss (1.36)% (1.44)% (1.82)% (1.87)% (1.81)%
Portfolio turnover 132% 158% 168% 170% 157%
Net assets at end of period
(000 omitted) $605,584 $111,355 $ 56,098 $ 73,940 $ 67,043
</TABLE>
----------
# Per share data are based on average shares outstanding.
## Ratios do not reflect reductions from certain expense offset arrangements.
23
<PAGE>
<TABLE>
<CAPTION>
Class C Shares
-----------------------------------------------------------------------------------------------------------
Year Ended August 31,
---------------------
2000 1999 1998 1997 1996
-----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per share data (for a share outstanding
throughout each period):
Net asset value -- beginning of period $ 11.01 $ 7.53 $ 9.19 $ 8.85 $ 9.91
-------- -------- -------- -------- --------
Income from investment operations# --
Net investment loss $ (0.22) $ (0.14) $ (0.18) $ (0.16) $ (0.17)
Net realized and unrealized gain (loss) on
investments and foreign currency 9.77 4.91 (1.26) 1.74 0.94
-------- -------- -------- -------- --------
Total from investment operations $ 9.55 $ 4.77 $ (1.44) $ 1.58 $ 0.77
-------- -------- -------- -------- --------
Less distributions declared to shareholders
from net realized gain on investments and
foreign currency transactions $ (1.64) $ (1.29) $ (0.22) $ (1.24) $ (1.83)
-------- -------- -------- -------- --------
Net asset value -- end of period $ 18.92 $ 11.01 $ 7.53 $ 9.19 $ 8.85
======== ======== ======== ======== ========
Total return 93.37% 67.33% (16.00)% 19.44% 9.60%
Ratios (to average net assets)/
Supplemental data:
Expenses## 1.99% 2.07% 2.18% 2.16% 2.17%
Net investment loss (1.36)% (1.44)% (1.82)% (1.79)% (1.90)%
Portfolio turnover 132% 158% 168% 170% 157%
Net assets at end of period
(000 omitted) $178,008 $ 18,097 $ 5,607 $ 5,796 $ 6,860
</TABLE>
----------
# Per share data are based on average shares outstanding.
## Ratios do not reflect reductions from certain expense offset arrangements.
24
<PAGE>
--------------------------------------------------------------------------------
Appendix A
--------------------------------------------------------------------------------
o Investment Techniques and Practices
In pursuing its investment objective, the fund may engage in the following
principal and non-principal investment techniques and practices.
Investment techniques and practices which are the principal focus of the
fund are also described, together with their risks, in the Risk Return
Summary of the Prospectus. Both principal and non-principal investment
techniques and practices are described, together with their risks, in the
SAI.
Investment Techniques/Practices
--------------------------------------------------------------------------
Symbols X permitted -- not permitted
--------------------------------------------------------------------------
Debt Securities
Asset-Backed Securities
Collateralized Mortgage Obligations and Multiclass
Pass-Through Securities --
Corporate Asset-Backed Securities --
Mortgage Pass-Through Securities --
Stripped Mortgage-Backed Securities --
Corporate Securities X
Loans and Other Direct Indebtedness --
Lower Rated Bonds X
Municipal Bonds --
Speculative Bonds X
U.S. Government Securities X
Variable and Floating Rate Obligations X
Zero Coupon Bonds, Deferred Interest Bonds and PIK Bonds X
Equity Securities X
Foreign Securities Exposure
Brady Bonds --
Depositary Receipts X
Dollar-Denominated Foreign Debt Securities --
Emerging Markets X
Foreign Securities X
Forward Contracts X
Futures Contracts X
Indexed Securities --
Inverse Floating Rate Obligations --
A-1
<PAGE>
Investment Techniques/Practices (continued)
--------------------------------------------------------------------------
Symbols X permitted -- not permitted
--------------------------------------------------------------------------
Investment in Other Investment Companies
Open-End Funds X
Closed-End Funds X
Lending of Portfolio Securities X
Leveraging Transactions
Bank Borrowings --*
Mortgage "Dollar-Roll" Transactions --
Reverse Repurchase Agreements --
Options
Options on Foreign Currencies X
Options on Futures Contracts X
Options on Securities X
Options on Stock Indices X
Reset Options --
"Yield Curve" Options --
Repurchase Agreements X
Restricted Securities X
Short Sales X
Short Sales Against the Box X
Short Term Instruments X
Swaps and Related Derivative Instruments --
Temporary Borrowings X
Temporary Defensive Positions X
Warrants X
"When-issued" Securities X
----------
* May only be changed with shareholder approval.
A-2
<PAGE>
MFS(R) MID CAP GROWTH FUND
If you want more information about the fund, the following documents are
available free upon request:
Annual/Semiannual Reports. These reports contain information about the fund's
actual investments. Annual reports discuss the effect of recent market
conditions and the fund's investment strategy on the fund's performance during
its last fiscal year.
Statement of Additional Information (SAI). The SAI, dated January 1, 2001,
provides more detailed information about the fund and is incorporated into this
prospectus by reference.
You can get free copies of the annual/semiannual reports, the SAI and other
information about the fund, and make inquiries about the fund, by contacting:
MFS Service Center, Inc.
2 Avenue de Lafayette
Boston, MA 02111-1738
Telephone: 1-800-225-2606
Internet: http://www.mfs.com
Information about the fund (including its prospectus, SAI and shareholder
reports) can be reviewed and copied at the:
Public Reference Room
Securities and Exchange Commission
Washington, D.C., 20549-0102
Information on the operation of the Public Reference Room may be obtained by
calling the Commission at 202-942-8090. Reports and other information about the
fund are available on the EDGAR Database on the Commission's Internet website at
http://www.sec.gov, and copies of this information may be obtained, upon payment
of a duplicating fee, by electronic request to the following e-mail address:
[email protected], or by writing the Public Reference Section at the above
address.
The fund's Investment Company Act file number is 811-2594
MMC-1 12/00 607M 83/283/383/883
<PAGE>
--------------------------------------------------------------------------------
MFS(R) MID CAP GROWTH FUND
--------------------------------------------------------------------------------
January 1, 2001
Statement of Additional Information
[MFS LOGO](R)
INVESTMENT MANAGEMENT
We invented the mutual fund(R)
A series of MFS Series Trust IV
500 Boylston Street, Boston, MA 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, 2001. This SAI should be read in conjunction with the Prospectus. The
Fund's financial statements are incorporated into this SAI by reference to the
Fund's most recent Annual Report to shareholders. A copy of the Annual Report
accompanies this SAI. You may obtain a copy of the Fund's Prospectus and Annual
Report without charge by contacting MFS Service Center, Inc. (see back cover of
Part II of this SAI for address and phone number).
This SAI is divided into two Parts -- Part I and Part II. Part I contains
information that is particular to the Fund, while Part II contains information
that generally applies to each of the funds in the MFS Family of Funds (the "MFS
Funds"). Each Part of the SAI has a variety of appendices which can be found at
the end of Part I and Part II, respectively.
This SAI is NOT a prospectus and is authorized for distribution to prospective
investors only if preceded or accompanied by a current prospectus.
MMC-13 12/00 1M 83/283/383/88
El presente Documento de Informacion Adicional tambien se encuentra disponible
en espanol. Solicite un ejemplar a un representante de servicio de MFS llamando
al 1-800-225-2606. En el caso de discrepancias entre las versiones en ingles y
en espanol, se considerara valida la version en ingles.
<PAGE>
Statement of Additional Information
PART I
Part I of this SAI contains information that is particular to the Fund.
--------------------------------------------------------------------------------
TABLE OF CONTENTS
--------------------------------------------------------------------------------
Page
I Definitions........................................................... 1
II Management of the Fund................................................ 1
The Fund.............................................................. 1
Trustees and Officers-- Identification and Background................. 1
Trustee Compensation.................................................. 1
Affiliated Service Provider Compensation.............................. 1
III Sales Charges and Distribution Plan Payments.......................... 1
Sales Charges......................................................... 1
Distribution Plan Payments............................................ 1
IV Portfolio Transactions and Brokerage Commissions...................... 1
V Share Ownership....................................................... 1
VI Performance Information............................................... 1
VII Investment Techniques, Practices, Risks and Restrictions.............. 1
Investment Techniques, Practices and Risks............................ 1
Investment Restrictions............................................... 2
VIII Tax Considerations.................................................... 3
IX Independent Auditors and Financial Statements......................... 3
Appendix A -- Trustees and Officers -- Identification and Background.. A-1
Appendix B -- Trustee Compensation.................................... B-1
Appendix C -- Affiliated Service Provider Compensation................ C-1
Appendix D -- Sales Charges and Distribution Plan Payments............ D-1
Appendix E -- Portfolio Transactions and Brokerage Commissions........ E-1
Appendix F -- Share Ownership......................................... F-1
Appendix G -- Performance Information................................. G-1
<PAGE>
I DEFINITIONS
"Fund" -- MFS Mid Cap Growth Fund, a non-diversified series of the Trust.
The Fund was known as MFS OTC Fund until its name was changed on August
29, 1997.
"Trust" -- MFS Series Trust IV, a Massachusetts business Trust, organized
on September 8, 1975. 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" or "Distributor" -- MFS Fund Distributors, Inc., a Delaware
corporation.
"Prospectus" -- The Prospectus of the Fund, dated January 1, 2001, as
amended or supplemented from time to time.
II MANAGEMENT OF THE FUND
The Fund
The Fund is a non-diversified series of the Trust. The Trust is an
open-end management investment company.
The Fund and its Adviser and Distributor have adopted a code of ethics as
required under the Investment Company Act of 1940 (the "1940 Act").
Subject to certain conditions and restrictions, this code permits
personnel subject to the code to invest in securities for their own
accounts, including securities that may be purchased, held or sold by the
Fund. Securities transactions by some of these persons may be subject to
prior approval of the Adviser's Compliance Department. Securities
transactions of certain personnel are subject to quarterly reporting and
review requirements. The code is on public file with, and is available
from, the SEC. See the back cover of the prospectus for information on
obtaining a copy.
Trustees and Officers -- Identification and Background
The identification and background of the Trustees and officers of the
Trust are set forth in Appendix A of this Part I.
Trustee Compensation
Compensation paid to the non-interested Trustees and to Trustees who are
not officers of the Trust, for certain specified periods, is set forth in
Appendix B of this Part I.
Affiliated Service Provider Compensation
Compensation paid by the Fund to its affiliated service providers -- to
MFS, for investment advisory and administrative services, and to MFSC, for
transfer agency services -- for certain specified periods is set forth in
Appendix C to this Part I.
III SALES CHARGES AND DISTRIBUTION PLAN PAYMENTS
Sales Charges
Sales charges paid in connection with the purchase and sale of Fund shares
for certain specified periods are set forth in Appendix D to this Part I,
together with the Fund's schedule of dealer reallowances.
Distribution Plan Payments
Payments made by the Fund under the Distribution Plan for its most recent
fiscal year end are set forth in Appendix D to this Part I.
IV PORTFOLIO TRANSACTIONS AND BROKERAGE COMMISSIONS
Brokerage commissions paid by the Fund for certain specified periods, and
information concerning purchases by the Fund of securities issued by its
regular broker-dealers for its most recent fiscal year, are set forth in
Appendix E to this Part I.
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 Trustees (together with the Trustees of certain
other MFS Funds) have directed the Adviser to allocate a total of $43,800
of commission business from certain MFS Funds (including the Fund) to the
Pershing Division of Donaldson Lufkin & Jenrette as consideration for the
annual renewal of certain publications provided by Lipper Inc. (which
provides information useful to the Trustees in reviewing the relationship
between the Fund and the Adviser).
V SHARE OWNERSHIP
Information concerning the ownership of Fund shares by Trustees and
officers of the Trust as a group, by investors who control the Fund, if
any, and by investors who own 5% or more of any class of Fund shares, if
any, is set forth in Appendix F to this Part I.
VI PERFORMANCE INFORMATION
Performance information, as quoted by the Fund in sales literature and
marketing materials, is set forth in Appendix G to this Part I.
VII INVESTMENT TECHNIQUES, PRACTICES, RISKS AND RESTRICTIONS
Investment Techniques, Practices and Risks
The investment objective and principal investment policies of the Fund are
described in the Prospectus. In pursuing its investment objective and
principal investment policies, the Fund may engage in a number of
investment techniques and practices, which involve certain risks. These
investment techniques and practices, which may be changed without
shareholder approval unless indicated otherwise, are identified in
Appendix A to the Prospectus, and are more fully described, together with
their associated risks, in Part II of this SAI.
Part I -- 1
<PAGE>
The following percentage limitations apply to these investment techniques
and practices:
o Foreign Securities may be up to (but not including) 20% of net
assets
o Lower Rated Bonds may not exceed 10% of net assets
o Lending of Portfolio Securities may not exceed 30% of the Fund's net
assets
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 the Fund or class, as applicable, or
(ii) 67% or more of the outstanding shares of the Trust or the Fund or
class, as applicable, present at a meeting at which holders of more than
50% of the outstanding shares of the Trust or the Fund or class, as
applicable, are represented in person or by proxy). Except with respect to
the Fund's policy on borrowing and 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. In the event of
a violation of non-fundamental policy (1), the Fund will reduce the
percentage of its assets invested in illiquid investments in due course,
taking into account the best interest of shareholders.
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 extra-ordinary 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 Future 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 Investment
Company Act of 1940, as amended (the "1940 Act"). For purposes of
this restriction, collateral arrangements with respect to any type
of option (including Options on Futures Contracts, Options, Options
on Stock Indices and Options on Foreign Currencies), Forward
Contracts, Futures Contracts, any other type of futures contract,
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).
In addition, the Fund has the following non-fundamental 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. Securities that are determined to be liquid by the
Trust's Board of Trustees (or its delegee), will not be subject to
this 15% limitation;
(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 or retain securities of an issuer any of whose officers,
directors, trustees or security holders is an officer or Trustee of
the Trust, 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
Part I -- 2
<PAGE>
more than 0.5% of such securities together own beneficially more
than 5% of such securities;
(5) 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;
(6) 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;
(7) invest more than 5% of its gross assets in companies which,
including predecessors, controlling persons, sponsoring entities,
general partners and guarantors, have a record of less than three
years' continuous operation or relevant business experience;
(8) pledge, mortgage or hypothecate in excess of 33 1/2% 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 futures contract (including Futures
Contracts), and Forward Contracts, and payments of initial and
variation margin in connection therewith, are not considered a
pledge of assets;
(9) 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, indices of
securities, Options on Foreign Currencies, or any type of futures
contract (including Futures Contracts) or (b) the purchase,
ownership, holding or sale of contracts for the future delivery of
securities or currencies; or
(10) invest 25% or more of the market value of its total assets in
securities of issuers in any one industry.
VIII TAX CONSIDERATIONS
For a discussion of tax considerations, see Part II of this SAI.
IX INDEPENDENT AUDITORS AND FINANCIAL STATEMENTS
Deloitte & Touche LLP are the Fund's independent auditors, providing audit
services, tax services, and assistance and consultation with respect to
the preparation of filings with the Securities and Exchange Commission.
The Portfolio of Investments and the Statement of Assets and
Liabilities at August 31, 2000, the Statement of Operations for the year
ended August 31, 2000, the Statement of Changes in Net Assets for the two
years ended August 31, 1999 and August 31, 2000, 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 in reliance upon the report of Deloitte & Touche
LLP, independent auditors, given upon their authority as experts in
accounting and auditing. A copy of the Annual Report accompanies this SAI.
Part I -- 3
<PAGE>
--------------------------------------------------------------------------------
PART I -- APPENDIX A
--------------------------------------------------------------------------------
TRUSTEES AND OFFICERS -- IDENTIFICATION AND BACKGROUND
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
JEFFREY L. SHAMES* Chairman and President (born 6/2/55)
Massachusetts Financial Services Company, Chairman and Chief Executive Officer
J. ATWOOD IVES (born 5/1/36)
Private Investor; Eastern Enterprises (diversified services company), Chairman,
Trustee and Chief Executive Officer (until November 2000); KeySpan Corporation
(energy related services), Director
Address: Weston, Massachusetts
LAWRENCE T. PERERA (born 6/23/35)
Hemenway & Barnes (attorneys), Partner
Address: Boston, Massachusetts
WILLIAM J. POORVU (born 4/10/35)
Harvard University Graduate School of Business Administration, Adjunct
Professor; CBL Associates Properties, Inc. (real estate investment trust),
Director; The Baupost Fund (a mutual fund), Vice Chairman and Trustee
Address: Cambridge, Massachusetts
CHARLES W. SCHMIDT (born 3/18/28)
Private Investor; IT Group Inc. (diversified environmental and consulting),
Director
Address: Weston, Massachusetts
ARNOLD D. SCOTT* (born 12/16/42)
Massachusetts Financial Services Company, Senior Executive Vice President and
Director
ELAINE R. SMITH (born 4/25/46)
Independent Consultant
Address: Weston, Massachusetts
DAVID B. STONE (born 9/2/27)
North American Management Corp. (investment adviser), Chairman; Eastern
Enterprises (diversified services company), Trustee
Address: Boston Massachusetts
Officers
GEOFFREY L. KURINSKY,* Vice President (born 7/7/53)
Massachusetts Financial Services Company, Senior Vice President
STEPHEN E. CAVAN,* Clerk and Secretary (born 1/16/53)
Massachusetts Financial Services Company, Senior Vice President, General Counsel
and Secretary
JAMES R. BORDEWICK, JR.,* Assistant Clerk and Assistant Secretary (born 3/6/59)
Massachusetts Financial Services Company, Senior Vice President and Associate
General Counsel
JAMES O. YOST,* Treasurer (born 6/12/60)
Massachusetts Financial Services Company, Senior 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)
ELLEN 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).
LAURA HEALY,* Assistant Treasurer (born 3/20/64)
Massachusetts Financial Services Company, Vice President (since December 1996);
State Street Bank Fund Administration Group, Assistant Vice President (prior to
December 1996)
ROBERT R. FLAHERTY,* Assistant Treasurer (born 9/18/63)
Massachusetts Financial Services Company, Vice President (since August 2000);
UAM Fund Services, Senior Vice President (since 1996); Chase Global Fund
Services, Vice President (1995 to 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. Messrs. Shames and Scott, Directors of MFD,
and Mr. Cavan, the Secretary of MFD, hold similar positions with certain other
MFS affiliates.
Part I -- A-1
<PAGE>
--------------------------------------------------------------------------------
PART I -- APPENDIX B
--------------------------------------------------------------------------------
TRUSTEE COMPENSATION
The Fund pays the compensation of non-interested Trustees and of Trustees who
are not officers of the Trust, who currently receive a fee of $1,500 per year
plus $90 per meeting and $70 per committee meeting attended, together with such
Trustee's out-of-pocket expenses. In addition, the Trust has a retirement plan
for these Trustees as described under the caption "Management of the Fund --
Trustee Retirement Plan" in Part II. The retirement age under the plan is 73.
<TABLE>
<CAPTION>
Trustee Compensation Table
-----------------------------------------------------------------------------------------------------------
Retirement Benefit Total Trustee
Trustee Fees Accrued as Part Estimated Credited Fees from Fund
Trustee from Fund(1) of Fund Expense(1) Years of Service(2) and Fund Complex(3)
-----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Jeffrey L. Shames $ 0 $ 0 N/A $ 0
J. Atwood Ives 2,592 706 15 132,623
Lawrence T. Perera 2,637 727 14 144,098
William Poorvu 2,727 729 14 141,338
Charles W. Schmidt 2,607 701 7 137,678
Arnold D. Scott 0 0 N/A 0
Elaine R. Smith 2,867 778 25 144,908
David B. Stone 3,120 805 7 151,418
</TABLE>
----------
(1) For the fiscal year ended August 31, 2000.
(2) Based upon normal retirement age of 73 (age 74 for Mr. Stone).
(3) Information provided is provided for calendar year 1999. All Trustees
receiving compensation served as Trustees of 34 funds within the MFS fund
complex (having aggregate net assets at December 31, 1999, of
approximately $58.6 billion).
Estimated Annual Benefits Payable by Fund Upon Retirement(4)
--------------------------------------------------------------------------------
Years of Service
Average
Trustee Fees 3 5 7 10 or more
--------------------------------------------------------------------------------
$2,333 $350 $583 $ 816 $1,116
2,553 383 638 893 1,276
2,772 416 693 970 1,386
2,992 449 748 1,047 1,496
3,212 482 803 1,124 1,606
3,432 515 858 1,201 1,716
----------
(4) Other funds in the MFS Fund complex provide similar retirement benefits to
the Trustees.
Part I -- B-1
<PAGE>
--------------------------------------------------------------------------------
PART I -- APPENDIX C
--------------------------------------------------------------------------------
AFFILIATED SERVICE PROVIDER COMPENSATION
--------------------------------------------------------------------------------
The Fund paid compensation to its affiliated service providers over the
specified periods as follows:
<TABLE>
<CAPTION>
Paid to MFS Amount Paid to MFS for Paid To MFSC Amount Aggregate
for Advisory Waived Administrative for Transfer Waived Amount Paid
Fiscal Year Ended Services by MFS Services Agency Services by MFSC to MFS and MFSC
---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
August 31, 2000 $4,784,189 N/A $ 97,576 $ 637,892 N/A $5,519,657
August 31, 1999 1,185,344 N/A 20,200 168,148 N/A 1,373,692
August 31, 1998 972,215 N/A 18,411 152,959 N/A 1,143,585
</TABLE>
Part I -- C-1
<PAGE>
--------------------------------------------------------------------------------
PART I -- APPENDIX D
--------------------------------------------------------------------------------
SALES CHARGES AND DISTRIBUTION PLAN PAYMENTS
Sales Charges
--------------------------------------------------------------------------------
The following sales charges were paid during the specified periods:
<TABLE>
<CAPTION>
Class A Initial Sales Charges: CDSC Paid to MFD on:
Retained Reallowed Class A Class B Class C
Fiscal Year End Total By MFD to Dealers Shares Shares Shares
------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
August 31, 2000 $4,745,497 $699,333 $4,046,164 $9,532 $228,343 $22,225
August 31, 1999 430,900 62,134 368,766 847 119,773 6,491
August 31, 1998 282,205 44,488 237,717 3,036 109,015 3,111
</TABLE>
Dealer Reallowances
--------------------------------------------------------------------------------
As shown above, MFD pays (or "reallows") a portion of the Class A initial sales
charge to dealers. The dealer reallowance as expressed as a percentage of the
Class A shares' offering price is:
Dealer Reallowance as a
Amount of Purchase percent of Offering Price
--------------------------------------------------------------------------------
Less than $50,000 5.00%
--------------------------------------------------------------------------------
$50,000 but less than $100,000 4.00%
--------------------------------------------------------------------------------
$100,000 but less than $250,000 3.20%
--------------------------------------------------------------------------------
$250,000 but less than $500,000 2.25%
--------------------------------------------------------------------------------
$500,000 but less than $1,000,000 1.70%
--------------------------------------------------------------------------------
$1,000,000 or more None*
--------------------------------------------------------------------------------
----------
* A CDSC will apply to such purchase.
Distribution Plan Payments
--------------------------------------------------------------------------------
During the fiscal year ended August 31, 2000, the Fund made the following
Distribution Plan payments:
Amount of Distribution and Service Fees:
Class of Shares Paid By Fund Retained By MFD Paid To Dealers
--------------------------------------------------------------------------------
Class A Shares $ 608,076 $ 29,262 $ 578,814
Class B Shares 3,105,456 2,346,918 758,538
Class C Shares 774,365 1,450 772,915
Distribution plan payments retained by MFD are used to compensate MFD for
commissions advanced by MFD to dealers upon sale of fund shares.
Part I -- D-1
<PAGE>
--------------------------------------------------------------------------------
PART I -- APPENDIX E
--------------------------------------------------------------------------------
PORTFOLIO TRANSACTIONS AND BROKERAGE COMMISSIONS
Brokerage Commissions
--------------------------------------------------------------------------------
The following brokerage commissions were paid by the Fund during the specified
time periods:
Brokerage Commissions
Fiscal Year End Paid by Fund
--------------------------------------------------------------------------------
August 31, 2000 $1,414,866
August 31, 1999 530,846
August 31, 1998 326,715
Securities Issued By Regular Broker-Dealers
--------------------------------------------------------------------------------
During the fiscal year ended August 31, 2000, the Fund purchased securities
issued by the following regular broker-dealers of the Fund, which had the
following values as of August 31, 2000:
Broker-Dealer Value of Securities
--------------------------------------------------------------------------------
NONE
Part I -- E-1
<PAGE>
--------------------------------------------------------------------------------
PART I -- APPENDIX F
--------------------------------------------------------------------------------
SHARE OWNERSHIP
Ownership By Trustees and Officers
As of November 30, 2000, the Trustees and officers of the Trust as a group owned
less than 1% of any class of the Fund's shares.
25% or Greater Ownership
The following table identifies those investors who own 25% or more of the Fund's
shares (all share classes taken together) as of November 30, 2000, and are
therefore presumed to control the Fund:
<TABLE>
<CAPTION>
Jurisdiction of Organization
Name and Address of Investor Percentage Ownership (If a Company)
--------------------------------------------------------------------------------------
<S> <C>
None
</TABLE>
5% or Greater Ownership of Share Class
The following table identifies those investors who own 5% or more of any class
of the Fund's shares as of November 30, 2000:
Name and Address of Investor Ownership Percentage
--------------------------------------------------------------------------------
MLPF&S for the Sole Benefit of its Customers 7.48% of Class B shares
Attn: Fund Administration 97C41
4800 Deer Lake Drive E FL 3
Jacksonville, FL 32246-6484
--------------------------------------------------------------------------------
MFS Defined Contribution Plan 6.63% of Class I shares
c/o Chris Charron
Mass Financial Services
500 Boylston Street
Boston, MA 02116-3740
--------------------------------------------------------------------------------
MLPF&S for the Sole Benefit of its Customers 12.84% of Class C shares
Attn: Fund Administration 97JT8
4800 Deer Lake Drive E 3rd FL
Jacksonville, FL 32246-6484
--------------------------------------------------------------------------------
Farmers & Merchants Trust Company 8.72% of Class I shares
20 South Main Street
PO Box 6010
Chambersburg, PA 17201-6010
--------------------------------------------------------------------------------
Part I -- F-1
<PAGE>
--------------------------------------------------------------------------------
PART I -- APPENDIX G
--------------------------------------------------------------------------------
PERFORMANCE INFORMATION
--------------------------------------------------------------------------------
All performance quotations are as of August 31, 2000.
