<PAGE>
As filed with the Securities and Exchange Commission on August 27, 1996
1933 Act File No. 2-50409
1940 Act File No. 811-2464
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------------
FORM N-1A
REGISTRATION STATEMENT UNDER
THE SECURITIES ACT OF 1933
POST-EFFECTIVE AMENDMENT NO. 33
AND REGISTRATION STATEMENT UNDER
THE INVESTMENT COMPANY ACT OF 1940
AMENDMENT NO. 26
MFS SERIES TRUST IX
(FORMERLY KNOWN AS MFS FIXED INCOME TRUST)
(Exact Name of Registrant as Specified in Charter)
500 Boylston, Street, Boston, Massachusetts 02116
(Address of Principal Executive Offices)
Registrant's Telephone Number, Including Area Code: 617-954-5000
Stephen E. Cavan, Massachusetts Financial Services Company, 500 Boylston Street,
Boston, Massachusetts 02116
(Name and Address of Agent for Service)
APPROXIMATE DATE OF PROPOSED PUBLIC OFFERING:
It is proposed that this filing will become effective (check appropriate box)
|_| immediately upon filing pursuant to paragraph (b)
|X| on August 28, 1996 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
Pursuant to Rule 24f-2, the Registrant has registered an indefinite number of
its Shares of Beneficial Interest (without par value), under the Securities Act
of 1933. The Registrant filed a Rule 24f-2 Notice for its fiscal year ended
April 30, 1996 on June 25, 1996.
==========================
<PAGE>
MFS SERIES TRUST IX
==========================
MFS BOND FUND
MFS LIMITED MATURITY FUND
MFS MUNICIPAL LIMITED MATURITY FUND
CROSS REFERENCE SHEET
--------------------
(Pursuant to Rule 404 showing location in Prospectus and/or Statement of
Additional Information of the responses to the Items in Parts A and B of Form
N-1A)
STATEMENT OF
ITEM NUMBER ADDITIONAL
FORM N-1A, PART A PROSPECTUS CAPTION INFORMATION CAPTION
- - ----------------- ------------------ -------------------
1 (a), (b) Front Cover Page *
2 (a) Expense Summary *
(b), (c) * *
3 (a) Condensed Financial Information *
(b) * *
(c) Information Concerning Shares *
of the Fund - Performance
Information
(d) Condensed Financial Information *
4 (a) The Fund; Investment Objective *
and Policies
(b), (c) Investment Objective and Policies *
5 (a) The Fund; Management of the *
Fund - Investment Adviser
(b) Front Cover Page; Management *
of the Fund - Investment
Adviser; Back Cover Page
(c) Management of the Fund - *
Investment Adviser
(d) Management of the Fund - *
Investment Adviser; Back
Cover Page
(e) Management of the Fund - *
Shareholder Servicing Agent;
Back Cover Page
(f) Expense Summary; Condensed *
Financial Information; Information
Concerning Shares of the Fund -
Expenses
(g) Investment Objective and *
Policies; Information Concerning Shares
of the Fund - Purchases
5A (a), (b), (c) ** **
6 (a) Information Concerning Shares *
of the Fund - Description of
Shares, Voting Rights and
Liabilities; Information
Concerning Shares of the Fund -
Redemptions and Repurchases;
Information Concerning Shares
of the Fund - Purchases;
Information
Concerning Shares of the Fund -
Exchanges
(b), (c), (d) * *
(e) Shareholder Services *
(f) Information Concerning Shares *
of the Fund - Distributions;
Shareholder Services -
Distribution Options
(g) Information Concerning Shares *
of the Fund - Tax Status;
Information Concerning Shares
of the Fund - Distributions
(h) * *
7 (a) Front Cover Page; Management *
of the Fund - Distributor;
Back Cover Page
(b) Information Concerning Shares *
of the Fund - Purchases;
Information Concerning Shares
of the Fund - Net Asset Value
(c) Information Concerning Shares *
of the Fund - Purchases;
Information Concerning Shares
of the Fund - Exchanges;
Shareholder Services
(d) Front Cover Page; Information *
Concerning Shares of the Fund -
Purchases; Shareholder Services
(e) Information Concerning Shares *
of the Fund - Distribution
Plans; Information Concerning Shares
of the Fund - Purchases; Expense
Summary
(f) Information Concerning Shares *
of the Fund - Distribution
Plans
8 (a) Information Concerning Shares *
of the Fund - Redemptions and
Repurchases; Information
Concerning Shares of the Fund -
Purchases; Shareholder Services
(b),(c),(d) Information Concerning Shares *
of the Fund - Redemptions and
Repurchases
9 * *
10 (a),(b) * Front Cover Page
11 * Front Cover Page
12 The Fund Definitions
13 (a),(b),(c) * Investment Objective,
Policies and
Restrictions
(d) * *
14 (a), (b) * Management of the Fund -
Trustees and Officers
(c) * Management of the Fund -
Trustees and Officers;
Appendix A
15 (a) * *
(b), (c) * Management of the Fund -
Trustees and Officers
16 (a) Management of the Fund - Management of the Fund -
Investment Adviser Investment Adviser;
Management of the
Fund - Trustees and
Officers
(b) Management of the Fund - Management of the
Investment Adviser Fund - Investment
Adviser
(c) * *
(d) * Management of the Fund -
Investment Adviser
(e) * Portfolio Transactions
and Brokerage
Commissions
(f) Information Concerning Shares Distribution Plans
of the Fund - Distribution
Plans
(g) * *
(h) * Management of the Fund -
Custodian; Independent
Auditors and Financial
Statements;
Back Cover Page
(i) * Management of the Fund -
Shareholder Servicing
Agent
17 (a),(b),(c),(d),(e) * Portfolio Transactions and
Brokerage Commissions
18 (a) Information Concerning Shares Description of Shares
of the Fund - Description of Voting Rights and
Shares, Voting Rights and Liabilities
Liabilities
(b) * *
19 (a) Information Concerning Shares Shareholder Services
of the Fund - Purchases;
Shareholder Services
(b) Information Concerning Shares Management of the Fund -
of the Fund - Net Asset Value; Distributor;
Concerning Shares Determination of the
of the Fund - Purchases of Net Asset Value and
Performance - Net Asset
Value
(c) * *
20 * Tax Status
21 (a), (b) * Management of the Fund -
Distributor; Distribution
Plans
(c) * *
22 (a) * *
(b) * Determination of Net
Asset Value and
Performance
23 * Independent-Auditors
and Financial
Statements
- - --------------------------
* Not Applicable
** Contained in Annual Report
<PAGE>
MFS BOND FUND
SUPPLEMENT TO THE SEPTEMBER 1, 1996 PROSPECTUS AND
STATEMENT OF ADDITIONAL INFORMATION
THE FOLLOWING INFORMATION SHOULD BE READ IN CONJUNCTION WITH THE FUND'S
PROSPECTUS AND STATEMENT OF ADDITIONAL INFORMATION ("SAI"), DATED SEPTEMBER 1,
1996, AND CONTAINS A DESCRIPTION OF CLASS P SHARES.
CLASS P SHARES ARE AVAILABLE FOR PURCHASE ONLY BY CERTAIN RETIREMENT
PLANS ESTABLISHED FOR THE BENEFIT OF EMPLOYEES OF MASSACHUSETTS FINANCIAL
SERVICES COMPANY ("MFS"), THE FUND'S INVESTMENT ADVISER, AND EMPLOYEES OF MFS'
AFFILIATES ("MFS RETIREMENT PLANS"). CLASS P SHARES MAY NOT BE OFFERED OR SOLD
OUTSIDE OF THE COMMONWEALTH OF MASSACHUSETTS, AND THIS SUPPLEMENT DOES NOT
CONSTITUTE AN OFFER OF CLASS P SHARES TO ANY PERSON WHO RESIDES OUTSIDE OF THE
COMMONWEALTH OF MASSACHUSETTS.
EXPENSE SUMMARY
SHAREHOLDER TRANSACTION EXPENSES: CLASS P
Maximum Initial Sales Charge Imposed on Purchases of Fund
Shares (as a percentage of offering price)........................ None
Maximum Contingent Deferred Sales Charge (as a percentage
of original purchase price or redemption proceeds, as applicable). None
ANNUAL OPERATING EXPENSES OF THE FUND (AS A PERCENTAGE OF AVERAGE NET ASSETS):
Management Fees..................................................... 0.40%
Rule 12b-1 Fees..................................................... None
Other Expenses(1)(2)................................................ 0.33%
-----
Total Operating Expenses............................................ 0.73%
- - ---------
(1) Except for the shareholder servicing agent fee component, "Other Expenses"
is based on Class A expenses incurred during the fiscal year ended April
30, 1996. The shareholder servicing agent fee component of "Other Expenses"
is a predetermined percentage based upon the Fund's net assets attributable
to each class.
(2) The Fund has an expense offset arrangement which reduces the Fund's
custodian fee based upon the amount of cash maintained by the Fund with its
custodian and dividend disbursing agent, and may enter into other such
arrangements and directed brokerage arrangements (which would also have the
effect of reducing the Fund's expenses). Any such fee reductions are not
reflected under "Other Expenses."
EXAMPLE OF EXPENSES
An investor would pay the following dollar amounts of expenses on a
$1,000 investment in the Fund, assuming (a) a 5% annual return and (b)
redemption at the end of each of the time periods indicated (unless
otherwise noted):
PERIOD CLASS P
1 year........................................ $ 7
3 years....................................... 23
The purpose of the expense table above is to assist investors in
understanding the various costs and expenses that a shareholder of the Fund will
bear directly or indirectly. A more complete description of the Fund's
management fee is set forth under the caption "Management of the Fund" in the
Prospectus.
THE "EXAMPLE" SET FORTH ABOVE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST
OR FUTURE EXPENSES OF THE FUND; ACTUAL EXPENSES MAY BE GREATER OR LESS THAN
THOSE SHOWN.
THE FUND
Four classes of shares of the Fund currently are offered for sale,
Class A shares, Class B shares, Class C shares and Class P shares. Class P
shares are available for purchase only by the MFS Retirement Plans and are
described in this Supplement. Class A shares, Class B shares and Class C shares
are described in the Fund's Prospectus and are available for purchase by the
general public.
Class A shares are offered at net asset value plus an initial sales
charge up to a maximum of 4.75% of the offering price (or a contingent deferred
sales charge (a "CDSC") upon redemption of 1.00% during the first year in the
case of purchases of $1 million or more and certain purchases by retirement
plans), and are subject to an annual distribution fee and service fee up to a
maximum of 0.35% per annum. Class B shares are offered at net asset value
without an initial sales charge but are subject to a CDSC upon redemption
(declining from 4.00% during the first year to 0% after six years) and an annual
distribution fee and service fee up to a maximum of 1.00% per annum; Class B
shares will convert to Class A shares approximately eight years after purchase.
Class C shares are offered at net asset value without an initial sales charge
but are subject to a CDSC upon redemption of 1.00% during the first year and an
annual distribution fee and service fee up to a maximum of 1.00% per annum.
Class P shares are offered at net asset value without an initial sales charge or
CDSC and are not subject to a distribution or service fee. Class C and Class P
shares do not convert to any other class of shares of the Fund.
INFORMATION CONCERNING CLASS P SHARES OF THE FUND
As noted above, Class P shares are offered at net asset value without
an initial sales charge or a CDSC and are not subject to a distribution fee or
service fee. Class P shares are offered only to MFS Retirement Plans.
MFS Retirement Plans may exchange Class P shares of the Fund for Class
P shares of any other Fund available for purchase by such Plans at their net
asset value (if available for sale), and may redeem Class P shares of the Fund
at net asset value. Distributions paid by the Fund with respect to Class P
shares generally will be greater than those paid with respect to Class A, Class
B and Class C shares because expenses attributable to Class A, Class B and Class
C shares generally will be higher.
THE DATE OF THIS SUPPLEMENT IS SEPTEMBER 1, 1996
<PAGE>
PROSPECTUS
September 1, 1996
Class A Shares of Beneficial Interest
MFS(R) BOND FUND Class B Shares of Beneficial Interest
(A member of the MFS Family of Funds(R)) Class C Shares of Beneficial Interest
- - -------------------------------------------------------------------------------
Page
----
1. Expense Summary ................................................ 2
2. The Fund ....................................................... 3
3. Condensed Financial Information ................................ 4
4. Investment Objectives and Policies ............................. 6
5. Investment Techniques .......................................... 6
6. Additional Risk Factors ........................................ 12
7. Management of the Fund ......................................... 15
8. Information Concerning Shares of the Fund ...................... 16
Purchases .................................................. 16
Exchanges .................................................. 20
Redemptions and Repurchases ................................ 21
Distribution Plans ......................................... 24
Distributions .............................................. 26
Tax Status ................................................. 26
Net Asset Value ............................................ 27
Description of Shares, Voting Rights and Liabilities ....... 27
Performance Information .................................... 27
9. Shareholder Services ........................................... 28
Appendix A ..................................................... A-1
Appendix B ..................................................... B-1
Appendix C ..................................................... C-1
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
MFS BOND FUND
500 Boylston Street, Boston, Massachusetts 02116 (617) 954-5000
This Prospectus pertains to the MFS Bond Fund (the "Fund"), a diversified
series of MFS(R) Series Trust IX (the "Trust"), an open-end investment company
presently consisting of three series. The primary investment objective of the
Fund is to provide as high a level of current income as is believed to be
consistent with prudent investment risk. The secondary objective of the Fund
is to protect shareholders' capital. See "Investment Objectives and Policies"
below. The minimum initial investment is generally $1,000 per account (see
"Information Concerning Shares of the Fund -- Purchases" below).
The Fund's investment adviser and distributor of the Fund are Massachusetts
Financial Services Company ("MFS" or the "Adviser") and MFS Fund Distributors,
Inc. ("MFD"), respectively, both of which are located at 500 Boylston Street,
Boston, Massachusetts 02116.
INVESTMENT PRODUCTS ARE NOT INSURED BY THE FDIC OR ANY OTHER GOVERNMENT AGENCY,
AND ARE NOT DEPOSITS OR OTHER OBLIGATIONS OF, OR GUARANTEED BY, ANY FINANCIAL
INSTITUTION. SHARES OF MUTUAL FUNDS ARE SUBJECT TO INVESTMENT RISK, INCLUDING
POSSIBLE LOSS OF THE PRINCIPAL AMOUNT INVESTED, AND WILL FLUCTUATE IN VALUE. YOU
MAY RECEIVE MORE OR LESS THAN YOU PAID WHEN YOU REDEEM YOUR SHARES.
This Prospectus sets forth concisely the information concerning the Trust and
the Fund that a prospective investor ought to know before investing. The Trust
on behalf of the Fund has filed with the Securities and Exchange Commission
("SEC") a Statement of Additional Information, dated September 1, 1996, as
amended or supplemented from time to time (the "SAI") which contains more
detailed information about the Fund and the Trust and is incorporated into
this Prospectus by reference. See page 29 for a further description of the
information set forth in the SAI. A copy of the SAI may be obtained without
charge by contacting the Shareholder Servicing Agent (see back cover for
address and phone number). The SEC maintains an Internet World Wide Web site
that contains the SAI, materials that are incorporated by reference into this
Prospectus and the SAI, and other information regarding the Fund. This
Prospectus is available on the Adviser's Internet World Wide Web site at
http://www.mfs.com.
INVESTORS SHOULD READ THIS PROSPECTUS AND RETAIN IT FOR FUTURE REFERENCE.
<PAGE>
1. EXPENSE SUMMARY
CLASS A CLASS B CLASS C
------- ------- -------
SHAREHOLDER TRANSACTION EXPENSES:
Maximum Initial Sales Charge
Imposed on Purchases of Fund
Shares (as a percentage of
offering price) ........... 4.75% None None
Maximum Contingent Deferred Sales
Charge (as a percentage of
original purchase price or
redemption proceeds, as
applicable) ............... See below(1) 4.00% 1.00%
ANNUAL OPERATING EXPENSES (AS A PERCENTAGE OF AVERAGE NET ASSETS):
Management Fees ........... 0.40% 0.40% 0.40%
Rule 12b-1 Fees ........... 0.30%(2) 1.00%(3) 1.00%(3)
Other Expenses(4) ......... 0.33% 0.40% 0.33%
----- ----- -----
Total Operating Expenses .. 1.03% 1.80% 1.73%
- - ----------
(1) Purchases of $1 million or more and certain retirement plans are not
subject to an initial sales charge; however, a contingent deferred sales
charge ("CDSC") of 1% will be imposed on such purchases in the event of
certain redemption transactions within 12 months following such purchases
(see "Information Concerning Shares of the Fund -- Purchases" below).
(2) The Fund has adopted a Distribution Plan for its Class A shares in
accordance with Rule 12b-1 under the Investment Company Act of 1940, as
amended (the "1940 Act"), which provides that it will pay distribution/
service fees aggregating up to (but not necessarily all of) 0.35% per
annum of the average daily net assets attributable to Class A shares (see
"Information Concerning Shares of the Fund -- Distribution Plans" below).
The Fund is currently paying distribution fees in the amount of 0.05%.
Payment of the remaining portion of the 0.10% per annum distribution fee
will commence on such date as the Trustees of the Trust may determine.
Assets attributable to Class A shares sold prior to March 1, 1991 are
subject to a service fee of 0.15% per annum. Distribution expenses paid
under this Plan, together with the initial sales charge, may cause long-
term shareholders to pay more than the maximum sales charge that would
have been permissible if imposed entirely as an initial sales charge.
(3) The Fund has adopted separate Distribution Plans for its Class B and its
Class C shares in accordance with Rule 12b-1 under the 1940 Act, which
provide that it will pay distribution/service fees aggregating up to (but
not necessarily all of) 1.00% per annum of the average daily net assets
attributable to the Class B shares under the Class B Distribution Plan and
the Class C shares under the Class C Distribution Plan (see "Information
Concerning Shares of the Fund -- Distribution Plans" below). Distribution
expenses paid under these Plans, together with any CDSC payable upon
redemption of Class B shares, may cause long-term shareholders to pay more
than the maximum sales charge that would have been permissible if imposed
entirely as an initial sales charge.
(4) The Fund has an expense offset arrangement which reduces the Fund's
custodian fee based upon the amount of cash maintained by the Fund with
its custodian and dividend disbursing agent, and may enter into other such
arrangements and directed brokerage arrangements (which would also have
the effect of reducing the Fund's expenses). Any such fee reductions are
not reflected under "Other Expenses."
<PAGE>
EXAMPLE OF EXPENSES
-------------------
An investor would pay the following dollar amounts of expenses on a $1,000
investment in the Fund, assuming (a) 5% annual return and (b) redemption at
the end of each of the time periods indicated (unless otherwise noted):
PERIOD CLASS A CLASS B CLASS C
------ ------- -------------------- --------------------
(1) (1)
1 year ........... $ 58 $ 58 $ 18 $ 28 $ 18
3 years ........... 79 87 57 54 54
5 years ........... 102 117 97 94 94
10 years ........... 167 191(2) 191(2) 204 204
- - ----------
(1) Assumes no redemption.
(2) Class B shares convert to Class A shares approximately eight years after
purchase; therefore, years nine and ten reflect Class A expenses.
The purpose of the expense table above is to assist investors in
understanding the various costs and expenses that a shareholder of the Fund
will bear directly or indirectly. More complete descriptions of the following
expenses are set forth in the following sections of the Prospectus: (i)
varying sales charges on share purchases -- "Purchases"; (ii) varying CDSCs --
"Purchases"; (iii) management fees -- "Investment Adviser"; and (iv) Rule 12b-1
(i.e., distribution plan) fees -- "Distribution Plans."
THE ABOVE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES OF THE FUND; ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.
2. THE FUND
The Fund is a diversified series of the Trust, an open-end management
investment company which was organized as a trust under the laws of The
Commonwealth of Massachusetts in 1985. The Trust presently consists of three
series, each of which represents a portfolio with separate policies. Shares of
the Fund are continuously sold to the public and the Fund uses the proceeds to
buy securities for its portfolio. Three classes of shares of the Fund
currently are offered for sale to the general public. Class A shares are
offered at net asset value plus an initial sales charge up to a maximum of
4.75% of the offering price (or a CDSC upon redemption of 1.00% during the
first year in the case of purchases of $1 million or more and certain
purchases by retirement plans) and subject to an annual distribution and
service fee up to a maximum of 0.35% per annum. Class B shares are offered at
net asset value without an initial sales charge but subject to a CDSC upon
redemption (declining from 4.00% during the first year to 0% after six years)
and an annual distribution fee and service fee up to a maximum of 1.00% per
annum. Class B shares will convert to Class A shares approximately eight years
after purchase. Class C shares are offered at net asset value without an
initial sales charge but are subject to a CDSC upon redemption of 1.00% during
the first year and an annual distribution and service fee up to a maximum of
1.00% per annum. Class C shares do not convert to any other class of shares of
the Fund.
The Trust's Board of Trustees provides broad supervision over the affairs of
the Fund. A majority of the Trustees are not affiliated with the Adviser. The
Adviser is responsible for the management of the Fund's assets and the
officers of the Trust are responsible for the Fund's operations. The Adviser
manages the portfolio from day to day in accordance with the investment
objectives and policies of the Fund. The selection of investments and the way
they are managed depend on the conditions and trends in the economy and the
financial marketplaces. The Fund also offers to buy back (redeem) its shares
from its shareholders at any time at net asset value, less any applicable
CDSC.
<PAGE>
3. CONDENSED FINANCIAL INFORMATION
The following information has been audited for at least the latest five fiscal
years of the Fund and should be read in conjunction with the financial
statements included in the Fund's Annual Report to shareholders which are
incorporated by reference into the SAI in reliance upon the report of the
Fund's independent auditors, given upon their authority as experts in
accounting and auditing. The Fund's current independent auditors are Deloitte
& Touche LLP.
FINANCIAL HIGHLIGHTS
YEAR ENDED APRIL 30,
--------------------------------------------------
CLASS A
--------------------------------------------------
1996 1995 1994 1993 1992
------ ------ ------ ------ ------
PER SHARE DATA (FOR A
SHARE OUTSTANDING
THROUGHOUT EACH PERIOD):
Net asset value --
beginning of period .. $12.71 $12.75 $14.39 $13.70 $13.25
------ ------ ------ ------ ------
Income from investment
operations# --
Net investment income $ 0.95 $ 0.98 $ 1.02 $ 1.04 $ 1.13
Net realized and
unrealized gain (loss)
on investments ..... 0.15 (0.05) (0.63) 0.74 0.45
------ ------ ------ ------ ------
Total from
investment
operations ...... $ 1.10 $ 0.93 $ 0.39 $ 1.78 $ 1.58
------ ------ ------ ------ ------
Less distributions
declared to
shareholders --
From net investment
income ............ $ (0.94) $ (0.89) $ (1.06) $ (1.04) $ (1.13)
In excess of net
investment income . -- -- (0.02) -- --
From net realized
gain on investments -- -- (0.80) (0.05) --
In excess of net
realized gain on
investments ....... -- -- (0.01) -- --
From paid-in capital (0.02) (0.08) (0.14) -- --
------ ------ ------ ------ ------
Total distributions
declared to
shareholders .... $(0.96) $(0.97) $(2.03) $(1.09) $(1.13)
------ ------ ------ ------ ------
Net asset value -- end
of period ........... $12.85 $12.71 $12.75 $14.39 $13.70
====== ====== ====== ====== ======
Total return++ ........ 8.67% 7.78% 2.12% 13.42% 12.39%
RATIOS (TO AVERAGE NET
ASSETS)/SUPPLEMENTAL DATA:
Expenses## .......... 1.00% 1.00% 0.96% 0.88% 0.91%
Net investment income 7.10% 7.91% 7.17% 7.82% 8.39%
PORTFOLIO TURNOVER .... 377% 306% 410% 330% 243%
NET ASSETS AT END OF
PERIOD (000 OMITTED) $514,892 $477,056 $459,311 $490,417 $448,261
- - ----------
++ Total returns for Class A shares do not include the applicable sales charge
(except for reinvestment dividends prior to March 1, 1991). If the charge had
been included, the results would have been lower.
# Per share data for the periods subsequent to April 30, 1993 is based on
average shares outstanding.
## For fiscal years ending after September 1, 1995, the Fund's expenses are
calculated without reduction for fees paid indirectly.
<PAGE>
FINANCIAL HIGHLIGHTS -- CONTINUED
YEAR ENDED APRIL 30,
---------------------------------------------------
CLASS A
---------------------------------------------------
1991 1990 1989 1988 1987
------ ------ ------ ------ ------
PER SHARE DATA (FOR A
SHARE OUTSTANDING
THROUGHOUT EACH PERIOD):
Net asset value --
beginning of period .. $12.69 $12.80 $13.20 $14.04 $14.62
------ ------ ------ ------ ------
Income from investment
operations --
Net investment income $ 1.14 $ 1.20 $ 1.15 $ 1.16 $ 1.24
Net realized and
unrealized gain (loss)
on investments ..... 0.59 (0.14) (0.38) (0.42) (0.27)
------ ------ ------ ------ ------
Total from
investment
operations ...... $ 1.73 $ 1.06 $ 0.77 $ 0.74 $ 0.97
------ ------ ------ ------ ------
Less distributions
declared to
shareholders --
From net investment
income ............ $(1.17) $(1.17) $(1.17) $(1.15) $(1.15)
From net realized
gain on investments -- -- -- (0.43) (0.40)
------ ------ ------ ------ ------
Total distributions
declared to
shareholders .... $(1.17) $(1.17) $(1.17) $(1.58) $(1.55)
------ ------ ------ ------ ------
Net asset value -- end
of period ........... $13.25 $12.69 $12.80 $13.20 $14.04
====== ====== ====== ====== ======
Total return++ ........ 13.65% 7.69% 5.49% 5.18% 6.15%
RATIOS (TO AVERAGE NET
ASSETS)/SUPPLEMENTAL DATA:
Expenses ............ 0.79% 0.75% 0.83% 0.76% 0.68%
Net investment income 8.82% 9.10% 8.93% 8.85% 8.44%
PORTFOLIO TURNOVER .... 189% 186% 160% 287% 334%
NET ASSETS AT END OF
PERIOD (000 OMITTED) $315,722 $293,242 $299,485 $310,403 $318,329
- - ----------
++ Total returns for Class A shares do not include the applicable sales charge
(except for reinvestment dividends prior to March 1, 1991). If the charge had
been included, the results would have been lower.
YEAR ENDED APRIL 30,
------------------------------------------------------------------
CLASS B CLASS C
-------------------------------- ------------------------------
1996 1995 1994* 1996 1995 1994**
------ ------ ------ ------ ------ ------
PER SHARE DATA (FOR
A SHARE OUTSTANDING
THROUGHOUT EACH PERIOD):
Net asset value --
beginning of
period ...... $12.69 $12.73 $14.99 $12.68 $12.72 $13.57
------ ------ ------ ------ ------ ------
Income from
investment
operations# --
Net investment
income ..... $ 0.85 $ 0.88 $ 0.56 $ 0.85 $ 0.88 $ 0.29
Net realized
and unrealized
gain (loss) on
investments 0.13 (0.05) (1.30) 0.15 (0.05) (0.90)
------ ------ ------ ------ ------ ------
Total from
investment
operations $ 0.98 $ 0.83 $(0.74) $ 1.00 $ 0.83 $(0.61)
------ ------ ------ ------ ------ ------
Less distributions
declared to
shareholders --
From net
investment
income ...... $(0.85) $(0.80) $(0.59) $(0.85) $(0.80) $(0.22)
In excess of
net investment
income ...... (0.01) -- (0.02) (0.02) -- --
From net realized
gain on
investments . -- -- (0.80) -- -- --
In excess of
net realized
gain on
investments -- -- (0.01) -- -- --
From paid-in
capital ..... (0.02) (0.07) (0.10) (0.02) (0.07) (0.02)
------ ------ ------ ------ ------ ------
Total
distributions
declared to
shareholders $(0.88) $(0.87) $(1.52) $(0.89) $(0.87) $(0.24)
------ ------ ------ ------ ------ ------
Net asset value --
end of period $12.79 $12.69 $12.73 $12.79 $12.68 $12.72
====== ====== ====== ====== ====== ======
Total return 7.90% 6.90% (5.42)%++ 7.90% 7.00% 4.57%++
RATIOS (TO AVERAGE
NET ASSETS)/
SUPPLEMENTAL DATA:
Expenses## .. 1.80% 1.84% 1.83%+ 1.73% 1.75% 1.80%+
Net investment
income ..... 6.29% 7.17% 6.39%+ 6.35% 7.17% 6.57%+
PORTFOLIO
TURNOVER ..... 377% 306% 410% 377% 306% 410%
NET ASSETS AT END
OF PERIOD(000
OMITTED) ..... $102,914 $75,451 $33,413 $17,330 $8,171 $7,627
- - ----------
* For the period from the commencement of offering of Class B shares, September
7, 1993 to April 30, 1994.
** For the period from the commencement of offering of Class C shares, January
3, 1994 to April 30, 1994.
+ Annualized.
++ Not annualized.
# Per share data for the periods subsequent to April 30, 1993 is based on
average shares outstanding.
## For fiscal years ending after September 1, 1995, the Fund's expenses are
calculated without reduction for fees paid indirectly.
<PAGE>
4. INVESTMENT OBJECTIVES AND POLICIES
INVESTMENT OBJECTIVES -- The Fund's primary investment objective is to provide
as high a level of current income as is believed to be consistent with prudent
investment risk. The Fund's secondary objective is to protect shareholders'
capital. Any investment involves risk and there can be no assurance that the
Fund will achieve its investment objectives. The investment objectives and
policies are not fundamental and may be changed without shareholder approval.
INVESTMENT POLICIES The Fund seeks to achieve its investment objective by
investing, under normal market conditions, at least 65% of its total assets
in:
(1) convertible and non-convertible debt securities and preferred stocks;
(2) debt securities issued or guaranteed by the United States ("U.S.")
Government or its agencies, authorities or instrumentalities ("U.S.
Government Securities");
(3) commercial paper, repurchase agreements and cash or cash equivalents
(such as certificates of deposit and bankers' acceptances);
Not more than 20% of the Fund's net assets will be invested in securities
rated below the four highest grades of Standard & Poors Ratings Services
("S&P"), Fitch Investors Service, Inc. ("Fitch"), Duff & Phelps Credit Rating
Co. ("Duff & Phelps") (AAA, AA, A or BBB) or Moody's Investors Service, Inc.
(Aaa, Aa, A or Baa) and comparable unrated securities. For a description of
these ratings see Appendix B to this Prospectus and for a chart indicating the
composition of the Fund's portfolio for the fiscal year ended April 30, 1996,
with the debt securities rated by S&P separated into rating categories, see
Appendix C to this Prospectus. For a discussion of the risks of investing in
these securities see "Additional Risk Factors -- Lower Rated Fixed Income
Securities" below.
Although the Fund may purchase Canadian and other foreign securities, under
normal market conditions, it may not invest more than 10% of its assets in
non-dollar denominated non-Canadian foreign securities.
The Fund may not directly purchase common stocks. However, the Fund may retain
up to 10% of its total assets in common stocks which were acquired either by
conversion of fixed income securities or by the exercise of warrants attached
thereto.
U.S. Government Securities also include interest in trusts or other entities
representing interests in obligations that are issued or guaranteed by the
U.S. Government, its agencies, authorities or instrumentalities.
5. INVESTMENT TECHNIQUES
Consistent with the Fund's investment objectives and policies, the Fund may
engage in the following investment techniques, many of which are described
more fully in the SAI. See "Investment Objectives, Policies and Restrictions"
in the SAI.
CORPORATE ASSET-BACKED SECURITIES: The Fund may invest in corporate asset-
backed securities. These securities, issued by trusts and special purpose
corporations, are backed by a pool of assets, such as credit card and
automobile loan receivables, representing the obligations of a number of
different parties.
Corporate asset-backed securities present certain risks. For instance, in the
case of credit card receivables, these securities may not have the benefit of
any security interest in the related collateral. Credit card receivables are
generally unsecured and the debtors are entitled to the protection of a number
of state and federal consumer credit laws, many of which give such debtors the
right to set off certain amounts owed on the credit cards, thereby reducing
the balance due. Most issuers of automobile receivables permit the servicers
to retain possession of the underlying obligations. If the servicer were to
sell these obligations to another party, there is a risk that the purchaser
would acquire an interest superior to that of the holders of the related
automobile receivables. In addition, because of the large number of vehicles
involved in a typical issuance and technical requirements under state laws,
the trustee for the holders of the automobile receivables may not have a
proper security interest in all of the obligations backing such receivables.
Therefore, there is the possibility that recoveries on repossessed collateral
may not, in some cases, be available to support payments on these securities.
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 often 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
prepayments generally increase with falling interest rates and decrease with
rising interest rates. Like other fixed income securities, when interest rates
rise the value of a mortgage pass-through security generally will decline;
however, when interest rates are declining, the value of mortgage pass-through
securities with prepayment features may not increase as much as that of other
fixed-income securities.
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.
SWAPS AND RELATED TRANSACTIONS: As one way of managing its exposure to
different types of investments, the Fund may enter into interest rate swaps,
currency swaps and other types of available swap agreements, such as caps,
collars and floors. Swaps involve the exchange by the Fund with another party
of cash payments based upon different interest rate indexes, currencies, and
other prices or rates, such as the value of mortgage prepayment rates. For
example, in the typical interest rate swap, the Fund might exchange a sequence
of cash payments based on a floating rate index for cash payments based on a
fixed rate. Payments made by both parties to a swap transaction are based on a
principal amount determined by the parties.
The Fund may also purchase and sell caps, floors and collars. In a typical cap
or floor agreement, one party agrees to make payments only under specified
circumstances, usually in return for payment of a fee by the counterparty. For
example, the purchase of an interest rate cap entitles the buyer, to the
extent that a specified index exceeds a predetermined interest rate, to
receive payments of interest on a contractually-based principal amount from
the counterparty selling such interest rate cap. The sale of an interest rate
floor obligates the seller to make payments to the extent that a specified
interest rate falls below an agreed-upon level. A collar arrangement combines
elements of buying a cap and selling a floor.
Swap agreements will tend to shift the Fund's investment exposure from one
type of investment to another. For example, if the Fund agreed to exchange
payments in dollars for payments in foreign currency, in each case based on a
fixed rate, the swap agreement would tend to decrease the Fund's exposure to
U.S. interest rates and increase its exposure to foreign currency and interest
rates. Caps and floors have an effect similar to buying or writing options.
Depending on how they are used, swap agreements may increase or decrease the
overall volatility of the Fund's investments and its share price and yield.
Swap agreements are sophisticated hedging instruments that typically involve a
small investment of cash relative to the magnitude of risks assumed. As a
result, swaps can be highly volatile and may have a considerable impact on the
Fund's performance. Swap agreements are subject to risks related to the
counterparty's ability to perform, and may decline in value if the
counterparty's creditworthiness deteriorates. The Fund may also suffer losses
if it is unable to terminate outstanding swap agreements or reduce its
exposure through offsetting transactions.
REPURCHASE AGREEMENTS: The Fund may enter into repurchase agreements in order
to earn income on available cash or as a temporary defensive measure. Under a
repurchase agreement, the Fund acquires securities subject to the seller's
agreement to repurchase at a specified time and price. If the seller becomes
subject to a proceeding under the bankruptcy laws or its assets are otherwise
subject to a stay order, the Fund's right to liquidate the securities may be
restricted (during which time the value of the securities could decline). As
discussed in the SAI, the Fund has adopted certain procedures intended to
minimize risk.
LENDING OF SECURITIES: The Fund may seek to increase its income by lending
portfolio securities. Such loans will usually be made to member firms (and
subsidiaries thereof) of the New York Stock Exchange and to member banks of
the Federal Reserve System, and would be required to be secured continuously
by collateral in cash, U.S. Government securities or an irrevocable letter of
credit maintained on a current basis at an amount at least equal to the market
value of the securities loaned. The Fund will continue to collect the
equivalent of interest on the securities loaned and will also receive either
interest (through investment of cash collateral) or a fee (if the collateral
is U.S. government securities or an irrevocable letter of credit). If the
Adviser determines to make securities loans, it is intended that the value of
the securities loaned would not exceed 30% of the value of the total assets of
the Fund.
ZERO COUPON BONDS, DEFERRED INTEREST BONDS AND PIK BONDS: Fixed income
securities in which the Fund may invest also include zero coupon bonds,
deferred interest bonds and bonds on which the interest is payable in kind
("PIK bonds"). Zero coupon and deferred interest bonds are debt obligations
which are issued or purchased at a significant discount from face value. The
discount approximates the total amount of interest the bonds will accrue and
compound over the period until maturity or the first interest payment date, at
a rate of interest reflecting the market rate of the security at the time of
issuance. While zero coupon bonds do not require the periodic payment of
interest, deferred interest bonds provide for a period of delay before the
regular payment of interest begins. PIK bonds are debt obligations which
provide that the issuer thereof may, at its option, pay interest on such bonds
in cash or in the form of additional debt obligations. Such investments
benefit the issuer by mitigating its need for cash to meet debt service, but
also require a higher rate of return to attract investors who are willing to
defer receipt of such cash. Such investments may experience greater volatility
in market value due to changes in interest rates than debt obligations which
make regular payments of interest. The Fund will accrue income on such
investments for tax and accounting purposes, 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.
COLLATERALIZED MORTGAGE OBLIGATIONS AND MULTICLASS PASS-THROUGH SECURITIES
The Fund may invest a portion of its assets in collateralized mortgage
obligations or "CMOs", which are debt obligations collateralized by mortgage
loans or mortgage pass-through securities. Typically, CMOs are collateralized
by certificates issued by GNMA, FNMA or FHLMC, but also may be collateralized
by whole loans or private mortgage pass-through securities (such collateral
collectively referred to as "Mortgage Assets"). The Fund may also invest a
portion of its assets in multiclass pass-through securities which are
interests in a trust composed of Mortgage Assets. CMOs (which include
multiclass pass-through securities) may be issued by agencies or
instrumentalities of the U.S. Government or by private originators of, or
investors in, mortgage loans, including savings and loan associations,
mortgage banks, commercial banks, investment banks and special purpose
subsidiaries of the foregoing. Payments of principal of and interest on the
Mortgage Assets, and any reinvestment income thereon, provide the funds to pay
debt service on the CMOs or make scheduled distributions on the multiclass
pass-through securities. In a CMO, a series of bonds or certificates are
usually issued in multiple classes with different maturities. Each class of
CMOs, often referred to as a "tranche", is issued at a specific fixed or
floating coupon rate and has a stated maturity or final distribution date.
Principal prepayments on the Mortgage Assets may cause the CMOs to be retired
substantially earlier than their stated maturities or final distribution
dates, resulting in a loss of all or part of the premium if any has been paid.
Certain classes of CMOs have priority over others with respect to the receipt
of prepayments on the mortgages. Therefore, depending on the type of CMOs in
which the Fund invests, the investment may be subject to a greater or lesser
risk of prepayments than other types of mortgage-related securities.
The Fund may also invest in parallel pay CMOs and Planned Amortization Class
CMOs ("PAC Bonds"). Parallel pay CMOs are structured to provide payments of
principal on each payment date to more than one class. PAC Bonds generally
require payments of a specified amount of principal on each payment date. PAC
Bonds are always parallel pay CMOs with the required principal payment on such
securities having the highest priority after interest has been paid to all
classes.
STRIPPED MORTGAGE-BACKED SECURITIES: The Fund may also invest a portion of
its assets in stripped mortgage-backed securities ("SMBS"), which are
derivative multiclass mortgage securities usually structured with two classes
that receive different proportions of interest and principal distributions
from an underlying pool of mortgage assets. For a further description of SMBS
and the risks related to transactions therein, see the SAI.
EMERGING MARKET SECURITIES: Consistent with the Fund's objective and policies,
the Fund may invest in securities of issuers whose principal activities are
located in emerging market countries. Emerging market countries include any
country determined by the Adviser to have an emerging market economy, taking
into account a number of factors, including whether the country has a low- to
middle-income economy according to the International Bank for Reconstruction
and Development, the country's foreign currency debt rating, its political and
economic stability and the development of its financial and capital markets.
The Adviser determines whether an issuer's principal activities are located in
an emerging market country by considering such factors as its country of
organization, the principal trading market for its securities and the source
of its revenues and assets. The issuer's principal activities generally are
deemed to be located in a particular country if: (a) the security is issued or
guaranteed by the government of that country or any of its agencies,
authorities or instrumentalities; (b) the issuer is organized under the laws
of, and maintains a principal office in, that country; (c) the issuer has its
principal securities trading market in that country; (d) the issuer derives
50% or more of its total revenues from goods sold or services performed in
that country; or (e) the issuer has 50% or more of its assets in that country.
BRADY BONDS: The Fund may invest in Brady Bonds, which are securities created
through the exchange of existing commercial bank loans to public and private
entities in certain emerging markets for new bonds in connection with debt
restructurings under a debt restructuring plan introduced by former U.S.
Secretary of the Treasury, Nicholas F. Brady (the "Brady Plan"). Brady Plan
debt restructurings have been implemented to date in Argentina, Brazil,
Bulgaria, Costa Rica, Dominican Republic, Ecuador, Mexico, Jordan, Nigeria,
Panama, the Philippines, Poland, Uruguay and Venezuela. Brady Bonds have been
issued only recently, and for that reason do not have a long payment history.
Brady Bonds may be collateralized or uncollateralized, are issued in various
currencies (but primarily the U.S. dollar) and are actively traded in over-
the-counter secondary markets. U.S. dollar-denominated, collateralized Brady
Bonds, which may be fixed rate bonds or floating-rate bonds, are generally
collateralized in full as to principal by U.S. Treasury zero coupon bonds
having the same maturity as the bonds. Brady Bonds are often viewed as having
three or four valuation components: the collateralized repayment of principal
at final maturity; the collateralized interest payments; the uncollateralized
interest payments; and any uncollateralized repayment of principal at maturity
(these uncollateralized amounts constituting the "residual risk"). In light of
the residual risk of Brady Bonds and the history of defaults of countries
issuing Brady Bonds with respect to commercial bank loans by public and
private entities, investments in Brady Bonds may be viewed as speculative.
"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, the Fund will normally invest in cash,
cash equivalents and high grade debt securities.
INDEXED SECURITIES: The Fund may invest in indexed securities whose value is
linked to foreign currencies, interest rates, commodities, indices, or other
financial indicators. Most indexed securities are short to intermediate term
fixed-income securities whose values at maturity (i.e., principal value) or
interest rates rise or fall according to the change in one or more specified
underlying instruments. Indexed securities may be positively or negatively
indexed (i.e., their principal value or interest rates may increase or
decrease if the underlying instrument appreciates), and may have return
characteristics similar to direct investments in the underlying instrument or
to one or more options on the underlying instrument. Indexed securities may be
more volatile than the underlying instrument itself.
MORTGAGE "DOLLAR ROLL" TRANSACTIONS: The Fund may enter into mortgage "dollar
roll" transactions with selected banks and broker-dealers pursuant to which
the Fund sells mortgage-backed securities for delivery in the future
(generally within 30 days) and simultaneously contracts to repurchase
substantially similar (same type, coupon and maturity) securities on a
specified future date. The Fund will only enter into covered rolls. A "covered
roll" is a specific type of dollar roll for which there is an offsetting cash
position or a cash equivalent security position which matures on or before the
forward settlement date of the dollar roll transaction.
RESTRICTED SECURITIES: The Fund may also purchase securities that are not
registered under the Securities Act of 1933, 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"). The Trust's Board of Trustees determines, based upon a
continuing review of the trading markets for a specific Rule 144A security,
whether such security is liquid and thus not subject to the Fund's limitation
on investing not more than 10% of its net assets in illiquid investments. The
Board of Trustees has adopted guidelines and delegated to MFS the daily
function of determining and monitoring the liquidity of Rule 144A securities.
The Board, however, will retain sufficient oversight and be ultimately
responsible for the determinations. The Board will carefully monitor the
Fund's investments in Rule 144A securities, focusing on such important
factors, among others, as valuation, liquidity and availability of
information. This investment practice could have the effect of decreasing the
level of liquidity in the Fund to the extent that qualified institutional
buyers become for a time uninterested in purchasing these Rule 144A securities
held in the Fund's portfolio. Subject to the Fund's 10% 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.
OPTIONS: The Fund intends to write (sell) "covered" put and call options and
purchase put and call options on domestic and foreign fixed income securities.
Call options written by the Fund give the holder the right to buy the
underlying security from the Fund at a fixed exercise price up to a stated
expiration date or, in the case of certain options, on such date. Put options
give the holder the right to sell the underlying security to the Fund during
the term of the option at a fixed exercise price up to a stated expiration
date or, in the case of certain options, on such date. Call options are
"covered" by the Fund, when it owns the underlying security, and put options
are "covered" by the Fund, when it has established a segregated account of
cash, short-term money market instruments or high quality debt securities
which can be liquidated promptly to satisfy any obligation of the Fund to
purchase the underlying security. The Fund may also write straddles
(combinations of puts and calls on the same underlying security). The writing
of straddles provides the Fund with additional premium income, but could
involve greater risk.
The Fund will receive a premium from writing a put or call option, which
increases the Fund's gross income in the event the option expires unexercised
or is closed out at a profit. The amount of the premium will reflect, among
other things, the relationship of the exercise price to the market price and
volatility of the underlying security, the remaining term of the option,
supply and demand and interest rates. By writing a call option, the Fund
limits its opportunity to profit from any increase in the market value of the
underlying security above the exercise price of the option. By writing a put
option, the Fund assumes the risk that it may be required to purchase the
underlying security for an exercise price higher than its then current market
value, resulting in a potential capital loss unless the security subsequently
appreciates in value.
The Fund may terminate an option that it has written prior to its expiration
by entering into a closing purchase transaction in which it purchases an
option having the same terms as the option written. It is possible, however,
that illiquidity in the options markets may make it difficult from time to
time for the Fund to close out its written option positions.
The Fund may also purchase put or call options in anticipation of changes in
interest rates which may adversely affect the value of its portfolio or the
prices of securities that the Fund wants to purchase at a later date. The
premium paid for a put or call option plus any transaction costs will reduce
the benefit, if any, realized by the Fund upon exercise of the option, and,
unless the price of the underlying security changes sufficiently, the option
may expire without value to the Fund.
The Fund intends to write and purchase options on securities not only for
hedging purposes, but also for the purpose of increasing its return. Options
on securities that are written or purchased by the Fund will be traded on U.S.
and foreign exchanges and over-the-counter. Over-the-counter transactions also
involve certain risks which may not be present in an exchange environment.
The Fund may also enter into options on the yield "spread" or yield
differential between two fixed income securities, a transaction referred to as
a "yield curve" option, for hedging and non-hedging purposes. In contrast to
other types of options, a yield curve option is based on the difference
between the yields of designated fixed income securities rather than the
actual prices of the individual securities. Yield curve options written by the
Fund will be covered but could involve additional risks.
The staff of the SEC has taken the position that purchased over-the-counter
options and assets used to cover written over-the-counter options are illiquid
and, therefore, together with other illiquid securities, cannot exceed a
certain percentage of the Fund's assets (the "SEC illiquidity ceiling").
Although the Adviser disagrees with this position, the Adviser intends to
limit the Fund's writing of over-the-counter options in accordance with the
following procedure. Except as provided below, the Fund intends to write over-
the-counter options only with primary U.S. Government securities dealers
recognized by the Federal Reserve Bank of New York. Also, the contracts which
the Fund has in place with such primary dealers will provide that the Fund has
the absolute right to repurchase an option it writes at any time at a price
which represents the fair market value, as determined in good faith through
negotiation between the parties, but which in no event will exceed a price
determined pursuant to a formula in the contract. Although the specific
formula may vary between contracts with different primary dealers, the formula
will generally be based on a multiple of the premium received by the Fund for
writing the option, plus the amount, if any, of the option's intrinsic value
(i.e., the amount that the option is in-the-money). The formula may also
include a factor to account for the difference between the price of the
security and the strike price of the option if the option is written out-of-
the-money. The Fund will treat all or a part of the formula price as illiquid
for purposes of the SEC illiquidity ceiling. The Fund may also write over-the-
counter options with non-primary dealers, including foreign dealers, and will
treat the assets used to cover these options as illiquid for purposes of such
SEC illiquidity ceiling.
FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS: The Fund may 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 which may become
available for trading ("Futures Contracts"). The Fund may also purchase and
write options on such Futures Contracts ("Options on Futures Contracts").
These instruments will be used only to hedge against anticipated future
changes in interest rates which otherwise might either adversely affect the
value of the Fund's portfolio securities or adversely affect the prices of
securities which the Fund intends to purchase at a later date. Should interest
rates move in an unexpected manner, the Fund may not achieve the anticipated
benefits of the hedging transactions and may realize a loss. Such transactions
may also be entered into for non-hedging purposes, to the extent permitted
under applicable law, which involves greater risks and could result in losses
which are not offset by gains on other portfolio assets.
The Fund has adopted the additional restriction that it will not enter into a
Futures Contract if, immediately thereafter, the value of securities and other
obligations underlying all such Futures Contracts would exceed 50% of the
value of the Fund's total assets. Moreover, the Fund will not purchase put and
call options on securities, on Futures Contracts or on foreign currencies, if,
as a result, more than 5% of its total assets would be invested in such
options.
Futures Contracts and Options on Futures Contracts that are entered into by
the Fund will be traded on U.S. and foreign exchanges.
FORWARD CONTRACTS: The Fund may enter into forward foreign currency exchange
contracts ("Forward Contracts") for hedging purposes only. A Forward Contract
is an obligation to purchase or sell a specific currency for an agreed price
at a future date which is individually negotiated and privately traded by
currency traders and their customers. The Fund will enter into Forward
Contracts to attempt to minimize the risk to the Fund from adverse changes in
the relationship between the U.S. dollar and foreign currency. The Fund may
enter into a Forward Contract, for example, when it enters into a contract for
the purchase or sale of a security denominated in a foreign currency in order
to "lock in" the U.S. dollar price of the security. Additionally, for example,
when the Fund believes that a foreign currency may suffer a substantial
decline against the U.S. dollar, it may enter into a Forward Contract to sell
an amount of that foreign currency approximating the value of some or all of
the Fund's portfolio securities denominated in such foreign currency. The
Fund may also enter into a Forward Contract on one currency in order to hedge
against risk of loss arising from fluctuations in the value of a second
currency (referred to as a "cross hedge") if, in the judgment of the Adviser,
a reasonable degree of correlation can be expected between movements in the
values of the two currencies. The Fund may choose to, or be required to,
receive delivery of the foreign currencies underlying Forward Contracts it has
entered into. Under certain circumstances, such as where the Adviser believes
that the applicable exchange rate is unfavorable at the time the currencies
are received or the Adviser anticipates, for any other reason, that the
exchange rate will improve, the Fund may hold such currencies for an
indefinite period of time. The Fund has established procedures consistent with
statements of the SEC and its staff regarding the use of Forward Contracts by
registered investment companies, which requires use of segregated assets or
"cover" in connection with the purchase and sale of such contracts. See
"Additional Risk Factors -- Foreign Securities" below for information on the
risks associated with holding foreign currency.
OPTIONS ON FOREIGN CURRENCIES: The Fund may purchase and write put and call
options on foreign currencies for the purpose of protecting against declines
in the dollar value of foreign portfolio securities and against increases in
the dollar cost of foreign securities to be acquired. As in the case of other
kinds of options, however, the writing of an option on foreign currency will
constitute only a partial hedge, up to the amount of the premium received, and
the Fund could be required to purchase or sell foreign currencies at
disadvantageous exchange rates, thereby incurring losses. The purchase of an
option on foreign currency may constitute an effective hedge against
fluctuations in exchange rates although, in the event of rate movements
adverse to the Fund's position, it may forfeit the entire amount of the
premium plus related transaction costs. Options on foreign currencies written
or purchased by the Fund will be traded on U.S. and foreign exchanges and
over-the-counter. The Fund may also choose to, or be required to, receive
delivery of the foreign currencies underlying options on foreign currencies it
has entered into. Under certain circumstances, such as where the Adviser
believes that the applicable exchange rate is unfavorable at the time the
currencies are received or the Adviser anticipates, for any other reason, that
the exchange rate will improve, the Fund may hold such currencies for an
indefinite period of time. See "Additional Risk Factors -- Foreign
Securities," below for information on the risks associated with holding
foreign currency.
6. ADDITIONAL RISK FACTORS
The following discussion of additional risk factors supplements the risk
factors described above. Additional information concerning risk factors can be
found under the caption "Investment Objectives, Policies and Restrictions" in
the SAI.
OPTIONS, FUTURES CONTRACTS, FORWARD CONTRACTS: Although the Fund will enter
into certain transactions in options, Futures Contracts, Options on Futures
Contracts, Forward Contracts and options on foreign currencies for hedging
purposes, and will enter into certain other options transactions for hedging
purposes, such transactions nevertheless involve risks. For example, a lack of
correlation between the instrument underlying an option or Futures Contract
and the assets being hedged, or unexpected adverse price movements, could
render the Fund's hedging strategy unsuccessful and could result in losses.