<TABLE>
<CAPTION>
Average Annual
Total Returns Actual 30-Day 30-Day Yield Current
------------------------------- Yield (Including (Without Any Distribution
1 year 5 years Life* Waivers) Waivers) Rate+
-------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Class A Shares, with initial sales charge
(5.75%) 83.55% 28.35% 25.48% N/A N/A N/A
Class A Shares, at net asset value 94.75% 29.88% 26.58% N/A N/A N/A
Class B Shares, with CDSC (declining
over 6 years from 4% to 0%) 89.37% 28.75% 25.51% N/A N/A N/A
Class B Shares, at net asset value 93.37% 28.89% 25.51% N/A N/A N/A
Class C Shares, with CDSC
(1% for first year) 92.37% 28.89% 25.54% N/A N/A N/A
Class C Shares, at net asset value 93.37% 28.89% 25.54% N/A N/A N/A
Class I Shares, at net asset value 95.21% 30.09% 26.74% N/A N/A N/A
</TABLE>
----------
* From commencement of the Fund's investment operations on December 1, 1993.
The Fund commenced investment operations on December 1, 1993, with the offering
of class A shares and class B shares, and subsequently offered class C and class
I shares on August 1, 1994 and January 2, 1997, respectively. Class C share
performance includes the performance of the Fund's class B shares for periods
prior to the offering of class C shares. This blended class C share performance
has been adjusted to take into account the CDSC applicable to class C shares
rather than the CDSC applicable to class B shares. This blended performance has
not been adjusted to take into account differences in class specific operating
expenses. Because operating expenses of class B and C shares are similar, this
blended class C share performance is similar to what the performance of C shares
would have been had class C shares been offered for the entire period.
Class I share performance includes the performance of the Fund's class A shares
for periods prior to the offering of class I shares. This blended class I share
performance has been adjusted to take into account the fact that class I shares
have no initial sales charge (load). This blended performance has not been
adjusted to take into account differences in class specific operating expenses.
Because operating expenses of class I shares are lower than those of class A
shares, this blended class I share performance is lower than what the
performance of class I shares would have been had class I shares been offered
for the entire period. If you would like the Fund's current yield, contact the
MFS Service Center at the toll free number set forth on the back cover page of
Part II of this SAI.
Performance results include any applicable expense subsidies and waivers, which
may cause the results to be more favorable.
Part I -- G-1
<PAGE>
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
PART II
Part II of this SAI describes policies and practices that apply to each of the
Funds in the MFS Family of Funds. References in this Part II to a "Fund" means
each Fund in the MFS Family of Funds, unless noted otherwise. References in
this Part II to a "Trust" means the Massachusetts business trust of which the
Fund is a series, or, if the Fund is not a series of a Massachusetts business
trust, references to a "Trust" shall mean the Fund.
-----------------
TABLE OF CONTENTS
-----------------
PAGE
I Management of the Fund ............................................ 1
Trustees/Officers ................................................. 1
Investment Adviser ................................................ 1
Administrator ..................................................... 2
Custodian ......................................................... 2
Shareholder Servicing Agent ....................................... 2
Distributor ....................................................... 2
Code of Ethics .................................................... 2
II Principal Share Characteristics ................................... 2
Class A Shares .................................................... 2
Class B Shares, Class C Shares and Class I Shares ................. 3
Waiver of Sales Charges ........................................... 3
Dealer Commissions and Concessions ................................ 3
General ........................................................... 3
III Distribution Plan ................................................. 3
Features Common to Each Class of Shares ........................... 3
Features Unique to Each Class of Shares ........................... 4
IV Investment Techniques, Practices and Risks ........................ 5
V Net Income and Distributions ...................................... 5
Money Market Funds ................................................ 5
Other Funds ....................................................... 6
VI Tax Considerations ................................................ 6
Taxation of the Fund .............................................. 6
Taxation of Shareholders .......................................... 6
Special Rules for Municipal Fund Distributions .................... 8
VII Portfolio Transactions and Brokerage Commissions .................. 8
VIII Determination of Net Asset Value .................................. 10
Money Market Funds ................................................ 10
Other Funds ....................................................... 10
IX Performance Information ........................................... 11
Money Market Funds ................................................ 11
Other Funds ....................................................... 11
General ........................................................... 12
MFS Firsts ........................................................ 13
X Shareholder Services .............................................. 13
Investment and Withdrawal Programs ................................ 13
Exchange Privilege ................................................ 16
Tax-Deferred Retirement Plans ..................................... 17
XI Description of Shares, Voting Rights and Liabilities .............. 17
Appendix A -- Waivers of Sales Charges ............................ A-1
Appendix B -- Dealer Commissions and Concessions .................. B-1
Appendix C -- Investment Techniques, Practices and Risks .......... C-1
Appendix D -- Description of Bond Ratings ......................... D-1
I MANAGEMENT OF THE FUND
TRUSTEES/OFFICERS
BOARD OVERSIGHT -- The Board of Trustees which oversees the Fund provides
broad supervision over the affairs of the Fund. The Adviser is responsible
for the investment management of the Fund's assets, and the officers of the
Trust are responsible for its operations.
TRUSTEE RETIREMENT PLAN -- Each Trust (except MFS Series Trust XI) has a
retirement plan for Trustees who are non-interested Trustees and Trustees
who are not officers of the Trust. Under this plan, a Trustee will retire
upon reaching a specified age (see Part I -- "Appendix B ") ("Retirement
Age") 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 his Retirement Age 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. The Fund will
accrue its allocable portion of compensation expenses under the retirement
plan each year to cover the current year's service and amortize past
service cost.
INDEMNIFICATION OF TRUSTEES AND OFFICERS -- The Declaration of Trust of the
Trust provides that the Trust will indemnify its Trustees and officers
against liabilities and expenses incurred in connection with litigation in
which they may be involved because of their offices with the Trust, unless,
as to liabilities of the Trust or its shareholders, it is determined that
they engaged in willful misfeasance, bad faith, gross negligence or
reckless disregard of the duties involved in their offices, or with respect
to any matter, unless it is adjudicated that they did not act in good faith
in the reasonable belief that their actions were in the best 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 they have not engaged in willful misfeasance, bad faith, gross
negligence or reckless disregard of their duties.
INVESTMENT ADVISER
The Trust has retained Massachusetts Financial Services Company ("MFS" or
the "Adviser") as the Fund's investment adviser. MFS and its predecessor
organizations have a history of money management dating from 1924. MFS is a
subsidiary of Sun Life of Canada (U.S.) Financial Services Holdings, Inc.,
which in turn is an indirect wholly owned subsidiary of Sun Life of Canada
(an insurance company).
MFS has retained, on behalf of certain MFS Funds, sub-investment advisers
to assist MFS in the management of the Fund's assets. A description of
these sub-advisers, the services they provide and their compensation is
provided under the caption "Management of the Fund -- Sub-Adviser" in Part
I of this SAI for Funds which use sub-advisers.
INVESTMENT ADVISORY AGREEMENT -- The Adviser manages the Fund pursuant to
an Investment Advisory Agreement (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 an annual management fee, computed and
paid monthly, as disclosed in the Prospectus under the heading "Management
of the Fund[s]."
The Adviser pays the compensation of the Trust's officers and of any
Trustee who is an officer 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 Fund's
investments and effecting its portfolio transactions.
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: advisory and administrative services;
governmental fees; interest charges; taxes; membership dues in the
Investment Company Institute allocable to the Fund; fees and expenses of
independent auditors, of legal counsel, and of any transfer agent,
registrar or dividend disbursing agent of the Fund; expenses of
repurchasing and redeeming shares and servicing shareholder accounts;
expenses of preparing, printing and mailing prospectuses, 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
Fund's custodian, for all services to the Fund, including safekeeping of
funds and securities and maintaining required books and accounts; expenses
of calculating the net asset value of shares of the Fund; and expenses of
shareholder meetings. Expenses relating to the issuance, registration and
qualification of shares of the Fund and the preparation, printing and
mailing of prospectuses are borne by the Fund except that the Distribution
Agreement with MFD requires MFD to pay for prospectuses that are to be used
for sales purposes. Expenses of the Trust which are not attributable to a
specific series are allocated between the series in a manner believed by
management of the Trust to be fair and equitable.
The Advisory Agreement has an initial two year term and continues in
effect thereafter only if such continuance is specifically approved at
least annually by the Board of Trustees or by vote of a majority of the
Fund's shares (as defined in "Investment Restrictions" in Part I of this
SAI) 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" in Part I of this SAI), or by either
party on not more than 60 days" nor less than 30 days" written notice. The
Advisory Agreement provides that if MFS ceases to serve as the Adviser to
the Fund, the Fund will change its name so as to delete the initials "MFS"
and that MFS may render services to others and may permit other fund
clients to use the initials "MFS" in their names. The Advisory Agreement
also provides that neither the Adviser nor its personnel shall be liable
for any error of judgment or mistake of law or for any loss arising out of
any investment or for any act or omission in the execution and 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. Under this Agreement, the Fund
pays MFS an administrative fee of up to 0.0175% on the first $2.0 billion;
0.0130% on the next $2.5 billion; 0.0005% on the next $2.5 billion; and
0.0% on amounts in excess of $7.0 billion, 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.
CUSTODIAN
State Street Bank and Trust Company (the "Custodian") is the custodian of
the Fund's assets. The Custodian's responsibilities include safekeeping and
controlling the Fund's cash and securities, handling the receipt and
delivery of securities, determining income and collecting interest and
dividends on the Fund's investments, maintaining books of original entry
for portfolio and fund accounting and other required books and accounts,
and calculating the daily net asset value of each class of shares of the
Fund. The Custodian does not determine the investment policies of the Fund
or decide which securities the Fund will buy or sell. The Fund may,
however, invest in securities of the Custodian and may deal with the
Custodian as principal in securities transactions. The Custodian also acts
as the dividend disbursing agent of the Fund.
SHAREHOLDER SERVICING AGENT
MFS Service Center, Inc. ("MFSC"), a wholly owned subsidiary of MFS, is the
Fund's shareholder servicing agent, pursuant to an Amended and Restated
Shareholder Servicing Agreement (the "Agency Agreement"). The Shareholder
Servicing Agent's responsibilities under the Agency Agreement include
administering and performing transfer agent functions and the keeping of
records in connection with the issuance, transfer and redemption of each
class of shares of the Fund. For these services, MFSC will receive a fee
calculated as a percentage of the average daily net assets of the Fund at
an effective annual rate of up to 0.1125%. In addition, MFSC will be
reimbursed by the Fund for certain expenses incurred by MFSC on behalf of
the Fund. The Custodian has contracted with MFSC to perform certain
dividend disbursing agent functions for the Fund.
DISTRIBUTOR
MFS Fund Distributors, Inc. ("MFD"), a wholly owned subsidiary of MFS,
serves as distributor for the continuous offering of shares of the Fund
pursuant to an Amended and Restated Distribution Agreement (the
"Distribution Agreement"). The Distribution Agreement has an initial two
year term and continues in effect thereafter only if such continuance is
specifically approved at least annually by the Board of Trustees or by vote
of a majority of the Fund's shares (as defined in "Investment Restrictions"
in Part I of this SAI) 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.
CODE OF ETHICS
The Fund and its Adviser and Distributor have adopted a code of ethics as
required under the Investment Company Act of 1940 ("the 1940 Act"). Subject
to certain conditions and restrictions, this code permits personnel subject
to the code to invest in securities for their own accounts, including
securities that may be purchased, held or sold by the Fund. Securities
transactions by some of these persons may be subject to prior approval of
the Adviser's Compliance Department. Securities transactions of certain
personnel are subject to quarterly reporting and review requirements. The
code is on public file with, and is available from, the SEC. See the back
cover of the prospectus for information on obtaining a copy.
II PRINCIPAL SHARE CHARACTERISTICS
Set forth below is a description of Class A, B, C and I shares offered by
the MFS Family of Funds. Some MFS Funds may not offer each class of shares
-- see the Prospectus of the Fund to determine which classes of shares the
Fund offers.
CLASS A SHARES
MFD acts as agent in selling Class A shares of the Fund to dealers. The
public offering price of Class A shares of the Fund is their net asset
value next computed after the sale plus a sales charge which varies based
upon the quantity purchased. The public offering price of a Class A share
of the Fund is calculated by dividing the net asset value of a Class A
share by the difference (expressed as a decimal) between 100% and the sales
charge percentage of offering price applicable to the purchase (see "How to
Purchase, Exchange and Redeem Shares" 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 and other funds (as noted under
Right of Accumulation) by any person, including members of a family unit
(e.g., husband, wife and minor children) and bona fide trustees, and also
applies to purchases made under the Right of Accumulation or a Letter of
Intent (see "Investment and Withdrawal Programs" below). A group might
qualify to obtain quantity sales charge discounts (see "Investment and
Withdrawal Programs" below). Certain purchases of Class A shares may be
subject to a 1% CDSC instead of an initial sales charge, as described in
the Fund's 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. Class B and C shares
are generally subject to a CDSC, as described in the Fund's Prospectus.
WAIVER OF SALES CHARGES
In certain circumstances, the initial sales charge imposed upon purchases
of Class A shares and the CDSC imposed upon redemptions of Class A, B and C
shares are waived. These circumstances are described in Appendix A of this
Part II. 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, because the sales effort, if any, involved in making such
sales is negligible, or in the case of certain CDSC waivers, because the
circumstances surrounding the redemption of Fund shares were not
foreseeable or voluntary.
DEALER COMMISSIONS AND CONCESSIONS
MFD pays commission and provides concessions to dealers that sell Fund
shares. These dealer commissions and concessions are described in Appendix
B of this Part II.
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.
III 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 expense ratio to the extent the Fund's fixed costs are spread over a
larger net asset base. Also, an increase in net assets may lessen the
adverse 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.
In certain circumstances, the fees described below may not be imposed,
are being waived or do not apply to certain MFS Funds. Current distribution
and service fees for each Fund are reflected under the caption "Expense
Summary" in the Prospectus.
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,
Class B 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 in addition to the service fee described above 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. 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 expense and equipment. The amount of the distribution fee
paid by the Fund with respect to each class differs under the Distribution
Plan, as does the use by MFD of such distribution fees. Such amounts and
uses are described below in the discussion of the provisions of the
Distribution Plan relating to each Class of shares. While the amount of
compensation received by MFD in the form of distribution fees during any
year may be more or less than the expenses incurred by MFD under its
distribution agreement with the Fund, the Fund is not liable to MFD for any
losses MFD may incur in performing services under its distribution
agreement with the Fund.
OTHER COMMON FEATURES -- Fees payable under the Distribution Plan are
charged to, and therefore reduce, income allocated to shares of the
Designated Class. The provisions of the Distribution Plan relating to
operating policies as well as initial approval, renewal, amendment and
termination are substantially identical as they relate to each Class of
shares covered by the Distribution Plan.
The Distribution Plan remains in effect from year to year only if its
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" in Part I of this SAI). 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" in Part I of this
SAI) 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.
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). In
addition to the initial sales charge, the dealer also generally receives
the ongoing 0.25% per annum service fee, as discussed above.
No service fees will be paid: (i) to any dealer who is the holder or
dealer or 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.
In the case of a retirement plan (or multiple plans maintained by the
same plan sponsor) which has established accounts with MFSC, on or after
April 1, 2000 and is, at that time, a party to a retirement plan
recordkeeping or administrative services agreement with MFD or one of its
affiliates pursuant to which such services are provided with respect to at
least $10 million in plan assets, MFD may retain the service fee paid by
the fund with respect to shares purchased by such plan for the first year
after purchase. Dealers will become eligible to receive the ongoing
applicable service fee with respect to such shares commencing in the 13th
month following purchase.
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 (0.25% per annum for certain Funds). As
noted above, MFD may use the distribution fee to cover distribution-
related expenses incurred by it under its distribution agreement with the
Fund, including commissions to dealers and payments to wholesalers employed
by MFD (e.g., MFD pays commissions to dealers with respect to purchases of
$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). 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 (0.50% per annum for certain Funds), 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. 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.
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.
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).
CLASS C SHARES -- Class C shares are offered at net asset value without an
initial sales charge but subject to a CDSC of 1.00% upon redemption during
the first year. MFD will pay a commission to dealers of 1.00% of the
purchase price of Class C shares purchased through dealers at the time of
purchase. In compensation for this 1.00% commission paid by MFD to dealers,
MFD will retain the 1.00% per annum Class C distribution and service fees
paid by the Fund with respect to such shares for the first year after
purchase, and dealers will become eligible to receive from MFD the ongoing
1.00% per annum distribution and service fees paid by the Fund to MFD with
respect to such shares commencing in the thirteenth month following
purchase.
This ongoing 1.00% fee is comprised of the 0.25% per annum service fee
paid to MFD under the Distribution Plan (which MFD in turn pays to
dealers), as discussed above, and a distribution fee paid to MFD (which MFD
also in turn pays to dealers) under the Distribution Plan, equal, on an
annual basis, to 0.75% of the Fund's average daily net assets attributable
to Class C shares.
IV INVESTMENT TECHNIQUES, PRACTICES AND RISKS
Set forth in Appendix C of this Part II is a description of investment
techniques and practices which the MFS Funds may generally use in pursuing
their investment objectives and principal investment policies, and the
risks associated with these investment techniques and practices. The Fund
will engage only in certain of these investment techniques and practices,
as identified in Part I. Investment practices and techniques that are not
identified in Part I do not apply to the Fund.
V NET INCOME AND DISTRIBUTIONS
MONEY MARKET FUNDS
The net income attributable to each MFS Fund that is a money market fund is
determined each day during which the New York Stock Exchange is open for
trading (see "Determination of Net Asset Value" below for a list of days
the Exchange is closed).
For this purpose, the net income attributable to shares of a money market
fund (from the time of the immediately preceding determination thereof)
shall consist of (i) all interest income accrued on the portfolio assets of
the money market fund, (ii) less all actual and accrued expenses of the
money market 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 the
money market fund, if any. Interest income shall include discount earned
(including both original issue and market discount) on discount paper
accrued ratably to the date of maturity.
Since the net income is declared as a dividend each time the net income
is determined, the net asset value per share (i.e., the value of the net
assets of the money market fund divided by the number of shares
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, representing the reinvestment of dividend income,
is reflected by an increase in the number of shares in the shareholder's
account.
It is expected that the shares of the money market fund will have a
positive net income at the time of each determination thereof. If for any
reason the net income determined at any time is a negative amount, which
could occur, for instance, upon default by an issuer of a portfolio
security, the money market fund would first offset the negative amount with
respect to each shareholder account 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), the
money market fund could reduce the number of its outstanding shares by
treating each shareholder of the money market fund as having contributed to
its capital that number of full and fractional shares of the money market
fund in the account of such shareholder which represents its proportion of
such excess. Each shareholder of the money market fund will be deemed to
have agreed to such contribution in these circumstances by its investment
in the money market fund. This procedure would permit the net asset value
per share of the money market fund to be maintained at a constant $1.00 per
share.
OTHER FUNDS
Each MFS Fund other than the MFS money market funds intends to distribute
to its shareholders dividends equal to all of its net investment income
with such frequency as is disclosed in the Fund's prospectus. These Funds'
net investment income consists of non-capital gain income less expenses. In
addition, these Funds intend to distribute net realized short- and
long-term capital gains, if any, at least annually. Shareholders will be
informed of the tax consequences of such distributions, including whether
any portion represents a return of capital, after the end of each calendar
year.
VI TAX CONSIDERATIONS
The following discussion is a brief summary of some of the important
federal (and, where noted, state) income tax consequences affecting the
Fund and its shareholders. The discussion is very general, and therefore
prospective investors are urged to consult their tax advisors about the
impact an investment in the Fund may have on their own tax situations.
TAXATION OF THE FUND
FEDERAL TAXES -- The Fund (even if it is a fund in a Trust with multiple
series) is treated as a separate entity for federal income tax purposes
under the Internal Revenue Code of 1986, as amended (the "Code"). The Fund
has elected (or in the case of a new Fund, intends to elect) to be, and
intends to qualify to be treated 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 its distributions (as a percentage
of both its overall income and any tax-exempt income), and the composition
of its portfolio assets. As a regulated investment company, the Fund will
not be subject to any federal income or excise taxes on its net investment
income and net realized capital gains that it distributes to shareholders
in accordance with the timing requirements imposed by the Code. The Fund's
foreign-source income, if any, may be subject to foreign withholding taxes.
If the Fund failed to qualify as a "regulated investment company" in any
year, it would incur a regular federal corporate income tax on all of its
taxable income, whether or not distributed, and Fund distributions would
generally be taxable as ordinary dividend income to the shareholders.
MASSACHUSETTS TAXES -- 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.
TAXATION OF SHAREHOLDERS
TAX TREATMENT OF DISTRIBUTIONS -- Subject to the special rules discussed
below for Municipal Funds, shareholders of the Fund normally will have to
pay federal income tax and any state or local income taxes on the dividends
and capital gain distributions they receive from the Fund. Any
distributions from ordinary income and from net short-term capital gains
are taxable to shareholders as ordinary income for federal income tax
purposes whether paid in cash or reinvested in additional shares.
Distributions of net capital gain (i.e., the excess of net long-term
capital gain over net short-term capital loss), 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. Any Fund dividend that is
declared in October, November, or December of any calendar year, payable to
shareholders of record in such a month, and paid during 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, other than dividends that are declared by the Fund
on a daily basis, will have the effect of reducing the per share net asset
value of Fund shares by the amount of the distribution. Shareholders
purchasing shares shortly before the record date of any such distribution
(other than an exempt-interest dividend) may thus pay the full price for
the shares and then effectively receive a portion of the purchase price
back as a taxable distribution.
DIVIDENDS-RECEIVED DEDUCTION -- If the Fund receives dividend income from
U.S. corporations, 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.
DISPOSITION OF SHARES -- In general, any gain or loss realized upon a
disposition of Fund shares by a shareholder that holds such shares as a
capital asset will be treated as a long-term capital gain or loss if the
shares have been held for more than twelve months and otherwise as a
short-term capital gain or loss. However, any loss realized upon a
disposition of Fund shares 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 Fund shares held for 90 days or less followed by any purchase (including
purchases by exchange or by reinvestment) without payment of an additional
sales charge of Class A shares of the Fund or of any other shares of an MFS
Fund generally sold subject to a sales charge.
DISTRIBUTION/ACCOUNTING POLICIES -- The Fund's current distribution 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.
U.S. TAXATION OF NON-U.S. PERSONS -- Dividends and certain other payments
(but not including distributions of net capital gains) 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 at that rate on taxable dividends and other
payments to Non-U.S. Persons that are subject to such withholding. The Fund
may withhold at a lower rate permitted by an applicable treaty if the
shareholder provides the documentation required by the Fund. 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.
BACKUP WITHHOLDING -- The Fund is also required in certain circumstances to
apply backup withholding at the rate of 31% on taxable dividends and
capital gain distributions (and redemption proceeds, if applicable) paid to
any non-corporate 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.
FOREIGN INCOME TAXATION OF NON-U.S. PERSONS -- Distributions received from
the Fund by Non-U.S. Persons may also be subject to tax under the laws of
their own jurisdictions.
STATE AND LOCAL INCOME TAXES: U.S. GOVERNMENT SECURITIES -- Dividends paid
by the Fund that are derived from interest on obligations of the U.S.
Government and certain of its agencies and instrumentalities (but generally
not distributions of capital gains realized upon the disposition of such
obligations) may be exempt from state and local income taxes. The Fund
generally intends to advise shareholders of the extent, if any, to which
its dividends consist of such interest. Shareholders are urged to consult
their tax advisors regarding the possible exclusion of such portion of
their dividends for state and local income tax purposes.
CERTAIN SPECIFIC INVESTMENTS -- Any investment in zero coupon bonds,
deferred interest bonds, payment-in-kind bonds, certain stripped
securities, and certain securities purchased at a market discount will
cause the Fund to recognize income prior to the receipt of cash payments
with respect to those securities. To distribute this income (as well as
non-cash income described in the next two paragraphs) 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. Any investment in residual
interests of a CMO that has elected to be treated as a real estate mortgage
investment conduit, or "REMIC," can create complex tax problems, especially
if the Fund has state or local governments or other tax-exempt
organizations as shareholders.
OPTIONS, FUTURES CONTRACTS, AND FORWARD CONTRACTS -- 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, Forward Contracts, short sales
"against the box" and swaps and related transactions to the extent
necessary to meet the requirements of Subchapter M of the Code.
FOREIGN INVESTMENTS -- Special tax considerations apply with respect to
foreign investments by the Fund. Foreign exchange gains and losses realized
by the Fund may be treated as ordinary income and loss. Use of foreign
currencies for non-hedging purposes and investment by the Fund in certain
"passive foreign investment companies" may be limited in order to avoid a
tax on the Fund. The Fund may elect to mark to market any investments in
"passive foreign investment companies" on the last day of each year. This
election may cause the Fund to recognize income prior to the receipt of
cash payments with respect to those investments; in order to distribute
this income and avoid a tax on the Fund, the Fund may be required to
liquidate portfolio securities that it might otherwise have continued to
hold, potentially resulting in additional taxable gain or loss to the Fund.
FOREIGN INCOME TAXES -- Investment income received by the Fund and gains
with respect to foreign securities may be subject to foreign income taxes
withheld at the source. The United States has entered into tax treaties
with many foreign countries that may entitle the Fund to a reduced rate of
tax or an exemption from tax on such income; the Fund intends to qualify
for treaty reduced rates where available. It is not possible, however, to
determine the Fund's effective rate of foreign tax in advance, since the
amount of the Fund's assets to be invested within various countries is not
known.