The Fund also may enter into transactions in such instruments for other than
hedging purposes, which involves greater risk. In particular, such
transactions may result in losses for the Fund which are not offset by gains
on other portfolio positions, thereby reducing gross income. In addition,
foreign currency markets may be extremely volatile from time to time. There
can be no assurance that a liquid secondary market will exist for any contract
purchased or sold, and the Fund may be required to maintain a position until
exercise or expiration, which could result in losses.
Transactions in options may be entered into by the Fund on U.S. exchanges
regulated by the SEC, in the over-the-counter market and on foreign exchanges,
while Forward Contracts may be entered into only in the over-the-counter
market. Futures Contracts and Options on Futures Contracts may be entered into
on U.S. exchanges regulated by the CFTC and on foreign exchanges. In
addition, the securities underlying options and Futures Contracts traded by
the Fund will include foreign as well as domestic securities.
FIXED INCOME SECURITIES: The net asset value of the shares of an open-end
investment company, such as the Fund, which invests primarily in fixed income
securities, changes with the general level of interest rates. When interest
rates decline, the market value of a portfolio invested at higher yields can
be expected to rise. Conversely, when interest rates rise, the market value of
a portfolio invested at lower yields can be expected to decline.
LOWER-RATED FIXED INCOME SECURITIES: As indicated above, the Fund may also
invest up to 20% of its net assets in securities rated Ba or lower by Moody's
or BB or lower by S&P or Fitch and comparable unrated securities (commonly
known as "junk bonds"). No minimum rating standard is required by the Fund.
These securities are considered speculative and, while generally providing
greater income than investments in higher rated securities, will involve
greater risk of principal and income (including the possibility of default or
bankruptcy of the issuers of such securities) and may involve greater
volatility of price (especially during periods of economic uncertainty or
change) than securities in the higher rating categories. However, since yields
vary over time, no specific level of income can ever be assured. These lower
rated high yielding fixed income securities generally tend to reflect economic
changes and short-term corporate and industry developments to a greater extent
than higher rated securities which react primarily to fluctuations in the
general level of interest rates. These lower rated fixed income securities are
also affected by changes in interest rates, the market's perception of their
credit quality, and the outlook for economic growth. In the past, economic
downturns or an increase in interest rates have, under certain circumstances,
caused a higher incidence of default by the issuers of these securities and
may do so in the future, especially in the case of highly leveraged issuers.
During certain periods, the higher yields on the Fund's lower rated high
yielding fixed income securities are paid primarily because of the increased
risk of loss of principal and income, arising from such factors as the
heightened possibility of default or bankruptcy of the issuers of such
securities. Due to the fixed income payments of these securities, the Fund may
continue to earn the same level of interest income while its net asset value
declines due to portfolio losses, which could result in an increase in the
Fund's yield despite the actual loss of principal. The market for these lower
rated fixed income securities may be less liquid than the market for
investment grade fixed income securities. Therefore, judgment may at times
play a greater role in valuing these securities than in the case of investment
grade fixed income securities.
The Fund may also invest in fixed income securities rated Baa by Moody's or
BBB by S&P or Fitch and comparable unrated securities. These securities, while
normally exhibiting adequate protection parameters, have speculative
characteristics and changes in economic conditions or other circumstances are
more likely to lead to a weakened capacity to make principal and interest
payments than in the case of higher grade fixed income securities.
These lower rated and comparable unrated securities may also include zero
coupon bonds, deferred interest bonds and PIK bonds, described above.
FOREIGN SECURITIES: The Fund may invest in foreign securities to the extent
described above. Investing in securities of foreign issuers generally involves
risks not ordinarily associated with investing in securities of domestic
issuers. These risks include changes in currency rates, exchange control
regulations, governmental administration or economic or monetary policy (in
the U.S. 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 U.S.
investments in foreign countries could be affected by other factors including
expropriation, confiscatory taxation and potential difficulties in enforcing
contractual obligations and could be subject to extended settlement periods.
The Fund may hold foreign currency received in connection with investments in
foreign securities when, in the judgment of the Adviser, it would be
beneficial to convert such currency into U.S. dollars at a later date, based
on anticipated changes in the relevant exchange rate. The Fund may also hold
foreign currency in anticipation of purchasing foreign securities.
EMERGING MARKET SECURITIES: The risks of investing in foreign securities may
be intensified in the case of investments in emerging markets. Securities of
many issuers in emerging markets may be less liquid and more volatile than
securities of comparable domestic issuers. Emerging markets also have
different clearance and settlement procedures, and in certain markets there
have been times when settlements have been unable to keep pace with the volume
of securities transactions, making it difficult to conduct such transactions.
Delays in settlement could result in temporary periods when a portion of the
assets of the Fund is uninvested and no return is earned thereon. The
inability of the Fund to make intended security purchases due to settlement
problems could cause the Fund to miss attractive investment opportunities.
Inability to dispose of portfolio securities due to settlement problems could
result in losses to the Fund due to subsequent declines in value of the
portfolio security, a decrease in the level of liquidity in the Fund's
portfolio or, if the Fund has entered into a contract to sell the security, in
possible liability to the purchaser. Certain markets may require payment for
securities before delivery and in such markets, the Fund bears the risk that
the securities will not be delivered and that the Fund's payments will not be
returned. Securities prices in emerging markets can be significantly more
volatile than in the more developed nations of the world, reflecting the
greater uncertainties of investing in less established markets and economies.
In particular, countries with emerging markets may have relatively unstable
governments, present the risk of nationalization of businesses, restrictions
on foreign ownership, or prohibitions of repatriation of assets, and may have
less protection of property rights than more developed countries. The
economies of countries with emerging markets may be predominantly based on
only a few industries, may be highly vulnerable to changes in local or global
trade conditions, and may suffer from extreme and volatile debt burdens or
inflation rates. Local securities markets may trade a small number of
securities and may be unable to respond effectively to increases in trading
volume, potentially making prompt liquidation of substantial holdings
difficult or impossible at times. Securities of issuers located in countries
with emerging markets may have limited marketability and may be subject to
more abrupt or erratic price movements.
Certain emerging markets may require governmental approval for the
repatriation of investment income, capital or the proceeds of sales of
securities by foreign investors. In addition, if a deterioration occurs in an
emerging market's balance of payments or for other reasons, a country could
impose temporary restrictions on foreign capital remittances. The Fund could
be adversely affected by delays in, or a refusal to grant, any required
governmental approval for repatriation of capital, as well as by the
application to the Fund of any restrictions on investments.
Investment in certain foreign emerging market debt obligations may be
restricted or controlled to varying degrees. These restrictions or controls
may at times preclude investment in certain foreign emerging market debt
obligations and increase the expenses of the Fund.
PORTFOLIO TRADING: The Fund intends to engage in portfolio trading rather than
holding portfolio securities to maturity. In trading portfolio securities, the
Fund seeks to take advantage of market developments, yield disparities and
variations in the creditworthiness of issuers. For the fiscal year ended April
30, 1996, the Fund had a portfolio turnover rate of over 100%. Transaction
costs incurred by the Fund and the realized capital gains and losses of the
Fund may be greater than that of a fund with a lesser portfolio turnover rate.
For a description of the strategies which may be used by the Fund in trading
portfolio securities, see "Portfolio Trading" in the SAI.
The primary consideration in placing portfolio security transactions with
broker-dealers is to obtain, and maintain the availability of, execution at
the most favorable prices. Consistent with the foregoing primary
consideration, the Rules of Fair Practice of the National Association of
Securities Dealers, Inc. (the "NASD") and such other policies as the Trustees
may determine, the Adviser may consider sales of shares of the Fund and of the
other investment company clients of MFD, the Fund's distributor, as a factor
in the selection of broker-dealers to execute the Fund's portfolio
transactions. From time to time, the Adviser may direct certain portfolio
transactions to broker-dealer firms which, in turn, have agreed to pay a
portion of the Fund's operating expenses (e.g., fees charged by the custodian
of the Fund's assets).
------------------------
The SAI includes a discussion of other investment policies and a listing of
specific investment restrictions which govern the Fund's investment policies.
The specific investment restrictions listed in the SAI may be changed without
shareholder approval unless otherwise indicated (see "Investment Restrictions"
in the SAI). The Fund's limitations, policies and rating restrictions are
adhered to at the time of purchase or utilization of assets; a subsequent
change in circumstances will not be considered to result in a violation of
policy.
7. MANAGEMENT OF THE FUND
INVESTMENT ADVISER -- The Adviser manages the assets of the Fund pursuant to
an Investment Advisory Agreement, dated December 2, 1985 (the "Advisory
Agreement"). The Adviser provides the Fund with overall investment advisory
and administrative services, as well as general office facilities. Geoffrey L.
Kurinsky, a Senior Vice President of the Adviser, has been the Fund's
portfolio manager since 1989 and has been employed as a portfolio manager by
the Adviser since 1987. Subject to such policies as the Trustees may
determine, the Adviser makes investment decisions for the Fund. For these
services and facilities, the Adviser receives a management fee, computed and
paid monthly fixed by a formula based upon a percentage of the Fund's average
daily net assets for its then-current fiscal year plus a percentage of the
Fund's gross income (i.e., income other than gains from the sale of
securities, gains from options and futures transactions and premium income
from options written) for that fiscal year. The applicable percentages are
reduced as assets and income attain the following levels:
ANNUAL RATE OF MANAGEMENT FEE ANNUAL RATE OF MANAGEMENT
BASED ON AVERAGE DAILY NET ASSETS FEE BASED ON GROSS INCOME
- - --------------------------------- --------------------------
.225% of the first $200 million 2.75% of the first $20 million
.191% of average daily net assets 2.34% of gross income in
in excess of $200 million excess of $20 million
For the Fund's fiscal year ended April 30, 1996, MFS received management fees
under the Advisory Agreement of $2,531,652 (equivalent to 0.40% of the Fund's
average daily net assets).
MFS also serves as investment adviser to each of the other funds in the MFS
Family of Funds (the "MFS Funds") and to MFS Municipal Income Trust, MFS
Multimarket Income Trust, MFS Government Markets Income Trust, MFS
Intermediate Income Trust, MFS Charter Income Trust, MFS Special Value Trust,
MFS Institutional Trust, MFS Union Standard Trust, MFS Variable Insurance
Trust, Sun Growth Variable Annuity Fund, Inc., MFS/Sun Life Series Trust and
seven variable accounts, each of which is a registered investment company
established by Sun Life Assurance Company of Canada (U.S.) ("Sun Life of
Canada (U.S.)") in connection with the sale of various fixed/variable annuity
contracts. MFS and its wholly owned subsidiary, MFS Asset Management Inc.,
provide investment advice to substantial private clients.
MFS is America's oldest mutual fund organization. MFS and its predecessor
organizations have a history of money management dating from 1924 and the
founding of the first mutual fund in the United States, Massachusetts
Investors Trust. Net assets under the management of the MFS organization were
approximately $45.9 billion on behalf of approximately 2.1 million investor
accounts as of July 31, 1996. As of such date, the MFS organization managed
approximately $19.5 billion of net assets in fixed income funds and fixed
income portfolios of MFS Asset Management, Inc. MFS is a subsidiary of Sun
Life of Canada (U.S.), which in turn is a wholly owned subsidiary of Sun Life
Assurance Company of Canada ("Sun Life"). The Directors of MFS are A. Keith
Brodkin, Jeffrey L. Shames, Arnold D. Scott, John R. Gardner and John D.
McNeil, Mr. Brodkin is the Chairman, Mr. Shames is the President and Mr. Scott
is the Secretary and a Senior Executive Vice President of MFS. Messrs. McNeil
and Gardner are the Chairman and the President, respectively, of Sun Life. Sun
Life, a mutual life insurance company, is one of the largest international
life insurance companies and has been operating in the U.S. since 1895,
establishing a headquarters office here in 1973. The executive officers of MFS
report directly to the Chairman of Sun Life.
A. Keith Brodkin, the Chairman and a Director of MFS, is the Chairman,
President and a Trustee of the Trust. W. Thomas London, Stephen E. Cavan,
James R. Bordewick, Jr., James O. Yost, Robert A. Dennis and Geoffrey L.
Kurinsky, all of whom are officers of MFS, are officers of the Trust.
MFS has established a strategic alliance with Foreign & Colonial Management
Ltd. ("Foreign & Colonial"). Foreign & Colonial is a subsidiary of two of the
world's oldest financial services institutions, the London-based Foreign &
Colonial Investment Trust PLC, which pioneered the idea of investment
management in 1868, and HYPO-BANK (Bayerische Hypotheken-und Wechsel-Bank AG),
the oldest publicly listed bank in Germany, founded in 1835. As part of this
alliance, the portfolio managers and investment analysts of MFS and Foreign &
Colonial share their views on a variety of investment related issues, such as
the economy, securities markets, portfolio securities and their issuers,
investment recommendations, strategies and techniques, risk analysis, trading
strategies and other portfolio management matters. MFS has access to the
extensive international equity investment expertise of Foreign & Colonial, and
Foreign & Colonial has access to the extensive U.S. equity investment
expertise of MFS. MFS and Foreign & Colonial each have investment personnel
working in each other's offices in Boston and London, respectivley.
In certain instances there may be securities which are suitable for the Fund's
portfolio as well as for portfolios of other clients of MFS or clients of
Foreign & Colonial. Some simultaneous transactions are inevitable when several
clients receive investment advice from MFS and Foreign & Colonial,
particularly when the same security is suitable for more than one client.
While in some cases this arrangement could have a detrimental effect on the
price or availability of the security as far as the Fund is concerned, in
other cases, however, it may produce increased investment opportunities for
the Fund.
DISTRIBUTOR -- MFD, a wholly owned subsidiary of MFS, is the distributor of
shares of the Fund and also serves as distributor for each of the other MFS
Funds.
SHAREHOLDER SERVICING AGENT -- MFS Service Center, Inc. (the "Shareholder
Servicing Agent"), a wholly owned subsidiary of MFS, performs transfer agency,
certain dividend disbursing agency and other services for the Fund.
8. INFORMATION CONCERNING SHARES OF THE FUND
PURCHASES
Shares of the Fund may be purchased at the public offering price through any
dealer or other financial institution ("dealers") having a selling agreement
with MFD. Dealers may also charge their customers fees relating to
investments in the Fund.
The Fund offers three classes of shares (Class A, B and C shares) which bear
sales charges and distribution fees in different forms and amounts, as
described below:
CLASS A SHARES: Class A shares are generally offered at net asset value plus
an initial sales charge, but in certain cases are offered at net asset value
without an initial sales charge but subject to a CDSC.
PURCHASES SUBJECT TO INITIAL SALES CHARGE. Class A shares are offered at
net asset value plus an initial sales charge as follows:
SALES CHARGE* AS
PERCENTAGE OF:
-------------------------- DEALER ALLOWANCE
NET AMOUNT AS A PERCENTAGE
AMOUNT OF PURCHASE OFFERING PRICE INVESTED OF OFFERING PRICE
- - ------------------ -------------- ---------- ---------------
Less than $100,000 .............. 4.75% 4.99% 4.00%
$100,000 but less than $250,000 . 4.00 4.17 3.20
$250,000 but less than $500,000 . 2.95 3.04 2.25
$500,000 but less than $1,000,000 2.20 2.25 1.70
$1,000,000 or more .............. None** None** See Below**
- - ----------
*Because of rounding in the calculation of offering price, actual sales
charges may be more or less than those calculated using the percentages
above.
**A CDSC will apply to such purchases, as discussed below.
MFD allows discounts to dealers (which are alike for all dealers) from the
applicable public offering price, as shown in the above table. In the case of
the maximum sales charge, the dealer retains 4% and MFD retains approximately
3/4 of 1% of the public offering price. The sales charge may vary depending on
the number of shares of the Fund as well as certain other MFS Funds owned or
being purchased, the existence of an agreement to purchase additional shares
during a 13-month period (or 36-month period for purchases of $1 million or
more) or other special purchase programs. A description of the Right of
Accumulation, Letter of Intent and Group Purchase privileges by which the
sales charge may be reduced is set forth in the SAI.
PURCHASES SUBJECT TO A CDSC (but not an initial sales charge). In the
following four circumstances, Class A shares are offered at net asset value
without an initial sales charge, but subject to a CDSC equal to 1% of the
lesser of the value of the shares redeemed (exclusive of reinvested dividend
and capital gain distributions) or the total cost of such shares, in the event
of a share redemption within 12 months following the purchase:
(i) on investments of $1 million or more in Class A shares;
(ii) on investments in Class A shares by certain retirement plans subject
to the Employee Retirement Income Security Act of 1974, as amended
("ERISA"), if: (a) the plan had established an account with the
Shareholder Servicing Agent prior to July 1, 1996 and (b) the
sponsoring organization has demonstrated to the satisfaction of MFD
that either (i) the employer has at least 25 employees or (ii) the
aggregate purchases by the retirement plan of Class A shares of
Funds in the MFS Funds will be in an aggregate amount of at least
$250,000 within a reasonable period of time, as determined by MFD in
its sole discretion;
(iii) on investments in Class A shares by certain retirement plans subject
to ERISA, if: (a) the retirement plan and/or sponsoring organization
subscribes to the MFS FUNDamental 401(k) Program or any similar
recordkeeping system made available by the Shareholder Servicing
Agent (the "MFS Participant Recordkeeping System"); (b) the plan
establishes an account with the Shareholder Servicing Agent on or
after July 1, 1996; and (c) the aggregate purchases by the
retirement plan of Class A shares of the MFS Funds will be in an
aggregate amount of at least $500,000 within a reasonable period of
time, as determined by MFD in its sole discretion; and
(iv) on investments in Class A shares by certain retirement plans subject
to ERISA, if: (a) the plan establishes an account with the
Shareholder Servicing Agent on or after July 1, 1996 and (b) the plan
has, at the time of purchase, a market value of $500,000 or more
invested in shares of any class or classes of the MFS Funds. THE
RETIREMENT PLAN WILL QUALIFY UNDER THIS CATEGORY ONLY IF THE PLAN OR
ITS SPONSORING ORGANIZATION INFORMS THE SHAREHOLDER SERVICING AGENT
PRIOR TO THE PURCHASES THAT THE PLAN HAS A MARKET VALUE OF $500,000
OR MORE INVESTED IN SHARES OF ANY CLASS OR CLASSES OF THE MFS FUNDS.
THE SHAREHOLDER SERVICING AGENT HAS NO OBLIGATION INDEPENDENTLY TO
DETERMINE WHETHER SUCH A PLAN QUALIFIES UNDER THIS CATEGORY.
In the case of all such purchases, MFD will pay commissions to dealers on new
investments in Class A shares made through such dealers as follows:
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
For purposes of determining the level of commissions to be paid to dealers
with respect to a shareholder's new investment in Class A shares made on or
after April 1, 1996, purchases for each shareholder account (and certain other
accounts for which the shareholder is a record or beneficial holder) will be
aggregated over a 12-month period (commencing from the date of the first such
purchases).
See "Redemptions and Repurchases -- Contingent Deferred Sales Charge" in the
Prospectus for further discussion of the CDSC.
WAIVERS OF INITIAL SALES CHARGE AND CDSC. In certain circumstances, the
initial sales charge imposed upon purchases of Class A shares and the CDSC
imposed upon redemption of Class A shares is waived. These circumstances are
described in Appendix A to this Prospectus. In addition to these
circumstances, the CDSC imposed upon the redemption of Class A shares is
waived with respect to shares held by certain retirement plans qualified under
Section 401(a) or 403(b) of the Internal Revenue Code of 1986, as amended (the
"Code"), and subject to ERISA, where:
(i) the retirement plan and/or sponsoring organization does not subscribe to
the MFS Participant Recordkeeping System; and
(ii) the retirement plan and/or sponsoring organization demonstrates to the
satisfaction of, and certifies to the Shareholder Servicing Agent that
the retirement plan has, at the time of certification or will have
pursuant to a purchase order placed with the certification, a market
value of $500,000 or more invested in shares of any class or classes of
the MFS Funds and aggregate assets of at least $10 million;
provided, however, that the CDSC will not be waived (i.e., it will be imposed)
in the event that there is a change in law or regulations which results in a
material adverse change to the tax advantaged nature of the plan, or in the
event that the plan and/or sponsoring organization: (i) becomes insolvent or
bankrupt; (ii) is terminated or partially terminated under ERISA or is
liquidated or dissolved; or (iii) is acquired by, merged into, or consolidated
with, any other entity.
CLASS B SHARES: Class B shares are offered at net asset value without an
initial sales charge but subject to a CDSC upon redemption as follows:
YEAR OF CONTINGENT
REDEMPTION DEFERRED SALES
AFTER PURCHASE CHARGE
-------------- --------------
First ........................................................... 4%
Second .......................................................... 4%
Third ........................................................... 3%
Fourth .......................................................... 3%
Fifth ........................................................... 2%
Sixth ........................................................... 1%
Seventh and following ........................................... 0%
The CDSC imposed is assessed against the lesser of the value of the shares
redeemed (exclusive of reinvested dividends and capital gain distributions) or
the total cost of such shares. No CDSC is assessed against shares acquired
through the automatic reinvestment of dividends or capital gain distributions.
Except as described below, MFD will pay commissions to dealers of 3.75% of the
purchase price of Class B shares purchased through dealers. MFD will also
advance to dealers the first year service fee payable under the Fund's Class B
Distribution Plan (see "Distribution Plans" below) at a rate equal to 0.25% of
the purchase price of such shares. Therefore, the total amount paid to a
dealer upon the sale of Class B shares is 4% of the purchase price of the
shares (commission rate of 3.75% plus a service fee equal to 0.25% of the
purchase price).
Class B shares purchased by a retirement plan whose sponsoring organization
subscribes to the MFS Participant Recordkeeping System and which has
established its account with the Shareholder Servicing Agent on or after July
1, 1996, will be subject to the CDSC described above, only under limited
circumstances, as explained below under "Waivers of CDSC." With respect to
such purchases, MFD pays an amount to dealers equal to 3.00% of the amount
purchased through such dealers (rather than the 4.00% payment described
above), which is comprised of a commission of 2.75% plus the advancement of
the first year service fee equal to 0.25% of the purchase price payable under
the Class B Distribution Plan. As discussed above, such retirement plans are
eligible to purchase Class A shares of the Fund at net asset value without an
initial sales charge but subject to a 1% CDSC if the plan has, at the time of
purchase, a market value of $500,000 or more invested in shares of any class
or classes of the MFS Funds. IN THIS EVENT, THE PLAN OR ITS SPONSORING
ORGANIZATION SHOULD INFORM THE SHAREHOLDER SERVICING AGENT THAT THE PLAN IS
ELIGIBLE TO PURCHASE CLASS A SHARES UNDER THIS CATEGORY; THE SHAREHOLDER
SERVICING AGENT HAS NO OBLIGATION INDEPENDENTLY TO DETERMINE WHETHER SUCH A
PLAN QUALIFIES UNDER THIS CATEGORY FOR THE PURCHASE OF CLASS A SHARES.
SEE "REDEMPTIONS AND REPURCHASES -- CONTINGENT DEFERRED SALES CHARGE" FOR
FURTHER DISCUSSION OF THE CDSC.
WAIVERS OF CDSC. In certain circumstances, the CDSC imposed upon
redemption of Class B shares is waived. These circumstances are described in
Appendix A to this Prospectus. In addition to these circumstances, the CDSC
imposed upon the redemption of Class B shares is waived with respect to shares
held by a retirement plan whose sponsoring organization subscribes to the MFS
Participant Recordkeeping System and which has established an account with the
Shareholder Servicing Agent on or after July 1, 1996; provided, however, that
the CDSC will not be waived (i.e., it will be imposed) in the event that there
is a change in law or regulations which results in a material adverse change
to the tax advantaged nature of the plan, or in the event that the plan and/or
sponsoring organization: (i) becomes insolvent or bankrupt; (ii) is terminated
or partially terminated under ERISA or is liquidated or dissolved; or (iii) is
acquired by, merged into, or consolidated with, any other entity.
CONVERSION OF CLASS B SHARES. Class B shares of the Fund that remain
outstanding for approximately eight years will convert to Class A shares of
the same Fund. Shares purchased through the reinvestment of distributions paid
in respect of Class B shares will be treated as Class B shares for purposes of
the payment of the distribution and service fees under the Distribution Plan
applicable to Class B shares. See "Distribution Plans" below. However, for
purposes of conversion to Class A shares, all shares in a shareholder's
account that were purchased through the reinvestment of dividends and
distributions paid in respect of Class B shares (and which have not converted
to Class A shares as provided in the following sentence) will be held in a
separate sub-account. Each time any Class B shares in the shareholder's
account (other than those in the sub-account) convert to Class A shares, a
portion of the Class B shares then in the sub-account will also convert to
Class A shares. The portion will be determined by the ratio that the
shareholder's Class B shares not acquired through reinvestment of dividends
and distributions that are converting to Class A shares bear to the
shareholder's total Class B shares not acquired through reinvestment. The
conversion of Class B shares to Class A shares is subject to the continuing
availability of a ruling from the Internal Revenue Service or an opinion of
counsel that such conversion will not constitute a taxable event for federal
tax purposes. There can be no assurance that such ruling or opinion will be
available, and the conversion of Class B shares to Class A shares will not
occur if such ruling or opinion is not available. In such event, Class B
shares would continue to be subject to higher expenses than Class A shares for
an indefinite period.
CLASS C SHARES: Class C shares are offered at net asset value without an
initial sales charge but are subject to a CDSC upon redemption of 1.00% during
the first year. Class C shares do not convert to any other class of shares of
the Fund. The maximum investment in Class C shares that may be made is up to
$1,000,000 per transaction.
The CDSC imposed is assessed against the lesser of the value of the shares
redeemed (exclusive of reinvested dividend and capital gain distributions) or
the total cost of such shares. No CDSC is assessed against shares acquired
through the automatic reinvestment of dividend or capital gain distributions.
See "Redemptions and Repurchases -- Contingent Deferred Sales Charge" below
for further discussion of the CDSC.
MFD will pay dealers 1.00% of the purchase price of Class C shares purchased
through dealers and, as compensation therefor, MFD will retain the 1.00% per
annum distribution and service fee paid under the Class C Distribution Plan by
the Fund to MFD for the first year after purchase (see "Distribution Plans"
below).
Class C shares are not currently available for purchase by any retirement plan
qualified under Sections 401(a) or 403(b) of the Internal Revenue Code of
1986, as amended (the "Code") if the retirement plan and/or the sponsoring
organization subscribe to the MFS FUNDamental 401(k) Plan or another similar
recordkeeping program made available by the Shareholder Servicing Agent.