If the Fund holds more than 50% of its assets in foreign stock and
securities at the close of its taxable year, it may elect to "pass through"
to its shareholders foreign income taxes paid by it. If the Fund so elects,
shareholders will be required to treat their pro rata portions of the
foreign income taxes paid by the Fund as part of the amounts distributed to
them by it and thus includable in their gross income for federal income tax
purposes. Shareholders who itemize deductions would then be allowed to
claim a deduction or credit (but not both) on their federal income tax
returns for such amounts, subject to certain limitations. Shareholders who
do not itemize deductions would (subject to such limitations) be able to
claim a credit but not a deduction. No deduction will be permitted to
individuals in computing their alternative minimum tax liability. If the
Fund is not eligible, or does not elect, to "pass through" to its
shareholders foreign income taxes it has paid, shareholders will not be
able to claim any deduction or credit for any part of the foreign taxes
paid by the Fund.
SPECIAL RULES FOR MUNICIPAL FUND DISTRIBUTIONS
The following special rules apply to shareholders of funds whose objective
is to invest primarily in obligations that pay interest that is exempt from
federal income tax ("Municipal Funds").
TAX EXEMPT DISTRIBUTIONS -- The portion of a Municipal 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. Except when the Fund provides actual monthly
percentage breakdowns, the percentage of income designated as tax-exempt
will be applied uniformly to all distributions by the Fund of net
investment income made during each 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.
TAXABLE DISTRIBUTIONS -- A Municipal Fund may also earn some income that is
taxable (including interest from any obligations that lose their federal
tax exemption) and may recognize capital gains and losses as a result of
the disposition of securities and from certain options and futures
transactions. Shareholders normally will have to pay federal income tax on
the non-exempt-interest dividends and capital gain distributions they
receive from the Fund, whether paid in cash or reinvested in additional
shares. However, the Fund does not expect that the non-tax-exempt portion
of its net investment income, if any, will be substantial. 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.
CONSEQUENCES OF DISTRIBUTIONS BY A MUNICIPAL FUND: EFFECT OF ACCRUED TAX-
EXEMPT INCOME -- Shareholders redeeming shares after tax-exempt income has
been accrued but not yet declared as a dividend should be aware that a
portion of the proceeds realized upon redemption of the shares will reflect
the existence of such accrued tax-exempt income and that this portion will
be subject to tax as a capital gain even though it would have been
tax-exempt had it been declared as a dividend prior to the redemption. For
this reason, if a shareholder wishes to redeem shares of a Municipal Fund
that does not declare dividends on a daily basis, the shareholder may wish
to consider whether he or she could obtain a better tax result by redeeming
immediately after the Fund declares dividends representing substantially
all the ordinary income (including tax-exempt income) accrued for that
month.
CERTAIN ADDITIONAL INFORMATION FOR MUNICIPAL FUND SHAREHOLDERS -- Interest
on indebtedness incurred by shareholders to purchase or carry Fund shares
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 advisors before purchasing Fund shares.
CONSEQUENCES OF REDEMPTION OF SHARES -- Any loss realized on a redemption
of Municipal Fund shares 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.
STATE AND LOCAL INCOME TAXES: MUNICIPAL OBLIGATIONS -- The exemption of
exempt-interest dividends for federal income tax purposes does not
necessarily result in exemption under the income tax laws of any state or
local taxing authority. Some states do exempt from tax that portion of an
exempt-interest dividend that represents interest received by a regulated
investment company on its holdings of securities issued by that state and
its political subdivisions and instrumentalities. Therefore, the Fund will
report annually to its shareholders the percentage of interest income
earned by it during the preceding year on Municipal Bonds and will
indicate, on a state-by-state basis only, the source of such income.
VII PORTFOLIO TRANSACTIONS AND BROKERAGE COMMISSIONS
Specific decisions to purchase or sell securities for the Fund are made by
persons affiliated with the Adviser. Any such person may serve other
clients of the Adviser, or any subsidiary of the Adviser in a similar
capacity. Changes in the Fund's investments are reviewed by the Trust's
Board of Trustees.
The primary consideration in placing portfolio security transactions is
execution at the most favorable prices. The Adviser has complete freedom as
to the markets in and broker-dealers through which it seeks this result. In
the U.S. and in some other countries debt securities are traded principally
in the over-the-counter market on a net basis through dealers acting for
their own account and not as brokers. In other countries both debt and
equity securities are traded on exchanges at fixed commission rates. The
cost of securities purchased from underwriters includes an underwriter's
commission or concession, and the prices at which securities are purchased
and sold from and to dealers include a dealer's mark-up or mark-down. The
Adviser normally seeks to deal directly with the primary market makers or
on major exchanges unless, in its opinion, better prices are available
elsewhere. Subject to the requirement of seeking execution at the best
available price, securities may, as authorized by the Advisory Agreement,
be bought from or sold to dealers who have furnished statistical, research
and other information or services to the Adviser. At present no
arrangements for the recapture of commission payments are in effect.
Consistent with the foregoing primary consideration, the Conduct Rules of
the National Association of Securities Dealers, Inc. ("NASD") and such
other policies as the Trustees may determine, the Adviser may consider
sales of shares of the Fund and of the other investment company clients of
MFD as a factor in the selection of broker-dealers to execute the Fund's
portfolio transactions.
Under the Advisory Agreement and as permitted by Section 28(e) of the
Securities Exchange Act of 1934, the Adviser may cause the Fund to pay a
broker-dealer which provides brokerage and research services to the
Adviser, an amount of commission for effecting a securities transaction for
the Fund in excess of the amount other broker-dealers would have charged
for the transaction, if the Adviser determines in good faith that the
greater commission is reasonable in relation to the value of the brokerage
and research services provided by the executing broker-dealer viewed in
terms of either a particular transaction or their respective overall
responsibilities to the Fund or to their other clients. Not all of such
services are useful or of value in advising the Fund.
The term "brokerage and research services" includes advice as to the
value of securities, the advisability of investing in, purchasing or
selling securities, and the availability of securities or of purchasers or
sellers of securities; furnishing analyses and reports concerning issues,
industries, securities, economic factors and trends, portfolio strategy and
the performance of accounts; and effecting securities transactions and
performing functions incidental thereto, such as clearance and settlement.
Although commissions paid on every transaction will, in the judgment of
the Adviser, be reasonable in relation to the value of the brokerage
services provided, commissions exceeding those which another broker might
charge may be paid to broker-dealers who were selected to execute
transactions on behalf 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 Adviser's investment management personnel attempt to evaluate the
quality of Research provided by brokers. The Adviser sometimes uses
evaluations resulting from this effort as a consideration in the selection
of brokers to execute portfolio transactions.
The management fee of the Adviser will not be reduced as a consequence of
the Adviser's receipt of brokerage and research service. To the extent the
Fund's portfolio transactions are used to obtain brokerage and research
services, the brokerage commissions paid by the Fund will exceed those that
might otherwise be paid for such portfolio transactions, or for such
portfolio transactions and research, 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.
The Fund has entered into an arrangement with State Street Brokerage
Services, Inc. ("SSB"), an affiliate of the Custodian, under which, with
respect to any brokerage transactions directed to SSB, the Fund receives,
on a trade-by-trade basis, a credit for part of the brokerage commission
paid, which is applied against other expenses of the Fund, including the
Fund's custodian fee. The Adviser receives no direct or indirect benefit
from this arrangement.
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.
VIII DETERMINATION OF NET ASSET VALUE
The net asset value per share of each class of the Fund is determined each
day during which the New York Stock 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 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.
MONEY MARKET FUNDS
Portfolio securities of each MFS Fund that is a money market fund are
valued at amortized cost, which the Board of Trustees which oversees the
money market fund has 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 Board of Trustees determines
that it does not constitute fair value for such purposes. Each money market
fund will limit its portfolio to those investments in U.S. dollar-
denominated instruments which its Board of Trustees determines present
minimal credit risks, and which are of high quality as determined by any
major rating service or, in the case of any instrument that is not so
rated, of comparable quality as determined by the Board of Trustees. Each
money market fund has also agreed to maintain a dollar-weighted average
maturity of 90 days or less and to invest only in securities maturing in 13
months or less. The Board of Trustees which oversees each money market fund
has established procedures designed to stabilize its net asset value per
share, as computed for the purposes of sales and redemptions, at $1.00 per
share. If the Board determines 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, it will take corrective
action it regards 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.
OTHER FUNDS
The following valuation techniques apply to each MFS Fund that is not a
money market fund.
Equity securities in the Fund's portfolio are valued at the last sale
price on the exchange on which they are primarily traded or on the Nasdaq
stock market system for unlisted national market issues, or at the last
quoted bid price for listed securities in which there were no sales during
the day or for unlisted securities not reported on the Nasdaq stock market
system. Bonds and other fixed income securities (other than short-term
obligations) of U.S. issuers in the Fund's portfolio are valued on the
basis of valuations furnished by a pricing service which utilizes both
dealer-supplied valuations and electronic data processing techniques which
take into account appropriate factors such as institutional-size trading in
similar groups of securities, yield, quality, coupon rate, maturity, type
of issue, trading characteristics and other market data without exclusive
reliance upon quoted prices or exchange or over-the-counter prices, since
such valuations are believed to reflect 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 services has been approved by the 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 system, in which case they are valued at the last sale price or, if
no sales occurred during the day, at the last quoted bid price. Short-term
obligations in the Fund's portfolio are valued at amortized cost, which
constitutes fair value as determined by the Board of Trustees. Short-term
obligations with a remaining maturity in excess of 60 days will be valued
upon dealer supplied valuations. Portfolio investments for which there are
no such quotations or valuations are valued at fair value as determined in
good faith by or at the direction of the Board of Trustees.
Generally, trading in foreign securities is substantially completed each
day at various times prior to the close of regular trading on the Exchange.
Occasionally, events affecting the values of such securities may occur
between the times at which they are determined and the close of regular
trading on the Exchange which will not be reflected in the computation of
the Fund's net asset value unless the Trustees deem that such event would
materially affect the net asset value in which case an adjustment would be
made.
All investments and assets are expressed in U.S. dollars based upon
current currency exchange rates. A share's net asset value is effective for
orders received by the dealer prior to its calculation and received by MFD
prior to the close of that business day.
IX PERFORMANCE INFORMATION
MONEY MARKET FUNDS
Each MFS Fund that is a money market fund will provide current annualized
and effective annualized yield quotations based on the daily dividends of
shares of the money market fund. These quotations may from time to time be
used in advertisements, shareholder reports or other communications to
shareholders.
Any current yield quotation of a money market fund which is used in such
a manner as to be subject to the provisions of Rule 482(d) under the 1933
Act 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 of that class 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 a money market 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. These
yield quotations should not be considered as representative of the yield of
a money market fund in the future since the yield will vary based on the
type, quality and maturities of the securities held in its portfolio,
fluctuations in short-term interest rates and changes in the money market
fund's expenses.
OTHER FUNDS
Each MFS Fund that is not a money market fund may quote the following
performance results.
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 any applicable CDSC 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 any applicable sales charge and/or (iii) total rates of return
which represent aggregate performance over a period or year-by-year
performance, and which may or may not reflect the effect of the maximum or
other sales charge or CDSC.
The Fund offers multiple classes of shares which were initially offered
for sale to, and purchased by, the public on different dates (the class
"inception date"). The calculation of total rate of return for a class of
shares which has a later class inception date than another class of shares
of the Fund is based both on (i) the performance of the Fund's newer class
from its inception date and (ii) the performance of the Fund's oldest class
from its inception date up to the class inception date of the newer class.
As discussed in the Prospectus, the sales charges, expenses and expense
ratios, and therefore the performance, of the Fund's classes of shares
differ. In calculating total rate of return for a newer class of shares in
accordance with certain formulas required by the SEC, the performance will
be adjusted to take into account the fact that the newer class is subject
to a different sales charge than the oldest class (e.g., if the newer class
is Class A shares, the total rate of return quoted will reflect the
deduction of the initial sales charge applicable to Class A shares; if the
newer class is Class B shares, the total rate of return quoted will reflect
the deduction of the CDSC applicable to Class B shares). However, the
performance will not be adjusted to take into account the fact that the
newer class of shares bears different class specific expenses than the
oldest 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).
Any total rate of return quotation provided by the Fund should not be
considered as representative of the performance of the Fund in the future
since the net asset value of shares of the Fund will vary based not only on
the type, quality and maturities of the securities held in the Fund's
portfolio, but also on changes in the current value of such securities and
on changes in the expenses of the Fund. These factors and possible
differences in the methods used to calculate total rates of return should
be considered when comparing the total rate of return of the Fund to total
rates of return published for other investment companies or other
investment vehicles. Total rate of return reflects the performance of both
principal and income. Current net asset value and account balance
information may be obtained by calling 1-800-MFS-TALK (637-8255).
YIELD -- Any yield quotation for a class of shares of the Fund is based on
the annualized net investment income per share of that class for the 30-
day period. The yield for each class of the Fund is calculated by dividing
the net investment income allocated to that class earned during the period
by the maximum offering price per share of that class of the Fund on the
last day of the period. The resulting figure is then annualized. Net
investment income per share of a class is determined by dividing (i) the
dividends and interest allocated to that class during the period, minus
accrued expense of that class for the period by (ii) the average number of
shares of the class entitled to receive dividends during the period
multiplied by the maximum offering price per share on the last day of the
period. The Fund's yield calculations assume a maximum sales charge of
5.75% in the case of Class A shares and no payment of any CDSC in the case
of Class B and Class C shares.
TAX-EQUIVALENT YIELD -- The tax-equivalent yield for a class of shares of a
Fund is calculated by determining the rate of return that would have to be
achieved on a fully taxable investment in such shares to produce the
after-tax equivalent of the yield of that class. In calculating tax-
equivalent yield, a Fund assumes certain federal tax brackets for
shareholders and does not take into account state taxes.
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 (i) annualizing the
distributions (excluding short-term capital gains) of the class for a
stated period; (ii) adding any short-term capital gains paid within the
immediately preceding twelve-month period; and (iii) dividing the result by
the maximum offering price or net asset value per share on the last day of
the period. 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 may be calculated over a different period of time. The Fund's current
distribution rate calculation for Class B shares and Class C shares assumes
no CDSC is paid.
GENERAL
From time to time the Fund may, as appropriate, quote Fund rankings or
reprint all or a portion of evaluations of fund performance and operations
appearing in various independent publications, including but not limited to
the following: Money, Fortune, U.S. News and World Report, Kiplinger's
Personal Finance, The Wall Street Journal, Barron's, Investors Business
Daily, Newsweek, Financial World, Financial Planning, Investment Advisor,
USA Today, Pensions and Investments, SmartMoney, Forbes, Global Finance,
Registered Representative, Institutional Investor, the Investment Company
Institute, Johnson's Charts, Morningstar, Lipper Analytical Securities
Corporation, 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 and use
charts and graphs to illustrate the past performance of various indices
such as those mentioned above and illustrations using hypothetical rates of
return to illustrate the effects of compounding and tax-deferral. 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.
From time to time, the Fund may discuss or quote its current portfolio
manager as well as other investment personnel, including such persons'
views on: the economy; securities markets; portfolio securities and their
issuers; investment philosophies, strategies, techniques and criteria used
in the selection of securities to be purchased or sold for the Fund; the
Fund's portfolio holdings; the investment research and analysis process;
the formulation and evaluation of investment recommendations; and the
assessment and evaluation of credit, interest rate, market and economic
risks, and similar or related matters.
The Fund may also use charts, graphs or other presentation formats to
illustrate the historical correlation of its performance to fund categories
established by Morningstar (or other nationally recognized statistical
ratings organizations) and to other MFS Funds.
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, including
issues concerning social security; 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; the history of the mutual fund
industry; investor behavior; and other similar or related matters.
From time to time, the Fund may also advertise annual returns showing the
cumulative value of an initial investment in the Fund in various amounts
over specified periods, with capital gain and dividend distributions
invested in additional shares or taken in cash, and with no adjustment for
any income taxes (if applicable) payable by shareholders.
MFS FIRSTS
MFS has a long history of innovations.
o 1924 -- Massachusetts Investors Trust is established as the first
open-end mutual fund in America.
o 1924 -- Massachusetts Investors Trust is the first mutual fund to make
full public disclosure of its operations in shareholder reports.
o 1932 -- One of the first internal research departments is established to
provide in-house analytical capability for an investment management
firm.
o 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").
o 1936 -- Massachusetts Investors Trust is the first mutual fund to allow
shareholders to take capital gain distributions either in additional
shares or in cash.
o 1976 -- MFS(R) Municipal Bond Fund is among the first municipal bond
funds established.
o 1979 -- Spectrum becomes the first combination fixed/ variable annuity
with no initial sales charge.
o 1981 -- MFS(R) Global Governments Fund is established as America's first
globally diversified fixed-income mutual fund.
o 1984 -- MFS(R) Municipal High Income Fund is the first open-end mutual
fund to seek high tax-free income from lower-rated municipal securities.
o 1986 -- MFS(R) Managed Sectors Fund becomes the first mutual fund to
target and shift investments among industry sectors for shareholders.
o 1986 -- MFS(R) Municipal Income Trust is the first closed-end, high-yield
municipal bond fund traded on the New York Stock Exchange.
o 1987 -- MFS(R) Multimarket Income Trust is the first closed-end,
multimarket high income fund listed on the New York Stock Exchange.
o 1989 -- MFS(R) Regatta becomes America's first non-qualified market value
adjusted fixed/variable annuity.
o 1990 -- MFS(R) Global Total Return Fund is the first global balanced
fund.
o 1993 -- MFS(R) Global Growth Fund is the first global emerging markets
fund to offer the expertise of two sub-advisers.
o 1993 -- MFS(R) becomes money manager of MFS(R) Union Standard(R) Equity
Fund, the first fund to invest principally 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.
X 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 programs are described
below and, in certain cases, in the Prospectus. The programs involve no
extra charge to shareholders (other than a sales charge in the case of
certain Class A share purchases) and may be changed or discontinued at any
time by a shareholder or the Fund.
LETTER OF INTENT -- If a shareholder (other than a group purchaser
described below) anticipates purchasing $50,000 or more of Class A shares
of the Fund alone or in combination with shares of any class of 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 Account Application
or filing a separate Letter of Intent application (available from MFSC)
within 90 days of the commencement of purchases. Subject to acceptance by
MFD and the conditions mentioned below, each purchase will be made at a
public offering price applicable to a single transaction of the dollar
amount specified in the Letter of Intent application. The shareholder or
his dealer must inform MFD that the Letter of Intent is in effect each time
shares are purchased. The shareholder makes no commitment to purchase
additional shares, but if his purchases within 13 months (or 36 months in
the case of purchases of $1 million or more) plus the value of shares
credited toward completion of the Letter of Intent do not total the sum
specified, he will pay the increased amount of the sales charge as
described below. Instructions for issuance of shares in the name of a
person other than the person signing the Letter of Intent application must
be accompanied by a written statement from the dealer stating that the
shares were paid for by the person signing such Letter. Neither income
dividends nor capital gain distributions taken in additional shares will
apply toward the completion of the Letter of Intent. Dividends and
distributions of other MFS Funds automatically reinvested in shares of the
Fund pursuant to the Distribution Investment Program will also not apply
toward completion of the Letter of Intent.
Out of the shareholder's initial purchase (or subsequent purchases if
necessary), 5% of the dollar amount specified in the Letter of Intent
application shall be held in escrow by MFSC 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, MFSC 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
MFSC. By completing and signing the Account Application or separate Letter
of Intent application, the shareholder irrevocably appoints MFSC his
attorney to surrender for redemption any or all escrowed shares with full
power of substitution in the premises.
RIGHT OF ACCUMULATION -- A shareholder qualifies for cumulative quantity
discounts on the purchase of Class A shares when his new investment,
together with the current offering price value of all holdings of Class A,
Class B and Class C shares of that shareholder in the MFS Funds or MFS
Fixed Fund reaches a discount level. See "Purchases" in the Prospectus for
the sales charges on quantity discounts. A shareholder must provide MFSC
(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 MFSC 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 MFSC 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. MFSC 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. MFSC
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 that 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 MFSC to send him (or
anyone he designates) regular periodic payments based upon the value of his
account. Each payment under a Systematic Withdrawal Plan ("SWP") must be at
least $100, except in certain limited circumstances. The aggregate
withdrawals of Class B and Class C shares in any year pursuant to a SWP
generally are limited to 10% of the value of the account at the time of
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) shares representing reinvested
distributions; (ii) shares representing undistributed capital gains and
income; and (iii) to the extent necessary, shares representing direct
investments subject to the lowest CDSC. 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 received in full and fractional shares of the
Fund at the net asset value in effect at the close of business on the
record date for such distributions. To initiate this service, shares having
an aggregate value of at least $5,000 either must be held on deposit by, or
certificates for such shares must be deposited with, MFSC. 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.
MFSC 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 MFSC 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 MFSC. 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 at
MFD's discretion as a single purchaser and, under the Right of Accumulation
(but not the 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 participate in the Automatic Exchange Plan. The
Automatic Exchange Plan provides for automatic exchanges of funds from the
shareholder's account in an MFS Fund for investment in the same class of
shares of other MFS Funds selected by the shareholder (if available for
sale). 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 transfer will occur after receipt and
processing by MFSC 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 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 the 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 MFSC 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 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 any of the MFS Funds (if shares of
the fund are available for sale) at net asset value (without a sales
charge). For shareholders who exercise this privilege after redeeming class
A or class C shares, if the redemption involved a CDSC, your account will
be credited with the appropriate amount of the CDSC you paid; however, your
new class A or class C shares (as applicable) will still be subject to a
CDSC for up to one year from the date you originally purchased the shares
redeemed.
Until December 31, 2001, shareholders who redeem class B shares and then
exercise their 90-day reinstatement privilege may reinvest their redemption
proceeds either in
o class B shares, in which case any applicable CDSC you paid on the
redemption will be credited to your account, and your new shares will
be subject to a CDSC which will be determined from the date you
originally purchased the shares redeemed, or
o class A shares, in which case the class A shares purchased will not be
subject to a CDSC, but if you paid a CDSC when you redeemed your class
B shares, your account will not be credited with the CDSC you paid.
After December 31, 2001, shareholders who exercise their 90-day
reinstatement privilege after redeeming class B shares may reinvest their
redemption proceeds only in class A shares as described as the second
option above.
In the case of proceeds reinvested in 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.
Although redemptions and repurchases of shares are taxable events, a
reinvestment within a certain period of time in the same fund may be
considered a "wash sale" and may result in the inability to recognize
currently all or a portion of a loss realized on the original redemption
for federal income tax purposes. Please see your tax adviser for further
information.
EXCHANGE PRIVILEGE
Subject to the requirements set forth below, some or all of the shares of
the same class in an account with the Fund for which payment has been
received by the Fund (i.e., an established account) may be exchanged for
shares of the same class of any of the other MFS Funds (if available for
sale and if the purchaser is eligible to purchase the Class of shares) at
net asset value. Exchanges will be made only after instructions in writing
or by telephone (an "Exchange Request") are received for an established
account by MFSC.
EXCHANGES AMONG MFS FUNDS (excluding exchanges from MFS money market funds)
-- No initial sales charge 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 "How to Purchase,
Exchange and Redeem Shares" 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 -- 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
MFS FUNDamental 401(k) Plan or another similar 401(k) recordkeeping system
made available by MFSC) or all the shares in the account. Each exchange
involves the redemption of the shares of the Fund to be exchanged and the
purchase 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 MFSC prior to the close of regular trading on the
Exchange the exchange usually will occur on that day if all the
requirements set forth above have been complied with at that time. However,
payment of the redemption proceeds by the Fund, and thus the purchase of
shares of the other MFS 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.
Additional information with respect to any of the MFS Funds, including a
copy of its current prospectus, may be obtained from investment dealers or
MFSC. A shareholder considering an exchange should obtain and read the
prospectus of the other fund and consider the differences in objectives and
policies before making any exchange.
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 imposed
from time to time at the discretion of the Funds in order to protect the
Funds.
TAX-DEFERRED RETIREMENT PLANS Shares of the Fund may be purchased by all
types of tax-deferred retirement plans. MFD makes available, through
investment dealers, plans and/or custody agreements, the following:
o Traditional Individual Retirement Accounts (IRAs) (for individuals who
desire to make limited contributions to a tax-deferred retirement
program and, if eligible, to receive a federal income tax deduction for
amounts contributed);
o Roth Individual Retirement Accounts (Roth IRAs) (for individuals who
desire to make limited contributions to a tax-favored retirement
program);
o Simplified Employee Pension (SEP-IRA) Plans;
o Retirement Plans Qualified under Section 401(k) of the Internal Revenue
Code of 1986, as amended (the "Code");
o 403(b) Plans (deferred compensation arrangements for employees of
public school systems and certain non-profit organizations); and
o Certain other qualified pension and profit-sharing plans.
The plan documents provided by MFD designate a trustee or custodian
(unless another trustee or custodian is designated by the individual or
group establishing the plan) and contain specific information about the
plans. Each plan provides that dividends and distributions will be
reinvested automatically. For further details with respect to any plan,
including fees charged by the trustee, custodian or MFD, tax consequences
and redemption information, see the specific documents for that plan. Plan
documents other than those provided by MFD may be used to establish any of
the plans described above. Third party administrative services, available
for some corporate plans, may limit or delay the processing of
transactions.
An investor should consult with his tax adviser before establishing any
of the tax-deferred retirement plans described above.
Class C shares are not currently available for purchase by any retirement
plan qualified under Internal Revenue Code Section 401(a) or 403(b) if the
retirement plan and/or the sponsoring organization subscribe to the MFS
FUNDamental 401(k) Plan or another similar Section 401(a) or 403(b)
recordkeeping program made available by MFSC.
XI 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 Declaration of
Trust further authorizes the Trustees to classify or reclassify any series
of shares into one or more classes. 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 a number of series and
additional classes of shares, in which case the shares of each class of a
series would participate equally in the earnings, dividends and assets
allocable to that class of the particular series.
Shareholders are entitled to one vote for each share held and may vote in
the election of Trustees and on other matters submitted to meetings of
shareholders. To the extent a shareholder of the Fund owns a controlling
percentage of the Fund's shares, such shareholder may affect the outcome of
such matters to a greater extent than other Fund shareholders. Although
Trustees are not elected annually by the shareholders, the Declaration of
Trust provides that a Trustee may be removed from office at a meeting of
shareholders by a vote of two-thirds of the outstanding shares of the
Trust. A meeting of shareholders will be called upon the request of
shareholders of record holding in the aggregate not less than 10% of the
outstanding voting securities of the Trust. No material amendment may be
made to the Declaration of Trust without the affirmative vote of a majority
of the Trust's outstanding shares (as defined in "Investment Restrictions"
in Part I of this SAI). The Trust or any series of the Trust may be
terminated (i) upon the merger or consolidation of the Trust or any series
of the Trust with another organization or upon the sale of 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 or the affected series' outstanding
shares voting as a single class, or of the affected series 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 or the
affected series' outstanding shares will be sufficient, or (ii) upon
liquidation and distribution of the assets of a Fund, if approved by the
vote of the holders of two-thirds of its outstanding shares of the Trust,
or (iii) by the Trustees by written notice to its shareholders. 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 Trust
property for any shareholder held personally liable for the obligations of
the Trust. The Declaration of Trust also provides that the Trust shall
maintain appropriate insurance (for example, fidelity bonding and errors
and omissions insurance) for the protection of the Trust and its
shareholders and the Trustees, officers, employees and agents of the Trust
covering possible tort and other liabilities. Thus, the risk of a
shareholder incurring financial loss on account of shareholder liability is
limited to circumstances in which both inadequate insurance existed and the
Trust itself was unable to meet its obligations.
The Declaration of Trust further provides that obligations of the Trust
are not binding upon the Trustees individually but only upon the property
of the Trust and that the Trustees will not be liable for any action or
failure to act, but nothing in the Declaration of Trust protects a Trustee
against any liability to which he would otherwise be subject by reason of
his willful misfeasance, bad faith, gross negligence, or reckless disregard
of the duties involved in the conduct of his office.
<PAGE>
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PART II - APPENDIX A
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WAIVERS OF SALES CHARGES
This Appendix sets forth the various circumstances in which all applicable
sales charges are waived (Section I), the initial sales charge and the
CDSC for Class A shares are waived (Section II), and the CDSC for Class B
and Class C shares is waived (Section III). Some of the following
information will not apply to certain funds in the MFS Family of Funds,
depending on which classes of shares are offered by such fund. As used in
this Appendix, the term "dealer" includes any broker, dealer, bank
(including bank trust departments), registered investment adviser,
financial planner and any other financial institutions having a selling
agreement or other similar agreement with MFD.
I WAIVERS OF ALL APPLICABLE SALES CHARGES
In the following circumstances, the initial sales charge imposed on
purchases of Class A shares and the CDSC imposed on certain redemptions of
Class A shares and on redemptions of Class B and Class C shares, as
applicable, are waived:
DIVIDEND REINVESTMENT
o Shares acquired through dividend or capital gain reinvestment; and
o 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.
CERTAIN ACQUISITIONS/LIQUIDATIONS
o Shares acquired on account of the acquisition or liquidation of assets
of other investment companies or personal holding companies.
AFFILIATES OF AN MFS FUND/CERTAIN DEALERS.
Shares acquired by:
o Officers, eligible directors, employees (including retired employees)
and agents of MFS, Sun Life or any of their subsidiary companies;
o Trustees and retired trustees of any investment company for which MFD
serves as distributor;
o Employees, directors, partners, officers and trustees of any sub-adviser
to any MFS Fund;
o Employees or registered representatives of dealers;
o Certain family members of any such individual and their spouses or
domestic partners 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
o Institutional Clients of MFS or MFS Institutional Advisors, Inc.
INVOLUNTARY REDEMPTIONS (CDSC WAIVER ONLY)
o 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.
RETIREMENT PLANS (CDSC WAIVER ONLY).
Shares redeemed on account of distributions made under the following
circumstances:
o Individual Retirement Accounts ("IRAs")
> Death or disability of the IRA owner.
o 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 Corporate Plan Services 401(k) Plan or another similar
recordkeeping system made available by MFSC (the "MFS Participant
Recordkeeping System");
> 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; and
> Shares purchased by certain retirement plans or trust accounts if: (i)
the plan is currently a party to a retirement plan recordkeeping or
administration services agreement with MFD or one of its affiliates
and (ii) the shares purchased or redeemed represent transfers from or
transfers to plan investments other than the MFS Funds for which
retirement plan recordkeeping services are provided under the terms of
such agreement.
o Section 403(b) Salary Reduction Only Plans ("SRO Plans")
> Death or disability of SRO Plan participant.
o Nonqualified deferred compensation plans (currently a party to a
retirement plan recordkeeping or administrative services agreement with
MFD or one of its affiliates)
> Eligible participant distributions, such as distributions due to
death, disability, financial hardship, retirement and termination of
employment.
CERTAIN TRANSFERS OF REGISTRATION (CDSC WAIVER ONLY).
Shares transferred:
o 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
o From a single account maintained for a 401(a) Plan to multiple accounts
maintained by MFSC on behalf of individual participants of such Plan,
provided that the Plan sponsor subscribes to the MFS Corporate Plan
Services 401(k) Plan or another similar recordkeeping system made
available by MFSC.
LOAN REPAYMENTS
o 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 Corporate Plan Services
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:
WRAP ACCOUNT AND FUND "SUPERMARKET" INVESTMENTS
o 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.
INVESTMENT BY INSURANCE COMPANY SEPARATE ACCOUNTS
o Shares acquired by insurance company separate accounts.
SECTION 529 PLANS
Shares acquired by college savings plans qualified under Section 529 of
the Internal Revenue Code whose sponsors or administrators have entered
into an agreement with MFD or one of its affiliates to perform certain
administrative or investment advisory services.
RETIREMENT PLANS
o 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.
o 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.
o Reinvestment of Redemption Proceeds from Class B Shares
> Shares acquired by a retirement plan whose sponsoring organization
subscribes to the MFS Participant Recordkeeping System where the
purchase represents the immediate reinvestment of proceeds from the
plan's redemption of its Class B shares of the MFS Funds and is equal
to or exceeds $500,000, either alone or in aggregate with the current
market value of the plan's existing Class A shares.
o Retirement Plan Recordkeeping Services Agreements
> Where the retirement plan is, at that time, a party to a retirement
plan recordkeeping or administrative services agreement with MFD or
one of its affiliates pursuant to which certain of those services are
provided by Benefit Services Corporation or any successor service
provider designated by MFD.
> Where the retirement plan has established an account with MFSC on or
after January 1, 2000 and is, at that time, a party to a retirement
plan recordkeeping or administrative services agreement with MFD or
one of its affiliates pursuant to which such services are provided
with respect to at least $10 million in plan assets.
o MFS Prototype IRAs
> Shares acquired by the IRA owner if: (i) the purchase represents the
immediate reinvestment of distribution proceeds from a retirement plan
or trust which is currently a party to a retirement plan recordkeeping
or administrative services agreement with MFD or one of its affiliates
and (ii) such distribution proceeds result from the redemption or
liquidation of plan investments other than the MFS Funds for which
retirement plan recordkeeping services are provided under the terms of
such agreement.
SHARES REDEEMED ON ACCOUNT OF DISTRIBUTIONS
MADE UNDER THE FOLLOWING CIRCUMSTANCES:
o 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.
o 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.
o 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.
o 401(a) Plans and ESP Plans
> where the retirement plan and/or sponsoring organization does not
subscribe to the MFS Participant Recordkeeping System; and
> where the retirement plan and/or sponsoring organization demonstrates
to the satisfaction of, and certifies to, MFSC 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
Family of 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 MFSC on
or after November 1, 1997, in the event that the plan makes a complete
redemption of all of its shares in the MFS Family of Funds, or (b) with
respect to plans which establish an account with MFSC prior to November 1,
1997, in the event that there is a change in law or regulations which
result 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.
PURCHASES OF AT LEAST $5 MILLION (CDSC WAIVER ONLY)
o 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.
BANK TRUST DEPARTMENTS AND LAW FIRMS
o Shares acquired by certain bank trust departments or law firms acting as
trustee or manager for trust accounts which have entered into an
administrative services agreement with MFD and are acquiring such shares
for the benefit of their trust account clients.
INVESTMENT OF PROCEEDS FROM CERTAIN REDEMPTIONS OF CLASS I SHARES.
o The initial sales charge imposed on purchases of Class A shares, and the
contingent deferred sales charge imposed on certain redemptions of Class
A shares, are waived with respect to Class A shares acquired of any of
the MFS Funds through the immediate reinvestment of the proceeds of a
redemption of Class I shares of any of the MFS Funds.
III WAIVERS OF CLASS B AND CLASS C SALES CHARGES
In addition to the waivers set forth in Section I above, in the following
circumstances the CDSC imposed on redemptions of Class B and Class C
shares is waived:
SYSTEMATIC WITHDRAWAL PLAN
o 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.
DEATH OF OWNER
o Shares redeemed on account of the death of the account owner (e.g.,
shares redeemed by the estate or any transferal of the shares from the
estate) if the shares were held solely in the deceased individual's
name, or for the benefit, of the deceased individual.
DISABILITY OF OWNER
o 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 MFSC).
RETIREMENT PLANS.
Shares redeemed on account of distributions made under the following
circumstances:
o 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 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.
o 401(a) and ESP Plans Only (Class B CDSC Waiver Only)
> By a retirement plan whose sponsoring organization subscribes to the
MFS Participant Recordkeeping System and which established an account
with MFSC between July 1, 1996 and December 31, 1998; 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.
> By a retirement plan whose sponsoring organization subscribes to the
MFS Recordkeeper Plus product and which established its account with
MFSC on or after January 1, 1999 (provided that the plan establishment
paperwork is received by MFSC in good order on or after November 15,
1998). A plan with a pre-existing account(s) with any MFS Fund which
switches to the MFS Recordkeeper Plus product will not become eligible
for this waiver category.
<PAGE>
--------------------
PART II - APPENDIX B
--------------------
DEALER COMMISSIONS AND CONCESSIONS
This Appendix describes the various commissions paid and concessions made
to dealers by MFD in connection with the sale of Fund shares. As used in
this Appendix, 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.
CLASS A SHARES
Purchases Subject to an Initial Sales Charge. For purchases of Class A
shares subject to an initial sales charge, MFD reallows a portion of the
initial sales charge to dealers (which are alike for all dealers), as
shown in Appendix D to Part I of this SAI. The difference between the
total amount invested and the sum of (a) the net proceeds to the Fund and
(b) the dealer reallowance, is the amount of the initial sales charge
retained by MFD (as shown in Appendix D to Part I of this SAI). Because of
rounding in the computation of offering price, the portion of the sales
charge retained by MFD 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.
Purchases Subject to a CDSC (but not an Initial Sales Charge). For
purchases of Class A shares subject to a CDSC, MFD pays commissions to
dealers on new investments made through such dealers as follows:
COMMISSION
PAID BY MFD
TO DEALERS CUMULATIVE PURCHASE AMOUNT
------------------------------------------------------
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
Except for those employer sponsored retirement plans described below,
for purposes of determining the level of commissions to be paid to dealers
with respect to a shareholder's new investment in Class A shares purchases
for each shareholder account (and certain other accounts for which the
shareholder is a record or beneficial holder) will be aggregated over a
12-month period (commencing from the date of the first such purchase).
In the case of employer sponsored retirement plans whose account
application or other account establishment paperwork is received in good
order after December 31, 1999, purchases will be aggregated as described
above but the cumulative purchase amount will not be re-set after the date
of the first such purchase.
CLASS B SHARES
For purchases of Class B shares, 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 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).
For purchases of Class B shares by a retirement plan whose sponsoring
organization subscribes to the MFS Participant Recordkeeping System and
which established its account with MFSC between July 1, 1996 and December
31, 1998, 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.
For purchases of Class B shares by a retirement plan whose sponsoring
organization subscribes to the MFS Recordkeeper Plus product and which has
established its account with MFSC on or after January 1, 1999 (provided
that the plan establishment paperwork is received by MFSC in good order on
or after November 15, 1998), MFD pays no up front commissions to dealers,
but instead pays an amount to dealers equal to 1% per annum of the average
daily net assets of the Fund attributable to plan assets, payable at the
rate of 0.25% at the end of each calendar quarter, in arrears. This
commission structure is not available with respect to a plan with a pre-
existing account(s) with any MFS Fund which seeks to switch to the MFS
Recordkeeper Plus product.
CLASS C SHARES
For purchases of Class C shares, 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.
ADDITIONAL DEALER COMMISSIONS/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 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 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 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.
For most of the MFS Funds:
o In lieu of the sales commission and service fees normally paid by MFD to
broker-dealers of record as described in the Prospectus, MFD has agreed
to pay Bear, Stearns & Co. Inc. the following amounts with respect to
Class A shares of the Fund purchased through a special retirement plan
program offered by a third party administrator: (i) an amount equal to
0.05% per annum of the average daily net assets invested in shares of
the Fund pursuant to such program, and (ii) an amount equal to 0.20% of
the net asset value of all net purchases of shares of the Fund made
through such program, subject to a refund in the event that such shares
are redeemed within 36 months.
o Until terminated by MFD, MFD will incur, on behalf of H. D. Vest
Investment Securities, Inc., the initial ticket charge of $15 with
respect to purchases of shares of any MFS fund made through VESTADVISOR
accounts. MFD will not incur such charge with respect to redemptions or
repurchases of fund shares, exchanges of fund shares, or shares
purchased or redeemed through systematic investment or withdrawal plans.
o The following provisions shall apply to any retirement plan (each a
"Merrill Lynch Daily K Plan") whose records are maintained on a daily
valuation basis by either Merrill Lynch, Pierce, Fenner & Smith
Incorporated ("Merrill Lynch"), or by an independent recordkeeper (an
"Independent Recordkeeper") whose services are provided through a
contract or alliance arrangement with Merrill Lynch, and with respect to
which the sponsor of such plan has entered into a recordkeeping service
agreement with Merrill Lynch (a "Merrill Lynch Recordkeeping
Agreement").
The initial sales charge imposed on purchases of Class A shares of the
Funds, and the contingent deferred sales charge ("CDSC") imposed on
certain redemptions of Class A shares of the Funds, is waived in the
following circumstances with respect to a Merrill Lynch Daily K Plan:
(i) if, on the date the Plan sponsor signs the Merrill Lynch
Recordkeeping Agreement, such Plan has $3 million or more in
assets invested in broker-dealer sold funds not advised or managed
by Merrill Lynch Asset Management L.P. ("MLAM") that are made
available pursuant to agreements between Merrill Lynch and such
funds' principal underwriters or distributors, and in funds
advised or managed by MLAM (collectively, the "Applicable
Investments"); or
(ii) if such Plan's records are maintained by an Independent
Recordkeeper and, on the date the Plan sponsor signs the Merrill
Lynch Recordkeeping Agreement, such Plan has $3 million or more in
assets, excluding money market funds, invested in Applicable
Investments; or
(iii) such Plan has 500 or more eligible employees, as determined by the
Merrill Lynch plan conversion manager on the date the Plan sponsor
signs the Merrill Lynch Recordkeeping Agreement.
The CDSC imposed on redemptions of Class B shares of the Fund is waived
in the following circumstances with respect to a Merrill Lynch Daily K
Plan:
(i) if, on the date the Plan sponsor signs the Merrill Lynch
Recordkeeping Agreement, such Plan has less than $3 million in
assets invested in Applicable Investments;
(ii) if such Plan's records are maintained by an independent
recordkeeper and, on the date the Plan sponsor signs the Merrill
Lynch Recordkeeping Agreement, such Plan has less than $3 million
dollars in assets, excluding money market funds, invested in
Applicable Investments; or
(iii) such Plan has fewer than 500 eligible employees, as determined by
the Merrill Lynch plan conversion manager on the date the Plan
sponsor signs the Merrill Lynch Recordkeeping Agreement.
No front-end commissions are paid with respect to any Class A or Class B
shares of the Fund purchased by any Merrill Lynch Daily K Plan.
o In lieu of the sales commission and service fees normally paid by MFD to
borker-dealers of record as described in the Prospectus, MFD has agreed
to pay Bear, Stearns & Co. Inc. the following amounts with respect to
Class A shares of the Fund purchased through a special retirement plan
program offered by a third party administrator: (i) an amount equal to
0.05% per annum of the average daily net assets invested in shares of
the Fund pursuant to such program, and (ii) an amount equal to 0.20% of
the net asset value of all net purchases of shares of the Fund made
through such program, subject to a refund in the event that such shares
are redeemed within 36 months.
For MFS Union Standard(R) Equity Fund:
o The initial sales charge on Class A shares will be waived on shares
purchased using redemption proceeds from a separate institutional
account of Connecticut General Life Insurance Company with respect to
which MFS Institutional Advisors, Inc. acts as investment adviser. No
commissions will be payable to any dealer, bank or other financial
intermediary with respect to shares purchased in this manner.
For MFS Emerging Growth Fund, MFS Research Fund, MFS Capital
Opportunities Fund and MFS Money Market Fund:
o Class A shares of the Fund may be purchased at net asset value by one or
more Chilean retirement plans, known as Administradores de Fondos de
Pensiones, which are clients of the 1850 K Street N.W., Washington D.C.
office of Dean Witter Reynolds, Inc. ("Dean Witter").
MFD will waive any applicable contingent deferred sales charges upon
redemption by such retirement plans on purchases of Class A shares over
$1 million, provided that (i) in lieu of the commissions otherwise
payable as specified in the prospectus, MFD will pay Dean Witter a
commission on such purchases equal to 1.00% (including amounts in excess
of $5 million) and (ii) if one or more such clients redeem all or a
portion of these shares within three years after the purchase thereof,
Dean Witter will reimburse MFD for the commission paid with respect to
such shares on a pro rata basis based on the remaining portion of such
three-year period.
<PAGE>
--------------------
PART II - APPENDIX C
--------------------
INVESTMENT TECHNIQUES, PRACTICES AND RISKS
Set forth below is a description of investment techniques and practices
which the MFS Funds may generally use in pursuing their investment
objectives and principal investment policies, and the risks associated with
these investment techniques and practices. The Fund will engage only in
certain of these investment techniques and practices, as identified in
Appendix A of the Fund's Prospectus. Investment practices and techniques
that are not identified in Appendix A of the Fund's Prospectus do not apply
to the Fund.
INVESTMENT TECHNIQUES AND PRACTICES
DEBT SECURITIES
To the extent the Fund invests in the following types of debt securities,
its net asset value may change as the general levels of interest rates
fluctuate. When interest rates decline, the value of debt securities can be
expected to rise. Conversely, when interest rates rise, the value of debt
securities can be expected to decline. The Fund's investment in debt
securities with longer terms to maturity are subject to greater volatility
than the Fund's shorter-term obligations. Debt securities may have all types
of interest rate payment and reset terms, including fixed rate, adjustable
rate, zero coupon, contingent, deferred, payment in kind and auction rate
features.
ASSET-BACKED SECURITIES: The Fund may purchase the following types of
asset-backed securities:
COLLATERALIZED MORTGAGE OBLIGATIONS AND MULTICLASS PASS-THROUGH
SECURITIES: The Fund may invest a portion of its assets in collateralized
mortgage obligations or "CMOs," which are debt obligations collateralized by
mortgage loans or mortgage pass-through securities (such collateral referred
to collectively as "Mortgage Assets"). Unless the context indicates
otherwise, all references herein to CMOs include multiclass pass-through
securities.
Interest is paid or accrues on all classes of the CMOs on a monthly,
quarterly or semi-annual basis. The principal of and interest on the
Mortgage Assets may be allocated among the several classes of a CMO in
innumerable ways. In a common structure, payments of principal, including
any principal prepayments, on the Mortgage Assets are applied to the classes
of a CMO in the order of their respective stated maturities or final
distribution dates, so that no payment of principal will be made on any
class of CMOs until all other classes having an earlier stated maturity or
final distribution date have been paid in full. Certain CMOs may be stripped
(securities which provide only the principal or interest factor of the
underlying security). See "Stripped Mortgage-Backed Securities" below for a
discussion of the risks of investing in these stripped securities and of
investing in classes consisting of interest payments or principal payments.
The Fund may also invest in parallel pay CMOs and Planned Amortization
Class CMOs ("PAC Bonds"). Parallel pay CMOs are structured to provide
payments of principal on each payment date to more than one class. These
simultaneous payments are taken into account in calculating the stated
maturity date or final distribution date of each class, which, as with other
CMO structures, must be retired by its stated maturity date or final
distribution date but may be retired earlier.
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. These 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. The underlying assets
(e.g., loans) are also subject to prepayments which shorten the securities'
weighted average life and may lower their return.
Corporate asset-backed securities are backed by a pool of assets
representing the obligations of a number of different parties. To lessen the
effect of failures by obligors on underlying assets to make payments, 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.
MORTGAGE PASS-THROUGH SECURITIES: The Fund may invest in mortgage
pass-through securities. Mortgage pass-through securities are securities
representing interests in "pools" of mortgage loans. Monthly payments of
interest and principal by the individual borrowers on mortgages are passed
through to the holders of the securities (net of fees paid to the issuer or
guarantor of the securities) as the mortgages in the underlying mortgage
pools are paid off. The average lives of mortgage pass-throughs are variable
when issued because their average lives depend on prepayment rates. The
average life of these securities is likely to be substantially shorter than
their stated final maturity as a result of unscheduled principal prepayment.
Prepayments on underlying mortgages result in a loss of anticipated
interest, and all or part of a premium if any has been paid, and the actual
yield (or total return) to the Fund may be different than the quoted yield
on the securities. Mortgage premiums generally increase with falling
interest rates and decrease with rising interest rates. Like other fixed
income securities, when interest rates rise the value of a mortgage
pass-through security generally will decline; however, when interest rates
are declining, the value of mortgage pass-through securities with prepayment
features may not increase as much as that of other fixed-income securities.
In the event of an increase in interest rates which results in a decline in
mortgage prepayments, the anticipated maturity of mortgage pass-through
securities held by the Fund may increase, effectively changing a security
which was considered short or intermediate-term at the time of purchase into
a long-term security. Long-term securities generally fluctuate more widely
in response to changes in interest rates than short or intermediate-term
securities.
Payment of principal and interest on some mortgage pass-through securities
(but not the market value of the securities themselves) may be guaranteed by
the full faith and credit of the U.S. Government (in the case of securities
guaranteed by the Government National Mortgage Association ("GNMA")); or
guaranteed by agencies or instrumentalities of the U.S. Government (such as
the Federal National Mortgage Association "FNMA") or the Federal Home Loan
Mortgage Corporation, ("FHLMC") which are supported only by the
discretionary authority of the U.S. Government to purchase the agency's
obligations). Mortgage pass-through securities may also be issued by
non-governmental issuers (such as commercial banks, savings and loan
institutions, private mortgage insurance companies, mortgage bankers and
other secondary market issuers). Some of these mortgage pass-through
securities may be supported by various forms of insurance or guarantees.
Interests in pools of mortgage-related securities differ from other forms
of debt securities, which normally provide for periodic payment of interest
in fixed amounts with principal payments at maturity or specified call
dates. Instead, these securities provide a monthly payment which consists of
both interest and principal payments. In effect, these payments are a
"pass-through" of the monthly payments made by the individual borrowers on
their mortgage loans, net of any fees paid to the issuer or guarantor of
such securities. Additional payments are caused by prepayments of principal
resulting from the sale, refinancing or foreclosure of the underlying
property, net of fees or costs which may be incurred. Some mortgage
pass-through securities (such as securities issued by the GNMA) are
described as "modified pass-through." These securities entitle the holder to
receive all interests and principal payments owed on the mortgages in the
mortgage pool, net of certain fees, at the scheduled payment dates
regardless of whether the mortgagor actually makes the payment.
The principal governmental guarantor of mortgage pass-through securities
is GNMA. GNMA is a wholly owned U.S. Government corporation within the
Department of Housing and Urban Development. GNMA is authorized to
guarantee, with the full faith and credit of the U.S. Government, the timely
payment of principal and interest on securities issued by institutions
approved by GNMA (such as savings and loan institutions, commercial banks
and mortgage bankers) and backed by pools of Federal Housing Administration
("FHA") insured or Veterans Administration ("VA") guaranteed mortgages.
These guarantees, however, do not apply to the market value or yield of
mortgage pass-through securities. GNMA securities are often purchased at a
premium over the maturity value of the underlying mortgages. This premium is
not guaranteed and will be lost if prepayment occurs.
Government-related guarantors (i.e., whose guarantees are not backed by
the full faith and credit of the U.S. Government) include FNMA and FHLMC.
FNMA is a government-sponsored corporation owned entirely by private
stockholders. It is subject to general regulation by the Secretary of
Housing and Urban Development. FNMA purchases conventional residential
mortgages (i.e., mortgages not insured or guaranteed by any governmental
agency) from a list of approved seller/servicers which include state and
federally chartered savings and loan associations, mutual savings banks,
commercial banks, credit unions and mortgage bankers. Pass-through
securities issued by FNMA are guaranteed as to timely payment by FNMA of
principal and interest.
FHLMC is also a government-sponsored corporation owned by private
stockholders. FHLMC issues Participation Certificates ("PCs") which
represent interests in conventional mortgages (i.e., not federally insured
or guaranteed) for FHLMC's national portfolio. FHLMC guarantees timely
payment of interest and ultimate collection of principal regardless of the
status of the underlying mortgage loans.