WAIVERS OF CDSC. In certain circumstances, the CDSC imposed upon redemption of
Class C shares is waived. These circumstances are described in Appendix A to
this Prospectus.
GENERAL: The following information applies to purchases of all classes of the
Fund's shares.
MINIMUM INVESTMENT. Except as described below, the minimum initial
investment is $1,000 per account and the minimum additional investment is $50
per account. Accounts being established for monthly automatic investments and
under payroll savings programs and tax-deferred retirement programs (other
than IRAs) involving the submission of investments by means of group remittal
statements are subject to a $50 minimum on initial and additional investments
per account. The minimum initial investment for IRAs is $250 per account and
the minimum additional investment is $50 per account. Accounts being
established for participation in the Automatic Exchange Plan are subject to a
$50 minimum on initial and additional investments per account. There are also
other limited exceptions to these minimums for certain tax-deferred retirement
programs. Any minimums may be changed at any time at the discretion of MFD.
The Fund reserves the right to cease offering its shares at any time.
RIGHT TO REJECT PURCHASE ORDERS/MARKET TIMING. Purchases and exchanges
should be made for investment purposes only. The Fund and MFD each reserve the
right to reject any specific purchase order or to restrict purchases by a
particular purchaser (or group of related purchasers). The Fund or MFD may
reject or restrict any purchases by a particular purchaser or group, for
example, when such purchase is contrary to the best interests of the Fund's
other shareholders or otherwise would disrupt the management of the Fund.
MFD may enter into an agreement with shareholders who intend to make exchanges
among certain classes of shares of certain MFS Funds (as determined by MFD)
which follow a timing pattern, and with individuals or entities acting on such
shareholders' behalf (collectively, "market timers"), setting forth the terms,
procedures and restrictions with respect to such exchanges. In the absence of
such an agreement, it is the policy of the Fund and MFD to reject or restrict
purchases by market timers if (i) more than two exchange purchases are
effected in a timed account in the same calendar quarter or (ii) a purchase
would result in shares being held in timed accounts by market timers
representing more than (x) one percent of the Fund's net assets or (y)
specified dollar amounts in the case of certain MFS Funds which may include
the Fund and which may change from time to time. The Fund and MFD each reserve
the right to request market timers to redeem their shares at net asset value,
less any applicable CDSC, if either of these restrictions is violated.
DEALER CONCESSIONS. Dealers may receive different compensation with
respect to sales of Class A, Class B and Class C shares. In addition, from
time to time, MFD may pay dealers 100% of the applicable sales charge on sales
of Class A shares of certain specified MFS Funds sold by such dealer during a
specified sales period. In addition, MFD or its affiliates may, from time to
time, pay dealers an additional commission equal to 0.50% of the net asset
value of all of the Class B and/or Class C shares of certain specified MFS
Funds sold by such dealer during a specified sales period. In addition, from
time to time, MFD, at its expense, may provide additional commissions,
compensation or promotional incentives ("concessions") to dealers which sell
shares of the Fund. Such concessions provided by MFD may include financial
assistance to dealers in connection with preapproved conferences or seminars,
sales or training programs for invited registered representatives, payment for
travel expenses, including lodging, incurred by registered representatives for
such seminars or training programs, seminars for the public, advertising and
sales campaigns regarding one or more MFS Funds, and/or other dealer-sponsored
events. From time to time, MFD may make expense reimbursements for special
training of a dealer's registered representatives in group meetings or to help
pay the expenses of sales contests. Other concessions may be offered to the
extent not prohibited by state laws or any self-regulatory agency, such as the
NASD.
SPECIAL INVESTMENT PROGRAMS. For shareholders who elect to participate in
certain investment programs (e.g., the Automatic Investment Plan) or other
shareholder services, MFD or its affiliates may either (i) give a gift of
nominal value, such as a hand-held calculator, or (ii) make a nominal
charitable contribution on their behalf.
RESTRICTIONS ON ACTIVITIES OF NATIONAL BANKS. The Glass-Steagall Act
prohibits national banks from engaging in the business of underwriting,
selling or distributing securities. Although the scope of the prohibition has
not been clearly defined, MFD believes that such Act should not preclude banks
from entering into agency agreements with MFD. If, however, a bank were
prohibited from so acting, the Trustees would consider what actions, if any,
would be necessary to continue to provide efficient and effective shareholder
services in respect of Shareholders who invested in the Fund through a
national bank. It is not expected that shareholders would suffer any adverse
financial consequence as a result of these occurrences. In addition, state
securities laws on this issue may differ from the interpretation of federal
law expressed herein and banks and financial institutions may be required to
register as broker-dealers pursuant to state law.
------------------------
A shareholder whose shares are held in the name of, or controlled by, a dealer
might not receive many of the privileges and services from the Fund (such as
Right of Accumulation, Letter of Intent and certain recordkeeping services)
that the Fund ordinarily provides.
EXCHANGES
Subject to the requirements set forth below, some or all of the shares in an
account with the Fund for which payment has been received by the Fund (i.e.,
an established account) may be exchanged for shares of the same class of any
of the other MFS Funds in the MFS Family of Funds (the "MFS Funds") at net
asset value (if available for sale). Shares of one class may not be exchanged
for shares of any other class.
EXCHANGES AMONG MFS FUNDS (EXCLUDING MFS MONEY MARKET FUNDS): No initial sales
charges or CDSC will be imposed in connection with an exchange from shares of
an MFS Fund to shares of any other MFS Fund, except with respect to exchanges
from an MFS money market fund to another MFS Fund which is not an MFS money
market fund (discussed below). With respect to an exchange involving shares
subject to a CDSC, the CDSC will be unaffected by the exchange and the holding
period for purposes of calculating the CDSC will carry over to the acquired
shares.
EXCHANGES FROM AN MFS MONEY MARKET FUND: Special rules apply with respect to
the imposition of an initial sales charge or a CDSC for exchanges from an MFS
money market fund to another MFS Fund which is not an MFS money market fund.
These rules are described under the caption "Exchanges" in the Prospectuses of
those MFS money market funds.
EXCHANGES INVOLVING THE MFS FIXED FUND: Class A shares of any MFS Fund held by
certain qualified retirement plans may be exchanged for units of
participation of the MFS Fixed Fund (a bank collective investment fund) (the
"Units"), and Units may be exchanged for Class A shares of any MFS Fund. With
respect to exchanges between Class A shares subject to a CDSC and Units, the
CDSC will carry over to the acquired shares or Units and will be deducted from
the redemption proceeds when such shares or Units are subsequently redeemed,
assuming the CDSC is then payable (the period during which the Class A shares
and the Units were held will be aggregated for purposes of calculating the
applicable CDSC). In the event that a shareholder initially purchases Units
and then exchanges into Class A shares subject to an initial sales charge of
an MFS Fund, the initial sales charge shall be due upon such exchange, but
will not be imposed with respect to any subsequent exchanges between such
Class A shares and Units with respect to shares on which the initial sales
charge has already been paid. In the event that a shareholder initially
purchases Units and then exchanges into Class A shares subject to a CDSC of an
MFS Fund, the CDSC period will commence upon such exchange, and the
applicability of the CDSC with respect to subsequent exchanges shall be
governed by the rules set forth in this paragraph above.
GENERAL: A shareholder should read the prospectus of the other MFS Fund and
consider the differences in objectives, policies and restrictions before
making any exchange. Exchanges will be made only after instructions in writing
or by telephone (an "Exchange Request") are received for an established
account by the Shareholder Servicing Agent in proper form (i.e., if in writing
- - -- signed by the record owner(s) exactly as the shares are registered; if by
telephone -- proper account identification is given by the dealer or
shareholder of record) and each exchange must involve either shares having an
aggregate value of at least $1,000 ($50 in the case of retirement plan
participants whose sponsoring organizations subscribe to the MFS FUNDamental
401(k) Plan or another similar 401(k) recordkeeping system made available by
the Shareholder Servicing Agent) or all the shares in the account. If an
Exchange Request is received by the Shareholder Servicing Agent on any
business day prior to the close of regular trading on the New York Stock
Exchange (generally, 4:00 p.m., Eastern time) (the "Exchange"), the exchange
will occur on that day if all the requirements set forth above have been
complied with at that time, and subject to the Fund's right to reject purchase
orders. No more than five exchanges may be made in any one Exchange Request by
telephone. Additional information concerning this exchange privilege and
prospectuses for any of the other MFS Funds may be obtained from dealers or
the Shareholder Servicing Agent. For federal and (generally) state income tax
purposes, an exchange is treated as a sale of the shares exchanged and,
therefore, an exchange could result in a gain or loss to the shareholder
making the exchange. Exchanges by telephone are automatically available to
most non-retirement plan accounts and certain retirement plan accounts. For
further information regarding exchanges by telephone, see "Redemptions by
Telephone." The exchange privilege (or any aspect of it) may be changed or
discontinued and is subject to certain limitations, including certain
restrictions on purchases by market timers. Special procedures, privileges and
restrictions with respect to exchanges may apply to market timers who enter
into an agreement with MFD, as set forth in such agreement. See "Purchases --
General -- Right to Reject Purchase Orders/Market Timing."
REDEMPTIONS AND REPURCHASES
A shareholder may withdraw all or any portion of the value of his account on
any date on which the Fund is open for business by redeeming shares at their
net asset value (a redemption) or by selling such shares to the Fund through a
dealer (a repurchase). Certain redemptions and repurchases are, however,
subject to a CDSC. See "Contingent Deferred Sales Charge" below. Because the
net asset value of shares of the account fluctuates, redemptions or
repurchases, which are taxable transactions, are likely to result in gains or
losses to the shareholder. When a shareholder withdraws an amount from his
account, the shareholder is deemed to have tendered for redemption a
sufficient number of full and fractional shares in his account to cover the
amount withdrawn. The proceeds of a redemption or repurchase will normally be
available within seven days, except for shares purchased or received in
exchange for shares purchased by check (including certified checks or
cashier's checks). Payment of redemption proceeds may be delayed for up to 15
days from the purchase date in an effort to assure that such check has
cleared. See "Tax Status" below.
REDEMPTION BY MAIL: Each shareholder may redeem all or any portion of the
shares in his account by mailing or delivering to the Shareholder Servicing
Agent (see back cover for address) a stock power with a written request for
redemption or letter of instruction, together with his share certificates (if
any were issued), all in "good order" for transfer. "Good order" generally
means that the stock power, written request for redemption, letter of
instruction or certificate must be endorsed by the record owner(s) exactly as
the shares are registered and the signature(s) must be guaranteed in the
manner set forth below under the caption "Signature Guarantee." In addition,
in some cases "good order" will require the furnishing of additional
documents. The Shareholder Servicing Agent may make certain de minimis
exceptions to the above requirements for redemption. Within seven days after
receipt of a redemption request in "good order" by the Shareholder Servicing
Agent, the Fund will make payment in cash of the net asset value of the shares
next determined after such redemption request was received, reduced by the
amount of any applicable CDSC described above and the amount of any income tax
required to be withheld, except during any period in which the right of
redemption is suspended or date of payment is postponed because the Exchange
is closed or trading on such Exchange is restricted or to the extent otherwise
permitted by the 1940 Act if an emergency exists.
REDEMPTION BY TELEPHONE: Each shareholder may redeem an amount from his
account by telephoning the Shareholder Servicing Agent toll-free at (800) 225-
2606. Shareholders wishing to avail themselves of this telephone redemption
privilege must so elect on their Account Application, designate thereon a bank
and account number to receive the proceeds of such redemption, and sign the
Account Application Form with the signature(s) guaranteed in the manner set
forth below under the caption "Signature Guarantee." The proceeds of such a
redemption, reduced by the amount of any applicable CDSC and the amount of any
income tax required to be withheld, are mailed by check to the designated
account, without charge, if the redemption proceeds do not exceed $1,000, and
are wired in federal funds to the designated account if the redemption
proceeds exceed $1,000. If a telephone redemption request is received by the
Shareholder Servicing Agent by the close of regular trading on the Exchange on
any business day, shares will be redeemed at the closing net asset value of
the Fund on that day. Subject to the conditions described in this section,
proceeds of a redemption are normally mailed or wired on the next business day
following the date of receipt of the order for redemption. The Shareholder
Servicing Agent will not be responsible for any losses resulting from
unauthorized telephone transactions if it follows reasonable procedures
designed to verify the identity of the caller. The Shareholder Servicing Agent
will request personal or other information from the caller, and will normally
also record calls. Shareholders should verify the accuracy of confirmation
statements immediately after their receipt.
REPURCHASE THROUGH A DEALER: If a shareholder desires to sell his shares
through his dealer (a repurchase), the shareholder can place a repurchase
order with his dealer, who may charge the shareholder a fee. IF THE DEALER
RECEIVES THE SHAREHOLDER'S ORDER PRIOR TO THE CLOSE OF REGULAR TRADING ON THE
EXCHANGE AND COMMUNICATES IT TO MFD BEFORE THE CLOSE OF BUSINESS ON THE SAME
DAY, THE SHAREHOLDER WILL RECEIVE THE NET ASSET VALUE CALCULATED ON THAT DAY,
REDUCED BY THE AMOUNT OF ANY APPLICABLE CDSC AND THE AMOUNT OF ANY INCOME TAX
REQUIRED TO BE WITHHELD.
REDEMPTION BY CHECK: Only Class A and Class C shares may be redeemed by check.
A shareholder owning Class A or Class C shares of the Fund may elect to have a
special account with State Street Bank and Trust Company (the "Bank") for the
purpose of redeeming Class A or Class C shares from his or her account by
check. The Bank will provide each Class A or Class C shareholder, upon
request, with forms of checks drawn on the Bank. Only shareholders having
accounts in which no share certificates have been issued will be permitted to
redeem shares by check. Checks may be made payable in any amount not less
than $500. Shareholders wishing to avail themselves of this redemption by
check privilege should so request on their Account Application, must execute
signature cards (for additional information, see the Account Application) with
signature guaranteed in the manner set forth under the caption "Signature
Guarantee" below, and must return any Class A or Class C share certificates
issued to them. Additional documentation will be required from corporations,
partnerships, fiduciaries or other such institutional investors. All checks
must be signed by the shareholder(s) of record exactly as the account is
registered before the Bank will honor them. The shareholders of joint
accounts may authorize each shareholder to redeem by check. The check may not
draw on monthly dividends which have been declared but not distributed.
SHAREHOLDERS WHO PURCHASE CLASS A AND CLASS C SHARES BY CHECK (INCLUDING
CERTIFIED CHECKS OR CASHIER'S CHECKS) MAY WRITE CHECKS AGAINST THOSE SHARES
ONLY AFTER THEY HAVE BEEN ON THE FUND'S BOOKS FOR 15 DAYS. WHEN SUCH A CHECK
IS PRESENTED TO THE BANK FOR PAYMENT, A SUFFICIENT NUMBER OF FULL AND
FRACTIONAL SHARES WILL BE REDEEMED TO COVER THE AMOUNT OF THE CHECK, ANY
APPLICABLE CDSC AND THE AMOUNT OF ANY INCOME TAX REQUIRED TO BE WITHHELD. IF
THE AMOUNT OF THE CHECK, PLUS ANY APPLICABLE CDSC AND THE AMOUNT OF ANY INCOME
TAX REQUIRED TO BE WITHHELD IS GREATER THAN THE VALUE OF CLASS A OR CLASS C
SHARES HELD IN THE SHAREHOLDER'S ACCOUNT, THE CHECK WILL BE RETURNED UNPAID,
AND THE SHAREHOLDER MAY BE SUBJECT TO EXTRA CHARGES. TO AVOID DISHONOR OF
CHECKS DUE TO FLUCTUATIONS IN ACCOUNT VALUE, SHAREHOLDERS ARE ADVISED AGAINST
REDEEMING ALL OR MOST OF THEIR ACCOUNT BY CHECK. CHECKS SHOULD NOT BE USED TO
CLOSE A FUND ACCOUNT BECAUSE WHEN THE CHECK IS WRITTEN, THE SHAREHOLDER WILL
NOT KNOW THE EXACT TOTAL VALUE OF THE ACCOUNT ON THE DAY THE CHECK CLEARS.
There is presently no charge to the shareholder for the maintenance of this
special account or for the clearance of any checks, but the Fund and the Bank
reserve the right to impose such charges or to modify or terminate the
redemption by check privilege at any time.
CONTINGENT DEFERRED SALES CHARGE: Investments in Class A shares, Class B
shares or Class C shares ("Direct Purchases") will be subject to a CDSC for a
period of (i) with respect to Class A and Class C shares, 12 months (however,
the CDSC on Class A shares is only imposed with respect to purchases of $1
million or more of Class A shares or purchases by certain retirement plans of
Class A shares) or (ii) with respect to Class B shares, six years. Purchases
of Class A shares made during a calendar month, regardless of when during the
month the investment occurred, will age one month on the last day of the month
and each subsequent month. Class C shares and Class B shares purchased on or
after January 1, 1993 will be aggregated on a calendar month basis -- all
transactions made during a calendar month, regardless of when during the month
they have occurred, will age one year at the close of business on the last day
of such month in the following calendar year and each subsequent year. For
Class B shares of the Fund purchased prior to January 1, 1993, transactions
will be aggregated on a calendar year basis -- all transactions made during a
calendar year, regardless of when during the year they have occurred, will age
one year at the close of business on December 31 of that year and each
subsequent year. Prior to April 1, 1996, Class C shares of the MFS Funds were
not subject to a CDSC upon redemption. In no event will Class C shares of the
MFS Funds purchased prior to this date be subject to a CDSC. For the purpose
of calculating the CDSC upon redemption of shares acquired in an exchange on
or after April 1, 1996, the purchase of shares acquired in one or more
exchanges is deemed to have occurred at the time of the original purchase of
the exchanged shares (if such original purchase occurred prior to April 1,
1996, then no CDSC would be imposed upon such a redemption).
At the time of a redemption, the amount by which the value of a shareholder's
account for a particular class of shares represented by Direct Purchases
exceeds the sum of the six calendar year aggregations (12 months in the case
of purchases of Class C shares and of purchases of $1 million or more of Class
A shares or purchases by certain retirement plans of Class A shares) of Direct
Purchases may be redeemed without charge ("Free Amount"). Moreover, no CDSC is
ever assessed on additional shares acquired through the automatic reinvestment
of dividends or capital gain distributions ("Reinvested Shares"). Therefore,
at the time of redemption of a particular class, (i) any Free Amount is not
subject to the CDSC and (ii) the amount of the redemption equal to the then-
current value of Reinvested Shares is not subject to the CDSC, but (iii) any
amount of the redemption in excess of the aggregate of the then-current value
of Reinvested Shares and the Free Amount is subject to a CDSC. The CDSC will
first be applied against the amount of Direct Purchases which will result in
any such charge being imposed at the lowest possible rate. The CDSC to be
imposed upon redemptions of shares will be calculated as set forth in
"Purchases" above.
The applicability of a CDSC will be unaffected by exchanges or transfers of
registration, except as described in Appendix A hereto.
GENERAL: The following information applies to redemptions and repurchases of
all classes of the Fund's shares.
SIGNATURE GUARANTEE. In order to protect shareholders against fraud, the
Fund requires, in certain instances as indicated above, that the shareholder's
signature be guaranteed. In these cases the shareholder's signature must be
guaranteed by an eligible bank, broker, dealer, credit union, national
securities exchange, registered securities association, clearing agency or
savings association. Signature guarantees shall be accepted in accordance with
policies established by the Shareholder Servicing Agent.
REINSTATEMENT PRIVILEGE. Shareholders of the Fund who have redeemed their
shares have a one-time right to reinvest the redemption proceeds in the same
class of shares of any of the MFS Funds (if shares of such Fund are available
for sale) at net asset value (with a credit for any CDSC paid) within 90 days
of the redemption pursuant to the Reinstatement Privilege. If the shares
credited for any CDSC paid are then redeemed within six years of the initial
purchase in the case of Class B shares or within 12 months of the initial
purchase for Class C shares and certain Class A share purchases, a CDSC will
be imposed upon redemption. Such purchases under the Reinstatement Privilege
are subject to all limitations in the SAI regarding this privilege.
IN-KIND DISTRIBUTIONS. The Trust agrees to redeem shares of the Fund
solely in cash up to the lesser of $250,000 or 1% of the net asset value of
the Fund during any 90-day period for any one shareholder. The Fund has
reserved the right to pay other redemptions, either totally or partially, by a
distribution in-kind of securities (instead of cash) from the Fund's
portfolio. The securities distributed in such a distribution would be valued
at the same amount as that assigned to them in calculating the net asset value
for the shares being sold. If a shareholder received a distribution in-kind,
the shareholder could incur brokerage or transaction charges when converting
the securities to cash.
INVOLUNTARY REDEMPTIONS/SMALL ACCOUNTS. Due to the relatively high cost of
maintaining small accounts, the Fund reserves the right to redeem shares in
any account for their then-current value if at any time the total investment
in such account drops below $500 because of redemptions, except in the case of
accounts being established for monthly automatic investments and certain
payroll savings programs, Automatic Exchange Plan accounts and tax-deferred
retirement plans, for which there is a lower minimum investment requirement.
See "Purchases -- General -- Minimum Investment." Shareholders will be
notified that the value of their account is less than the minimum investment
requirement and allowed 60 days to make an additional investment before the
redemption is processed.
DISTRIBUTION PLANS
The Trustees have adopted separate Distribution Plans for Class A, Class B and
Class C shares pursuant to Section 12(b) of the 1940 Act and Rule 12b-1
thereunder (the "Distribution Plans"), after having concluded that there is a
reasonable likelihood that the Distribution Plans would benefit the Fund and
its shareholders.
In certain circumstances, the fees described may not be imposed or are being
waived. These circumstances, if any, are described below under the heading
"Current Level of Distribution and Service Fees."
FEATURES COMMON TO EACH DISTRIBUTION PLAN: The Distribution Plans have certain
common features, as described below.
SERVICE FEES. Each Distribution Plan provides that the Fund may pay MFD a
service fee of up to 0.25% of the average daily net assets attributable to the
class of shares to which the Distribution Plan relates (i.e., Class A, 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 each
Distribution Plan for which there is no dealer of record or for which
qualification standards have not been met as partial consideration for
personal services and/or account maintenance services performed by MFD or its
affiliates to shareholder accounts.
DISTRIBUTION FEES. Each Distribution Plan provides that the Fund may pay
MFD a distribution fee based on the average daily net assets attributable to
the Designated Class as partial consideration for distribution services
performed and expenses incurred in the performance of MFD's obligations under
its distribution agreement with the Fund. See "Management of the Fund --
Distributor" in the SAI. The amount of the distribution fee paid by the Fund
with respect to each class differs under the Distribution Plans, as does the
use by MFD of such distribution fees. Such amounts and uses are described
below in the discussion of the separate Distribution Plans.
OTHER COMMON FEATURES. Fees payable under each Distribution Plan are
charged to, and therefore reduce, income allocated to shares of the Designated
Class. The Distribution Plans have substantially identical provisions with
respect to their operating policies and their initial approval, renewal,
amendment and termination.
FEATURES UNIQUE TO EACH DISTRIBUTION PLAN: The Distribution Plans have certain
features that are unique to each class of shares, as described below.
CLASS A DISTRIBUTION PLAN. Class A shares are generally offered pursuant
to an initial sales charge, a substantial portion of which is paid to or
retained by the dealer making the sale (the remainder of which is paid to
MFD). See "Purchases -- Class A Shares" above. In addition to the initial
sales charge, the dealer also generally receives the ongoing 0.25% per annum
service fee, as discussed above.
The distribution fee paid to MFD under the Class A Distribution Plan is equal,
on an annual basis, to 0.10% of the Fund's average daily net assets
attributable to Class A shares. As noted above, MFD may use the distribution
fee to cover distribution-related expenses incurred by it under its
distribution agreement with the Fund, including commissions to dealers and
payments to wholesalers employed by MFD (e.g., MFD pays commission to dealers
with respect to purchases of $1 million or more and purchases by certain
retirement plans of Class A shares which are sold at net asset value but which
are subject to a 1% CDSC for one year after purchase). See "Purchases --
Class A Shares" above. In addition, to the extent that the aggregate service
and distribution fees paid under the Class A Distribution Plan do not exceed
0.35% per annum of the average daily net assets of the Fund attributable to
Class A shares, the Fund is permitted to pay such distribution-related
expenses or other distribution-related expenses.
CLASS B DISTRIBUTION PLAN. Class B shares are offered at net asset value
without an initial sales charge but subject to a CDSC. See "Purchases --
Class B Shares" above. MFD will advance to dealers the first year service fee
described above at a rate equal to 0.25% of the purchase price of such shares
and, as compensation therefore, MFD may retain the service fee paid by the
Fund with respect to such shares for the first year after purchase. Dealers
will become eligible to receive the ongoing 0.25% per annum service fee with
respect to such shares commencing in the thirteenth month following purchase.
Under the Class B Distribution Plan, the Fund pays MFD a distribution fee
equal, on an annual basis, to 0.75% of the Fund's average daily net assets
attributable to Class B shares. As noted above, this distribution fee may be
used by MFD to cover its distribution-related expenses under its distribution
agreement with the Fund (including the 3.75% commission it pays to dealers
upon purchase of Class B shares, as described under "Purchases -- Class B
Shares" above).
CLASS C DISTRIBUTION PLAN. Class C shares are offered at net asset value
without an initial sales charge but subject to a CDSC. See "Purchases --
Class C shares" above. MFD will pay a commission to dealers of 1.00% of the
purchase price of Class C shares purchased through dealers at the time of
purchase. In compensation for this 1.00% commission paid by MFD to dealers,
MFD will retain the 1.00% per annum Class C distribution and service fees paid
by the Fund with respect to such shares for the first year after purchase, and
dealers will become eligible to receive from MFD the ongoing 1.00% per annum
distribution and service fees paid by the Fund to MFD with respect to such
shares commencing in the thirteenth month following purchase.
This ongoing 1.00% fee is comprised of the 0.25% per annum service fee paid to
MFD under the Class C Distribution Plan (which MFD in turn pays to dealers),
as discussed above, and a distribution fee paid to MFD (which MFD also in turn
pays to dealers) under the Class C Distribution Plan equal, on an annual
basis, to 0.75% of the Fund's average daily net assets attributable to Class C
shares.
CURRENT LEVEL OF DISTRIBUTION AND SERVICE FEES: The Fund's Class A, Class B
and Class C distribution and service fees for its current fiscal year are
0.30%, 1.00% and 1.00% per annum, respectively. The Fund is currently paying
distribution fees of 0.05% under the Class A Distribution Plan. Payment of the
remaining portion of the 0.10% per annum distribution fee will commence on
such date as the Trustees of the Trust may determine. Assets attributable to
Class A shares sold prior to March 1, 1991 are subject to a service fee of
0.15% per annum.