Commercial banks, savings and loan institutions, private mortgage
insurance companies, mortgage bankers and other secondary market issuers
also create pass through pools of mortgage loans. Such issuers may also be
the originators and/or servicers of the underlying mortgage-related
securities. Pools created by such non-governmental issuers generally offer a
higher rate of interest than government and government-related pools because
there are no direct or indirect government or agency guarantees of payments
in the former pools. However, timely payment of interest and principal of
mortgage loans in these pools may be supported by various forms of insurance
or guarantees, including individual loan, title, pool and hazard insurance
and letters of credit. The insurance and guarantees are issued by
governmental entities, private insurers and the mortgage poolers. There can
be no assurance that the private insurers or guarantors can meet their
obligations under the insurance policies or guarantee arrangements. The Fund
may also buy mortgage-related securities without insurance or guarantees.
STRIPPED MORTGAGE-BACKED SECURITIES: The Fund may invest a portion of its
assets in stripped mortgage-backed securities ("SMBS") which are derivative
multiclass mortgage securities issued by agencies or instrumentalities of
the U.S. Government, or by private originators of, or investors in, mortgage
loans, including savings and loan institutions, mortgage banks, commercial
banks and investment banks.
SMBS are usually structured with two classes that receive different
proportions of the interest and principal distributions from a pool of
mortgage assets. A common type of SMBS will have one class receiving some of
the interest and most of the principal from the Mortgage Assets, while the
other class will receive most of the interest and the remainder of the
principal. In the most extreme case, one class will receive all of the
interest (the interest-only or "I0" class) while the other class will
receive all of the principal (the principal-only or "P0" class). The yield
to maturity on an I0 is extremely sensitive to the rate of principal
payments, including prepayments on the related underlying Mortgage Assets,
and a rapid rate of principal payments may have a material adverse effect on
such security's yield to maturity. If the underlying Mortgage Assets
experience greater than anticipated prepayments of principal, the Fund may
fail to fully recoup its initial investment in these securities. The market
value of the class consisting primarily or entirely of principal payments
generally is unusually volatile in response to changes in interest rates.
Because SMBS were only recently introduced, established trading markets for
these securities have not yet developed, although the securities are traded
among institutional investors and investment banking firms.
CORPORATE SECURITIES: The Fund may invest in debt securities, such as
convertible and non-convertible bonds, notes and debentures, issued by
corporations, limited partnerships and other similar entities.
LOANS AND OTHER DIRECT INDEBTEDNESS: The Fund may purchase loans and other
direct indebtedness. In purchasing a loan, the Fund acquires some or all of
the interest of a bank or other lending institution in a loan to a
corporate, governmental or other borrower. Many such loans are secured,
although some may be unsecured. Such loans may be in default at the time of
purchase. Loans that are fully secured offer the Fund more protection than
an unsecured loan in the event of non-payment of scheduled interest or
principal. However, there is no assurance that the liquidation of collateral
from a secured loan would satisfy the corporate borrowers obligation, or
that the collateral can be liquidated.
These loans are made generally to finance internal growth, mergers,
acquisitions, stock repurchases, leveraged buy-outs and other corporate
activities. Such loans are typically made by a syndicate of lending
institutions, represented by an agent lending institution which has
negotiated and structured the loan and is responsible for collecting
interest, principal and other amounts due on its own behalf and on behalf of
the others in the syndicate, and for enforcing its and their other rights
against the borrower. Alternatively, such loans may be structured as a
novation, pursuant to which the Fund would assume all of the rights of the
lending institution in a loan or as an assignment, pursuant to which the
Fund would purchase an assignment of a portion of a lenders interest in a
loan either directly from the lender or through an intermediary. The Fund
may also purchase trade or other claims against companies, which generally
represent money owned by the company to a supplier of goods or services.
These claims may also be purchased at a time when the company is in default.
Certain of the loans and the other direct indebtedness acquired by the
Fund may involve revolving credit facilities or other standby financing
commitments which obligate the Fund to pay additional cash on a certain date
or on demand. These commitments may have the effect of requiring the Fund to
increase its investment in a company at a time when the Fund might not
otherwise decide to do so (including at a time when the company's financial
condition makes it unlikely that such amounts will be repaid). To the extent
that the Fund is committed to advance additional funds, it will at all times
hold and maintain in a segregated account cash or other high grade debt
obligations in an amount sufficient to meet such commitments.
The Fund's ability to receive payment of principal, interest and other
amounts due in connection with these investments will depend primarily on
the financial condition of the borrower. In selecting the loans and other
direct indebtedness which the Fund will purchase, the Adviser will rely upon
its own (and not the original lending institution's) credit analysis of the
borrower. As the Fund may be required to rely upon another lending
institution to collect and pass onto the Fund amounts payable with respect
to the loan and to enforce the Fund's rights under the loan and other direct
indebtedness, an insolvency, bankruptcy or reorganization of the lending
institution may delay or prevent the Fund from receiving such amounts. In
such cases, the Fund will evaluate as well the creditworthiness of the
lending institution and will treat both the borrower and the lending
institution as an "issuer" of the loan for purposes of certain investment
restrictions pertaining to the diversification of the Fund's portfolio
investments. The highly leveraged nature of many such loans and other direct
indebtedness may make such loans and other direct indebtedness especially
vulnerable to adverse changes in economic or market conditions. Investments
in such loans and other direct indebtedness may involve additional risk to
the Fund.
LOWER RATED BONDS: The Fund may invest in fixed income securities rated Ba
or lower by Moody's or BB or lower by S&P, Fitch or Duff & Phelps and
comparable unrated securities (commonly known as "junk bonds"). See Appendix
D for a description of bond ratings. No minimum rating standard is required
by the Fund. These securities are considered speculative and, while
generally providing greater income than investments in higher rated
securities, will involve greater risk of principal and income (including the
possibility of default or bankruptcy of the issuers of such securities) and
may involve greater volatility of price (especially during periods of
economic uncertainty or change) than securities in the higher rating
categories and because yields vary over time, no specific level of income
can ever be assured. These lower rated high yielding fixed income securities
generally tend to reflect economic changes (and the outlook for economic
growth), short-term corporate and industry developments and the market's
perception of their credit quality (especially during times of adverse
publicity) to a greater extent than higher rated securities which react
primarily to fluctuations in the general level of interest rates (although
these lower rated fixed income securities are also affected by changes in
interest rates). In the past, economic downturns or an increase in interest
rates have, under certain circumstances, caused a higher incidence of
default by the issuers of these securities and may do so in the future,
especially in the case of highly leveraged issuers. The prices for these
securities may be affected by legislative and regulatory developments. The
market for these lower rated fixed income securities may be less liquid than
the market for investment grade fixed income securities. Furthermore, the
liquidity of these lower rated securities may be affected by the market's
perception of their credit quality. Therefore, the Adviser's judgment may at
times play a greater role in valuing these securities than in the case of
investment grade fixed income securities, and it also may be more difficult
during times of certain adverse market conditions to sell these lower rated
securities to meet redemption requests or to respond to changes in the
market.
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 a Fund invests in these lower rated securities, the achievement of
its investment objectives may be a more dependent on the Adviser's own
credit analysis than in the case of a fund investing in higher quality fixed
income securities. These lower rated securities may also include zero coupon
bonds, deferred interest bonds and PIK bonds.
MUNICIPAL BONDS: The Fund may invest 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"). Municipal Bonds include debt securities which pay
interest income that is subject to the alternative minimum tax. The Fund may
invest in Municipal Bonds whose issuers pay interest on the Bonds from
revenues from projects such as multifamily housing, nursing homes, electric
utility systems, hospitals or life care facilities.
If a revenue bond is secured by payments generated from a project, and the
revenue bond is also secured by a lien on the real estate comprising the
project, foreclosure by the indenture trustee on the lien for the benefit of
the bondholders creates additional risks associated with owning real estate,
including environmental risks.
Housing revenue bonds typically are issued by a state, county or local
housing authority and are secured only by the revenues of mortgages
originated by the authority using the proceeds of the bond issue. Because of
the impossibility of precisely predicting demand for mortgages from the
proceeds of such an issue, there is a risk that the proceeds of the issue
will be in excess of demand, which would result in early retirement of the
bonds by the issuer. Moreover, such housing revenue bonds depend for their
repayment upon the cash flow from the underlying mortgages, which cannot be
precisely predicted when the bonds are issued. Any difference in the actual
cash flow from such mortgages from the assumed cash flow could have an
adverse impact upon the ability of the issuer to make scheduled payments of
principal and interest on the bonds, or could result in early retirement of
the bonds. Additionally, such bonds depend in part for scheduled payments of
principal and interest upon reserve funds established from the proceeds of
the bonds, assuming certain rates of return on investment of such reserve
funds. If the assumed rates of return are not realized because of changes in
interest rate levels or for other reasons, the actual cash flow for
scheduled payments of principal and interest on the bonds may be inadequate.
The financing of multi-family housing projects is affected by a variety of
factors, including satisfactory completion of construction within cost
constraints, the achievement and maintenance of a sufficient level of
occupancy, sound management of the developments, timely and adequate
increases in rents to cover increases in operating expenses, including
taxes, utility rates and maintenance costs, changes in applicable laws and
governmental regulations and social and economic trends.
Electric utilities face problems in financing large construction programs
in inflationary periods, cost increases and delay occasioned by
environmental considerations (particularly with respect to nuclear
facilities), difficulty in obtaining fuel at reasonable prices, the cost of
competing fuel sources, difficulty in obtaining sufficient rate increases
and other regulatory problems, the effect of energy conservation and
difficulty of the capital market to absorb utility debt.
Health care facilities include life care facilities, nursing homes and
hospitals. Life care facilities are alternative forms of long-term housing
for the elderly which offer residents the independence of condominium life
style and, if needed, the comprehensive care of nursing home services. Bonds
to finance these facilities have been issued by various state industrial
development authorities. Since the bonds are secured only by the revenues of
each facility and not by state or local government tax payments, they are
subject to a wide variety of risks. Primarily, the projects must maintain
adequate occupancy levels to be able to provide revenues adequate to
maintain debt service payments. Moreover, in the case of life care
facilities, since a portion of housing, medical care and other services may
be financed by an initial deposit, there may be risk if the facility does
not maintain adequate financial reserves to secure estimated actuarial
liabilities. The ability of management to accurately forecast inflationary
cost pressures weighs importantly in this process. The facilities may also
be affected by regulatory cost restrictions applied to health care delivery
in general, particularly state regulations or changes in Medicare and
Medicaid payments or qualifications, or restrictions imposed by medical
insurance companies. They may also face competition from alternative health
care or conventional housing facilities in the private or public sector.
Hospital bond ratings are often based on feasibility studies which contain
projections of expenses, revenues and occupancy levels. A hospital's gross
receipts and net income available to service its debt are influenced by
demand for hospital services, the ability of the hospital to provide the
services required, management capabilities, economic developments in the
service area, efforts by insurers and government agencies to limit rates and
expenses, confidence in the hospital, service area economic developments,
competition, availability and expense of malpractice insurance, Medicaid and
Medicare funding, and possible federal legislation limiting the rates of
increase of hospital charges.
The Fund may invest in municipal lease securities. These are undivided
interests in a portion of an obligation in the from 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. There are, of course, variations in
the security of municipal lease securities, both within a particular
classification and between classifications, depending on numerous factors.
The Fund may also invest in bonds for industrial and other projects, such
as sewage or solid waste disposal or hazardous waste treatment facilities.
Financing for such projects will be subject to inflation and other general
economic factors as well as construction risks including labor problems,
difficulties with construction sites and the ability of contractors to meet
specifications in a timely manner. Because some of the materials, processes
and wastes involved in these projects may include hazardous components,
there are risks associated with their production, handling and disposal.
SPECULATIVE BONDS: The Fund may invest in fixed income and convertible
securities rated Baa by Moody's or BBB by S&P, Fitch or Duff & Phelps and
comparable unrated securities. See Appendix D for a description of bond
ratings. 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 securities.
U.S. GOVERNMENT SECURITIES: The Fund may invest in U.S. Government
Securities including (i) U.S. Treasury obligations, all of which are backed
by the full faith and credit of the U.S. Government and (ii) U.S. Government
Securities, some of which are backed by the full faith and credit of the
U.S. Treasury, e.g., direct pass-through certificates of the GNMA; some of
which are backed only by the credit of the issuer itself, e.g., obligations
of the Student Loan Marketing Association; and some of which are supported
by the discretionary authority of the U.S. Government to purchase the
agency's obligations, e.g., obligations of the FNMA.
U.S. Government Securities also include interests in trust or other
entities representing interests in obligations that are issued or guaranteed
by the U.S. Government, its agencies, authorities or instrumentalities.
VARIABLE AND FLOATING RATE OBLIGATIONS: The Fund may invest in floating or
variable rate securities. Investments in floating or variable rate
securities normally will involve industrial development or revenue bonds
which provide that the rate of interest is set as a specific percentage of a
designated base rate, such as rates on Treasury Bonds or Bills or the prime
rate at a major commercial bank, and that a bondholder can demand payment of
the obligations on behalf of the Fund on short notice at par plus accrued
interest, which amount may be more or less than the amount the bondholder
paid for them. The maturity of floating or variable rate obligations
(including participation interests therein) is deemed to be the longer of
(i) the notice period required before the Fund is entitled to receive
payment of the obligation upon demand or (ii) the period remaining until the
obligation's next interest rate adjustment. If not redeemed by the Fund
through the demand feature, the obligations mature on a specified date which
may range up to thirty years from the date of issuance.
ZERO COUPON BONDS, DEFERRED INTEREST BONDS AND PIK BONDS: The Fund may
invest in zero coupon bonds, deferred interest bonds and bonds on which the
interest is payable in kind ("PIK bonds"). Zero coupon and deferred interest
bonds are debt obligations which are issued at a significant discount from
face value. The discount approximates the total amount of interest the bonds
will accrue and compound over the period until maturity or the first
interest payment date at a rate of interest reflecting the market rate of
the security at the time of issuance. While zero coupon bonds do not require
the periodic payment of interest, deferred interest bonds provide for a
period of delay before the regular payment of interest begins. PIK bonds are
debt obligations which provide that the issuer may, at its option, pay
interest on such bonds in cash or in the form of additional debt
obligations. Such investments benefit the issuer by mitigating its need for
cash to meet debt service, but also require a higher rate of return to
attract investors who are willing to defer receipt of such cash. Such
investments may experience greater volatility in market value than debt
obligations which make regular payments of interest. The Fund will accrue
income on such investments for tax and accounting purposes, 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.
EQUITY SECURITIES
The Fund may invest in all types of equity securities, including the
following: common stocks, preferred stocks and preference stocks; securities
such as bonds, warrants or rights that are convertible into stocks; and
depositary receipts for those securities. These securities may be listed on
securities exchanges, traded in various over-the-counter markets or have no
organized market.
FOREIGN SECURITIES EXPOSURE
The Fund may invest in various types of foreign securities, or securities
which provide the Fund with exposure to foreign securities or foreign
currencies, as discussed below:
BRADY BONDS: The Fund may invest in Brady Bonds, which are securities
created through the exchange of existing commercial bank loans to public and
private entities in certain emerging markets for new bonds in connection
with debt restructurings under a debt restructuring plan introduced by
former U.S. Secretary of the Treasury, Nicholas F. Brady (the "Brady Plan").
Brady Plan debt restructurings have been implemented to date in Argentina,
Brazil, Bulgaria, Costa Rica, Croatia, Dominican Republic, Ecuador, Jordan,
Mexico, Morocco, Nigeria, Panama, Peru, the Philippines, Poland, Slovenia,
Uruguay and Venezuela. Brady Bonds have been issued only recently, and for
that reason do not have a long payment history. Brady Bonds may be
collateralized or uncollateralized, are issued in various currencies (but
primarily the U.S. dollar) and are actively traded in over-the-counter
secondary markets. U.S. dollar-denominated, collateralized Brady Bonds,
which may be fixed rate bonds or floating-rate bonds, are generally
collateralized in full as to principal by U.S. Treasury zero coupon bonds
having the same maturity as the bonds. Brady Bonds are often viewed as
having three or four valuation components: the collateralized repayment of
principal at final maturity; the collateralized interest payments; the
uncollateralized interest payments; and any uncollateralized repayment of
principal at maturity (these uncollateralized amounts constituting the
"residual risk"). In light of the residual risk of Brady Bonds and the
history of defaults of countries issuing Brady Bonds with respect to
commercial bank loans by public and private entities, investments in Brady
Bonds may be viewed as speculative.
DEPOSITARY RECEIPTS: The Fund may invest in American Depositary Receipts
("ADRs"), Global Depositary Receipts ("GDRs") and other types of depositary
receipts. ADRs are certificates by a U.S. depositary (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. GDRs and other types of
depositary receipts are typically issued by foreign banks or trust companies
and evidence ownership of underlying securities issued by either a foreign
or a U.S. company. Generally, ADRs are in registered form and are designed
for use in U.S. securities markets and GDRs are in bearer form and are
designed for use in foreign securities markets. For the purposes of the
Fund's policy to invest a certain percentage of its assets in foreign
securities, the investments of the Fund in ADRs, GDRs and other types of
depositary receipts are deemed to be investments in the underlying
securities.
ADRs may be sponsored or unsponsored. A sponsored ADR is issued by a
depositary which has an exclusive relationship with the issuer of the
underlying security. An unsponsored ADR may be issued by any number of U.S.
depositories. Under the terms of most sponsored arrangements, depositories
agree to distribute notices of shareholder meetings and voting instructions,
and to provide shareholder communications and other information to the ADR
holders at the request of the issuer of the deposited securities. The
depository of an unsponsored ADR, on the other hand, is under no obligation
to distribute shareholder communications received from the issuer of the
deposited securities or to pass through voting rights to ADR holders in
respect of the deposited securities. The Fund may invest in either type of
ADR. Although the U.S. investor holds a substitute receipt of ownership
rather than direct stock certificates, the use of the depositary 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 depositary
of an ADR agent bank in 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, information available to a U.S. investor will be limited to the
information the foreign issuer is required to disclose in its 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 a foreign currency.
DOLLAR-DENOMINATED FOREIGN DEBT SECURITIES: The Fund may invest in
dollar-denominated foreign debt securities. Investing in dollar-denominated
foreign debt represents a greater degree of risk than investing in domestic
securities, due to less publicly available information, less securities
regulation, war or expropriation. Special considerations may include higher
brokerage costs and thinner trading markets. Investments in foreign
countries could be affected by other factors including extended settlement
periods.
EMERGING MARKETS: The Fund may invest in securities of government,
government-related, supranational and corporate issuers located in emerging
markets. Emerging markets include any country determined by the Adviser to
have an emerging market economy, taking into account a number of factors,
including whether the country has a low- to middle-income economy according
to the International Bank for Reconstruction and Development, the country's
foreign currency debt rating, its political and economic stability and the
development of its financial and capital markets. The Adviser determines
whether an issuer's principal activities are located in an emerging market
country by considering such factors as its country of organization, the
principal trading market for securities, the source of its revenues and the
location of its assets. Such investments entail significant risks as
described below.
o Company Debt -- Governments of many emerging market countries have
exercised and continue to exercise substantial influence over many
aspects of the private sector through the ownership or control of many
companies, including some of the largest in any given country. As a
result, government actions in the future could have a significant effect
on economic conditions in emerging markets, which in turn, may adversely
affect companies in the private sector, general market conditions and
prices and yields of certain of the securities in the Fund's portfolio.
Expropriation, confiscatory taxation, nationalization, political,
economic or social instability or other similar developments have
occurred frequently over the history of certain emerging markets and
could adversely affect the Fund's assets should these conditions recur.
o Default; Legal Recourse -- The Fund may have limited legal recourse in
the event of a default with respect to certain debt obligations it may
hold. If the issuer of a fixed income security owned by the Fund
defaults, the Fund may incur additional expenses to seek recovery. Debt
obligations issued by emerging market governments differ from debt
obligations of private entities; remedies from defaults on debt
obligations issued by emerging market governments, unlike those on
private debt, must be pursued in the courts of the defaulting party
itself. The Fund's ability to enforce its rights against private issuers
may be limited. The ability to attach assets to enforce a judgment may
be limited. Legal recourse is therefore somewhat diminished. Bankruptcy,
moratorium and other similar laws applicable to private issuers of debt
obligations may be substantially different from those of other
countries. The political context, expressed as an emerging market
governmental issuer's willingness to meet the terms of the debt
obligation, for example, is of considerable importance. In addition, no
assurance can be given that the holders of commercial bank debt may not
contest payments to the holders of debt obligations in the event of
default under commercial bank loan agreements.
o Foreign Currencies -- The securities in which the Fund invests may be
denominated in foreign currencies and international currency units and
the Fund may invest a portion of its assets directly in foreign
currencies. Accordingly, the weakening of these currencies and units
against the U.S. dollar may result in a decline in the Fund's asset
value.
Some emerging market countries also may have managed currencies, which
are not free floating against the U.S. dollar. In addition, there is
risk that certain emerging market countries may restrict the free
conversion of their currencies into other currencies. Further, certain
emerging market currencies may not be internationally traded. Certain of
these currencies have experienced a steep devaluation relative to the
U.S. dollar. Any devaluations in the currencies in which a Fund's
portfolio securities are denominated may have a detrimental impact on
the Fund's net asset value.
o Inflation -- Many emerging markets have experienced substantial, and in
some periods extremely high, rates of inflation for many years.
Inflation and rapid fluctuations in inflation rates have had and may
continue to have adverse effects on the economies and securities markets
of certain emerging market countries. In an attempt to control
inflation, wage and price controls have been imposed in certain
countries. Of these countries, some, in recent years, have begun to
control inflation through prudent economic policies.
o Liquidity; Trading Volume; Regulatory Oversight -- The securities
markets of emerging market countries are substantially smaller, less
developed, less liquid and more volatile than the major securities
markets in the U.S. Disclosure and regulatory standards are in many
respects less stringent than U.S. standards. Furthermore, there is a
lower level of monitoring and regulation of the markets and the
activities of investors in such markets.
The limited size of many emerging market securities markets and limited
trading volume in the securities of emerging market issuers compared to
volume of trading in the securities of U.S. issuers could cause prices
to be erratic for reasons apart from factors that affect the soundness
and competitiveness of the securities issuers. For example, limited
market size may cause prices to be unduly influenced by traders who
control large positions. Adverse publicity and investors' perceptions,
whether or not based on in-depth fundamental analysis, may decrease the
value and liquidity of portfolio securities.
The risk also exists that an emergency situation may arise in one or
more emerging markets, as a result of which trading of securities may
cease or may be substantially curtailed and prices for the Fund's
securities in such markets may not be readily available. The Fund may
suspend redemption of its shares for any period during which an
emergency exists, as determined by the Securities and Exchange
Commission (the "SEC"). Accordingly, if the Fund believes that
appropriate circumstances exist, it will promptly apply to the SEC for a
determination that an emergency is present. During the period commencing
from the Fund's identification of such condition until the date of the
SEC action, the Fund's securities in the affected markets will be valued
at fair value determined in good faith by or under the direction of the
Board of Trustees.
o Sovereign Debt -- Investment in sovereign debt can involve a high degree
of risk. The governmental entity that controls the repayment of
sovereign debt may not be able or willing to repay the principal and/or
interest when due in accordance with the terms of such debt. A
governmental entity's willingness or ability to repay principal and
interest due in a timely manner may be affected by, among other factors,
its cash flow situation, the extent of its foreign reserves, the
availability of sufficient foreign exchange on the date a payment is
due, the relative size of the debt service burden to the economy as a
whole, the governmental entity's policy towards the International
Monetary Fund and the political constraints to which a governmental
entity may be subject. Governmental entities may also be dependent on
expected disbursements from foreign governments, multilateral agencies
and others abroad to reduce principal and interest on their debt. The
commitment on the part of these governments, agencies and others to make
such disbursements may be conditioned on a governmental entity's
implementation of economic reforms and/or economic performance and the
timely service of such debtor's obligations. Failure to implement such
reforms, achieve such levels of economic performance or repay principal
or interest when due may result in the cancellation of such third
parties' commitments to lend funds to the governmental entity, which may
further impair such debtor's ability or willingness to service its debts
in a timely manner. Consequently, governmental entities may default on
their sovereign debt. Holders of sovereign debt (including the Fund) may
be requested to participate in the rescheduling of such debt and to
extend further loans to governmental entities. There is no bankruptcy
proceedings by which sovereign debt on which governmental entities have
defaulted may be collected in whole or in part.
Emerging market governmental issuers are among the largest debtors to
commercial banks, foreign governments, international financial
organizations and other financial institutions. Certain emerging market
governmental issuers have not been able to make payments of interest on
or principal of debt obligations as those payments have come due.
Obligations arising from past restructuring agreements may affect the
economic performance and political and social stability of those
issuers.
The ability of emerging market governmental issuers to make timely
payments on their obligations is likely to be influenced strongly by the
issuer's balance of payments, including export performance, and its
access to international credits and investments. An emerging market
whose exports are concentrated in a few commodities could be vulnerable
to a decline in the international prices of one or more of those
commodities. Increased protectionism on the part of an emerging market's
trading partners could also adversely affect the country's exports and
tarnish its trade account surplus, if any. To the extent that emerging
markets receive payment for their exports in currencies other than
dollars or non-emerging market currencies, its ability to make debt
payments denominated in dollars or non-emerging market currencies could
be affected.
To the extent that an emerging market country cannot generate a trade
surplus, it must depend on continuing loans from foreign governments,
multilateral organizations or private commercial banks, aid payments
from foreign governments and on inflows of foreign investment. The
access of emerging markets to these forms of external funding may not be
certain, and a withdrawal of external funding could adversely affect the
capacity of emerging market country governmental issuers to make
payments on their obligations. In addition, the cost of servicing
emerging market debt obligations can be affected by a change in
international interest rates since the majority of these obligations
carry interest rates that are adjusted periodically based upon
international rates.
Another factor bearing on the ability of emerging market countries to
repay debt obligations is the level of international reserves of the
country. Fluctuations in the level of these reserves affect the amount
of foreign exchange readily available for external debt payments and
thus could have a bearing on the capacity of emerging market countries
to make payments on these debt obligations.
o Withholding -- Income from securities held by the Fund could be reduced
by a withholding tax on the source or other taxes imposed by the
emerging market countries in which the Fund makes its investments. The
Fund's net asset value may also be affected by changes in the rates or
methods of taxation applicable to the Fund or to entities in which the
Fund has invested. The Adviser will consider the cost of any taxes in
determining whether to acquire any particular investments, but can
provide no assurance that the taxes will not be subject to change.