DISTRIBUTIONS
The Fund intends to pay substantially all of the Fund's net investment income
to its shareholders as dividends on a monthly basis. In determining the net
investment income available for distributions, the Fund may rely on
projections of its anticipated net investment income, including short-term
capital gains from the sales of securities or other assets and premiums from
options written, over a longer term, rather than its actual net investment
income for the period. The Fund may make one or more distributions during the
calendar year to its shareholders from any long-term capital gains, and may
also make one or more distributions during the calendar year to its
shareholders from short-term capital gains. Shareholders may elect to receive
dividends and capital gain distributions in either cash or additional shares
of the same class with respect to which a distribution is made. See "Tax
Status" and "Shareholder Services -- Distribution Options" below.
Distributions paid by the Fund with respect to Class A shares will generally
be greater than those paid with respect to Class B and Class C shares because
expenses attributable to Class B and Class C shares will generally be higher.
TAX STATUS
The Fund is treated as an entity separate from the other series of the Trust
for federal income tax purposes. In order to minimize the taxes the Fund would
otherwise be required to pay, the Fund intends to qualify each year as a
"regulated investment company" under Subchapter M of the Code, and to make
distributions to its shareholders in accordance with the timing requirements
imposed by the Code. It is not expected that the Fund will be required to pay
any entity level federal income or excise taxes, although the Fund's foreign-
source income may be subject to foreign withholding taxes.
Shareholders of the Fund normally will have to pay federal income taxes, and
any state or local taxes, on the dividends and capital gain distributions they
receive from the Fund, whether the distribution is paid in cash or in
additional shares. The Fund expects that none of its distributions will be
eligible for the dividends received deduction for corporations. Shareholders
of the Fund may not have to pay state or local taxes on dividends derived from
interest on U.S. Government obligations. Investors should consult with their
tax advisers in this regard.
Shortly after the end of each calendar year, each shareholder will be sent a
statement setting forth the federal income tax status of all dividends and
distributions for that year, including the portion taxable as ordinary income,
the portion, if any, taxable as long-term capital gain, the portion, if any,
representing a return of capital (which is free of current taxes but results
in a basis reduction), the portion, if any, representing interest on U.S.
Government obligations, and the amount, if any, of federal income tax
withheld.
Fund distributions will reduce the Fund's net asset value per share.
Shareholders who buy shares shortly before the fund makes a distribution may
thus pay the full price for the shares and then effectively receive a portion
of the purchase price back as a taxable distribution.
The Fund intends to withhold U.S. federal income tax at the rate of 30% on
dividends and other payments that are subject to such withholding and that are
made to persons who are neither citizens nor residents of the U.S., regardless
of whether a lower rate may be permitted under an applicable treaty. The Fund
is also required in certain circumstances to apply backup withholding at the
rate of 31% on taxable dividends and certain redemption proceeds paid to any
shareholder (including a shareholder who is neither a citizen nor a resident
of the U.S.) who does not furnish to the Fund certain information and
certifications or who is otherwise subject to backup withholding. Backup
withholding, however, will not be applied to payments that have been subject
to 30% withholding. Prospective investors should read the Fund's Account
Application for additional information regarding backup withholding of federal
income tax and should consult their own tax advisers as to the tax
consequences to them of an investment in the Fund.
NET ASSET VALUE
The net asset value per share of each class of the Fund is determined each day
during which the Exchange is open for trading. This determination is made once
during each such day as of the close of regular trading on the Exchange by
deducting the amount of the liabilities attributable to the class from the
value of the Fund's assets attributable to the class and dividing the
difference by the number of shares of the class outstanding. Values of assets
in the Fund's portfolio are determined on the basis of their market or other
fair value, as described in the SAI. The net asset value of each class of
shares is effective for orders received in "good order" by the dealer prior to
its calculation and received by MFD prior to the close of that business day.
DESCRIPTION OF SHARES, VOTING RIGHTS AND LIABILITIES
The Fund, one of three series of the Trust, has three classes of shares,
entitled Class A, Class B and Class C Shares of Beneficial Interest (without
par value). The Trust has reserved the right to create and issue additional
series and classes of shares, in which case each class of a series would
participate equally in the earnings, dividends and assets attributable to that
class of the particular series. Shareholders are entitled to one vote for each
share held and shares of each series are entitled to vote separately to
approve investment advisory agreements or changes in investment restrictions,
but shares of all series vote together in the election of Trustees and
ratification of selection of accountants. Additionally, each class of shares
of a series will vote separately on any material increases in the fees under
its Distribution Plan or on any other matter that affects solely that class of
shares, but will otherwise vote together with all other classes of shares of
the series on all other matters. The Trust does not intend to hold annual
shareholder meetings. The Declaration of Trust provides that a Trustee may be
removed from office in certain instances (see "Description of Shares, Voting
Rights and Liabilities" in the SAI).
Each share of a class of the Fund represents an equal proportionate interest
in the Fund with each other class, subject to the liabilities of the
particular class. Shares have no pre-emptive or conversion rights (except as
set forth above in "Purchases -- Conversion of Class B Shares"). Shares of the
Fund are fully paid and nonassessable. Should the Fund be liquidated,
shareholders of each class would be entitled to share pro rata in the net
assets attributable to that class available for distribution to shareholders.
Shares will remain on deposit with the Shareholder Servicing Agent and
certificates will not be issued except in connection with pledges, assignments
and in certain other limited circumstances.
The Trust is an entity of the type commonly known as a "Massachusetts business
trust." Under Massachusetts law, shareholders of such a trust may, under
certain circumstances, be held personally liable as partners for its
obligations. However, the risk of a shareholder incurring financial loss on
account of shareholder liability is limited to circumstances in which both
inadequate insurance (e.g., fidelity bonding and errors and omissions
insurance) existed and the Trust itself was unable to meet its obligations.
PERFORMANCE INFORMATION
From time to time, the Fund will provide yield, current distribution rate and
total rate of return quotations for each class of shares and may also quote
fund rankings in the relevant fund category from various sources, such as the
Lipper Analytical Services, Inc. and Wiesenberger Investment Companies
Service. Yield quotations are based on the annualized net investment income
per share allocated to each class of the Fund over a 30-day period stated as a
percent of the maximum public offering price of that class on the last day of
that period. Yield calculations for Class B and Class C shares assume no CDSC
is paid. The current distribution rate for each class is generally based upon
the total amount of dividends per share paid by the Fund to shareholders of
that class during the past 12 months and is computed by dividing the amount of
such dividends by the maximum public offering price of that class at the end
of such period. Current distribution rate calculations for Class B and Class C
shares assume no CDSC is paid. The current distribution rate differs from the
yield calculation because it may include distributions to shareholders from
sources other than dividends and interest, such as premium income from option
writing, short-term capital gains, and return of invested capital, and is
calculated over a different period of time. Total rate of return quotations
will reflect the average annual percentage change over stated periods in the
value of an investment in each class of shares of the Fund made at the maximum
public offering price of the shares of that class with all distributions
reinvested and which will give effect to the imposition of any applicable CDSC
assessed upon redemptions of the Fund's Class B and Class C shares. Such total
rate of return quotations may be accompanied by quotations which do not
reflect the reduction in value of the initial investment due to the sales
charge or the deduction of the CDSC, and which will thus be higher. All
performance quotations are based on historical performance and are not
intended to indicate future performance. Yield reflects only net portfolio
income as of a stated period of time, and current distribution rate reflects
only the rate of distributions paid by the Fund over a stated period of time,
while total rate of return reflects all components of investment return over a
stated period of time. The Fund's quotations may from time to time be used in
advertisements, shareholder reports or other communications to shareholders.
For a discussion of the manner in which the Fund will calculate its yield,
current distribution rate and total rate of return, see the SAI. For further
information about the Fund's performance for the fiscal year ended April 30,
1996, please see the Fund's Annual Report. A copy of the Annual Report may be
obtained without charge by contacting the Shareholder Servicing Agent (see
back cover for address and phone number). In addition to information provided
in shareholder reports, the Fund may, in its discretion, from time to time,
make a list of all or a portion of its holdings available to investors upon
request.
9. SHAREHOLDER SERVICES
Shareholders with questions concerning the shareholder services described
below or concerning other aspects of the Fund, should contact the Shareholder
Servicing Agent (see back cover for address and phone number).
ACCOUNT AND CONFIRMATION STATEMENTS -- Each shareholder will receive
confirmation statements showing the transaction activity in his account.
Cancelled checks, if any, will be sent to shareholders monthly. At the end of
each calendar year, each shareholder will receive income tax information
regarding reportable dividends and capital gain distributions for that year
(see "Tax Status").
DISTRIBUTION OPTIONS -- The following options are available to all accounts
(except Systematic Withdrawal Plan accounts) and may be changed as often as
desired by notifying the Shareholder Servicing Agent:
-- Dividends and capital gain distributions reinvested in additional
shares. This option will be assigned if no other option is specified;
-- Dividends in cash; capital gain distributions (except as provided
below) reinvested in additional shares;
-- Dividends and capital gain distributions in cash.
With respect to the second option, the Fund may from time to time make
distributions from short-term capital gains on a monthly basis, and to the
extent such gains are distributed monthly, they shall be paid in cash; any
remaining short-term capital gains not so distributed shall be reinvested in
additional shares.
Reinvestments (net of any tax withholding) will be made in additional full and
fractional shares of the same class of shares at the net asset value in effect
at the close of business on the record date. Dividends and capital gain
distributions in amounts less than $10 will automatically be reinvested in
additional shares of the Fund. If a shareholder has elected to receive
dividends and/or capital gain distributions in cash and the postal or other
delivery service is unable to deliver checks to the shareholder's address of
record, or the shareholder does not respond to mailings from the Shareholder
Servicing Agent with regard to uncashed distribution checks, such
shareholder's distribution option will automatically be converted to having
all dividends and other distributions reinvested in additional shares. Any
request to change a distribution option must be received by the Shareholder
Servicing Agent by the record date for a dividend or distribution in order to
be effective for that dividend or distribution. No interest will accrue on
amounts represented by uncashed distribution or redemption checks.
INVESTMENT AND WITHDRAWAL PROGRAMS -- For the convenience of shareholders, the
Fund makes available the following programs designed to enable shareholders to
add to their investment in an account with the Fund or withdraw from it with a
minimum of paper work. The programs involve no extra charge to shareholders
(other than a sales charge in the case of certain Class A share purchases) and
may be changed or discontinued at any time by a shareholder or the Fund.
LETTER OF INTENT: If a shareholder (other than a group purchaser as
described in the SAI) anticipates purchasing $100,000 or more of Class A
shares of the Fund alone or in combination with shares of any class of other
MFS Funds or MFS Fixed Fund (a bank collective investment fund) within a 13-
month period (or 36-month period for purchases of $1 million or more), the
shareholder may obtain such shares of the Fund at the same reduced sales
charge as though the total quantity were invested in one lump sum, subject to
escrow agreements and the appointment of an attorney for redemptions from the
escrow amount if the intended purchases are not completed, by completing the
Letter of Intent section of the Account Application.
RIGHT OF ACCUMULATION: A shareholder qualifies for cumulative quantity
discounts on the purchases of Class A shares when his new investment, together
with the current offering price value of all holdings of all classes of shares
of that shareholder in the MFS Funds or MFS Fixed Fund reaches a discount
level.
DISTRIBUTION INVESTMENT PROGRAM: Shares of a particular class of the Fund
may be sold at net asset value (and without any applicable CDSC) through the
automatic reinvestment of dividend and capital gain distributions from the
same class of any other MFS Fund. Furthermore, distributions made by the Fund
may be automatically invested at net asset value (and without any applicable
CDSC) in shares of the same class of another MFS Fund, if shares of such Fund
are available for sale.
SYSTEMATIC WITHDRAWAL PLAN: A shareholder may direct the Shareholder
Servicing Agent to send him (or anyone he designates) regular periodic
payments based upon the value of his account. Each payment under a Systematic
Withdrawal Plan (a "SWP") must be at least $100, except in certain limited
circumstances. The aggregate withdrawals of Class B and Class C shares in any
year pursuant to a SWP will not be subject to a CDSC and are generally limited
to 10% of the value of the account at the time of the establishment of the
SWP. The CDSC will not be waived in the case of SWP redemptions of Class A
shares which are subject to a CDSC.
DOLLAR COST AVERAGING PROGRAMS --
AUTOMATIC INVESTMENT PLAN: Cash investments of $50 or more may be made
through a shareholder's checking account twice monthly, monthly or quarterly.
Required forms are available from the Shareholder Servicing Agent or
investment dealers.
AUTOMATIC EXCHANGE PLAN: Shareholders having account balances of at least
$5,000 in any MFS Fund may exchange their shares for the same class of shares
of other MFS Funds (and in the case of Class C shares, for shares of the MFS
Money Market Fund) under the Automatic Exchange Plan. The Automatic Exchange
Plan provides for automatic monthly or quarterly exchanges of funds from the
shareholder's account in an MFS Fund for investment in the same class of
shares of other MFS Funds selected by the shareholder if such fund is
available for sale. Under the Automatic Exchange Plan, exchanges of at least
$50 each may be made to up to four different funds. A shareholder should
consider the differences in objectives and policies of a fund and review its
prospectus before electing to exchange money into such fund through the
Automatic Exchange Plan. No transaction fee is imposed in connection with
exchange transactions under the Automatic Exchange Plan. However, exchanges 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. For federal and (generally) state income tax purposes, an exchange is
treated as a sale of shares exchanged and, therefore, could result in a
capital gain or loss to the shareholder making the exchange. See the SAI for
further information concerning the Automatic Exchange Plan. Investors should
consult their tax advisers for information regarding the potential capital
gain and loss consequences of transactions under the Automatic Exchange Plan.
Because a dollar cost averaging program involves periodic purchases of shares
regardless of fluctuating share offering prices, a shareholder should consider
his financial ability to continue his purchases through periods of low price
levels. Maintaining a dollar cost averaging program concurrently with a
withdrawal program could be disadvantageous because of the sales charges
included in share purchases in the case of Class A shares, and because of the
assessment of the CDSC for certain share redemptions in the case of Class A
shares.
TAX-DEFERRED RETIREMENT PLANS -- Except as noted under "Purchases -- Class C
Shares," shares of the Fund may be purchased by all types of tax-deferred
retirement plans, including IRAs, SEP-IRA plans, 401(k) plans, 403(b) plans
and other corporate pension and profit-sharing plans. Investors should consult
with their tax adviser before establishing any of these tax-deferred
retirement plans.
----------------
The Fund's SAI, dated September 1, 1996, as amended or supplemented from time
to time, contains more detailed information about the Fund, including, but not
limited to, information related to (i) the Fund's investment objectives,
policies and restrictions, (ii) the Trustees, officers and investment adviser,
(iii) portfolio transactions and brokerage commissions, (iv) the method used
to calculate performance quotations, (v) the Fund's Class A, Class B and Class
C Distribution Plans and (vi) various services and privileges provided by the
Fund, including additional information with respect to the exchange privilege.
<PAGE>
APPENDIX A
WAIVERS OF SALES CHARGES
This Appendix sets forth the various circumstances in which all applicable
sales charges are waived (Section I), the initial sales charge and the
contingent deferred sales charge ("CDSC") for Class A shares are waived
(Section II), and the CDSC for Class B and Class C shares is waived (Section
III).
I. WAIVERS OF ALL APPLICABLE SALES CHARGES
In the following circumstances, the initial sales charge imposed on
purchases of Class A shares and the CDSC imposed on certain redemptions of
Class A shares and on redemptions of Class B and Class C shares, as
applicable, are waived:
1. DIVIDEND REINVESTMENT
* Shares acquired through dividend or capital gain reinvestment; and
* Shares acquired by automatic reinvestment of distributions of dividends
and capital gains of any MFS Fund in the MFS Family of Funds ("MFS
Funds") pursuant to the Distribution Investment Program.
2. CERTAIN ACQUISITIONS/LIQUIDATIONS
* Shares acquired on account of the acquisition or liquidation of
assets of other investment companies or personal holding companies.
3. AFFILIATES OF AN MFS FUND/CERTAIN DEALERS. Shares acquired by:
* Officers, eligible directors, employees (including retired employees)
and agents of Massachusetts Financial Services Company ("MFS"), Sun
Life Assurance Company of America ("Sun Life") or any of their
subsidiary companies;
* Trustees and retired trustees of any investment company for which MFS
Fund Distributors, Inc. ("MFD") serves as distributor;
* Employees, directors, partners, officers and trustees of any
sub-adviser to any MFS Fund;
* Employees or registered representatives of dealers and other financial
institution ("dealers") which have a sales agreement with MFD;
* Certain family members of any such individual and their spouses
identified above and certain trusts, pension, profit-sharing or other
retirement plans for the sole benefit of such persons, provided the
shares are not resold except to the MFS Fund which issued the shares;
and
* Institutional Clients of MFS or MFS Asset Management, Inc. ("AMI").
4. INVOLUNTARY REDEMPTIONS (CDSC WAIVER ONLY)
* Shares redeemed at an MFS Fund's direction due to the small size of
a shareholder's account. See "Redemptions and Repurchases -- General --
Involuntary Redemptions/Small Accounts" in the Prospectus.
5. RETIREMENT PLANS (CDSC WAIVER ONLY). Shares redeemed on account of
distributions made under the following circumstances:
INDIVIDUAL RETIREMENT ACCOUNTS ("IRA'S")
* Death or disability of the IRA owner.
SECTION 401(A) PLANS ("401(A) PLANS") AND SECTION 403(B) EMPLOYER
SPONSORED PLANS ("ESP PLANS")
* Death, disability or retirement of 401(a) or ESP Plan participant;
* Loan from 401(a) or ESP Plan (repayment of loans, however, will
constitute new sales for purposes of assessing sales charges);
* Financial hardship (as defined in Treasury Regulation Section 1.401
(k)-1(d)(2), as amended from time to time);
* Termination of employment of 401(a) or ESP Plan participant (excluding,
however, a partial or other termination of the Plan);
* Tax-free return of excess 401(a) or ESP Plan contributions;
* To the extent that redemption proceeds are used to pay expenses (or
certain participant expenses) of the 401(a) or ESP Plan (e.g.,
participant account fees), provided that the Plan sponsor subscribes to
the MFS FUNDamental 401(k) Plan or another similar recordkeeping system
made available by the Shareholder Servicing Agent; and
* Distributions from a 401(a) or ESP Plan that has invested its assets in
one or more of the MFS Funds for more than 10 years from the later to
occur of: (i) January 1, 1993 or (ii) the date such 401(a) or ESP Plan
first invests its assets in one or more of the MFS Funds. The sales
charges will be waived in the case of a redemption of all of the 401(a)
or ESP Plan's shares in all MFS Funds (i.e., all the assets of the
401(a) or ESP Plan invested in the MFS Funds are withdrawn), unless
immediately prior to the redemption, the aggregate amount invested by
the 401(a) or ESP Plan in shares of the MFS Funds (excluding the
reinvestment of distributions) during the prior four years equals 50%
or more of the total value of the 401(a) or ESP Plan's assets in the
MFS Funds, in which case the sales charges will not be waived.
SECTION 403(B) SALARY REDUCTION ONLY PLANS ("SRO PLANS")
* Death or disability of SRO Plan participant.
6. CERTAIN TRANSFERS OF REGISTRATION (CDSC WAIVER ONLY). Shares
transferred:
* To an IRA rollover account where any sales charges with respect to the
shares being reregistered would have been waived had they been
redeemed; and
* From a single account maintained for a 401(a) Plan to multiple accounts
maintained by the Shareholder Servicing Agent on behalf of individual
participants of such Plan, provided that the Plan sponsor subscribes to
the MFS FUNDamental 401(k) Plan or another similar recordkeeping system
made available by the Shareholder Servicing Agent.
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 redemption of Class A shares are
waived:
1. INVESTMENT OF REDEMPTION PROCEEDS FROM UNAFFILIATED MUTUAL FUNDS
* Shares acquired through the investment of redemption proceeds from
another open-end management investment company not distributed or
managed by MFD or its affiliates if: (i) the investment is made through
a dealer and appropriate documentation is submitted to MFD; (ii) the
redeemed shares were subject to an initial sales charge or deferred
sales charge (whether or not actually imposed); (iii) the redemption
occurred no more than 90 days prior to the purchase of Class A shares;
and (iv) the MFS Fund, MFD or its affiliates have not agreed with such
company or its affiliates, formally or informally, to waive sales
charges on Class A shares or provide any other incentive with respect
to such redemption and sale.
2. WRAP ACCOUNT INVESTMENTS
* Shares acquired by investments through certain dealers which have
entered into an agreement with MFD which includes a requirement that
such shares be sold for the sole benefit of clients participating in a
"wrap" account or a similar program under which such clients pay a fee
to such dealer.
3. INVESTMENT BY INSURANCE COMPANY SEPARATE ACCOUNTS
* Shares acquired by insurance company separate accounts.
4. RETIREMENT PLANS
ADMINISTRATIVE SERVICES ARRANGEMENTS
* Shares acquired by retirement plans whose third party administrators,
or dealers have entered into an administrative services agreement with
MFD or one of its affiliates to perform certain administrative
services, subject to certain operational and minimum size requirements
specified from time to time by MFD or one or more of its affiliates.
REINVESTMENT OF DISTRIBUTIONS FROM QUALIFIED RETIREMENT PLANS
* Shares acquired through the automatic reinvestment in Class A shares of
Class A or Class B distributions which constitute required withdrawals
from qualified retirement plans.
SHARES REDEEMED ON ACCOUNT OF DISTRIBUTIONS MADE UNDER THE FOLLOWING
CIRCUMSTANCES:
IRA'S
* Distributions made on or after the IRA owner has attained the age of 59
1/2 years old; and
* Tax-free returns of excess IRA contributions.
401(A) PLANS
* Distributions made on or after the 401(a) Plan participant has attained
the age of 59 1/2 years old; and
* Certain involuntary redemptions and redemptions in connection with
certain automatic withdrawals from a 401(a) Plan.
ESP PLANS AND SRO PLANS
* Distributions made on or after the ESP or SRO Plan participant has
attained the age of 59 1/2 years old.
III. WAIVERS OF CLASS B AND CLASS C SALES CHARGES
In addition to the waivers set forth in Section I above, in the following
circumstances the CDSC imposed on redemptions of Class B and Class C
shares is waived:
1. SYSTEMATIC WITHDRAWAL PLAN
* Systematic Withdrawal Plan redemptions with respect to up to 10% per
year of the account value at the time of establishment.
2. DEATH OF OWNER
* Shares redeemed on account of the death of the account owner if the
shares are held solely in the deceased individual's name or in a living
trust for the benefit of the deceased individual.
3. DISABILITY OF OWNER
* Shares redeemed on account of the disability of the account owner if
shares are held either solely or jointly in the disabled individual's
name or in a living trust for the benefit of the disabled individual
(in which case a disability certification form is required to be
submitted to the Shareholder Servicing Agent.).
4. RETIREMENT PLANS. Shares redeemed on account of distributions made
under the following circumstances:
IRA'S, 401(A) PLANS, ESP PLANS AND SRO PLANS
* Distributions made on or after the IRA owner or the 401(a), ESP or SRO
Plan participant, as applicable, has attained the age of 70 1/2 years
old, but only with respect to the minimum distribution under applicable
Internal Revenue Code ("Code") rules.
SALARY REDUCTION SIMPLIFIED EMPLOYEE PENSION PLANS ("SAR-SEP PLANS")
* Distributions made on or after the SAR-SEP Plan participant has
attained the age of 70 1/2 years old, but only with respect to the
minimum distribution under applicable Code rules;
* Death or disability of a SAR-SEP Plan participant.
<PAGE>
APPENDIX B
DESCRIPTION OF BOND RATINGS
The ratings of Moody's, S&P, Fitch and Duff & Phelps represent their opinions as
to the quality of various debt instruments. It should be emphasized, however,
that ratings are not absolute standards of quality. Consequently, debt
instruments with the same maturity, coupon and rating may have different yields
while debt instruments of the same maturity and coupon with different ratings
may have the same yield.
MOODY'S
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
edge". Interest payments are protected by a large or by an exceptionally stable
margin and principal is secure. While the various protective elements are likely
to change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
Aa: Bonds which are rated Aa are judged to be of high quality by all standards.
Together with the Aaa group they comprise what are generally known as high grade
bonds. They are rated lower than the best bonds because margins of protection
may not be as large as in Aaa securities or fluctuation of protective elements
may be of greater amplitude or there may be other elements present which make
the long- term risks appear somewhat larger than in Aaa securities.
A: Bonds which are rated A possess many favorable investment attributes and are
to be considered as upper medium grade obligations. Factors giving security to
principal and interest are considered adequate but elements may be present which
suggest a susceptibility to impairment sometime in the future.
Baa: Bonds which are rated Baa are considered as medium grade obligations, i.e.,
they are neither highly protected nor poorly secured. Interest payments and
principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
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 other good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B: Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Caa: Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
Ca: Bonds which are rated Ca represent obligations which are speculative in a
high degree. Such issues are often in default or have other marked shortcomings.
C: Bonds which are rated C are the lowest rated class of bonds and issues so
rated can be regarded as having extremely poor prospects of ever attaining any
real investment standing.
ABSENCE OF RATING: Where no rating has been assigned or where a rating has been
suspended or withdrawn, it may be for reasons unrelated to the quality of the
issue.
Should no rating be assigned, the reason may be one of the following:
1. An application for rating was not received or accepted.
2. The issue or issuer belongs to a group of securities or companies that
are not rated as a matter of policy.
3. There is a lack of essential data pertaining to the issue or issuer.
4. The issue was privately placed, in which case the rating is not
published in Moody's publications.
Suspension or withdrawal may occur if new and material circumstances arise,
the effects of which preclude satisfactory analysis; if there is no longer
available reasonable up-to-date data to permit a judgment to be formed; if a
bond is called for redemption; or for other reasons.
S&P
AAA: Debt rated AAA has the highest rating assigned by S&P. Capacity to pay
interest and repay principal is extremely strong.
AA: Debt rated AA has a very strong capacity to pay interest and repay
principal and differs from the higher rated issues only in small degree.
A: Debt rated A has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher rated categories.
BBB: Debt rated BBB is regarded as having an adequate capacity to pay interest
and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories.