FOREIGN SECURITIES: The Fund may invest in dollar-denominated and non
dollar-denominated foreign securities. 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.
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,
securities settlement practices, 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. As a result
of its investments in foreign securities, the Fund may receive interest or
dividend payments, or the proceeds of the sale or redemption of such
securities, in the foreign currencies in which such securities are
denominated. Under certain circumstances, such as where the Adviser believes
that the applicable exchange rate is unfavorable at the time the currencies
are received or the Adviser anticipates, for any other reason, that the
exchange rate will improve, the Fund may hold such currencies for an
indefinite period of time. While the holding of currencies will permit the
Fund to take advantage of favorable movements in the applicable exchange
rate, such strategy also exposes the Fund to risk of loss if exchange rates
move in a direction adverse to the Fund's position. Such losses could reduce
any profits or increase any losses sustained by the Fund from the sale or
redemption of securities and could reduce the dollar value of interest or
dividend payments received. The Fund's investments in foreign securities may
also include "privatizations." Privatizations are situations where the
government in a given country, including emerging market countries, sells
part or all of its stakes in government owned or controlled enterprises. In
certain countries, the ability of foreign entities to participate in
privatizations may be limited by local law and the terms on which the
foreign entities may be permitted to participate may be less advantageous
than those afforded local investors.
FORWARD CONTRACTS
The Fund may enter into contracts for the purchase or sale of a specific
currency at a future date at a price set at the time the contract is entered
into (a "Forward Contract"), for hedging purposes (e.g., to protect its
current or intended investments from fluctuations in currency exchange
rates) as well as for non-hedging purposes.
A Forward Contract to sell a currency may be entered into where the Fund
seeks to protect against an anticipated increase in the exchange rate for a
specific currency which could reduce the dollar value of portfolio
securities denominated in such currency. Conversely, the Fund may enter into
a Forward Contract to purchase a given currency to protect against a
projected increase in the dollar value of securities denominated in such
currency which the Fund intends to acquire.
If a hedging transaction in Forward Contracts is successful, the decline
in the dollar value of portfolio securities or the increase in the dollar
cost of securities to be acquired may be offset, at least in part, by
profits on the Forward Contract. Nevertheless, by entering into such Forward
Contracts, the Fund may be required to forego all or a portion of the
benefits which otherwise could have been obtained from favorable movements
in exchange rates. The Fund does not presently intend to hold Forward
Contracts entered into until the value date, at which time it would be
required to deliver or accept delivery of the underlying currency, but will
seek in most instances to close out positions in such Contracts by entering
into offsetting transactions, which will serve to fix the Fund's profit or
loss based upon the value of the Contracts at the time the offsetting
transaction is executed.
The Fund will also enter into transactions in Forward Contracts for other
than hedging purposes, which presents greater profit potential but also
involves increased risk. For example, the Fund may purchase a given foreign
currency through a Forward Contract if, in the judgment of the Adviser, the
value of such currency is expected to rise relative to the U.S. dollar.
Conversely, the Fund may sell the currency through a Forward Contract if the
Adviser believes that its value will decline relative to the dollar.
The Fund will profit if the anticipated movements in foreign currency
exchange rates occur, 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 and could involve
significant risk of loss.
The use by the Fund of Forward Contracts also involves the risks described
under the caption "Special Risk Factors -- Options, Futures, Forwards, Swaps
and Other Derivative Transactions" in this Appendix.
FUTURES CONTRACTS
The Fund may purchase and sell futures contracts ("Futures Contracts") on
stock indices, foreign currencies, interest rates or interest-rate related
instruments, indices of foreign currencies or commodities. The Fund may also
purchase and sell Futures Contracts on foreign or domestic fixed income
securities or indices of such securities including municipal bond indices
and any other indices of foreign or domestic fixed income securities that
may become available for trading. Such investment strategies will be used
for hedging purposes and for non-hedging purposes, subject to 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, foreign
currency or commodity, 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 month in which, in
the case of the majority of commodities, interest rate and foreign currency
futures contracts, the underlying commodities, fixed income securities or
currency are delivered by the seller and paid for by the purchaser, or on
which, in the case of index futures contracts and certain interest rate and
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 "mark-to-market."
Purchases or sales of stock index futures contracts are 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.
Interest rate Futures Contracts may be purchased or sold to attempt to
protect against the effects of interest rate changes on the Fund's current
or intended investments in fixed income securities. For example, if the Fund
owned long-term bonds and interest rates were expected to increase, the Fund
might enter into interest rate futures contracts for the sale of debt
securities. Such a sale would have much the same effect as selling some of
the long-term bonds in the Fund's portfolio. If interest rates did increase,
the value of the debt securities in the portfolio would decline, but the
value of the Fund's interest rate futures contracts would increase at
approximately the same rate, subject to the correlation risks described
below, thereby keeping the net asset value of the Fund from declining as
much as it otherwise would have.
Similarly, if interest rates were expected to decline, interest rate
futures contracts may be purchased to hedge in anticipation of subsequent
purchases of long-term bonds at higher prices. Since the fluctuations in the
value of the interest rate futures contracts should be similar to that of
long-term bonds, the Fund could protect itself against the effects of the
anticipated rise in the value of long-term bonds without actually buying
them until the necessary cash became available or the market had stabilized.
At that time, the interest rate futures contracts could be liquidated and
the Fund's cash reserves could then be used to buy long-term bonds on the
cash market. 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, since the futures market may be
more liquid than the cash market in certain cases or at certain times, the
use of interest rate futures contracts as a hedging technique may allow the
Fund to hedge its interest rate risk without having to sell its portfolio
securities.
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 dollar 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, the 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.
The use by the Fund of Futures Contracts also involves the risks described
under the caption "Special Risk Factors -- Options, Futures, Forwards, Swaps
and Other Derivative Transactions" in this Appendix.
INDEXED SECURITIES
The Fund may purchase securities with principal and/or interest payments
whose prices are indexed to the prices of other securities, securities
indices, currencies, precious metals or other commodities, or other
financial indicators. Indexed securities typically, but not always, are debt
securities or deposits whose value at maturity or coupon rate is determined
by reference to a specific instrument or statistic. The Fund may also
purchase indexed deposits with similar characteristics. 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. Certain indexed securities may expose the Fund to the risk of
loss of all or a portion of the principal amount of its investment and/or
the interest that might otherwise have been earned on the amount invested.
The performance of indexed securities depends to a great extent on the
performance of the security, currency, or other instrument to which they are
indexed, and may also be influenced by interest rate changes in the U.S. and
abroad. At the same time, indexed securities are subject to the credit risks
associated with the issuer of the security, and their values may decline
substantially if the issuer's creditworthiness deteriorates. Recent issuers
of indexed securities have included banks, corporations, and certain U.S.
Government-sponsored entities.
INVERSE FLOATING RATE OBLIGATIONS
The Fund may invest in so-called "inverse floating rate obligations" or
"residual interest bonds" or other obligations or certificates relating
thereto structured to have similar features. In creating such an obligation,
a municipality issues a certain amount of debt and pays a fixed interest
rate. Half of the debt is issued as variable rate short term obligations,
the interest rate of which is reset at short intervals, typically 35 days.
The other half of the debt is issued as inverse floating rate obligations,
the interest rate of which is calculated based on the difference between a
multiple of (approximately two times) the interest paid by the issuer 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 as the comparable change in the market value of an equal principal
amount of long-term bonds which bear interest at the rate paid by the issuer
and have similar credit quality, redemption and maturity provisions.
INVESTMENT IN OTHER INVESTMENT COMPANIES
The Fund may invest in other investment companies. The total return on such
investment will be reduced by the operating expenses and fees of such other
investment companies, including advisory fees.
OPEN-END FUNDS. The Fund may invest in open-end investment companies.
CLOSED-END FUNDS. The Fund may invest in closed-end investment companies.
Such investment may involve the payment of substantial premiums above the
value of such investment companies' portfolio securities.
LENDING OF PORTFOLIO SECURITIES
The Fund may seek to increase its income by lending portfolio securities.
Such loans will usually be made only to member firms of the New York Stock
Exchange (the "Exchange") (and subsidiaries thereof) and member banks of the
Federal Reserve System, and would be required to be secured continuously by
collateral in cash, an irrevocable letter of credit or United States
("U.S.") Treasury securities 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 not usually exceed five
business days). For the duration of a loan, the Fund would continue to
receive the equivalent of the interest or dividends paid by the issuer on
the securities loaned. The Fund would also receive a fee from the borrower
or compensation from the investment of the collateral, less a fee paid to
the borrower (if the collateral is in the form of cash). The Fund would not,
however, have the right to vote any securities having voting rights during
the existence of the loan, but the Fund 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 can be earned currently from securities
loans of this type justifies the attendant risk.
LEVERAGING TRANSACTIONS
The Fund may engage in the types of transactions described below, which
involve "leverage" because in each case the Fund receives cash which it can
invest in portfolio securities and has a future obligation to make a
payment. The use of these transactions by the Fund will generally cause its
net asset value to increase or decrease at a greater rate than would
otherwise be the case. Any investment income or gains earned from the
portfolio securities purchased with the proceeds from these transactions
which is in excess of the expenses associated from these transactions can be
expected to cause the value of the Fund's shares and distributions on the
Fund's shares to rise more quickly than would otherwise be the case.
Conversely, if the investment income or gains earned from the portfolio
securities purchased with proceeds from these transactions fail to cover the
expenses associated with these transactions, the value of the Fund's shares
is likely to decrease more quickly than otherwise would be the case and
distributions thereon will be reduced or eliminated. Hence, these
transactions are speculative, involve leverage and increase the risk of
owning or investing in the shares of the Fund. These transactions also
increase the Fund's expenses because of interest and similar payments and
administrative expenses associated with them. Unless the appreciation and
income on assets purchased with proceeds from these transactions exceed the
costs associated with them, the use of these transactions by a Fund would
diminish the investment performance of the Fund compared with what it would
have been without using these transactions.
BANK BORROWINGS: The Fund may borrow money for investment purposes from
banks and invest the proceeds in accordance with its investment objectives
and policies.
MORTGAGE "DOLLAR ROLL" TRANSACTIONS: The Fund may enter into mortgage
"dollar roll" transactions pursuant to which it sells mortgage-backed
securities for delivery in the future and simultaneously contracts to
repurchase substantially similar securities on a specified future date.
During the roll period, the Fund foregoes principal and interest paid on the
mortgage-backed securities. The Fund is compensated for the lost interest by
the difference between the current sales price and the lower price for the
future purchase (often referred to as the "drop") as well as by the interest
earned on, and gains from, the investment of the cash proceeds of the
initial sale. The Fund may also be compensated by receipt of a commitment
fee.
If the income and capital gains from the Fund's investment of the cash
from the initial sale do not exceed the income, capital appreciation and
gain or loss that would have been realized on the securities sold as part of
the dollar roll, the use of this technique will diminish the investment
performance of the Fund compared with what the performance would have been
without the use of the dollar rolls. Dollar roll transactions involve the
risk that the market value of the securities the Fund is required to
purchase may decline below the agreed upon repurchase price of those
securities. If the broker/dealer to whom the Fund sells securities becomes
insolvent, the Fund's right to purchase or repurchase securities may be
restricted. Successful use of mortgage dollar rolls may depend upon the
Adviser's ability to correctly predict interest rates and prepayments. There
is no assurance that dollar rolls can be successfully employed.
REVERSE REPURCHASE AGREEMENTS: The Fund may enter into reverse repurchase
agreements. In a reverse repurchase agreement, the Fund will sell securities
and receive cash proceeds, subject to its agreement to repurchase the
securities at a later date for a fixed price reflecting a market rate of
interest. There is a risk that the counter party to a reverse repurchase
agreement will be unable or unwilling to complete the transaction as
scheduled, which may result in losses to the Fund. The Fund will invest the
proceeds received under a reverse repurchase agreement in accordance with
its investment objective and policies.
OPTIONS
The Fund may invest in the following types of options, which involve the
risks described under the caption "Special Risk Factors -- Options, Futures,
Forwards, Swaps and Other Derivative Transactions" in this Appendix:
OPTIONS ON FOREIGN CURRENCIES: The Fund may purchase and write options on
foreign currencies for hedging and non-hedging purposes in a manner similar
to that in which Futures Contracts on foreign currencies, or Forward
Contracts, will be utilized. For example, a decline in the dollar value of a
foreign currency in which portfolio securities are denominated will reduce
the dollar value of such securities, even if their value in the foreign
currency remains constant. In order to protect against such diminutions in
the value of portfolio securities, the Fund may purchase put options on the
foreign currency. If the value of the currency does decline, the Fund will
have the right to sell such currency for a fixed amount in dollars and will
thereby offset, in whole 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 effect of the
adverse movements in exchange rates. As in the case of other types of
options, however, the benefit to the Fund deriving from purchases of foreign
currency options will be reduced by the amount of the premium and related
transaction costs. In addition, where currency exchange rates do not move in
the direction or to the extent anticipated, the Fund could sustain losses on
transactions in foreign currency options which would require it to 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 could, instead of purchasing a put option, write a call
option on the relevant currency. If the expected decline occurs, the option
will most likely not be exercised, and the diminution in value of portfolio
securities will 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.
Similarly, instead of purchasing a call option to hedge against an
anticipated increase in the dollar cost of securities to be acquired, the
Fund could write a put option on the relevant currency which, if rates move
in the manner projected, will expire unexercised and allow the Fund to hedge
such increased cost up to the amount of the premium. Foreign currency
options written by the Fund will generally be covered in a manner similar to
the covering of other types of options. As in the case of other types of
options, however, the writing of a foreign currency option will constitute
only a partial hedge up to the amount of the premium, and only if rates move
in the expected direction. If this does not occur, the option may be
exercised and the Fund would be required to purchase or sell the underlying
currency at a loss which may not be offset by the amount of the premium.
Through the writing of options on foreign currencies, the Fund also may be
required to forego all or a portion of the benefits which might otherwise
have been obtained from favorable movements in exchange rates. The use of
foreign currency options for non-hedging purposes, like the use of other
types of derivatives for such purposes, presents greater profit potential
but also significant risk of loss and could be considered speculative.
OPTIONS ON FUTURES CONTRACTS: The Fund also may purchase and write options
to buy or sell those Futures Contracts in which it may invest ("Options on
Futures Contracts") as described above under "Futures Contracts." Such
investment strategies will be used 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. Upon
exercise of the option by the holder, the contract market clearinghouse
establishes a corresponding short position for the writer of the option, in
the case of a call option, or a corresponding long position in the case of a
put option. In the event that an option is exercised, the parties will be
subject to all the risks associated with the trading of Futures Contracts,
such as payment of initial and variation margin deposits. In addition, the
writer of an Option on a Futures Contract, unlike the holder, is subject to
initial and variation margin requirements on the option position.
A position in an Option on a Futures Contract may be terminated by the
purchaser or seller prior to expiration by effecting a closing purchase or
sale transaction, subject to the availability of a liquid secondary market,
which is the purchase or sale of an option of the same type (i.e., the same
exercise price and expiration date) as the option previously purchased or
sold. The difference between the premiums paid and received represents the
Fund's profit or loss on the transaction.
Options on Futures Contracts that are written or purchased by the Fund on
U.S. exchanges are traded on the same contract market as the underlying
Futures Contract, and, like Futures Contracts, are subject to regulation by
the Commodity Futures Trading Commission (the "CFTC") and the performance
guarantee of the exchange clearinghouse. In addition, Options on Futures
Contracts may be traded on foreign exchanges. 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 Fund owns liquid
and unencumbered assets equal to the difference. The Fund may cover the
writing of put Options on Futures Contracts (a) through sales of the
underlying Futures Contract, (b) through the ownership of liquid and
unencumbered assets 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 where the exercise price of the put
held (ii) is less than the exercise price of the put written if the Fund
owns liquid and unencumbered assets equal to the difference. Put and call
Options on Futures Contracts may also be 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. 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 writing of a call option on a Futures Contract for hedging purposes
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 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 the changes in the value of its
futures positions, the Fund's losses from existing Options on Futures
Contracts may to some extent be reduced or increased by changes in the value
of portfolio securities.
The Fund may purchase Options on Futures Contracts for hedging purposes
instead of 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 in 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.
OPTIONS ON SECURITIES: The Fund may write (sell) covered put and call
options, and purchase put and call options, on securities. Call and put
options written by the Fund may be covered in the manner set forth below.
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 that security without additional cash consideration (or for
additional cash consideration if the Fund owns liquid and unencumbered
assets equal to the amount of cash consideration) 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 Fund owns
liquid and unencumbered assets equal to the difference. A put option written
by the Fund is "covered" if the Fund owns liquid and unencumbered assets
with a value equal to the exercise price, or else holds a put on the same
security and in the same principal amount as the put written where the
exercise price of the put held is equal to or greater than the exercise
price of the put written or where the exercise price of the put held is less
than the exercise price of the put written if the Fund owns liquid and
unencumbered assets equal to the difference. 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. If the
writer's obligation is not so covered, it is subject to the risk of the full
change in value of the underlying security from the time the option is
written until exercise.
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 Fund owns liquid and unencumbered 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
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 repurchase 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. Buy-and-write transactions using in-the-money call options may be
used when it is expected that the price of the underlying security will
decline moderately during the option period. Buy-and-write transactions
using out-of-the-money call options may be used when it is expected that the
premiums received from writing the call option plus the appreciation in the
market price of the underlying security up to the exercise price will be
greater than the appreciation in the price of the underlying security alone.
If the call options are exercised in such transactions, the Fund's maximum
gain will be the premium received by it for writing the option, adjusted
upwards or downwards by the difference between the Fund's purchase price of
the security and the exercise price, less related transaction costs. If the
options are not exercised and the price of the underlying security declines,
the amount of such decline will be offset in part, or entirely, by the
premium received.
The writing of covered put options is similar in terms of risk/return
characteristics to buy-and-write transactions. If the market price of the
underlying security rises or otherwise is above the exercise price, the put
option will expire worthless and the Fund's gain will be limited to the
premium received, less related transaction costs. If the market price of the
underlying security declines or otherwise is below the exercise price, the
Fund may elect to close the position or retain the option until it is
exercised, at which time the Fund will be required to take delivery of the
security at the exercise price; the Fund's return will be the premium
received from the put option minus the amount by which the market price of
the security is below the exercise price, which could result in a loss.
Out-of-the-money, at-the-money and in-the-money 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 also write combinations of put and call options on the same
security, known as "straddles" with the same exercise price and expiration
date. 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 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 the
security remains stable and neither the call nor the put is exercised. In
those instances 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 not be undertaken by the Fund solely for hedging
purposes, 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 constitute only a partial hedge against
declines in the value of portfolio securities or against increases in the
value of securities to be acquired, up to the amount of the premium.
The Fund may also purchase options for hedging purposes or to increase its
return. Put options may be purchased to hedge against a decline in the value
of portfolio securities. If such decline occurs, the put options will permit
the Fund to sell the 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 by transaction costs.
The Fund may also purchase call options to hedge against an increase in
the price of securities that the Fund anticipates purchasing in the future.
If such increase occurs, the call option will permit the Fund to purchase
the securities at the exercise price, or to close out the options at a
profit. 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.
OPTIONS ON STOCK INDICES: The Fund may write (sell) covered call and put
options and purchase call and put options on stock indices. In contrast to
an option on a security, an option on a stock index provides the holder with
the right but not the obligation to make or receive a cash settlement upon
exercise of the option, rather than the right to purchase or sell a
security. The amount of this settlement is generally equal to (i) the
amount, if any, by which the fixed exercise price of the option exceeds (in
the case of a call) or is below (in the case of a put) the closing value of
the underlying index on the date of exercise, multiplied by (ii) a fixed
"index multiplier." The Fund may cover written 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 underlying index, or by having an
absolute and immediate right to acquire such securities without additional
cash consideration (or for additional cash consideration if the Fund owns
liquid and unencumbered assets equal to the amount of cash consideration)
upon conversion or exchange of other securities in its portfolio. 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 Fund owns liquid and unencumbered assets equal to the
difference. The Fund may cover put options on stock indices by owning liquid
and unencumbered assets with a value equal to the exercise price, or by
holding a put on the same stock index 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 Fund owns liquid and unencumbered
assets equal to the difference. Put and call options on stock indices 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 the 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 Fund may also 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.
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 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 index underlying a stock index option may be a "broad-based" index,
such as the Standard & Poor's 500 Index or the New York Stock Exchange
Composite Index, the changes in value of which ordinarily will reflect
movements in the stock market in general. In contrast, certain options may
be based on narrower market indices, such as the Standard & Poor's 100
Index, or on indices of securities of particular industry groups, such as
those of oil and gas or technology companies. A stock index assigns relative
values to the stocks included in the index and the index fluctuates with
changes in the market values of the stocks so included. The composition of
the index is changed periodically.
RESET OPTIONS:
In certain instances, the Fund may purchase or write options on U.S.
Treasury securities which provide for periodic adjustment of the strike
price and may also provide for the periodic adjustment of the premium during
the term of each such option. Like other types of options, these
transactions, which may be referred to as "reset" options or "adjustable
strike" options grant the purchaser the right to purchase (in the case of a
call) or sell (in the case of a put), a specified type of U.S. Treasury
security at any time up to a stated expiration date (or, in certain
instances, on such date). In contrast to other types of options, however,
the price at which the underlying security may be purchased or sold under a
"reset" option is determined at various intervals during the term of the
option, and such price fluctuates from interval to interval based on changes
in the market value of the underlying security. As a result, the strike
price of a "reset" option, at the time of exercise, may be less advantageous
than if the strike price had been fixed at the initiation of the option. In
addition, the premium paid for the purchase of the option may be determined
at the termination, rather than the initiation, of the option. If the
premium for a reset option written by the Fund is paid at termination, the
Fund assumes the risk that (i) the premium may be less than the premium
which would otherwise have been received at the initiation of the option
because of such factors as the volatility in yield of the underlying
Treasury security over the term of the option and adjustments made to the
strike price of the option, and (ii) the option purchaser may default on its
obligation to pay the premium at the termination of the option. Conversely,
where the Fund purchases a reset option, it could be required to pay a
higher premium than would have been the case at the initiation of the
option.
"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 owns liquid and unencumbered
assets sufficient to cover the Fund's net liability under the two options.
Therefore, the Fund's liability for such a covered option is generally
limited to the difference between the amount of the Fund's liability under
the option written by the Fund less the value of the option held by the
Fund. Yield curve options may also be covered in such other manner as may be
in accordance with the requirements of the counterparty with which the
option is traded and applicable laws and regulations. Yield curve options
are traded over-the-counter and because they have been only recently
introduced, established trading markets for these securities have not yet
developed.
REPURCHASE AGREEMENTS
The Fund may enter into repurchase agreements with sellers who are member
firms (or a subsidiary thereof) of the New York Stock 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 Government securities.
The repurchase agreement provides that in the event the seller fails to
pay the amount agreed upon on the agreed upon delivery date or upon demand,
as the case may be, the Fund will have the right to liquidate the
securities. If at the time the Fund is contractually entitled to exercise
its right to liquidate the securities, the seller is subject to a proceeding
under the bankruptcy laws or its assets are otherwise subject to a stay
order, the Fund's exercise of its right to liquidate the securities may be
delayed and result in certain losses and costs to the Fund. The Fund has
adopted and follows procedures which are intended to minimize the risks of
repurchase agreements. For example, the Fund only enters into repurchase
agreements after the Adviser has determined that the seller is creditworthy,
and the Adviser monitors that seller's creditworthiness on an ongoing basis.
Moreover, under such agreements, the value of the securities (which are
marked to market every business day) is required to be greater than the
repurchase price, and the Fund has the right to make margin calls at any
time if the value of the securities falls below the agreed upon collateral.
RESTRICTED SECURITIES
The Fund may purchase securities that are not registered under the
Securities Act of 1933, as amended ("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") and
commercial paper issued under Section 4(2) of the 1933 Act ("4(2) Paper"). A
determination is made, based upon a continuing review of the trading markets
for the Rule 144A security or 4(2) Paper, whether such security is liquid
and thus not subject to the Fund's limitation on investing 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 and 4(2) Paper. The Board, however, retains oversight of the
liquidity determinations focusing on factors such as valuation, liquidity
and availability of information. Investing in Rule 144A securities could
have the effect of decreasing the level of liquidity in the Fund to the
extent that qualified institutional buyers become for a time uninterested in
purchasing these Rule 144A securities held in the Fund's portfolio. Subject
to the Fund's 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.
SHORT SALES
The Fund may seek to hedge investments or realize additional gains through
short sales. The Fund may make short sales, which are transactions in which
the Fund sells a security it does not own, in anticipation of a decline in
the market value of that security. To complete such a transaction, the Fund
must borrow the security to make delivery to the buyer. The Fund then is
obligated to replace the security borrowed by purchasing it at the market
price at the time of replacement. The price at such time may be more or less
than the price at which the security was sold by the Fund. Until the
security is replaced, the Fund is required to repay the lender any dividends
or interest which accrue during the period of the loan. To borrow the
security, the Fund also may be required to pay a premium, which would
increase the cost of the security sold. The net proceeds of the short sale
will be retained by the broker, to the extent necessary to meet margin
requirements, until the short position is closed out. The Fund also will
incur transaction costs in effecting short sales.
The Fund will incur a loss as a result of the short sale if the price of
the security increases between the date of the short sale and the date on
which the Fund replaces the borrowed security. The Fund will realize a gain
if the price of the security declines between those dates. The amount of any
gain will be decreased, and the amount of any loss increased, by the amount
of the premium, dividends or interest the Fund may be required to pay in
connection with a short sale.