BB, B, CCC, CC AND C: Debt rated BB, B, CCC, CC and C is regarded, on balance,
as predominantly speculative with respect to capacity to pay interest and
repay principal in accordance with the terms of the obligation. BB indicates
the lowest degree of speculation and C the highest degree of speculation.
While such debt will likely have some quality and protective characteristics,
these are outweighed by large uncertainties or major risk exposures to adverse
conditions.
CI: The rating CI is reserved for income bonds on which no interest is being
paid.
D: Debt rated D is in payment default. The D rating category is used when
interest payments or principal payments are not made on the date due even if
the applicable grace period has not expired, unless S&P 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 if debt service payments 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
categories.
NR: indicates that no public rating has been requested, that there is
insufficient information on which to base a rating, or that S&P does not rate
a particular type of obligation as a matter of policy.
FITCH INVESTORS SERVICE, INC.
AAA: Bonds considered to be investment grade and of the highest credit
quality. The obligor has an exceptionally strong ability to pay interest and
repay principal, which is unlikely to be affected by reasonably foreseeable
events.
AA: Bonds considered to be investment grade and of very high credit quality.
The obligor's ability to pay interest and repay principal is very strong,
although not quite as strong as bonds rated "AAA". Because bonds rated in the
"AAA" and "AA" categories are not significantly vulnerable to foreseeble
future developments, short-term debt of these issuers is generally rated
"F-1+".
A: Bonds considered to be investment grade and of high credit quality. The
obligor's ability to pay interest and repay principal is considered to be
strong, but may be more vulnerable to adverse changes in economic conditions
and circumstances than bonds with higher ratings.
BBB: Bonds considered to be investment grade and of satisfactory credit
quality. The obligor's ability to pay interest and repay principal is
considered to be adequate. Adverse changes in economic conditions, however,
are more likely to have adverse impact on these bonds, and therefore impair
timely payment. The likelihood that the ratings of these bonds will fall below
investment grade is higher than for bonds with higher ratings.
BB: Bonds are considered speculative. The obligor's ability to pay interest
and repay principal may be affected over time by adverse economic changes.
However, business and financial alternatives can be identified which could
assist the obligor in satisfying its debt service requirements.
B: Bonds are considered highly speculative. While bonds in this class are
currently meeting debt service requirements, the probability of continued
timely payment of principal and interest reflects the obligor's limited margin
of safety and the need for reasonable business and economic activity
throughout the life of the issue.
CCC: Bonds have certain identifiable characteristics which, if not remedied,
may lead to default. The ability to meet obligations requires an advantageous
business and economic environment.
CC: Bonds are minimally protected. Default in payment of interest and/or
principal seems probable over time.
C: Bonds are in imminent default in payment of interest or principal.
PLUS (+) MINUS (-): Plus and minus signs are used with a rating symbol to
indicate the relative position of a credit within the rating category. Plus
and minus signs, however, are not used in the "AAA" category.
NR: Indicates that Fitch does not rate the specific issue.
CONDITIONAL: A conditional rating is premised on the successful completion of
a project or the occurrence of a specific event.
SUSPENDED: A rating is suspended when Fitch deems the amount of information
available from the issuer to be indadequate for rating purposes.
WITHDRAWN: A rating will be withdrawn when an issue matures or is called or
refinanced, and, at Fitch's discretion, when an issuer fails to furnish proper
and timely information.
FITCHALERT: Ratings are placed on FitchAlert to notify investors of an
occurrence that is likely to result in a rating change and the likely
direction of such change. These are designated as "Positive", indicating a
potential upgrade, "Negative", for potential downgrade, or "Evolving", where
ratings may be raised or lowered. FitchAlert is relatively short-term, and
should be resolved within 12 months.
DUFF & PHELPS CREDIT RATING CO.
AAA: Bonds considered to be investment grade and of the highest credit
quality. The obligor has an exceptionally strong ability to pay interest and
repay principal, which is unlikely to be affected by reasonably foreseeable
events.
AA. Bonds considered to be investment grade and of very high credit quality. The
obligor's ability to pay interest and repay principal is very strong, although
not quite as strong as bonds rated "AAA". Because bonds rated in the "AAA" and
"AA" categories are not significantly vulnerable to foreseeable future
developments, short-term debt of these issuers is generally rated "D-1+".
A. Bonds considered to be investment grade and of high credit quality. The
obligor's ability to pay interest and repay principal is considered to be
strong, but may be more vulnerable to adverse changes in economic conditions and
circumstances than bonds with higher ratings.
BBB. Bonds considered to be investment grade and of satisfactory credit quality.
The obligor's ability to pay interest and repay principal is considered to be
adequate. Adverse changes in economic conditions and circumstances, however, are
more likely to have adverse impact on these bonds, and therefore impair timely
payment. The likelihood that the ratings of these bonds will fall below
investment grade is higher than for bonds with higher ratings.
BB. Bonds are considered speculative. The obligor's ability to pay interest and
repay principal may be affected over time by adverse economic changes. However,
business, and financial alternatives can be identified which could assist the
obligor in satisfying its debt service requirements.
B. Bonds are considered highly speculative. While bonds in this class are
currently meeting debt service requirements, the probability of continued timely
payment of principal and interest reflects the obligor's limited margin of
safety and the need for reasonable business and economic activity throughout the
life of the issue.
CCC. Bonds have certain identifiable characteristics which, if not remedied, may
lead to default. The ability to meet obligations requires an advantageous
business and economic environment.
PLUS (+) OR MINUS (-). Plus and minus signs are used with a rating symbol to
indicate the relative position of a credit within a rating category. Plus and
minus signs, however, are not used in the "AAA" category.
NR. Indicates that Duff & Phelps does not rate the specific issue.
DUFF & PHELPS SHORT-TERM RATINGS
D-1+: Highest certainty of timely payment. Short-term liquidity, including
internal operation factors and/or access to alternative sources of funds, is
outstanding and safety is just below risk-free U.S. Treasury short-term
obligations.
D-1: Very high certainty of timely payment. Liquidity factors are excellent and
supported by good fundamental protection factors. risk factors are minor.
D-1-: High certainty of timely payment. Liquidity factors are strong and
supported by good fundamental protection factors. Risk factors are very small.
D-2: Good certainty of timely payment. Liquidity factors and company
fundamentals are sound. Although ongoing funding needs may enlarge total
financing requirements, access to capital markets is good. Risk factors are
small.
D-3: Satisfactory liquidity and other protection factors qualify issues as to
investment grade. Risk factors are larger and subject to more variation.
Nevertheless, timely payment is expected.
D-4: Speculative investment characteristics. Liquidity is not sufficient to
insure against disruption in debt service. Operating factors and market access
may be subject to a high degree of variation.
D-5: Issuer failed to meet scheduled principal and/or interest payments.
<PAGE>
APPENDIX C
PORTFOLIO COMPOSITION CHART
MFS BOND FUND
FOR FISCAL YEAR ENDED APRIL 30, 1996
The table below shows the percentages of the Fund's assets at April 30,
1996 invested in bonds assigned to the various rating categories by S&P,
Moody's (provided only for bonds not rated by S&P), Fitch (provided only for
bonds not rated by S&P or Moody's) and Duff & Phelps Credit Rating Co.
(provided only for bonds not rated by S&P, Moody's or Fitch) and in unrated
bonds determined by MFS to be of comparable quality. For split rated bonds,
the higher of S&P or Moody's is used. When neither an S&P or Moody's rating is
available, secondary sources are selected in the following order: Fitch and
Duff & Phelps.
UNRATED
SECURITIES OF
COMPILED COMPARABLE
RATING RATINGS QUALITY TOTAL
------ -------- ---------- -----
AAA/Aaa .................. 13.10% -- 13.10%
AA/Aa .................... 10.40% -- 10.40%
A/A ...................... 10.31% -- 10.31%
BBB/Baa .................. 49.01% -- 49.01%
BB/Ba .................... 14.93% -- 14.93%
B/B ...................... 2.25% -- 2.25%
CCC/Caa .................. --
CC/Ca .................... --
C/C ...................... --
Default .................. --
------- -------
TOTAL ................ 100.00% 100.00%
The chart does not necessarily indicate what the composition the Fund's
portfolio will be in subsequent years. Rather, the Fund's investment
objective, policies and restrictions indicate the extent to which the Fund may
purchase securities in the various categories.
<PAGE>
Investment Adviser
Massachusetts Financial Services Company
500 Boylston Street
Boston, MA 02116
(617) 954-5000
Distributor
MFS Fund Distributors, Inc.
500 Boylston Street
Boston, MA 02116
(617) 954-5000
Custodian
Investors Bank & Trust Company
89 South Street
Boston, MA 02111
Dividend Disbursing Agent
State Street Bank and Trust Company
225 Franklin Street
Boston, MA 02110
Shareholder Servicing Agent
MFS Service Center, Inc.
500 Boylston Street
Boston, MA 02116
Toll-free: (800) 225-2606
Mailing Address:
P.O. Box 2281
Boston, MA 02107-9906
Independent Auditors
Deloitte & Touche LLP
125 Summer Street
Boston, MA 02110
[LOGO]
THE FIRST NAME IN MUTUAL FUNDS
MFS(R) Bond Fund
500 Boylston Street
Boston, MA 02116
MFB-1-9/96/265M 11/211/311
[LOGO]
MFS(R) BOND FUND
Prospectus
September 1, 1996
<PAGE>
[LOGO]
THE FIRST NAME IN MUTUAL FUNDS
MFS(R) BOND FUND STATEMENT OF
ADDITIONAL INFORMATION
(A Member of the MFS Family of Funds(R)) September 1, 1996
- - ------------------------------------------------------------------------------
Page
----
1. Definitions ....................................................... 2
2. Investment Objectives, Policies and Restrictions .................. 2
3. Management of the Fund ............................................ 11
Trustees ....................................................... 12
Officers ....................................................... 12
Investment Adviser ............................................. 12
Custodian ...................................................... 13
Shareholder Servicing Agent .................................... 13
Distributor .................................................... 14
4. Portfolio Transactions and Brokerage Commissions .................. 14
5. Shareholder Services .............................................. 15
Investment and Withdrawal Programs ............................. 15
Exchange Privilege ............................................. 17
Tax-Deferred Retirement Plans .................................. 17
6. Tax Status ........................................................ 18
7. Determination of Net Asset Value and Performance .................. 19
8. Distribution Plans ................................................ 21
9. Description of Shares, Voting Rights and Liabilities .............. 22
10. Independent Auditors and Financial Statements ..................... 22
Appendix A ........................................................ 23
MFS BOND FUND
A Series of MFS Series Trust IX
500 Boylston Street, Boston, Massachusetts 02116
(617) 954-5000
This Statement of Additional Information as amended or supplemented from time to
time (the "SAI") sets forth information which may be of interest to investors
but which is not necessarily included in the Fund's Prospectus, dated September
1, 1996. This SAI should be read in conjunction with the Prospectus, a copy of
which may be obtained without charge by contacting the Shareholder Servicing
Agent (see last page for address and phone number).
THIS SAI IS NOT A PROSPECTUS AND IS AUTHORIZED FOR DISTRIBUTION TO PROSPECTIVE
INVESTORS ONLY IF PRECEDED OR ACCOMPANIED BY A CURRENT PROSPECTUS.
<PAGE>
1. DEFINITIONS
"Trust" -- MFS Series Trust IX, a
Massachusetts business trust. The
Trust was known as MFS Fixed Income
Trust prior to January 18, 1995,
and as Massachusetts Financial Bond
Fund prior to January 7, 1992.
"Fund" -- MFS Bond Fund, a diversified series
of the Trust, a Massachusetts
business trust.
"MFS" or the "Adviser" -- Massachusetts Financial Services
Company, a Delaware corporation.
"MFD" -- MFS Fund Distributors, Inc., a
Delaware corporation.
"Prospectus" -- The Prospectus of the Fund, dated
September 1, 1996, as amended or
supplemented from time to time.
2. INVESTMENT OBJECTIVES, POLICIES AND
RESTRICTIONS
INVESTMENT OBJECTIVES. The primary investment objective of the Fund is to
provide as high a level of current income as is believed to be consistent with
prudent investment risk. The secondary objective of the Fund is to protect
shareholders' capital. Any investment involves risk and there can be no
assurance that the Fund will achieve its investment objectives.
INVESTMENT POLICIES. The investment policies of the Fund are described in the
Prospectus. In addition, certain of the Fund's investment policies are
described in greater detail below.
MORTGAGE PASS-THROUGH SECURITIES. The Fund may invest in mortgage pass-through
securities as described in the Prospectus. Interests in pools of
mortgage-related securities differ from other forms of debt securities, which
normally provide for periodic payment of interest in fixed amounts with
principal payments at maturity or specified call dates. Instead, these
securities provide a monthly payment which consists of both interest and
principal payments. In effect, these payments are a "pass-through" of the
monthly payments made by the individual borrowers on their mortgage loans, net
of any fees paid to the issuer or guarantor of such securities. Additional
payments are caused by prepayments of principal resulting from the sale,
refinancing or foreclosure of the underlying property, net of fees or costs
which may be incurred. Some mortgage pass-through securities (such as securities
issued by the Government National Mortgage Association ("GNMA")) are described
as "modified pass-through." These securities entitle the holder to receive all
interest and principal payments owed on the mortgages in the mortgage pool, net
of certain fees, at the scheduled payment dates regardless of whether the
mortgagor actually makes the payment.
The principal governmental guarantor of mortgage pass-through securities is the
GNMA. 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 FHA-insured or VA-guaranteed mortgages. These guarantees, however, do
not apply to the market value or yield of mortgage pass-though 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., those whose guarantees are not backed by
the full faith and credit of the U.S. Government) include the Federal National
Mortgage Association ("FNMA") and the Federal Home Loan Mortgage Corporation
("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 was created by Congress in 1970 as a corporate instrumentality of the U.S.
Government for the purpose of increasing the availability of mortgage credit for
residential housing. FHLMC issues Participation Certificates ("PCs") which
represent interests in conventional mortgages (i.e., not federally insured or
guaranteed) from 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.
REPURCHASE AGREEMENTS: As described in the Prospectus, the Fund may enter into
repurchase agreements with sellers who are member firms (or a subsidiary
thereof) of the New York Stock Exchange (the "Exchange") or members of the
Federal Reserve System, recognized primary U.S. Government securities dealers or
institutions which the Adviser has determined to be of comparable
creditworthiness. The securities that the Fund purchases and holds through its
agent are securities that are issued or guaranteed as to principal and interest
by the U.S. Government, its agencies, authorities or instrumentalities
("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
price agreed upon on the agreed upon delivery date or upon demand, as the case
may be, the Fund will have the right to liquidate the securities. If at the time
the Fund is contractually entitled to exercise its right to liquidate the
securities, the seller is subject to a proceeding under the bankruptcy laws or
its assets are otherwise subject to a stay order, the Fund's exercise of its
right to liquidate the securities may be delayed and result in certain losses
and costs to the Fund. The Fund has adopted and follows procedures which are
intended to minimize the risks of repurchase agreements. For example, the Fund
only enters into repurchase agreements after the Adviser has determined that the
seller is creditworthy, and the Adviser monitors that seller's creditworthiness
on an ongoing basis. Moreover, under such agreements, the value of the
securities (which are marked to market every business day) is required to be
greater than the repurchase price, and the Fund has the right to make margin
calls at any time if the value of the securities falls below the agreed upon
margin.
SWAPS AND RELATED TRANSACTIONS: The Fund may enter into interest rate swaps,
currency swaps and other types of available swap agreements. Swaps involve the
exchange by the Fund with another party of cash payments based upon different
interest rate indexes, currencies, and other prices or rates, such as the value
of mortgage prepayment rates. For example, in the typical interest rate swap,
the Fund might exchange a sequence of cash payments based on a floating rate
index for cash payments based on a fixed rate. Payments made by both parties to
a swap transaction are based on a principal amount determined by the parties.
The Fund may also purchase and sell caps, floors and collars. In a typical cap
or floor agreement, one party agrees to make payments only under specified
circumstances, usually in return for payment of a fee by the counterparty. For
example, the purchase of an interest rate cap entitles the buyer, to the extent
that a specified index exceeds a predetermined interest rate, to receive
payments of interest on a contractually-based principal amount from the
counterparty selling such interest rate cap. The sale of an interest rate floor
obligates the seller to make payments to the extent that a specified interest
rate falls below an agreed-upon level. A collar arrangement combines elements of
buying a cap and selling a floor.
The Fund will maintain cash or appropriate liquid assets with its custodian to
cover its current obligations under swap transactions. If the Fund enters into a
swap agreement on a net basis (i.e., the two payment streams are netted out,
with the Fund receiving or paying, as the case may be, only the net amount of
the two payments), the Fund will maintain cash or liquid assets with its
Custodian 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 cash or liquid assets with
a value equal to the full amount of the Fund's accrued obligations under the
agreement.
The most significant factor in the performance of swaps, caps, floors and
collars is the change in the specific interest rate, currency or other factor
that determines the amount of payments to be made under the arrangement. If MFS
is incorrect in its forecasts of such factors, the investment performance of the
Fund would be less than what it would have been if these investment techniques
had not been used. If a swap agreement calls for payments by the Fund, the Fund
must be prepared to make such payments when due. In addition, if the
counterparty's creditworthiness declined, the value of the swap agreement would
be likely to decline, potentially resulting in losses. If the counterparty
defaults, the Fund's risk of loss consists of the net amount of payments that
the Fund is contractually entitled to receive. The Fund anticipates that it will
be able to eliminate or reduce its exposure under these arrangements by
assignment or other disposition or by entering into an offsetting agreement with
the same or another counterparty.
FOREIGN SECURITIES: The Fund may invest in foreign securities as discussed in
the Prospectus. Investing in foreign securities generally represents a greater
degree of risk than investing in domestic securities, due to possible exchange
rate fluctuations, less publicly available information, more volatile markets,
less securities regulation, less favorable tax provisions, war or expropriation.
As a result of its investments in foreign securities, the Fund may receive
interest or dividend payments, or the proceeds of the sale or redemption of such
securities, in the foreign currencies in which such securities are denominated.
Under certain circumstances, such as where the Adviser believes that the
applicable exchange rate is unfavorable at the time the currencies are received
or the Adviser anticipates, for any other reason, that the exchange rate will
improve, the Fund may hold such currencies for an indefinite period of time.
While the holding of currencies will permit the Fund to take advantage of
favorable movements in the applicable exchange rate, such strategy also exposes
the Fund to risk of loss if exchange rates move in a direction adverse to the
Fund's position. Such losses could reduce any profits or increase any losses
sustained by the Fund from the sale or redemption of securities and could reduce
the dollar value of interest or dividend payments received.
The Fund may not invest more than 10% of its assets in non-dollar denominated,
non-Canadian foreign securities.
COLLATERALIZED MORTGAGE OBLIGATIONS AND MULTICLASS PASS-THROUGH SECURITIES: As
described in the Prospectus, 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 semiannual basis. The principal of and interest on the Mortgage Assets may be
allocated among the several classes of a series of a CMO in innumerable ways. In
a common structure, payments of principal, including any principal prepayments,
on the Mortgage Assets are applied to the classes of the series of a CMO in the
order of their respective stated maturities or final distribution dates, so that
no payment of principal will be made on any class of CMOs until all other
classes having an earlier stated maturity or final distribution date have been
paid in full. Certain CMOs may be stripped (securities which provide only the
principal or interest factor of the underlying security). See "Stripped
Morgage-Backed Securities" below for a discussion of the risks of investing in
these stripped securities and of investing in classes consisting of principals
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.
MORTGAGE "DOLLAR ROLL" TRANSACTIONS: As described in the Prospectus, the Fund
may enter into mortgage "dollar roll" transactions pursuant to which it sells
mortgage-backed securities for delivery in the future and simultaneously
contracts to repurchase substantially similar securities on a specified future
date. During the roll period, the Fund foregoes principal and interest paid on
the mortgage-backed securities. The Fund is compensated for the lost interest by
the difference between the current sales price and the lower price for the
future purchase (often referred to as the "drop") as well as by the interest
earned on the cash proceeds of the initial sale. The Fund may also be
compensated by receipt of a commitment fee.
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 of 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 "IO"
class) while the other class will receive all of the principal (the
principal-only or "PO" class). The yield to maturity on an IO is extremely
sensitive to the rate of principal payments, including prepayments on the
related underlying Mortgage Assets, and a rapid rate of principal payments may
have a material adverse effect on such security's yield to maturity. If the
underlying Mortgage Assets experience greater than anticipated prepayments of
principal, the Fund may fail to fully recoup its initial investment in these
securities. The market value of the class consisting primarily or entirely of
principal payments generally is unusually volatile in response to changes in
interest rates. 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.
LENDING OF PORTFOLIO SECURITIES: As described in the Prospectus, the Fund may
seek to increase its income by lending portfolio securities. The Fund would have
the right to call a loan and obtain the securities loaned at any time on
customary industry settlement notice (which will usually not exceed five days).
The Fund would not, however, have the right to vote any securities having voting
rights during the existence of the loan, but would call the loan in anticipation
of an important vote to be taken among holders of the securities or of the
giving or withholding of their consent on a material matter affecting the
investment. As with other extensions of credit there are risks of delay in
recovery or even loss of rights in the collateral should the borrower of the
securities fail financially. However, the loans would be made only to entities
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. If the Adviser determines to make
securities loans, it is intended that the value of the securities loaned would
not exceed 30% of the value of the Fund's total assets.
"WHEN-ISSUED" SECURITIES: As described in the Prospectus, the Fund may purchase
debt securities on a "when-issued" or on a "forward delivery" basis. Although
the Fund is not limited as to the amount of these securities for which it may
have commitments to purchase on such bases, it is expected that under normal
circumstances the Fund will not commit more than 20% of its total assets to such
purchases. When the Fund commits to purchase these securities on a "when-issued"
or "forward delivery" basis, it will set up procedures consistent with the
General Statement of Policy of the Securities and Exchange Commission (the
"SEC") concerning such purchases. Since that policy currently recommends that an
amount of the Fund's assets equal to the amount of the purchase be held aside or
segregated to be used to pay for the commitment, the Fund will always have cash,
short-term money market instruments or high quality debt securities sufficient
to cover any commitments or to limit any potential risk. Although the Fund does
not intend to make such purchases for speculative purposes and intends to adhere
to the provisions of the SEC policy, purchases of securities on such bases may
involve more risk than other types of purchases. For example, the Fund may have
to sell assets which have been set aside in order to meet redemptions. Also, if
the Fund determines it is necessary to sell the "when-issued" or "forward
delivery" securities before delivery, the Fund may incur a loss because of
market fluctuations since the time the commitment to purchase such securities
was made.
The policies described above and the policies with respect to options, Futures
Contracts, Options on Futures Contracts, Forward Contracts, options on foreign
currencies, portfolio trading and the lending of portfolio securities described
below are not fundamental and may be changed without shareholder approval, as
may be the Fund's investment objectives.
INDEXED SECURITIES: The Fund may purchase securities whose prices are indexed to
the prices of other securities, securities indices, currencies, precious metals
or other commodities, or other financial indicators. Indexed securities
typically, but not always, are debt securities or deposits whose value at
maturity (i.e., principal value) or coupon rate is determined by reference to a
specific instrument or statistic. Gold-indexed securities, for example,
typically provide for a maturity value that depends on the price of gold,
resulting in a security whose price tends to rise and fall together with gold
prices. Currency-indexed securities typically are short-term to
intermediate-term debt securities whose maturity values or interest rates are
determined by reference to the values of one or more specified foreign
currencies, and may offer higher yields than U.S. dollar-denominated securities
of equivalent issuers. Currency-indexed securities may be positive or negatively
indexed; that is, their maturity value may increase when the specified currency
value increases, resulting in a security that performs similarly to a
foreign-denominated instrument, or their maturity value may decline when foreign
currencies increase, resulting in a security whose price characteristics are
similar to a put on the underlying currency. Currency-indexed securities may
also have prices that depend on the values of a number of different foreign
currencies relative to each other.
The performance of indexed securities depends to a great extent on the
performance of the security, currency, or other instrument to which they are
indexed, and may also be influenced by interest rate changes in the U.S. and
abroad. At the same time, indexed securities are subject to the credit risks
associated with the issuer of the security, and their values may decline
substantially if the issuer's creditworthiness deterioriates. Recent issuers of
indexed securities have included banks, corporations, and certain U.S.
government agencies.
OPTIONS: The Fund intends to write covered put and call options and purchase put
and call options on domestic and foreign fixed income securities that are traded
on U.S. and foreign securities exchanges and over-the-counter. Call options
written by the Fund give the holder the right to buy the underlying securities
from the Fund at a fixed exercise price; put options written by the Fund give
the holder the right to sell the underlying security to the Fund at a fixed
exercise price. A call option written by the Fund is "covered" if the Fund owns
the underlying security covered by the call or has an absolute and immediate
right to acquire that security without additional cash consideration (or for
additional cash consideration held in a segregated account by its custodian)
upon conversion or exchange of other securities held in its portfolio. A call
option is also covered if the Fund holds a call on the same security and in the
same principal amount as the call written where the exercise price of the call
held (a) is equal to or less than the exercise price of the call written or (b)
is greater than the exercise price of the call written if the difference is
maintained by the Fund in cash, short-term money market instruments or high
quality debt securities in a segregated account with its custodian. A put option
written by the Fund is "covered" if the Fund maintains cash, short-term money
market instruments or high quality debt securities with a value equal to the
exercise price in a segregated account with its custodian, or else holds a put
on the same security and in the same principal amount as the put written where
the exercise price of the put held (a) is equal to or greater than the exercise
price of the put written or (b) is less than the exercise price of the put
written if the difference is maintained by the Fund in cash, short-term money
market instruments or high quality debt securities in a segregated account with
its custodian. Put and call options written by the Fund may also be covered in
such other manner as may be in accordance with the requirements of the exchange,
or the counter party with which, the option is traded, and applicable laws and
regulations. The writer of an option may have no control over when the
underlying securities must be sold (in the case of a call option) or purchased
(in the case of a put option) since with regard to certain options, the writer
may be assigned an exercise notice at any time prior to the termination of the
obligation.
Effecting a closing transaction in the case of a written call option will permit
the Fund to write another call option on the underlying security with either a
different exercise price or expiration date or both, or in the case of a written
put option, will permit the Fund to write another put option to the extent that
the exercise price thereof is secured by deposited cash or short-term
securities. Such transactions permit the Fund to generate additional premium
income, which will partially offset declines in the value of portfolio
securities or increases in the cost of securities to be acquired. Also,
effecting a closing transaction will permit the cash or proceeds from the
concurrent sale of any securities subject to the option to be used for other
Fund investments. If the Fund desires to sell a particular security from its
portfolio on which it has written a call option, it will effect a closing
transaction prior to or concurrent with the sale of the security.