Whenever the Fund engages in short sales, it identifies liquid and
unencumbered assets in an amount that, when combined with the amount of
collateral deposited with the broker connection with the short sale, equals
the current market value of the security sold short.
SHORT SALES AGAINST THE BOX
The Fund may make short sales "against the box," i.e., when a security
identical to one owned by the Fund is borrowed and sold short. If the Fund
enters into a short sale against the box, it is required to segregate
securities equivalent in kind and amount to the securities sold short (or
securities convertible or exchangeable into such securities) and is required
to hold such securities while the short sale is outstanding. The Fund will
incur transaction costs, including interest, in connection with opening,
maintaining, and closing short sales against the box.
SHORT TERM INSTRUMENTS
The Fund may hold cash and invest in cash equivalents, such as short-term
U.S. Government Securities, commercial paper and bank instruments.
SWAPS AND RELATED DERIVATIVE INSTRUMENTS
The Fund may enter into interest rate swaps, currency swaps and other types
of available swap agreements, including swaps on securities, commodities and
indices, and related types of derivatives, such as caps, collars and floors.
A swap is an agreement between two parties pursuant to which each party
agrees to make one or more payments to the other on regularly scheduled
dates over a stated term, based on different interest rates, currency
exchange rates, security or commodity prices, the prices or rates of other
types of financial instruments or assets or the levels of specified indices.
Under a typical swap, one party may agree to pay a fixed rate or a floating
rate determined by reference to a specified instrument, rate or index,
multiplied in each case by a specified amount (the "notional amount"), while
the other party agrees to pay an amount equal to a different floating rate
multiplied by the same notional amount. On each payment date, the
obligations of parties are netted, with only the net amount paid by one
party to the other. All swap agreements entered into by the Fund with the
same counterparty are generally governed by a single master agreement, which
provides for the netting of all amounts owed by the parties under the
agreement upon the occurrence of an event of default, thereby reducing the
credit risk to which such party is exposed.
Swap agreements are typically individually negotiated and structured to
provide exposure to a variety of different types of investments or market
factors. Swap agreements may be entered into for hedging or non-hedging
purposes and therefore may increase or decrease the Fund's exposure to the
underlying instrument, rate, asset or index. Swap agreements can take many
different forms and are known by a variety of names. The Fund is not limited
to any particular form or variety of swap agreement if the Adviser
determines it is consistent with the Fund's investment objective and
policies.
For example, the Fund may enter into an interest rate swap in order to
protect against declines in the value of fixed income securities held by the
Fund. In such an instance, the Fund would agree with a counterparty to pay a
fixed rate (multiplied by a notional amount) and the counterparty would
agree to pay a floating rate multiplied by the same notional amount. If
interest rates rise, resulting in a diminution in the value of the Fund's
portfolio, the Fund would receive payments under the swap that would offset,
in whole or part, such diminution in value. The Fund may also enter into
swaps to modify its exposure to particular markets or instruments, such as a
currency swap between the U.S. dollar and another currency which would have
the effect of increasing or decreasing the Fund's exposure to each such
currency. The Fund might also enter into a swap on a particular security, or
a basket or index of securities, in order to gain exposure to the underlying
security or securities, as an alternative to purchasing such securities.
Such transactions could be more efficient or less costly in certain
instances than an actual purchase or sale of the securities.
The Fund may enter into other related types of over-the-counter
derivatives, such as "caps", "floors", "collars" and options on swaps, or
"swaptions", for the same types of hedging or non-hedging purposes. Caps and
floors are similar to swaps, except that one party pays a fee at the time
the transaction is entered into and has no further payment obligations,
while the other party is obligated to pay an amount equal to the amount by
which a specified fixed or floating rate exceeds or is below another rate
(multiplied by a notional amount). Caps and floors, therefore, are also
similar to options. A collar is in effect a combination of a cap and a
floor, with payments made only within or outside a specified range of prices
or rates. A swaption is an option to enter into a swap agreement. Like other
types of options, the buyer of a swaption pays a non-refundable premium for
the option and obtains the right, but not the obligation, to enter into the
underlying swap on the agreed-upon terms.
The Fund will maintain liquid and unencumbered assets to cover its current
obligations under swap and other over-the-counter derivative transactions.
If the Fund enters into a swap agreement on a net basis (i.e., the two
payment streams are netted out, with the Fund receiving or paying, as the
case may be, only the net amount of the two payments), the Fund will
maintain liquid and unencumbered assets with a daily value at least equal to
the excess, if any, of the Fund's accrued obligations under the swap
agreement over the accrued amount the Fund is entitled to receive under the
agreement. If the Fund enters into a swap agreement on other than a net
basis, it will maintain liquid and unencumbered assets with a value equal to
the full amount of the Fund's accrued obligations under the agreement.
The most significant factor in the performance of swaps, caps, floors and
collars is the change in the underlying price, rate or index level that
determines the amount of payments to be made under the arrangement. If the
Adviser is incorrect in its forecasts of such factors, the investment
performance of the Fund would be less than what it would have been if these
investment techniques had not been used. If a swap agreement calls for
payments by the Fund, the Fund must be prepared to make such payments when
due. In addition, if the counterparty's creditworthiness would decline, the
value of the swap agreement would be likely to decline, potentially
resulting in losses.
If the counterparty defaults, the Fund's risk of loss consists of the net
amount of payments that the Fund is contractually entitled to receive. The
Fund anticipates that it will be able to eliminate or reduce its exposure
under these arrangements by assignment or other disposition or by entering
into an offsetting agreement with the same or another counterparty, but
there can be no assurance that it will be able to do so.
The uses by the Fund of swaps and related derivative instruments also
involves the risks described under the caption "Special Risk Factors --
Options, Futures, Forwards, Swaps and Other Derivative Transactions" in
this Appendix.
TEMPORARY BORROWINGS
The Fund may borrow money for temporary purposes (e.g., to meet redemption
requests or settle outstanding purchases of portfolio securities).
TEMPORARY DEFENSIVE POSITIONS
During periods of unusual market conditions when the Adviser believes that
investing for temporary defensive purposes is appropriate, or in order to
meet anticipated redemption requests, a large portion or all of the assets
of the Fund may be invested in cash (including foreign currency) or cash
equivalents, including, but not limited to, obligations of banks (including
certificates of deposit, bankers' acceptances, time deposits and repurchase
agreements), commercial paper, short-term notes, U.S. Government Securities
and related repurchase agreements.
WARRANTS
The Fund may invest in warrants. Warrants are securities that give the Fund
the right to purchase equity securities from the issuer at a specific price
(the "strike price") for a limited period of time. The strike price of
warrants typically is much lower than the current market price of the
underlying securities, yet they are subject to similar price fluctuations.
As a result, warrants may be more volatile investments than the underlying
securities and may offer greater potential for capital appreciation as well
as capital loss. Warrants do not entitle a holder to dividends or voting
rights with respect to the underlying securities and do not represent any
rights in the assets of the issuing company. Also, the value of the warrant
does not necessarily change with the value of the underlying securities and
a warrant ceases to have value if it is not exercised prior to the
expiration date. These factors can make warrants more speculative than other
types of investments.
"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. In general, the Fund does not pay
for such 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, a Fund will identify liquid
and unencumbered assets equal to its forward delivery commitment.
SPECIAL RISK FACTORS -- OPTIONS, FUTURES, FORWARDS, SWAPS AND OTHER
DERIVATIVE TRANSACTIONS
RISK OF 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 derivatives, including options, Futures
Contracts, Options on Futures Contracts, Forward Contracts, swaps and other
types of derivatives depends 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. In the case of derivative
instruments based on an index, the portfolio will not duplicate the
components of the index, and in the case of derivative instruments on fixed
income securities, the portfolio securities which are being hedged may not
be the same type of obligation underlying such derivatives. The use of
derivatives for "cross hedging" purposes (such as a transaction in a Forward
Contract on one currency to hedge exposure to a different currency) may
involve greater correlation risks. Consequently, the Fund bears the risk
that the price of the portfolio securities being hedged will not move in the
same amount or direction as the underlying index or obligation.
If the Fund purchases a put option on an index and the index decreases
less than the value of the hedged securities, the Fund would experience a
loss which is not completely offset by the put option. It is also possible
that there may be a negative correlation between the index or obligation
underlying an option or Futures Contract in which the Fund has a position
and the portfolio securities the Fund is attempting to hedge, which could
result in a loss on both the portfolio and the hedging instrument. It should
be noted that stock index 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 based on a broad market index.
This is due to the fact that 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. Nevertheless, where the Fund enters into transactions
in options or futures on narrowly-based indices for hedging purposes,
movements in the value of the index should, if the hedge is successful,
correlate closely with the portion of the Fund's portfolio or the intended
acquisitions being hedged.
The trading of derivatives for hedging purposes entails the additional
risk of imperfect correlation between movements in the price of the
derivative 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 the derivatives markets. In this regard, trading by
speculators in derivatives has in the past occasionally resulted in market
distortions, which may be difficult or impossible to predict, particularly
near the expiration of such instruments.
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. The risk of imperfect correlation,
however, generally tends to diminish as the maturity date of the Futures
Contract or expiration date of the option approaches.
Further, with respect to options on securities, options on stock indices,
options on currencies 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. This could increase the
extent of any loss suffered by the Fund in connection with such
transactions.
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. For example, where
the Fund covers a call option written on a stock index through segregation
of securities, such securities may not match the composition of the index,
and the Fund may not be fully covered. As a result, the Fund could be
subject to risk of loss in the event of adverse market movements.
The writing of options on securities, options on stock indices or Options
on Futures Contracts constitutes only a partial hedge against fluctuations
in the value of the Fund's portfolio. When the Fund writes an option, it
will receive premium income in return for the holder's purchase of the right
to acquire or dispose of the underlying obligation. In the event that the
price of such obligation does not rise sufficiently above the exercise price
of the option, in the case of a call, or fall below the exercise price, in
the case of a put, the option will not be exercised and the Fund will retain
the amount of the premium, less related transaction costs, which will
constitute a partial hedge against any decline that may have occurred in the
Fund's portfolio holdings or any increase in the cost of the instruments to
be acquired.
Where the price of the underlying obligation moves sufficiently in favor
of the holder to warrant exercise of the option, however, and the option is
exercised, the Fund will incur a loss which may only be partially offset by
the amount of the premium it received. Moreover, by writing an option, the
Fund may be required to forego the benefits which might otherwise have been
obtained from an increase in the value of portfolio securities or other
assets or a decline in the value of securities or assets to be acquired. In
the event of the occurrence of any of the foregoing adverse market events,
the Fund's overall return may be lower than if it had not engaged in the
hedging transactions. Furthermore, the cost of using these techniques may
make it economically infeasible for the Fund to engage in such transactions.
RISKS OF NON-HEDGING TRANSACTIONS: The Fund may enter transactions in
derivatives for non-hedging purposes as well as hedging purposes. Non-
hedging transactions in such instruments 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 and unencumbered
assets necessary to satisfy an option exercise will be identified, unless
the option is 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. 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. The
Fund may also enter into futures, Forward Contracts or swaps for non-hedging
purposes. For example, the Fund may enter into such a transaction as an
alternative to purchasing or selling the underlying instrument or to obtain
desired exposure to an index or market. In such instances, the Fund will be
exposed to the same economic risks incurred in purchasing or selling the
underlying instrument or instruments. However, transactions in futures,
Forward Contracts or swaps may be leveraged, which could expose the Fund to
greater risk of loss than such purchases or sales. Entering into
transactions in derivatives for other than hedging purposes, therefore,
could expose the Fund to significant risk of loss if the prices, rates or
values of the underlying instruments or indices do not move in the direction
or to the extent anticipated.
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. Such
transactions, therefore, create an opportunity for increased return by
providing the Fund with two simultaneous premiums on the same security, but
involve additional risk, since the Fund may have an option exercised against
it regardless of whether the price of the security increases or decreases.
RISK OF A 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
contract 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 has insufficient cash available to meet margin
requirements, it will be necessary to liquidate portfolio securities or
other assets at a time when it is 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 portfolio, and could
result in trading losses.
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. Once the daily limit has been
reached in the contract, no trades may be entered into at a price beyond the
limit, thus preventing the liquidation of open futures or option positions
and requiring traders to make additional margin deposits. Prices have in the
past moved to the daily limit on a number of consecutive trading days.
The trading of Futures Contracts and options is also subject to the risk
of trading halts, suspensions, exchange or clearinghouse equipment failures,
government intervention, insolvency of a brokerage firm or clearinghouse 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 establishment
of a futures, forward or swap position (certain of which may require no
initial margin deposits) and the writing of an option, such transactions
involve substantial leverage. As a result, relatively small movements in the
price of the contract can result in substantial unrealized gains or losses.
Where the Fund enters into such transactions 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 or other assets held by the Fund or decreases in the prices of
securities or other assets the Fund intends to acquire. Where the Fund
enters into such transactions for other than hedging purposes, the margin
requirements associated with such transactions could expose the Fund to
greater risk.
POTENTIAL BANKRUPTCY OF A CLEARINGHOUSE OR BROKER: When the Fund enters into
transactions in exchange-traded futures or options, it is exposed to the
risk of the potential bankruptcy of the relevant exchange clearinghouse or
the broker through which the Fund has effected the transaction. In that
event, the Fund might not be able to recover amounts deposited as margin, or
amounts owed to the Fund in connection with its transactions, for an
indefinite period of time, and could sustain losses of a portion or all of
such amounts. Moreover, the performance guarantee of an exchange
clearinghouse generally extends only to its members and the Fund could
sustain losses, notwithstanding such guarantee, in the event of the
bankruptcy of its broker.
TRADING AND POSITION LIMITS: 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). Further, 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 portfolios of the Fund.
RISKS 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 security, index,
currency or Futures Contract.
RISKS OF TRANSACTIONS IN FOREIGN CURRENCIES AND OVER-THE-COUNTER DERIVATIVES
AND OTHER TRANSACTIONS NOT CONDUCTED ON U.S. EXCHANGES: Transactions in
Forward Contracts on foreign currencies, as well as futures and options on
foreign currencies and transactions executed on foreign exchanges, 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. Further, the value of such positions could be adversely affected
by a number of other complex political and economic factors applicable to
the countries issuing the underlying currencies.
Further, unlike trading in most other types of instruments, there is no
systematic reporting of last sale information with respect to the foreign
currencies underlying contracts thereon. As a result, the available
information on which trading systems will be based may not be as complete as
the comparable data on which the Fund makes investment and trading decisions
in connection with other transactions. Moreover, because the foreign
currency market is a global, 24-hour market, events could occur in that
market which will not be reflected in the forward, futures or options market
until the following day, thereby making it more difficult for the Fund to
respond to such events in a timely manner.
Settlements of exercises of over-the-counter Forward Contracts or foreign
currency options 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 U.S. or foreign
restrictions and regulations regarding the maintenance of foreign banking
relationships, fees, taxes or other charges.
Unlike transactions entered into by the Fund in Futures Contracts and
exchange-traded options, options on foreign currencies, Forward Contracts,
over-the-counter options on securities, swaps and other over-the-counter
derivatives are not traded on contract markets regulated by the CFTC or
(with the exception of certain foreign currency options) the SEC. To the
contrary, such instruments are traded through financial institutions acting
as market-makers, although foreign currency options are also traded on
certain national securities exchanges, such as the Philadelphia Stock
Exchange and the Chicago Board Options Exchange, subject to SEC regulation.
In an over-the-counter trading environment, many of the protections afforded
to exchange participants will not be available. For example, there are no
daily price fluctuation limits, and adverse market movements could therefore
continue to an unlimited extent over a period of time. Although the
purchaser of an option cannot lose more than the amount of the premium plus
related transaction costs, this entire amount could be lost. Moreover, the
option writer and a trader of Forward Contracts could lose amounts
substantially in excess of their initial investments, due to the margin and
collateral requirements associated with such positions.
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 or
swaps 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 guarantee of
an exchange clearinghouse, and the Fund will therefore be subject to the
risk of default by, or the bankruptcy of, the financial institution serving
as its counterparty. One or more of such institutions also may decide to
discontinue their role as market-makers in a particular currency or
security, thereby restricting the Fund's ability to enter into desired
hedging transactions. The Fund will enter into an over-the-counter
transaction only with parties whose creditworthiness has been reviewed and
found satisfactory by the Adviser.
Options on securities, options on stock indices, Futures Contracts,
Options on Futures Contracts and options on foreign currencies may be traded
on exchanges located in foreign countries. Such transactions may not be
conducted in the same manner as those entered into on U.S. exchanges, and
may be subject to different margin, exercise, settlement or expiration
procedures. As a result, many of the risks of over-the-counter trading may
be present in connection with such transactions.
Options on foreign currencies traded on national securities exchanges are
within the jurisdiction of the SEC, as are other securities traded on such
exchanges. As a result, many of the protections provided to traders on
organized exchanges will be available with respect to such transactions. In
particular, all foreign currency option positions entered into on a national
securities exchange are cleared and guaranteed by the Options Clearing
Corporation (the "OCC"), thereby reducing the risk of counterparty default.
Further, a liquid secondary market in options traded on a national
securities exchange may be more readily available than in the
over-the-counter market, potentially permitting the Fund to liquidate open
positions at a profit prior to exercise or expiration, or to limit losses in
the event of adverse market movements.
The purchase and sale of exchange-traded foreign currency options,
however, is subject to the risks of the availability of a liquid secondary
market described above, as well as the risks regarding adverse market
movements, margining of options written, the nature of the foreign currency
market, possible intervention by governmental authorities and the effects of
other political and economic events. In addition, exchange-traded options on
foreign currencies involve certain risks not presented by the
over-the-counter market. For example, exercise and settlement of such
options must be made exclusively through the OCC, which has established
banking relationships in applicable foreign countries for this purpose. As a
result, the OCC may, if it determines that foreign governmental restrictions
or taxes would prevent the orderly settlement of foreign currency option
exercises, or would result in undue burdens on the OCC or its clearing
member, impose special procedures on exercise and settlement, such as
technical changes in the mechanics of delivery of currency, the fixing of
dollar settlement prices or prohibitions on exercise.
POLICIES ON THE USE OF FUTURES AND OPTIONS ON 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 CFTC require that
the Fund enter into transactions in Futures Contracts, Options on Futures
Contracts and Options on Foreign Currencies traded on a CFTC-regulated
exchange only (i) for bona fide hedging purposes (as defined in CFTC
regulations), or (ii) for non-bona fide hedging purposes, provided that the
aggregate initial margin and premiums required to establish such non-bona
fide hedging positions does not exceed 5% of the liquidation value of the
Fund's assets, after taking into account unrealized profits and unrealized
losses on any such contracts the Fund has entered into, and excluding, in
computing such 5%, the in-the-money amount with respect to an option that is
in-the-money at the time of purchase.
<PAGE>
--------------------
PART II - APPENDIX D
--------------------
DESCRIPTION OF BOND RATINGS
The ratings of Moody's, S&P and Fitch represent their opinions as to the
quality of various debt instruments. It should be emphasized, however, that
ratings are not absolute standards of quality. Consequently, debt
instruments with the same maturity, coupon and rating may have different
yields while debt instruments of the same maturity and coupon with different
ratings may have the same yield.
MOODY'S INVESTORS SERVICE, INC.
Aaa: Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to
as "gilt edged." Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized
are most unlikely to impair the fundamentally strong position of such
issues.
Aa: Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally
known as high grade bonds. They are rated lower than the best bonds because
margins of protection may not be as large as in Aaa securities or
fluctuation of protective elements may be of greater amplitude or there may
be other elements present which make the long-term risk appear somewhat
larger than the Aaa securities.
A: Bonds which are rated A possess many favorable investment attributes and
are to be considered as upper-medium-grade obligations. Factors giving
security to principal and interest are considered adequate, but elements may
be present which suggest a susceptibility to impairment some time in the
future.
Baa: Bonds which are rated Baa are considered as medium-grade obligations,
(i.e., they are neither highly protected nor poorly secured). Interest
payments and principal security appear adequate for the present but certain
protective elements may be lacking or may be characteristically unreliable
over any great length of time. Such bonds lack outstanding investment
characteristics and in fact have speculative characteristics as well.
Ba: Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well-assured. Often the protection of
interest and principal payments may be very moderate, and thereby not well
safeguarded during both good and bad times over the future. Uncertainty of
position characterizes bonds in this class.
B: Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance
of other terms of the contract over any long period of time may be small.
Caa: Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to
principal or interest.
Ca: Bonds which are rated Ca represent obligations which are speculative
in a high degree. Such issues are often in default or have other marked
shortcomings.
C: Bonds which are rated C are the lowest rated class of bonds, and issues
so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.
STANDARD & POOR'S RATINGS SERVICES
AAA: An obligation rated AAA has the highest rating assigned by Standard &
Poor's. The obligor's capacity to meet its financial commitment on the
obligation is extremely strong.
AA: An obligation rated AA differs from the highest rated obligations only
in small degree. The obligor's capacity to meet its financial commitment on
the obligation is very strong.
A: An obligation rated A is somewhat more susceptible to the adverse effects
of changes in circumstances and economic conditions than obligations in
higher rated categories. However, the obligor's capacity to meet its
financial commitment on the obligation is still strong.
BBB: An obligation rated BBB exhibits adequate protection parameters.
However, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity of the obligor to meet its financial
commitment on the obligation.
Obligations rated BB, B, CCC, CC, and C are regarded as having significant
speculative characteristics. BB indicates the least degree of speculation
and C the highest. While such obligations will likely have some quality and
protective characteristics, these may be outweighed by large uncertainties
or major exposures to adverse conditions.
BB: An obligation rated BB is less vulnerable to nonpayment than other
speculative issues. However, it faces major ongoing uncertainties or
exposure to adverse business, financial, or economic conditions which could
lead to the obligor's inadequate capacity to meet its financial commitment
on the obligation.
B: An obligation rated B is more vulnerable to nonpayment than obligations
rated BB, but the obligor currently has the capacity to meet its financial
commitment on the obligation. Adverse business, financial, or economic
conditions will likely impair the obligor's capacity or willingness to meet
its financial commitment on the obligation.
CCC: An obligation rated CCC is currently vulnerable to nonpayment, and is
dependent upon favorable business, financial, and economic conditions for
the obligor to meet its financial commitment on the obligation. In the event
of adverse business, financial, or economic conditions the obligor is not
likely to have the capacity to meet its financial commitment on the
obligation.
CC: An obligation rated CC is currently highly vulnerable to nonpayment.
C: Subordinated debt or preferred stock obligation rated C is currently
highly vulnerable to nonpayment. The C rating may be used to cover a
situation where a bankruptcy petition has been filed or similar action has
been taken, but payments on this obligation are being continued. A "C"
rating will also be assigned to a preferred stock issue in arrears on
dividends or sinking fund payments, but that is currently paying.
D: An obligation rated D is in payment default. The D rating category is
used when payments on an obligation are not made on the date due even if the
applicable grace period has not expired, unless Standard & Poor's believes
that such payments will be made during such grace period. The D rating also
will be used upon the filing of a bankruptcy petition or the taking of a
similar action if payments on an obligation are jeopardized.
PLUS (+) OR MINUS (-) The ratings from "AA" to "CCC" may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
r: This symbol is attached to the ratings of instruments with significant
noncredit risks. It highlights risks to principal or volatility of expected
returns which are not addressed in the credit rating. Examples include:
obligations linked or indexed to equities, currencies, or commodities;
obligations exposed to severe prepayment risk -- such as interest-only or
principal-only mortgage securities; and obligations with unusually risky
interest terms, such as inverse floaters.
N.R. This indicates that no rating has been requested, that there is
insufficient information on which to base a rating, or that Standard &
Poor's does not rate a particular obligation as a matter of policy.
FITCH IBCA, DUFF & PHELPS
AAA: Highest credit quality. AAA ratings denote the lowest expectation of
credit risk. They are assigned only in case of exceptionally strong capacity
for timely payment of financial commitments. This capacity is highly
unlikely to be adversely affected by foreseeable events.
AA: Very high credit quality. AA ratings denote a very low expectation of
credit risk. They indicate very strong capacity for timely payment of
financial commitments. This capacity is not significantly vulnerable to
foreseeable events.
A: High credit quality. A ratings denote a low expectation of credit risk.
The capacity for timely payment of financial commitments is considered
strong. This capacity may, nevertheless, be more vulnerable to changes in
circumstances or in economic conditions than is the case for higher ratings.
BBB: Good credit quality. BBB ratings indicate that there is currently a low
expectation of credit risk. The capacity for timely payment of financial
commitments is considered adequate, but adverse changes in circumstances and
in economic conditions are more likely to impair this capacity. This is the
lowest investment-grade category.
Speculative Grade
BB: Speculative. BB ratings indicate that there is a possibility of credit
risk developing, particularly as the result of adverse economic change
over time; however, business or financial alternatives may be available to
allow financial commitments to be met. Securities rated in this category
are not investment grade.
B: Highly speculative. B ratings indicate that significant credit risk is
present, but a limited margin of safety remains. Financial commitments are
currently being met; however, capacity for continued payment is contingent
upon a sustained, favorable business and economic environment.
CCC, CC, C: High default risk. Default is a real possibility. Capacity for
meeting financial commitments is solely reliant upon sustained, favorable
business or economic developments. A CC rating indicates that default of
some kind appears probable. C ratings signal imminent default.
DDD, DD, D: Default. The ratings of obligations in this category are based
on their prospects for achieving partial or full recovery in a
reorganization or liquidation of the obligor. While expected recovery values
are highly speculative and cannot be estimated with any precision, the
following serve as general guidelines. DDD obligations have the highest
potential for recovery, around 90% - 100% of outstanding amounts and accrued
interest. DD indicates expected recoveries in the range of 50% - 90% and D
the lowest recovery potential, i.e. below 50%.
NOTES
"+" or "-" may be appended to a rating to denote relative status within
major rating categories. Such suffixes are not added to the "AAA" long-term
rating category, or to categorize below "CCC".
"NR" indicates that Fitch does not rate the issuer or issue in question.
"WITHDRAWN": A rating is withdrawn when Fitch deems the amount of
information available to be inadequate for rating purposes, or when an
obligation matures, is called, or refinanced.
<PAGE>
INVESTMENT ADVISER
MFS Investment Management(R)
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.
2 Avenue de Lafayette, Boston, MA 02111-1738
Toll free: (800) 225-2606
MAILING ADDRESS:
P.O. Box 2281, Boston, MA 02107-9906
[Logo] M F S (R)
INVESTMENT MANAGEMENT
WE INVENTED THE MUTUAL FUND(R)
500 Boylston Street, Boston, MA 02116
MFS-13P2 - 1/01
<PAGE>
MFS SERIES TRUST IV
MFS(R) MONEY MARKET FUND
MFS(R) GOVERNMENT MONEY MARKET FUND
MFS(R) MUNICIPAL BOND FUND
MFS(R) MID CAP GROWTH FUND (FORMERLY MFS OTC FUND)
PART C
Item 23. 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) Amendment to Declaration of Trust, dated August 29,
1997. (8)
2 Amended and Restated By-Laws, dated December 21,
1994. (1)
3 Form of Share Certificate for Classes of Shares. (6)
4 (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 (now MFS Mid Cap
Growth Fund), dated October 20, 1993. (1)
5 (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>
6 Retirement Plan for Non-Interested Person Trustees, as
amended and restated February 17, 1999. (9)
7 (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)
8 (a) Shareholder Servicing Agent Agreement, dated August 1,
1985. (1)
(b) Amendment to Shareholder Servicing Agreement, dated
April 1, 1999 to amend Fee Schedule. (15)
(c) Exchange Privilege Agreement, dated July 30, 1997. (11).
(d) Dividend Disbursing Agent Agreement, dated February 1,
1986. (2)
(e) Master Administrative Services Agreement, dated March 1,
1997, as amended and restated April 1, 1999. (12)
9 (a) Legal Opinion Consent, dated December 26, 2000; filed
herewith.
(b) Consent and Opinion of Counsel, dated December 22, 1997.
(10)
10 Consent of Deloitte & Touche LLP; filed herewith.
11 Not Applicable.
12 Not Applicable.
13 Master Distribution Plan Pursuant to Rule 12b-1 under
the Investment Company Act of 1940, effective January 1,
1997, as amended and restated September 20, 2000. (16)
14 Not Applicable.
<PAGE>
15 Plan pursuant to Rule 18f-3(d) under the Investment
Company Act of 1940, as amended and restated July 30,
1998 with Exhibit A dated April 12, 2000. (14)
16 Code of Ethics pursuant to Rule 17j-1 under the
Investment Company Act of 1940. (17)
Power of Attorney, dated July 1, 2000; filed herewith.
----------
(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 the Registrant's Post-Effective Amendment No.
33 filed with the SEC via EDGAR on November 30, 1998.
(9) Incorporated by reference to MFS Growth Opportunities Fund (File Nos.
2-36431 and 811-2032) Post-Effective Amendment No. 39 filed with the SEC
via EDGAR on February 26, 1999.
(10) Incorporated by reference to the Registrant's Post-Effective Amendment No.
32 filed with the SEC via EDGAR on December 23, 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.
(12) Incorporated by reference to MFS Series Trust III (File Nos. 2-60491 and
811-2794) Post-Effective Amendment No. 28 filed with the SEC via EDGAR on
March 31, 1999.
(13) Incorporated by reference to MFS Series Trust X (File Nos. 33-1657 and
811-4492) Post-Effective Amendment No. 21 filed with the SEC via EDGAR on
September 29, 1999.
(14) Incorporated by reference to MFS Government Limited Maturity Fund (File
Nos. 2-96738 and 811-4253) Post-Effective Amendment #21 filed with the SEC
via EDGAR on April 28, 2000.
(15) Incorporated by reference to the Registrant's Post-Effective Amendment No.
34 filed with the SEC via EDGAR on October 29, 1999.
(16) Incorporated by reference to Massachusetts Investors Growth Stock Fund
(File Nos. 2-14677 and 811-859) Post-Effective Amendment No. 68 filed with
the SEC via EDGAR on September 21, 2000.
(17) Incorporated by reference to MFS Series Trust IX (File Nos. 2-50409 and
811-2464) Post-Effective Amendment No. 40 filed with the SEC via EDGAR on
August 28, 2000.
Item 24. Persons Controlled by or under Common Control with Registrant
Not applicable.
<PAGE>
Item 25. 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 26. Business and Other Connections of Investment Adviser
MFS serves as investment adviser to the following open-end Funds
comprising the MFS Family of Funds (except the Vertex Funds mentioned below):
Massachusetts Investors Trust; Massachusetts Investors Growth Stock Fund; MFS
Growth Opportunities Fund; MFS Government Securities Fund; MFS Government
Limited Maturity Fund; MFS Series Trust I (which has 12 series: MFS Managed
Sectors Fund, MFS Cash Reserve Fund, MFS Global Asset Allocation Fund, MFS
Strategic Growth Fund, MFS Research Growth and Income Fund, MFS Core Growth
Fund, MFS Equity Income Fund, MFS New Discovery Fund, MFS Technology Fund, MFS
Research International Fund, MFS Global Telecommunications Fund and MFS Japan
Equity Fund); MFS Series Trust II (which has two series: MFS Emerging Growth
Fund and MFS Large Cap Growth Fund); MFS Series Trust III (which has three
series: MFS High Income Fund, MFS Municipal High Income Fund and MFS High Yield
Opportunities 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 five series: MFS Total
Return Fund, MFS Research Fund, MFS International New Discovery Fund, MFS
International Strategic Growth Fund and MFS International Value Fund); MFS
Series Trust VI (which has three series: MFS Global Total Return Fund, MFS
Utilities Fund and MFS Global Equity Fund); MFS Series Trust VII (which has two
series: MFS Global Governments Fund and MFS Capital Opportunities Fund); MFS
Series Trust VIII (which has two series: MFS Strategic Income Fund and MFS
Global Growth Fund); MFS Series Trust IX (which has eight series: MFS Bond Fund,
MFS Limited Maturity Fund, MFS Municipal Limited Maturity Fund, MFS Research
Bond Fund, MFS Intermediate Investment Grade Bond Fund, MFS Emerging
Opportunities Fund, MFS Large Cap Value Fund and MFS High Quality Bond Fund);
MFS Series Trust X (which has 11 series: MFS Government Mortgage Fund, MFS
Emerging Markets Equity Fund, MFS International Growth Fund, MFS International
Growth and Income Fund, MFS Strategic Value Fund, MFS Emerging Markets Debt
Fund, MFS Income Fund, MFS European Equity Fund, MFS High Yield Fund, MFS
Concentrated Growth Fund and MFS New Endeavor Fund); MFS Series Trust XI (which
has four series: MFS Union Standard Equity Fund, Vertex All Cap Fund, Vertex
Contrarian Fund and Vertex Income Fund); and MFS Municipal Series Trust (which
has 18 series: MFS
<PAGE>
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, MFS Municipal Income
Fund, MFS New York High Income Tax Free Fund and MFS Massachusetts High Income
Tax Free Fund) (the "MFS Funds"). The principal business address of each of the
MFS Funds is 500 Boylston Street, Boston, Massachusetts 02116.
MFS also serves as investment adviser of the following open-end
Funds: MFS Institutional Trust ("MFSIT") (which has 11 series) and MFS Variable
Insurance Trust ("MVI") (which has 16 series). The principal business address of
each of the aforementioned funds is 500 Boylston Street, Boston, Massachusetts
02116.
In addition, MFS serves as investment adviser to the following
closed-end funds: MFS Municipal Income Trust, MFS Multimarket Income Trust, MFS
Government Markets Income Trust, MFS Intermediate Income Trust, MFS Charter
Income Trust and MFS Special Value Trust (the "MFS Closed-End Funds"). The
principal business address of each of the MFS Closed-End Funds is 500 Boylston
Street, Boston, Massachusetts 02116.
Lastly, MFS serves as investment adviser to MFS/Sun Life Series
Trust ("MFS/SL") (which has 30 series), Money Market Variable Account, High
Yield Variable Account, Capital Appreciation Variable Account, Government
Securities Variable Account, Global Governments Variable Account, Total Return
Variable Account and Managed Sectors Variable Account (collectively, the
"Accounts"). The principal business address of MFS/SL is 500 Boylston Street,
Boston, Massachusetts 02116. The principal business address of each of the
aforementioned Accounts is One Sun Life Executive Park, Wellesley Hills,
Massachusetts 02181.
Vertex Investment Management, Inc., a Delaware corporation and a
wholly owned subsidiary of MFS, whose principal business address is 500 Boylston
Street, Boston, Massachusetts 02116 ("Vertex"), serves as investment adviser to
Vertex All Cap Fund, Vertex Contrarian Fund and Vertex Income Fund, each a
series of MFS Series Trust XI. The principal business address of the
aforementioned Funds is 500 Boylston Street, Boston, Massachusetts 02116.
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 known as the MFS
Funds after January 1999 (which will have 11 portfolios as of January 1999):
U.S. Equity Fund, U.S. Emerging Growth Fund, U.S. High Yield Bond Fund, U.S.
Dollar Reserve Fund, Charter Income Fund, U.S. Research Fund, U.S. Strategic
Growth Fund, Global Equity
<PAGE>
Fund, European Equity Fund and European Corporate Bond Fund) (the "MIL Funds").
The MIL Funds are organized in Luxembourg and qualify as an undertaking for
collective investments in transferable securities (UCITS). The principal
business address of the MIL Funds is 47, Boulevard Royal, L-2449 Luxembourg. MIL
also serves as investment adviser to and distributor for MFS Meridian U.S.
Government Bond Fund, MFS Meridian Charter Income Fund, MFS Meridian Global
Governments Fund, MFS Meridian U.S. Emerging Growth Fund, MFS Meridian Global
Equity Fund, MFS Meridian Limited Maturity Fund, MFS Meridian Global Growth
Fund, MFS Meridian Money Market Fund, MFS Meridian Global Balanced Fund, MFS
Meridian U.S. Equity Fund, MFS Meridian Research Fund, MFS Meridian U.S. High
Yield Fund, MFS Meridian Emerging Markets Debt Fund, MFS Meridian Strategic
Growth Fund and MFS Meridian Global Asset Allocation Fund and the MFS Meridian
Research International 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 Eversheds, Senator House, 85 Queen Victoria Street, London, England
EC4V 4JL, is involved primarily in marketing and investment research activities
with respect to private clients and the MIL Funds and the MFS Meridian Funds.
MFS Institutional Advisors (Australia) Ltd. ("MFSI-Australia"), a
private limited company organized under the Corporations Law of New South Wales,
Australia whose current address is Level 27, Australia Square, 264 George
Street, Sydney, NSW2000, Australia, is involved primarily in investment
management and distribution of Australian superannuation unit trusts and acts as
an investment adviser to institutional accounts.
MFS Holdings Australia Pty Ltd. ("MFS Holdings Australia"), a
private limited company organized pursuant to the Corporations Law of New South
Wales, Australia whose current address is Level 27, Australia Square, 264 George
Street, Sydney, NSW2000 Australia, and whose function is to serve primarily as a
holding company.
MFS Fund Distributors, Inc. ("MFD"), a wholly owned subsidiary of
MFS, serves as distributor for the MFS Funds, MVI and MFSIT.
MFS Service Center, Inc. ("MFSC"), a wholly owned subsidiary of MFS,
serves as shareholder servicing agent to the MFS Funds, the MFS Closed-End
Funds, MFSIT and MVI.
MFS Institutional Advisors, Inc. ("MFSI"), a wholly owned subsidiary
of MFS, provides investment advice to substantial private clients.
<PAGE>
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 Investment Management K.K. ("MIMCO"), a wholly owned subsidiary
of MFS, is a corporation incorporated in Japan. MIMCO, whose address is
Kamiyacho-Mori Building, 3-20, Tranomon 4-chome, Minato-ku, Tokyo, Japan, is
involved in investment management activities.
MFS Heritage Trust Company ("MFS Trust"), a New Hampshire-chartered
limited-purpose trust company whose current address is 650 Elm Street, Suite
404, Manchester, NH 03101, provides directed trustee services to retirement
plans.
MFS Original Research Partners, LLC, a Delaware limited liability
company and a wholly owned subsidiary of MFS whose address is 500 Boylston
Street, Boston, Massachusetts 02116, is an adviser to domestic pooled private
investment vehicles.
MFS Original Research Advisors, LLC, a Delaware limited liability
company and a wholly owned subsidiary of MFS whose address is 500 Boylston
Street, Boston, Massachusetts 02116, is an adviser to offshore pooled private
investment vehicles.
MFS
The Directors of MFS are Jeffrey L. Shames, Arnold D. Scott, John W.
Ballen, Kevin R. Parke, Thomas J. Cashman, Jr., Joseph W. Dello Russo, William
W. Scott, Donald A. Stewart, James Prieur and William W. Stinson. Mr. Shames is
the Chairman and Chief Executive Officer, Mr. Ballen is President and Chief
Investment Officer, Mr. Arnold Scott is a Senior Executive Vice President, Mr.
William Scott, Mr. Cashman, Mr. Dello Russo and Mr. Parke are Executive Vice
Presidents (Mr. Dello Russo is also Chief Financial Officer and Chief
Administrative Officer and Mr. Parke is also Chief Equity Officer), Stephen E.
Cavan is a Senior Vice President, General Counsel and Secretary of MFS, 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.
<PAGE>
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
MFS Series Trust II
MFS Series Trust III
MFS Series Trust IV
MFS Series Trust V
MFS Series Trust VI
MFS Series Trust VII
MFS Series Trust VIII
MFS Series Trust IX
MFS Series Trust X
MFS Series Trust XI
MFS Municipal Series Trust
MFS Variable Insurance Trust
MFS Institutional Trust
MFS Municipal Income Trust
MFS Multimarket Income Trust
MFS Government Markets Income Trust
MFS Intermediate Income Trust
MFS Charter Income Trust
MFS Special Value Trust
Jeffrey L. Shames is Chairman and President, Stephen E. Cavan is the
Secretary and Clerk, James O. Yost, a Senior Vice President of MFS, is the
Treasurer, Ellen M. Moynihan, Laura F. Healy, Robert R. Flaherty 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 and Assistant Clerk.
MFS/Sun Life Series Trust
C. James Prieur, President and Director of Sun Life Assurance
Company of Canada, is the President, S Stephen E. Cavan is the Secretary and
Clerk, James O. Yost is the Treasurer, Ellen M. Moynihan, Laura F. Healy, Robert
R. Flaherty and Mark E. Bradley are the Assistant Treasurers, James R.
Bordewick, Jr., is the Assistant Secretary and Assistant Clerk.
<PAGE>
Money Market Variable Account
High Yield Variable Account
Capital Appreciation Variable Account
Government Securities Variable Account
Total Return Variable Account
Global Governments Variable Account
Managed Sectors Variable Account
C. James Prieur is the President, Stephen E. Cavan is the Secretary,
and James R. Bordewick, Jr., is the Assistant Secretary.
MIL Funds
Jeffrey L. Shames is Chairman, Richard W. S. Baker, Arnold D. Scott
and William F. Waters are Directors, Stephen E. Cavan is the Secretary, James O.
Yost is the Treasurer, Ellen M. Moynihan, Laura F. Healy, Robert R. Flaherty and
Mark E. Bradley are the Assistant Treasurers, and James R. Bordewick, Jr. is the
Assistant Secretary.
MFS Meridian Funds
Jeffrey L. Shames is Chairman, Richard W. S. Baker, Arnold D. Scott
and William F. Waters are Directors, Stephen E. Cavan is the Secretary, James O.
Yost is the Treasurer, James R. Bordewick, Jr. is the Assistant Secretary and
Ellen M. Moynihan, Laura F. Healy, Robert R. Flaherty and Mark E. Bradley are
the Assistant Treasurers.
Vertex
Jeffrey L. Shames is the Chairman and President, Arnold D. Scott is
a Director, Kevin R. Parke and John W. Ballen are Executive Vice Presidents,
John D. Laupheimer is a Senior Vice President, Brian E. Stack is a Vice
President, Joseph W. Dello Russo is the Treasurer, Thomas B. Hastings is the
Assistant Treasurer, Stephen E. Cavan is the Secretary and Robert T. Burns is
the Assistant Secretary.
MIL
Peter D. Laird is President and a Director, Arnold D. Scott, Jeffrey
L. Shames and Thomas J. Cashman, Jr. are Directors, Stephen E. Cavan is a
Director, Senior Vice President and the Clerk, Robert T. Burns is an Assistant
Clerk, Joseph W. Dello Russo, Executive Vice President and Chief Financial
Officer of MFS, is the Treasurer and Thomas B. Hastings is the Assistant
Treasurer.
<PAGE>
MIL-UK
Peter D. Laird is President and a Director, Thomas J. Cashman,
Arnold D. Scott and Jeffrey L. Shames are Directors, Stephen E. Cavan is a
Director and the Secretary, Joseph W. Dello Russo is the Treasurer, Thomas B.
Hastings is the Assistant Treasurer and Robert T. Burns is the Assistant
Secretary.
MFSI - Australia
Thomas J. Cashman, Jr. is President and a Director, Graham E.
Lenzer, John A. Gee and David Adiseshan are Directors, Stephen E. Cavan is the
Secretary, Joseph W. Dello Russo is the Treasurer, Thomas B. Hastings is the
Assistant Treasurer, and Robert T. Burns is the Assistant Secretary.
MFS Holdings - Australia
Jeffrey L. Shames is the President and a Director, Arnold D. Scott,
Thomas J. Cashman, Jr., and Graham E. Lenzer are Directors, Stephen E. Cavan is
the Secretary, Joseph W. Dello Russo is the Treasurer, Thomas B. Hastings is the
Assistant Treasurer, and Robert T. Burns is the Assistant Secretary.
MFD
Arnold D. Scott and Jeffrey L. Shames are Directors, William W.
Scott, Jr., an Executive Vice President of MFS, is the President, Stephen E.
Cavan is the Secretary, Robert T. Burns is the Assistant Secretary, Joseph W.
Dello Russo is the Treasurer, and Thomas B. Hastings is the Assistant Treasurer.
MFSC
Arnold D. Scott and Jeffrey L. Shames are Directors, Joseph A.
Recomendes, a Senior Vice President and Chief Information Officer of MFS, is
Vice Chairman and a Director, Janet A. Clifford is the President, Joseph W.
Dello Russo is the Treasurer, Thomas B. Hastings is the Assistant Treasurer,
Stephen E. Cavan is the Secretary, and Robert T. Burns is the Assistant
Secretary.
MFSI
Thomas J. Cashman, Jr. is Chairman and a Director, Jeffrey L.
Shames, and Arnold D. Scott are Directors, Joseph J. Trainor is the President
and a Director, Leslie J. Nanberg is a Senior Vice President, a Managing
Director and a Director, Kevin R. Parke is the Executive Vice President and a
Managing Director, George F. Bennett, Jr., John A. Gee, Brianne Grady, Joseph A.
Kosciuszek and Joseph J. Trainor are Senior Vice Presidents and Managing
Directors, Joseph W. Dello Russo is the Treasurer, Thomas B. Hastings is the
Assistant Treasurer and Robert T. Burns is the Secretary.
<PAGE>
RSI
Arnold D. Scott is the Chairman and a Director, Martin E. Beaulieu
is the President, William W. Scott, Jr. is a Director, Joseph W. Dello Russo is
the Treasurer, Thomas B. Hastings is the Assistant Treasurer, Stephen E. Cavan
is the Secretary and Robert T. Burns is the Assistant Secretary.
MIMCO
Jeffrey L. Shames, Arnold D. Scott and Mamoru Ogata are Directors,
Shaun Moran is the Representative Director, Joseph W. Dello Russo is the
Statutory Auditor, Robert DiBella is the President and Thomas B. Hastings is the
Assistant Statutory Auditor.
MFS Trust
The Directors of MFS Trust are Martin E. Beaulieu, Stephen E. Cavan,
Janet A. Clifford, Joseph W. Dello Russo and Joseph A. Kosciuszek. Mr. Cavan is
President, Mr. Dello Russo is Treasurer, and Robert T. Burns is Clerk of MFS
Trust.
MFS Original Research Partners, LLC
Joseph J. Trainor is the President and a Manager, Jeffrey L. Shames,
John W. Ballen and Kevin R. Parke are Managers, Joseph W. Dello Russo is the
Treasurer, Stephen E. Cavan is the Secretary, Thomas B. Hastings is the
Assistant Treasurer and Robert T. Burns is the Assistant Secretary.
MFS Original Research Advisors, LLC
Joseph J. Trainor is the President and a Manager, Jeffrey L. Shames,
John W. Ballen and Kevin R. Parke are Managers, Joseph W. Dello Russo is the
Treasurer, Stephen E. Cavan is the Secretary, Thomas B. Hastings is the
Assistant Treasurer and Robert T. Burns is the Assistant Secretary.
In addition, the following persons, Directors or officers of MFS,
have the affiliations indicated:
Donald A. Stewart Chairman, Sun Life Assurance Company of
Canada, Sun Life Centre, 150 King Street
West, Toronto, Ontario, Canada (Mr.
Stewart is also an officer and/or
Director of various subsidiaries and
affiliates of Sun Life)
<PAGE>
C. James Prieur President and a Director, Sun Life
Assurance Company of Canada, Sun Life
Centre, 150 King Street West, Toronto,
Ontario, Canada (Mr. Prieur is also an
officer and/or Director of various
subsidiaries and affiliates of Sun Life)
William W. Stinson Director, Sun Life Assurance Company of
Canada, Sun Life Centre, 150 King Street
West, Toronto, Ontario, Canada;
Director, United Dominion Industries
Limited, Charlotte, N.C.; Director,
PanCanadian Petroleum Limited, Calgary,
Alberta; Director, LWT Services, Inc.,
Calgary Alberta; Director, Western Star
Trucks, Inc., Kelowna, British Columbia;
Director, Westshore Terminals Income
Fund, Vancouver, British Columbia;
Director (until 4/99), Canadian Pacific
Ltd., Calgary, Alberta
Item 27. Distributors
(a) Reference is hereby made to Item 26 above.
(b) Reference is hereby made to Item 26 above; the principal
business address of each of these persons is 500 Boylston Street, Boston,
Massachusetts 02116.
(c) Not applicable.
Item 28. Location of Accounts and Records
The accounts and records of the Registrant are located, in whole or
in part, at the office of the Registrant and the following locations:
NAME ADDRESS
Massachusetts Financial Services 500 Boylston Street
Company (investment adviser) Boston, 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
<PAGE>
MFS Service Center, Inc. 2 Avenue de Lafeyette
(transfer agent) Boston, MA 02111
Item 29. Management Services
Not Applicable.
Item 30. Undertakings
Not Applicable.
<PAGE>
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 27th day of December, 2000.
MFS SERIES TRUST IV
By: JAMES R. BORDEWICK, JR.
--------------------------------
Name: James R. Bordewick, Jr.
Title: Assistant Clerk and 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 27, 2000.
SIGNATURE TITLE
JEFFREY L. SHAMES* Chairman, President (Principal
------------------------------------ Executive Officer) and Trustee
Jeffrey L. Shames
JAMES O. YOST* Treasurer (Principal Financial Officer
------------------------------------ and Principal Accounting Officer)
James O. Yost
J. ATWOOD IVES* Trustee
------------------------------------
J. Atwood Ives
LAWRENCE T. PERERA* Trustee
------------------------------------
Lawrence T. Perera
WILLIAM J. POORVU* Trustee
------------------------------------
William J. Poorvu
<PAGE>
CHARLES W. SCHMIDT* Trustee
------------------------------------
Charles W. Schmidt
ARNOLD D. SCOTT* Trustee
------------------------------------
Arnold D. Scott
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 July 1, 2000;
filed herewith.
<PAGE>
POWER OF ATTORNEY
MFS Series Trust IV
The undersigned, Trustees and officers of MFS Series Trust IV (the
"Registrant"), hereby severally constitute and appoint Jeffrey L. Shames, Arnold
D. Scott, Stephen E. Cavan, James O. Yost and James R. Bordewick, Jr., and each
of them singly, as true and lawful attorneys, with full power to them and each
of them to sign for each of the undersigned, in the names of, and in the
capacities indicated below, any Registration Statement and any and all
amendments thereto and to file the same with all exhibits thereto, and other
documents in connection therewith, with the Securities and Exchange Commission
for the purpose of registering the Registrant as a management investment company
under the Investment Company Act of 1940 and/or the shares issued by the
Registrant under the Securities Act of 1933 granting unto our said attorneys,
and each of them, acting alone, full power and authority to do and perform each
and every act and thing requisite or necessary or desirable to be done in the
premises, as fully to all intents and purposes as he or she might or could do in
person, hereby ratifying and confirming all that said attorneys or any of them
may lawfully do or cause to be done by virtue thereof.
IN WITNESS WHEREOF, the undersigned have hereunto set their hand on this
1st day of July, 2000.
JEFFREY L. SHAMES Chairman of the Board; Trustee;
----------------------------- and Principal Executive Officer
Jeffrey L. Shames
JAMES O. YOST Principal Financial and Accounting Officer
-----------------------------
James O. Yost
J. ATWOOD IVES Trustee
-----------------------------
J. Atwood Ives
LAWRENCE T. PERERA Trustee
-----------------------------
Lawrence T. Perera
<PAGE>
WILLIAM J. POORVU Trustee
-----------------------------
William J. Poorvu
CHARLES W. SCHMIDT Trustee
-----------------------------
Charles W. Schmidt
ARNOLD D. SCOTT Trustee
-----------------------------
Arnold D. Scott
ELAINE R. SMITH Trustee
-----------------------------
Elaine R. Smith
DAVID B. STONE Trustee
-----------------------------
David B. Stone
<PAGE>
INDEX TO EXHIBITS
EXHIBIT NO. DESCRIPTION OF EXHIBIT PAGE NO.
----------- ---------------------- --------
9 (a) Legal Opinion Consent, dated
December 26, 2000.
10 Consent of Deloitte & Touche LLP.