The Fund will realize a profit from a closing transaction if the price of the
transaction is less than the premium received from writing the option or is more
than the premium paid to purchase the option; the Fund will realize a loss from
a closing transaction if the price of the transaction is more than the premium
received from writing the option or is less than the premium paid to purchase
the option. Because increases in the market price of a call option will
generally reflect increases in the market price of the underlying security, any
loss resulting from the closing out of a call option is likely to be offset in
whole or in part by appreciation of the underlying security owned by the Fund.
An option position may be closed out only where there exists a secondary market
for an option of the same series. If a secondary market does not exist, it might
not be possible to effect closing transactions in particular options with the
result that the would have to exercise the options in order to realize any
profit. If the Fund is unable to effect a closing purchase transaction in a
secondary market, it will not be able to sell the underlying security until the
option expires or it delivers the underlying security upon exercise. Reasons for
the absence of a liquid secondary market include the following: (i) there may be
insufficient trading interest in certain options; (ii) restrictions may be
imposed by a national securities exchange on opening transactions or closing
transactions or both; (iii) trading halts, suspensions or other restrictions may
be imposed with respect to particular classes or series of options or underlying
securities; (iv) unusual or unforeseen circumstances may interrupt normal
operations on an exchange; (v) the facilities of an exchange or the Options
Clearing Corporation (the "OCC") may not at all times be adequate to handle
current trading volume; or (vi) one or more exchanges could, for economic or
other reasons, decide or be compelled at some future date to discontinue the
trading of options (or a particular class or series of options), in which event
the secondary market on that exchange (or in that class or series of options)
would cease to exist, although outstanding options on that exchange that had
been issued by the OCC as a result of trades on that exchange would continue to
be exercisable in accordance with their terms.
The Fund may write options in connection with buy-and-write transactions; that
is, the Fund may purchase a security and then write a call option against that
security. The exercise price of the call the Fund determines to write will
depend upon the expected price movement of the underlying security. The exercise
price of a call option may be below ("in-the-money"), equal to ("at-the-money")
or above ("out-of-the-money") the current value of the underlying security at
the time the option is written. If the call options are exercised in such
transactions, the Fund's maximum gain will be the premium received by it for
writing the option, adjusted upwards or downwards by the difference between the
Fund's purchase price of the security and the exercise price. If the options are
not exercised and the price of the underlying security declines, the amount of
such decline will be offset in part, or entirely, by the premium received.
The writing of covered put options is similar in terms of risk/return
characteristics to buy-and-write transactions. Put options may be used by the
Fund in the same market environments that call options are used in equivalent
buy-and-write transactions.
The Fund may write combinations of put and call options on the same security, a
practice known as a "straddle." By writing a straddle, the Fund undertakes a
simultaneous obligation to sell and purchase the same security in the event that
one of the options is exercised. If the price of the security subsequently rises
sufficiently above the exercise price to cover the amount of the premium and
transaction costs, the call will likely be exercised and the Fund will be
required to sell the underlying security at a below market price. This loss may
be offset, however, in whole or in part, by the premiums received on the writing
of the two options. Conversely, if the price of the security declines by a
sufficient amount, the put will likely be exercised. The writing of straddles
will likely be effective, therefore, only where the price of a security remains
stable and neither the call nor the put is exercised. In an instance where one
of the options is exercised, the loss on the purchase or sale of the underlying
security may exceed the amount of the premiums received.
The Fund may also purchase put options to hedge against a decline in the value
of its portfolio. By using put options in this way, the Fund will reduce any
profit it might otherwise have realized in the underlying security by the amount
of the premium paid for the put option and by transaction costs.
The Fund may purchase call options to hedge against an increase in the price of
domestic or foreign securities that the Fund anticipates purchasing in the
future. The premium paid for the call option plus any transaction costs will
reduce the benefit, if any, realized by the Fund upon exercise of the option,
and, unless the price of the underlying security rises sufficiently, the option
may expire worthless to the Fund.
YIELD CURVE OPTIONS: The Fund may also enter into options on the yield "spread"
or yield differential between two fixed income securities, a transaction
referred to as a "yield curve" option. In contrast to other types of options, a
yield curve option is based on the difference between the yields of designated
fixed income securities, rather than the prices of the individual securities,
and is usually 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 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 fixed income 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 yield
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
written by the Fund is covered if the Fund holds another call (or put) option on
the yield spread between the same two securities and maintains in a segregated
account with its custodian cash or cash equivalents sufficient to cover the
Fund's net liability under the two options. Yield curve options may also be
covered in such other manner as may be in accordance with the requirements of
the counter party with which the option is traded and applicable laws and
regulations. Yield curve options are traded over-the-counter and because they
have been only recently introduced, established trading markets for these
securities have not yet developed. Because these securities are traded
over-the-counter, the SEC has taken the position that yield curve options are
illiquid and, therefore, cannot exceed the SEC illiquidity ceiling. See
"Investment Techniques -- Options" in the Prospectus for a discussion of the
policies the Adviser intends to follow to limit the Fund's investment in these
securities.
FUTURES CONTRACTS: The Fund may enter into contracts for hedging purposes, and
for non-hedging purposes to the extent permitted by applicable law, for the
future delivery of domestic or foreign fixed income securities or contracts
based on municipal bond or other financial indices including any index of
domestic or foreign fixed income securities, as such contracts become available
for trading ("Futures Contracts"). A "sale" of a Futures Contract means a
contractual obligation to deliver the securities called for by the contract at a
specified price in a fixed delivery month or, in the case of a Futures Contract,
on an index of securities, to make or receive a cash settlement. A "purchase" of
a Futures Contract means a contractual obligation to acquire the securities
called for by the contract at a specified price in a fixed delivery month or, in
the case of a Futures Contract on an index of securities, to make or receive a
cash settlement. U.S. Futures Contracts have been designed by exchanges which
have been designated as "contract markets" by the Commodity Futures Trading
Commission (the "CFTC"), and must be executed through a futures commission
merchant, or brokerage firm, which is a member of the relevant contract market.
Existing contract markets include the Chicago Board of Trade and the
International Monetary Market of the Chicago Mercantile Exchange. Futures
Contracts are traded on these markets, and, through their clearing corporations,
the exchanges guarantee performance of the contracts as between the clearing
members of the exchange. Futures Contracts purchased or sold by the Fund are
also traded on foreign exchanges which are not regulated by the CFTC.
At the same time a Futures Contract is purchased or sold, the Fund must allocate
cash or securities as a deposit payment ("initial deposit"). The initial deposit
varies but may be as low as 5% or less of the value of the contract. Daily
thereafter, the Futures Contract is valued and the payment of "variation margin"
may be required since each day the Fund would provide or receive cash that
reflects any decline or increase in the contract's value.
At the time of delivery of securities pursuant to a Futures Contract based on
fixed income securities, adjustments are made to recognize differences in value
arising from the delivery of securities with a different interest rate from that
specified in the contract. In some (but not many) cases, securities called for
by a Futures Contract may not have been issued when the contract was written.
A Futures Contract based on an index of securities, such as a municipal bond
index Futures Contract, provides for a cash payment, equal to the amount, if
any, by which the value of the index at maturity is above or below the value of
the index at the time the contract was entered into, times a fixed index
"multiplier". The index underlying such a Futures Contract is generally a broad
based index of securities designed to reflect movements in the relevant market
as a whole. The index assigns weighted values to the securities included in the
index, and its composition is changed periodically.
Although Futures Contracts call for the actual delivery or acquisition of
securities or, in the case of Futures Contracts based on an index, the making or
acceptance of a cash settlement at a specified future time, the contractual
obligation is usually fulfilled before such date by buying or selling, as the
case may be, on a commodities exchange, an identical Futures Contract calling
for settlement in the same month, subject to the availability of a liquid
secondary market. The Fund incurs brokerage fees when it purchases and sells
Futures Contracts.
The purpose of the acquisition or sale of a Futures Contract, in the case of a
portfolio such as that of the Fund, which holds or intends to acquire long-term
fixed income securities, is to attempt to protect the Fund from fluctuations in
interest rates without actually buying or selling long-term fixed income
securities. For example, if the Fund owns long-term bonds, and interest rates
were expected to increase, the Fund might enter into Futures Contracts for the
sale of debt securities. Such a sale would have much the same effect as selling
an equivalent value of the long-term bonds owned by the Fund. If interest rates
did increase, the value of the debt securities in the portfolio would decline,
but the value of the Futures Contracts would increase at approximately the same
rate, thereby keeping the net asset value of the Fund from declining as much as
it otherwise would have. The Fund could accomplish similar results by selling
bonds with long maturities and investing in bonds with short maturities when
interest rates are expected to increase. However, since the futures market is
more liquid than the cash market, the use of Futures Contracts as an investment
technique allows the Fund to maintain a hedging position without having to sell
its portfolio securities.
Similarly, when it is expected that interest rates may decline, Futures
Contracts may be purchased to attempt to hedge against anticipated purchases of
long-term bonds at higher prices. Since the fluctuations in the value of Futures
Contracts should be similar to that of long-term bonds, the Fund could take
advantage of the anticipated rise in the value of long-term bonds without
actually buying them until the market had stabilized. At that time, the Futures
Contracts could be liquidated and the Fund could then buy long-term bonds on the
cash market. To the extent the Fund enters into Futures Contracts for this
purpose, the assets in the segregated asset account maintained to cover the
Fund's obligations with respect to such Futures Contracts will consist of cash,
cash equivalents, or short-term money market instruments from its portfolio in
an amount equal to the difference between the fluctuating market value of such
Futures Contracts and the aggregate value of the initial and variation margin
payments made by the Fund with respect to such Futures Contracts.
The ordinary spreads between prices in the cash and futures markets, due to
differences in the nature of those markets, are subject to distortions. First,
all participants in the futures market are subject to initial deposit and
variation margin requirements. Rather than meeting additional variation margin
requirements, investors may close out Futures Contracts through offsetting
transactions which could distort the normal relationship between the cash and
futures markets. Second, the liquidity of the futures market depends on
participants entering into offsetting transactions rather than making or taking
delivery. To the extent participants decide to make or take delivery, liquidity
in the futures market could be reduced, thus producing distortion. Third, from
the point of view of speculators, the margin deposit requirements in the futures
market are less onerous than margin requirements in the securities market.
Therefore, increased participation by speculators in the futures market may
cause temporary price distortions. Due to the possibility of distortion, a
correct forecast of general interest rate trends by the Adviser may still not
result in a successful transaction.
In addition, Futures Contracts entail risks. Although the Fund believes that use
of such contracts will benefit the Fund, if the Adviser's investment judgment
about the general direction of interest rates is incorrect, the Fund's overall
performance would be poorer than if it had not entered into any such contract.
For example, if the Fund has hedged against the possibility of an increase in
interest rates which would adversely affect the price of bonds held in its
portfolio and interest rates decrease instead, the Fund will lose part or all of
the benefit of the increased value of its bonds which it has hedged because it
will have offsetting losses in its futures positions. In addition, in such
situations, if the Fund has insufficient cash, it may have to sell bonds from
its portfolio to meet daily variation margin requirements. Such sales of bonds
may be, but will not necessarily be, at increased prices which reflect the
rising market. The Fund may have to sell securities at a time when it may be
disadvantageous to do so. Transactions in Futures Contracts for non-hedging
purposes involve greater risks, and could result in losses which are not offset
by gains on other portfolio assets.
OPTIONS ON FUTURES CONTRACTS: The Fund intends to purchase and write options on
Futures Contracts ("Options on Futures Contracts") for hedging purposes. An
Option on a Futures Contract provides the holder with the right to enter into a
"long" position in the underlying Futures Contract (in the case of a call
option) or a "short" position in the underlying Futures Contract, in the case of
a put option, at a fixed exercise price up to a stated expiration date or (in
the case of certain options) on such date. Such Options on Futures Contracts
will be traded on U.S. contract markets regulated by the CFTC as well as on
foreign exchanges. Depending on the pricing of the option compared to either the
price of the Futures Contract upon which it is based or the price of the
underlying debt securities, it may or may not be less risky than ownership of
the Futures Contract or underlying debt securities. As with the purchase of
Futures Contracts, when the Fund is not fully invested it may purchase a call
Option on a Futures Contract to hedge against a market advance due to declining
interest rates.
The writing of a call Option on a Futures Contract constitutes a partial hedge
against declining prices of the securities which are deliverable upon exercise
of the Futures Contract. If the futures price at expiration of the option is
below the exercise price, the Fund will retain the full amount of the option
premium which provides a partial hedge against any decline that may have
occurred in the Fund's portfolio holdings. The writing of a put Option on a
Futures Contract constitutes a partial hedge against increasing prices of the
securities which are deliverable upon exercise of the Futures Contract. If the
futures price at expiration of the option is higher than the exercise price, the
Fund will retain the full amount of the option premium, less related transaction
costs, which provides a partial hedge against any increase in the price of
securities which the Fund intends to purchase. If a put or call option the Fund
has written is exercised, the Fund will incur a loss which will be reduced by
the amount of the premium it receives, less related transaction costs. Depending
on the degree of correlation between changes in the value of its portfolio
securities and changes in the value of its futures positions, the Fund's losses
from existing Options on Futures Contracts may to some extent be reduced or
increased by changes in the value of portfolio securities. The writer of an
Option on a Futures Contract is subject to the requirement of initial and
variation margin payments. The Fund will cover the writing of call Options on
Futures Contracts through purchases of the underlying Futures Contract or
through ownership of the security, or securities included in the index,
underlying the Futures Contract. The Fund may also cover the writing of call
Options on Futures Contracts through the purchase of such Options, provided that
the exercise price of the call purchased (a) is equal to or less than the
exercise price of the call written; or (b) is greater than the exercise price of
the call written if the difference is maintained by the Fund in cash, short-term
money market instruments or high quality debt securities in a segregated account
with the Fund's custodian. The Fund may cover the writing of put Options on
Futures Contracts through sales of the underlying Futures Contract or through
segregation of cash, short-term money market instruments or high quality debt
securities in an amount equal to the value of the security or index underlying
the Futures Contract. The Fund may also cover the writing of put Options on
Futures Contracts through the purchase of such Options, provided that the
exercise price of the put purchased is equal to or greater than the exercise
price of the put written, or is less than the exercise price of the put written
if the difference is maintained by the Fund in cash, short-term money market
instruments or high quality debt securities in a segregated account with its
custodian. In addition, the Fund may cover put and call Options on Futures
Contracts in accordance with the requirements of the exchange on which the
option is traded and applicable laws and regulations.
The Fund may also purchase straddles on Options on Futures Contracts in order to
protect against risk of loss arising as a result of anticipated changes in
volatility in the interest rate or fixed income markets. Under such
circumstances, if the anticipated changes in volatility in the market do not
occur, the Fund could be required to forfeit one or both of the premiums paid
for the Options.
The purchase of a put Option on a Futures Contract is similar in some respects
to the purchase of protective put options on portfolio securities. The Fund will
purchase a put Option on a Futures Contract to hedge the Fund's portfolio
against the risk of rising interest rates.
The amount of risk the Fund assumes when it purchases an Option on a Futures
Contract is the premium paid for the Option plus related transaction costs,
although in order to realize a profit it may be necessary to exercise the Option
and close out the underlying Futures Contract. In addition to the correlation
risks discussed above, the purchase of an Option also entails the risk that
changes in the value of the underlying Futures Contract will not be fully
reflected in the value of the option purchased. Transactions in Options on
Futures Contracts for non-hedging purposes involve greater risks, and could
result in losses which are not offset by gains on other portfolio assets.
FORWARD CONTRACTS: The Fund may enter into contractual obligations to purchase
or sell a specific quantity of a given foreign currency for a fixed exchange
rate at a future date ("Forward Contracts") for hedging purposes only. The Fund
may also enter into Forward Contracts for "cross hedging" as noted in the
Prospectus. Forward Contracts are individually negotiated and are traded through
the "interbank currency market", an informal network of banks and brokerage
firms which operates around the clock and throughout the world. Transactions in
the interbank market may be executed only through financial institutions acting
as market-makers in the interbank market, or through brokers executing purchases
and sales through such institutions. Market-makers in the interbank market
generally act as principals in taking the opposite side of their customers'
positions in Forward Contracts, and ordinarily charge a mark-up or commission
which may be included in the cost of the contract.
Prior to the stated maturity date of a Forward Contract, it may be possible to
liquidate the transaction by entering into an offsetting contract. In order to
do so, however, a customer may be required to maintain both contracts as open
positions until maturity and to make or receive a settlement of the difference
owed to or from the market-maker or broker at that time.
The Fund has established procedures consistent with statements by the SEC and
its staff regarding the use of Forward Contracts by registered investment
companies, which require the use of segregated assets or "cover" in connection
with the purchase and sale of such contracts. In those instances in which the
Fund satisfies this requirement through segregation of assets, it will maintain,
in a segregated account, cash, cash equivalents or high grade debt securities,
which will be marked to market on a daily basis, in an amount equal to the value
of its commitments under Forward Contracts. Alternatively, the Fund may "cover"
its obligations under such contracts through the ownership of the amount of
foreign currency required to be delivered under a Forward Contract, in the case
of a Forward Contract entered into by the Fund to sell such currency, or through
the purchase of a call option, or a call option on a Futures Contract, on the
underlying currency, provided that, if the strike price of the option is greater
than the price established under the Forward Contract, the Fund will segregate
cash, short-term money market instruments or high grade debt securities with a
value equal to the difference between the strike price of the option and the
price of the Forward Contract. The Fund may cover its obligations under a
Forward Contract to purchase a foreign currency by purchasing a put option, or a
put option on a Futures Contract, on the underlying currency, provided that, if
the strike price of the option is less than the price established under the
Forward Contract, the Fund will segregate cash, short-term money market
instruments or high grade debt securities with a value equal to the difference
between the strike price of the option and the price of the Forward Contact. The
Fund may also cover Forward Contracts in such other manner as may be in
accordance with the requirements of the counter party to the contract and
applicable laws and regulations.
Forward Contracts may limit potential gain from a positive change in the
relationship between the U.S. dollar and foreign currencies. Unanticipated
changes in currency prices may result in poorer overall performance for the Fund
than if it had not engaged in such contracts.
OPTIONS ON FOREIGN CURRENCIES: The Fund may purchase and write options on
foreign currencies for hedging purposes in a manner similar to that in which
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 or
in part, the adverse effect on its portfolio which otherwise would have
resulted.
Conversely, where a rise in the dollar value of a currency in which securities
to be acquired are denominated is projected, thereby increasing the cost of such
securities, the Fund may purchase call Options thereon. The purchase of such
Options could offset, at least partially, the effects of the adverse movements
in exchange rates. As in the case of other types of Options, however, the
benefit to the Fund deriving from purchases of foreign currency options 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.
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, less related transaction costs. 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,
less related transaction costs, 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.
Options on foreign currencies written or purchased by the Fund will be traded
over-the-counter or on U.S. or foreign securities exchanges. All options written
on foreign currencies will be covered. A call option written on foreign
currencies by the Fund is "covered" if the Fund owns the underlying foreign
currency covered by the call or has an absolute and immediate right to acquire
that foreign currency without additional cash consideration (or for additional
cash consideration held in a segregated account by its custodian) upon
conversion or exchange of other foreign currency held in its portfolio. A call
option is also covered if the Fund has a call on the same foreign currency and
in the same principal amount as the call written where the exercise price of the
call held (a) is equal to or less than the exercise price of the call written or
(b) is greater than the exercise price of the call written if the difference is
maintained by the Fund in cash, short-term money market instruments or high
quality debt securities in a segregated account with its custodian. A put option
written on foreign currencies by the Fund is "covered" if the Fund maintains
cash, short-term money market instruments or high quality debt securities with a
value equal to the exercise price in a segregated account with its custodian, or
else holds a put on the same foreign currency and in the same principal amount
as the put written where the exercise price of the put held is equal to or
greater than the exercise price of the put written or is less than the exercise
price of the put written if the difference is maintained by the Fund in cash,
short-term money market instruments or high quality debt securities in a
segregated account with its custodian. Options on foreign currencies written by
the Fund may also be covered in such other manner as may be in accordance with
the requirements of the exchange on which, or the counter party with which, the
option is traded, and applicable laws and regulations.
ADDITIONAL RISKS OF INVESTING IN OPTIONS ON SECURITIES, FUTURES CONTRACTS,
OPTIONS ON FUTURES CONTRACTS, FORWARD CONTRACTS AND OPTIONS ON FOREIGN
CURRENCIES: Various additional risks exist with respect to the trading of
options, Futures Contracts and Forward Contracts. For example, the Fund's
ability effectively to hedge all or a portion of its portfolio through
transactions in such instruments will depend on the degree to which price
movements in the underlying index or instrument correlate with price movements
in the relevant portion of the Fund's portfolio. The trading of futures and
options entails the additional risk of imperfect correlation between movements
in the futures or option price and the price of the underlying index or
obligation, while the trading of options also entails the risk of imperfect
correlation between securities used to cover options written and the securities
underlying such options. The anticipated spread between the prices may be
distorted because of various factors, which are set forth under "Futures
Contracts" above. When the Fund purchases or sells Futures Contracts based on an
index of securities, the securities comprising such index will not be the same
as the portfolio securities being hedged, thereby creating a risk that changes
in the value of the index will not correlate with changes in the value of such
portfolio securities. In addition, where the Fund enters into Forward Contracts
as a "cross hedge" (i.e., the purchase or sale of a Forward Contract on one
currency to hedge against risk of loss arising from changes in value of a second
currency), the Fund incurs the risk of imperfect correlation between changes in
the values of the two currencies, which could result in losses.
The Fund's ability to engage in options and futures strategies will also depend
on the availability of liquid markets in such instruments. "Options" above sets
forth certain reasons why a liquid secondary market may not exist.
The liquidity of a secondary market in a Futures Contract or option thereon may
be adversely affected by "daily price fluctuation limits", established by
exchanges, which limit the amount of fluctuation in the price of a contract
during a single trading day and prohibit trading beyond such limit. In addition,
the exchanges on which futures and options are traded may impose limitations
governing the maximum number of positions on the same side of the market and
involving the same underlying instrument which may be held by a single investor,
whether acting alone or in concert with others (regardless of whether such
contracts are held on the same or different exchanges or held or written in one
or more accounts or through one or more brokers).
Unlike transactions in Futures Contracts entered into by the Fund, options on
foreign currencies and Forward Contracts are not traded on contract markets
regulated by the CFTC or, with the exception of certain foreign currency
options, by 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. Similarly, options on securities may be traded over-the-counter.
In an over-the-counter trading environment, many of the protections afforded to
exchange participants will not be available. For example, there are no 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.
Options on foreign currencies traded on national securities exchanges are within
the jurisdiction of the SEC, as are other securities and options 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 options on securities and on foreign currencies entered into on a national
securities exchange are cleared and guaranteed by 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 members, 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.
In addition, Options on securities, Futures Contracts, Options on Futures
Contracts, Forward Contracts and options on foreign currencies may be traded on
foreign exchanges. Such transactions are subject to the risk of governmental
actions affecting trading in or the prices of foreign currencies or securities.
The value of such positions also could be adversely affected by (i) other
complex foreign, political and economic factors, (ii) lesser availability than
in the U.S. of data on which to make trading decisions, (iii) delays in the
Fund's ability to act upon economic events occuring in foreign markets during
non-business hours in the U.S., (iv) the imposition of different exercise and
settlement terms and procedures and margin requirements than in the United
States, and (v) lesser trading volume.
RESTRICTIONS ON THE USE OF OPTIONS AND FUTURES: In order to assure that the Fund
will not be deemed to be a "commodity pool" for purposes of the Commodity
Exchange Act, regulations of the CFTC require that the Fund enter into
transactions in Futures Contracts and Options on Futures Contracts only (i) for
bona fide hedging purposes (as defined in CFTC regulations), or (ii) for
non-hedging purposes, provided that the aggregate initial margin and premiums on
such non-hedging positions does not exceed 5% of the liquidation value of the
Fund's assets. In addition, the Fund must comply with the requirements of
various state securities laws in connection with such transactions.
RISKS OF INVESTING IN LOWER RATED BONDS. The Fund may invest in fixed income
securities rated Baa by Moody's or BBB by S&P and comparable unrated securities.
These securities, while normally exhibiting adequate protection parameters, have
speculative characteristics and changes in economic conditions or other
circumstances are more likely to lead to a weakened capacity to make principal
and interest payments than in the case of higher grade fixed income securities.
The Fund may also invest up to 20% of its net assets in securities rated Ba or
lower by Moody's or BB or lower by S&P or Fitch (and comparable unrated
securities) (commonly known as "junk bonds") to the extent described in the
Prospectus. No minimum rating standard is required by the Fund. These securities
are considered speculative and, while generally providing greater income than
investments in higher rated securities, will involve greater risk of principal
and income (including the possibility of default or bankruptcy of the issuers of
such securities) and may involve greater volatility of price (especially during
periods of economic uncertainty or change) than securities in the higher rating
categories and because yields vary over time, no specific level of income can
ever be assured. These lower rated high yielding fixed income securities
generally tend to reflect economic changes (and the outlook for economic growth)
short-term corporate and industry developments and the market's perception of
their credit quality (especially during times of adverse publicity) to a greater
extent than higher rated securities which react primarily to fluctuations in the
general level of interest rates (although these lower rated fixed income
securities are also affected by changes in interest rates). In the past,
economic downturns or an increase in interest rates have, under certain
circumstances, caused a higher incidence of default by the issuers of these
securities and may do so in the future, especially in the case of highly
leveraged issuers. The prices for these securities may be affected by
legislative and regulatory developments. For example, federal rules require that
savings and loan associations gradually reduce their holdings of high-yield
securities. An effect of such legislation may be to depress the prices of
outstanding lower rated high yielding fixed income securities. The market for
these lower rated fixed income securities may be less liquid than the market for
investment grade fixed income securities. Furthermore, the liquidity of these
lower rated securities may be affected by the market's perception of their
credit quality. Therefore, the Adviser's judgment may at times play a greater
role in valuing these securities than in the case of investment grade fixed
income securities, and it also may be more difficult during times of certain
adverse market conditions to sell these lower rated securities to meet
redemption requests or to respond to changes in the market.
While the Adviser may refer to ratings issued by established credit rating
agencies, it is not the Fund's policy to rely exclusively on ratings issued by
these rating agencies, but rather to supplement such ratings with the Adviser's
own independent and ongoing review of credit quality. To the extent the Fund
invests in these lower rated securities, the achievement of its investment
objectives may be more dependent on the Adviser's own credit analysis than in
the case of a fund investing in higher quality fixed income securities. These
lower rated securities may also include zero coupon bonds, deferred interest
bonds and payable in kind ("PIK") bonds which are described in the Prospectus.
PORTFOLIO TRADING: As described in the Prospectus, The Fund intends to engage in
portfolio trading rather than holding portfolio securities to maturity. Such
trading may involve the selling of securities held for a short time, ranging
from several months to less than a day and may be limited by tax restrictions.
In trading portfolio securities, the Fund may use the following strategies:
(1) shortening the average maturity of its portfolio in anticipation of a
rise in interest rates so as to minimize depreciation of principal;
(2) lengthening the average maturity of its portfolio in anticipation of a
decline in interest rates so as to maximize appreciation of principal;
(3) changing the average coupon of its portfolio when yield disparities
reflect a change in investment value among securities trading at differing
levels of premiums or discounts;
(4) selling one type of debt security (e.g., industrial bonds) and buying
another (e.g., utility bonds) when disparities arise in the relative values of
each; and
(5) changing from one debt security to an essentially similar debt security
when their respective yields are distorted due to market factors.
These strategies may result in minor temporary increases or decreases in the
Fund's current income available for distribution to its shareholders, and in its
holding debt securities which sell at moderate to substantial premiums or
discounts from face value. If the Fund's expectations of changes in interest
rates or the Fund's evaluation of the normal yield relationship between two
securities proves to be incorrect, the Fund's income, net asset value and
potential capital gain may be reduced or its potential capital loss may be
increased.
The Fund's limitations, policies and rating restrictions are adhered to at the
time of purchase or utilization of assets; a subsequent change in circumstances
will not be considered to result in a violation of policy.
INVESTMENT RESTRICTIONS. The Fund has adopted the following restrictions which
are fundamental and cannot be changed without the approval of the holders of a
majority of the shares of the Fund (which, as used in this SAI, means the lesser
of (i) more than 50% of the outstanding shares of the Trust or a series or
class, as applicable, or (ii) 67% or more of the outstanding shares of the Trust
or a series or class, as applicable, present at a meeting if holders of more
than 50% of the outstanding shares of the Trust or a series or class, as
applicable, are represented in person or by proxy):
The Fund may not:
(1) borrow money in an amount in excess of 10% of its gross assets, and then
only as a temporary measure for extraordinary or emergency purposes, or
pledge, mortgage or hypothecate an amount of its assets (taken at market
value) in excess of 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, Options on Futures Contracts, Forward Contracts
and options on foreign currencies and payments of initial and variation margin
in connection therewith are not considered a pledge of assets);
(2) underwrite securities issued by other persons except insofar as the Fund
may technically be deemed an underwriter under the Securities Act of 1933 in
selling a portfolio security;
(3) concentrate its investments in any particular industry, but if it is
deemed appropriate for the achievement of its investment objectives, the Fund
may invest up to 25% of its assets (taken at market value at the time of each
investment) in securities of issuers in any one industry;
(4) purchase or sell real estate (including limited partnership interests
but excluding securities of companies, such as real estate investment trusts,
which deal in real estate or interests therein), or mineral leases,
commodities or commodity contracts (except options, Futures Contracts, Options
on Futures Contracts, Forward Contracts and options on foreign currencies) in
the ordinary course of its business. The Fund reserves the freedom of action
to hold and to sell real estate or mineral leases, commodities or commodity
contracts (including options, Futures Contracts, Options on Futures Contracts,
Forward Contracts and options on foreign currencies) acquired as a result of
the ownership of securities. The Fund will not purchase securities for the
purpose of acquiring real estate or mineral leases, commodities or commodity
contracts (except options, Futures Contracts, Options on Futures Contracts,
Forward Contracts and options on foreign currencies);
(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 in accordance with its investment objectives and policies, the
lending of portfolio securities, or the investment of the Fund's assets in
repurchase agreements, shall not be considered the making of a loan;
(6) purchase the securities of any issuer if such purchase, at the time
thereof, would cause more than 5% of its total assets (taken at market value)
to be invested in the securities of such issuer, other than cash items and
U.S. Government securities;
(7) purchase voting securities of any issuer if such purchase, at the time
thereof, would cause more than 10% of the outstanding voting securities of
such issuer to be held by the Fund; or purchase securities of any issuer if
such purchase at the time thereof would cause more than 10% of any class of
securities of such issuer to be held by the Fund. For this purpose all
indebtedness of an issuer shall be deemed a single class and all preferred
stock of an issuer shall be deemed a single class;
(8) invest for the purpose of exercising control or management;
(9) purchase securities issued by any other 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 the Fund
shall not purchase such securities if such purchase at the time thereof would
cause more than 10% of its total assets (taken at market value) to be invested
in the securities of such issuers; and, provided further, that the Fund shall
not purchase securities issued by any open-end investment company;
(10) invest more than 5% of its assets in companies which, including
predecessors, have a record of less than three years' continuous operation;
(11) purchase or retain in its portfolio any securities issued by an issuer
any of whose officers, directors, trustees or security holders is an officer
or Trustee of the Trust, or is an officer or Director of the Adviser, if after
the purchase of the securities of such issuer by the Fund one or more of such
persons owns beneficially more than 1/2 of 1% of the shares or securities, or
both, of such issuer, and such persons owning more than 1/2 of 1% of such
shares or securities together own beneficially more than 5% of such shares or
securities, or both;
(12) purchase any securities or evidences of interest therein on margin,
except to make deposits on margin in connection with options, Futures
Contracts, Options on Futures Contracts, Forward Contracts and options on
foreign currencies, and except that the Fund may obtain such short-term credit
as may be necessary for the clearance of purchases and sales of securities;
(13) sell any security which the Fund does not own unless by virtue of its
ownership of other securities the Fund has at the time of sale a right to
obtain securities without payment of further consideration equivalent in kind
and amount to the securities sold and provided that if such right is
conditional the sale is made upon the same conditions;
(14) purchase or sell any put or call option or any combination thereof,
provided, that this shall not prevent the purchase, ownership, holding or sale
of warrants where the grantor of the warrants is the issuer of the underlying
securities or the writing, purchasing and selling of puts, calls or
combinations thereof with respect to securities, Futures Contracts and foreign
currencies; or
(15) invest in securities which are restricted as to disposition under
federal securities laws unless the Board of Trustees has determined that such
securities are liquid based upon trading markets for the specific security, if
more than 10% of the Fund's assets (taken at market value) would be invested
in such securities.
These investment restrictions are adhered to at the time of purchase or
utilization of assets; a subsequent change in circumstances will not be
considered to result in a violation of policy.
3. MANAGEMENT OF THE FUND
The Trust's Board of Trustees provides broad supervision over the affairs of the
Fund. The Adviser is responsible for the management of the Fund's assets, and
the officers of the Trust are responsible for its operations. The Trustees and
officers of the Trust are listed below, together with their principal
occupations during the past five years. (Their titles may have varied during
that period.)
TRUSTEES
A. KEITH BRODKIN,* Chairman and President
Massachusetts Financial Services Company, Chairman and Director
RICHARD B. BAILEY*
Private Investor; Massachusetts Financial Services Company, former Chairman
(prior to September 30, 1991); Cambridge Bancorp, Director; Cambridge Trust
Company, Director
PETER G. HARWOOD
Private Investor
Address: 211 Lindsay Pond Road, Concord, Massachusetts
J. ATWOOD IVES
Eastern Enterprises (diversified holding company), Chairman and Chief Executive
Officer (since December 1991); General Cinema Corporation, Vice Chairman and
Chief Financial Officer (prior to December 1991); The Neiman Marcus Group,
Inc., Vice Chairman and Chief Financial Officer (prior to February 1992)
Address: 9 Riverside Road, Weston, Massachusetts
LAWRENCE T. PERERA
Hemenway & Barnes (attorneys), Partner
Address: 60 State Street, Boston, Massachusetts
WILLIAM J. POORVU
Harvard University Graduate School of Business Administration, Adjunct
Professor; CBL & Associates Properties, Inc. (a real estate investment trust),
Director; The Baupost Fund (a registered investment company), Vice Chairman
(since November 1993), Chairman and Trustee (prior to November 1993)
Address: Harvard Business School, Soldiers Field Road, Cambridge,
Massachusetts
CHARLES W. SCHMIDT
Private Investor; OHM Corporation, Director; The Boston Company, Director;
Boston Safe Deposit and Trust Company, Director; Mohawk Paper Company,
Director
Address: 30 Colpitts Road, Weston, Massachusetts
ARNOLD D. SCOTT*
Massachusetts Financial Services Company, Senior Executive Vice President,
Secretary and Director
JEFFREY L. SHAMES*
Massachusetts Financial Services Company, President and Director
ELAINE R. SMITH
Independent Consultant; Brigham and Women's Hospital, Executive Vice President
and Chief Operating Officer (prior to September 1992)
Address: Weston, Massachusetts
DAVID B. STONE
North American Management Corp. (investment adviser), Chairman and Director;
Eastern Enterprises, Director
Address: 10 Post Office Square, Suite 300, Boston, Massachusetts
OFFICERS
W. THOMAS LONDON,* Treasurer
Massachusetts Financial Services Company, Senior Vice President
JAMES O. YOST,* Assistant Treasurer
Massachusetts Financial Services Company, Vice President
STEPHEN E. CAVAN,* Secretary and Clerk
Massachusetts Financial Services Company, Senior Vice President, General
Counsel and Assistant Secretary
JAMES R. BORDEWICK, JR.,* Assistant Secretary
Massachusetts Financial Services Company, Vice President and Associate General
Counsel
GEOFFREY L. KURINSKY,* Vice President
Massachusetts Financial Services Company, Senior Vice President
ROBERT A. DENNIS,* Vice President
Massachusetts Financial Services Company, Senior Vice President
- - ----------
*"Interested persons" (as defined in the "1940 Act") of the Adviser, whose
address is 500 Boylston Street, Boston, Massachusetts 02116.
Each Trustee and officer holds comparable positions with certain MFS
affiliates or with certain other funds of which MFS or a subsidiary of MFS is
the investment adviser or distributor. Mr. Brodkin, the Chairman of MFD,
Messrs. Shames and Scott, Directors of MFD and Mr. Cavan, the Secretary of
MFD, hold similar positions with certain other MFS affiliates. Mr. Bailey is a
Director of Sun Life Assurance Company of Canada (U.S.) ("Sun Life of Canada
(U.S.)"), the corporate parent of MFS.
The Fund pays the compensation of non-interested Trustees and Mr. Bailey (who
currently receive a fee of $2,500 per year plus $135 per meeting and $100 per
committee meeting attended, together with such Trustees out-of-pocket expenses)
and has adopted a retirement plan for non-interested Trustees and Mr. Bailey.
Under this plan, a Trustee will retire upon reaching age 73 and if the Trustee
has completed at least five years of service, he would be entitled to annual
payments during his lifetime of up to 50% of such Trustee's average annual
compensation based on the three years prior to his retirement depending on his
length of service. A Trustee may also retire prior to age 73 and receive reduced
payments if he has completed at least five years of service. Under the plan, a
Trustee (or his beneficiaries) will also receive benefits for a period of time
in the event the Trustee is disabled or dies. These benefits will also be based
on the Trustee's average annual compensation and length of service. There is no
retirement plan provided by the Trust for Messrs. Brodkin, Scott and Shames. The
Fund will accrue its allocable share of compensation expenses each year to cover
current year's service and amortize past service cost.
Set forth in Appendix A hereto is certain information concerning the cash
compensation paid to the Trustees and benefits accrued, and estimated benefits
payable, under the retirement plan.
As of July 31, 1996, all Trustees and officers as a group owned less than 1% of
the outstanding shares of the Fund not including 25,199.238 Class A shares
(which represent 0.06% of the outstanding shares of Class A shares of the Fund)
owned by employee benefit plans of MFS for which Mr. Brodkin is a Trustee.
As of July 31, 1996, Nationwide Life Insurance Co., c/o IPO CO 51 (OHIO CO 61),
Department 1749, Columbus, Ohio 43271, was the owner of approximately 6.73% of
the outstanding Class A shares of the Fund. Merrill Lynch, Pierce, Fenner &
Smith Inc., P.O. Box 45286, Jacksonville, Florida 32232-5286, was the owner of
6.99% of the outstanding Class B shares of the Fund. Merrill Lynch, Pierce,
Fenner & Smith Inc., P.O. Box 45286, Jacksonville, FL 32232-5286 was the owner
of 10.49% of the outstanding Class C shares of the Fund.
The Declaration of Trust provides that the Trust will indemnify its Trustees and
officers against liabilities and expenses incurred in connection with litigation
in which they may be involved because of their offices with the Trust, unless,
as to liabilities to the Trust or its shareholders, it is finally adjudicated
that they engaged in willful misfeasance, bad faith, gross negligence or
reckless disregard of the duties involved in their offices, or with respect to
any matter unless it is adjudicated that they did not act in good faith in the
reasonable belief that their actions were in the best interest of the Trust. In
the case of settlement, such indemnification will not be provided unless it has
been determined pursuant to the Declaration of Trust, that such officers and
Trustees have not engaged in willful misfeasance, bad faith, gross negligence or
reckless disregard of their duties.
INVESTMENT ADVISER
MFS and its predecessor organizations have a history of money management dating
from 1924. MFS is a subsidiary of Sun Life of Canada (U.S.) which in turn is a
wholly owned subsidiary of Sun Life Assurance Company of Canada ("Sun Life").
The Adviser manages the assets of the Fund pursuant to an Investment Advisory
Agreement, dated December 2, 1985 (the "Advisory Agreement"). The Adviser
provides the Fund with overall investment advisory and administrative services,
as well as general office facilities. Subject to such policies as the Trustees
may determine, the Adviser makes investment decisions for the Fund. For these
services and facilities, the Adviser receives a management fee computed and paid
monthly on the basis of a formula based upon a percentage of the Fund's average
daily net assets plus a percentage of its gross income (i.e., income other than
gains from the sale of securities, gains from options and futures transactions
and premium income from options written) in each case on an annualized basis for
the Trust's then-current fiscal year. The applicable percentages are reduced as
assets and income reach the following levels:
ANNUAL RATE OF ADVISORY FEE ANNUAL RATE OF ADVISORY FEE
BASED ON AVERAGE DAILY NET ASSETS BASED ON GROSS INCOME
- - ------------------------------------ --------------------------------
.225% of the first $200 million 2.75% of the first $20 million
.191% of average daily net assets in 2.34% of gross income in excess of
excess of $200 million $20 million
For the fiscal years ended April 30, 1994, 1995 and 1996, MFS received fees
under the Advisory Agreement of $2,114,447, $2,179,512, and $2,531,652,
respectively.
In order to comply with the expense limitations of certain state securities
commissions, the Adviser will reduce its management fee or otherwise reimburse
the Fund for any expenses, exclusive of interest, taxes, brokerage commissions
and extraordinary expenses, incurred by the Fund in any fiscal year to the
extent such expenses exceed the most restrictive of such state expense
limitations. The Adviser will make appropriate adjustments to such
reimbursements in response to any amendment or rescission of the various state
requirements. Any such adjustment would not become effective until the beginning
of the Fund's next fiscal year following the date of such amendment or the date
such requirements become no longer applicable.
The Fund pays all of the Fund's expenses (other than those assumed by Adviser or
MFD), including: governmental fees; interest charges; taxes; membership dues in
the Investment Company Institute allocable to the Fund; fees and expenses of
independent auditors, of legal counsel, and of any transfer agent, registrar or
dividend disbursing agent of the Fund; expenses of repurchasing and redeeming
shares; expenses of preparing, printing and mailing share certificates,
prospectuses, shareholders' reports, notices, proxy statements and reports to
governmental officers and commissions; brokerage and other expenses connected
with the execution of portfolio security transactions; insurance premiums; fees
and expenses of the custodian for all services to the Fund, including
safekeeping of funds and securities, keeping of books and accounts and
calculation of the net asset value of shares of the Fund; and expenses of
shareholders' meetings. Expenses relating to the issuance, registration and
qualification of shares of the Fund and the preparation, printing and mailing of
prospectuses for such purposes are borne by the Fund except that the Trust's
Distribution Agreement with MFD requires MFD to pay for prospectuses that are to
be used for sales purposes. Expenses of the Trust which are not attributable to
a specific portfolio are allocated among the portfolios in a manner believed by
management of the Trust to be fair and equitable. For a list of expenses,
including the compensation paid to the Trustees who are not officers of the
Adviser, for the fiscal year ended April 30, 1996, see "Statement of Operations"
in the Annual Report to the Fund's shareholders.
MFS pays the compensation of the officers and of any Trustee who is an officer
of MFS. The Adviser also furnishes at its own expense all necessary
administrative services, including office space, equipment, clerical personnel,
investment advisory facilities, and all executive and supervisory personnel
necessary for managing the Fund's investments, effecting the Fund's portfolio
transactions and, in general, administering the Fund's affairs.
The Advisory Agreement will remain in effect until August 1, 1997, and will
continue in effect thereafter only if such continuance is specifically approved
at least annually by the Board of Trustees or by vote of a majority of the
Fund's shares (as defined in "Investment Restrictions") and, in either case, by
a majority of the Trustees who are not parties to the Advisory Agreement or
interested persons of any such party. The Advisory Agreement terminates
automatically if it is assigned and may be terminated without penalty by vote of
a majority of the Fund's shares (as defined in "Investment Restrictions") or by
either party on not more than 60 days' nor less than 30 days' written notice.
The Advisory Agreement provides that MFS may render services to others and that
neither the Adviser nor its personnel shall be liable for any error of judgment
or mistake of law or for any loss arising out of any investment or for any act
or omission in the execution and management of the Fund, except for willful
misfeasance, bad faith or gross negligence in the performance of its or their
duties or by reason of reckless disregard of its or their obligations and duties
under the Advisory Agreement.
CUSTODIAN
Investors Bank & Trust Company (the "Custodian") is the custodian of the Trust'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 Trustees have reviewed and approved as in the best interest of
the Fund and its shareholders custodial arrangements with The Chase Manhattan
Bank for securities of the Fund held outside the U.S. The Custodian has
contracted with the Adviser for the Adviser to perform certain accounting
functions related to options transactions for which the Adviser receives
remuneration on a cost basis.
SHAREHOLDER SERVICING AGENT
MFS Service Center, Inc. (the "Shareholder Servicing Agent"), a wholly owned
subsidiary of MFS, is the Fund's shareholder servicing agent, pursuant to a
Shareholder Servicing Agreement, dated December 2, 1985 (the "Agency
Agreement"). The Shareholder Servicing Agent's responsibilities under the Agency
Agreement include administering and performing transfer agent functions and
keeping records in connection with the issuance, transfer and redemption of each
class of the shares of the Fund. For these services, the Shareholder Servicing
Agent will receive a fee calculated as a percentage of the average daily net
assets of each class of shares at an effective annual rate of up to 0.15%, up to
0.22% and up to 0.15% attributable to Class A, Class B and Class C shares,
respectively. In addition, the Shareholder Servicing Agent will be reimbursed by
the Fund for certain expenses incurred by the Shareholder Servicing Agent on
behalf of the Fund. The Custodian has contracted with the Shareholder Servicing
Agent to perform certain dividend and distribution disbursing functions for the
Fund.
DISTRIBUTOR
MFD, a wholly owned subsidiary of MFS, serves as distributor for the continuous
offering of shares of the Fund pursuant to a Distribution Agreement, dated as of
January 1, 1995 (the "Distribution Agreement"). Prior to January 1, 1995, MFS
Financial Services, Inc. ("FSI"), another wholly owned subsidiary of MFS, was
the Fund's distributor. Where this SAI refers to MFD in relation to the receipt
or payment of money with respect to a period or periods prior to January 1,
1995, such reference shall be deemed to include FSI, as the predecessor in
interest to MFD.
CLASS A SHARES: MFD acts as agent in selling Class A shares of the Fund to
dealers. The public offering price of Class A shares of the Fund is their net
asset value next computed after the sale plus a sales charge which varies based
upon the quantity purchased. The public offering price of Class A shares of the
Fund is calculated by dividing the net asset value of a Class A share by the
difference (expressed as a decimal) between 100% and the sales charge percentage
of offering price applicable to the purchase (see "Purchases" in the
Prospectus). The sales charge scale set forth in the Prospectus applies to
purchases of Class A shares of the Fund alone or in combination with shares of
all classes of certain other funds in the MFS Family of Funds (the "MFS Funds")
and other funds (as noted under Right of Accumulation) by any person, including
members of a family unit (e.g., husband, wife and minor children) and bona fide
trustees for the benefit of such persons, and also applies to purchases made
under the Right of Accumulation or a Letter of Intent (see "Investment and
Withdrawal Programs" below). A group might qualify to obtain quantity sales
charge discounts (see "Investment and Withdrawal Programs" below).
Class A shares of the Fund may be sold at their net asset value to certain
persons and in certain instances as described in the Prospectus. Such sales are
made without a sales charge to promote good will with employees and others with
whom MFS, MFD and/or the Fund have business relationships, and because the sales
effort, if any, involved in making such sales is negligible.
MFD allows discounts to dealers (which are alike for all dealers) from the
applicable public offering price of Class A shares. Dealer allowances expressed
as a percentage of offering price for all offering prices are set forth in the
Prospectus (see "Purchases" in the Prospectus). The difference between the total
amount invested and the sum of (a) the net proceeds to the Fund and (b) the
dealer commission is the commission paid to the distributor. Because of rounding
in the computation of offering price, the portion of the sales charge paid to
the distributor may vary and the total sales charge may be more or less than the
sales charge calculated using the sales charge expressed as a percentage of
offering price or as a percentage of the net amount invested as stated in the
Prospectus. In the case of the maximum sales charge, the dealer retains 4% and
MFD retains approximately 3/4 of 1% of the public offering price. In addition,
MFD, on behalf of the Fund, pays commissions to dealers who initiate and are
responsible for purchases of $1 million or more as described in the Prospectus.
CLASS B AND CLASS C SHARES: MFD acts as agent in selling Class B and Class C
shares of the Fund to dealers. The public offering price of Class B and Class C
shares is their net asset value next computed after the sale (see "Purchases" in
the Prospectus).
GENERAL: Neither MFD nor dealers are permitted to delay placing orders to
benefit themselves by a price change. On occasion, MFD may obtain brokers loans
from various banks, including the custodian banks for the MFS Funds, to
facilitate the settlement of sales of shares of the Fund to dealers. MFD may
benefit from its temporary holding of funds paid to it by investment dealers for
the purchase of Fund shares.
During the Fund's fiscal year ended April 30, 1996, MFD and dealers and certain
other financial institutions received sales charges of $172,391 and $1,168,867,
respectively, (as their concession on gross sales charges of $1,341,186) for
selling Class A shares of the Fund. The Fund received $120,847,186, representing
the aggregate net asset value of such shares. During the Fund's fiscal year
ended April 30, 1995, MFD received sales charges of $135,514 and dealers
received sales charges of $950,411, (as their concession on gross sales charges
of $1,085,925), for selling Class A shares of the Fund; the Fund received
$96,165,758 representing the aggregate net asset value of such shares. During
the Fund's fiscal year ended April 30, 1994, MFD and dealers and certain other
financial institutions received sales charges of $202,690 and $1,069,799,
respectively, (as their concession on gross sales charges of $1,272,489), for
selling Class A shares of the Fund. The Fund received $91,004,250 representing
the aggregate net asset value of such shares.
During the Fund's fiscal years ended April 30, 1994, 1995 and 1996, the
contingent deferred sales charge ("CDSC") imposed on redemption of Class A
shares was $300, $3,369 and $4,707, respectively. During the Fund's fiscal
period and years ended April 30, 1994, 1995 and 1996, the CDSC imposed on
redemption of Class B shares was $21,417, $145,665 and $217,113, respectively.
For the fiscal year ended April 30, 1996, the CDSC imposed on redemption of
Class C shares was $7.00.
The Distribution Agreement will remain in effect until August 1, 1997, and will
continue in effect thereafter only if such continuance is specifically approved
at least annually by the Board of Trustees or by vote of a majority of the
Fund's outstanding shares (as defined in "Investment Restrictions") and, in
either case, by a majority of the Trustees who are not interested persons of any
party to the Distribution Agreement. The Distribution Agreement terminates
automatically if it is assigned and may be terminated without penalty by either
party on not more than 60 days' nor less than 30 days' notice.
4. PORTFOLIO TRANSACTIONS AND BROKERAGE
COMMISSIONS
Specific decisions to purchase or sell securities for the Fund are made by a
portfolio manager who is an employee of the Adviser and who is appointed and
supervised by its senior officers. Changes in the Fund's investments are
reviewed by its Board of Trustees. The Fund's portfolio manager may serve other
clients of the Adviser or any subsidiary of the Adviser in a similar capacity.
The primary consideration in placing portfolio security transactions is
execution at the most favorable prices. The Adviser has complete freedom as to
the markets in and the broker-dealers through which it seeks this result. Debt
securities are traded principally in the over-the-counter market on a net basis
through dealers acting for their own account and not as brokers. The cost of
securities purchased from underwriters includes an underwriter's commission or
concession, and the prices at which securities are purchased and sold from and
to dealers include a dealer's mark-up or mark-down. The Adviser normally seeks
to deal directly with the primary market-makers unless, in its opinion, better
prices are available elsewhere. Securities firms or futures commission merchants
may receive brokerage commissions on transactions involving Futures Contracts
and Options on Futures Contracts. Subject to the requirement of seeking
execution at the best available price, securities may, as authorized by the
Advisory Agreement, be bought from or sold to dealers who have furnished
statistical, research and other information or services to the Adviser. At
present no recapture arrangements are in effect.
Consistent with the foregoing primary consideration, the Rules of Fair Practice
of the NASD and such other policies as the Trustees may determine, the Adviser
may consider sales of shares of the Fund and of the other investment company
clients of MFD as a factor in the selection of broker-dealers to execute the
Fund's portfolio transactions.
In certain instances there may be securities which are suitable for the Fund's
portfolio as well as for that of one or more of the other clients of the Adviser
or any subsidiary of the Adviser. Investment decisions for the Fund and for such
other clients are made with a view to achieving their respective investment
objectives. It may develop that a particular security is bought or sold for only
one client even though it might be held by, or bought or sold for, other
clients. Likewise, a particular security may be bought for one or more clients
when one or more other clients are selling that same security. Some simultaneous
transactions are inevitable when several clients receive investment advice from
the same investment adviser, particularly when the same security is suitable for
the investment objectives of more than one client. When two or more clients are
simultaneously engaged in the purchase or sale of the same security, the
securities are allocated among clients in a manner believed by the Adviser to be
equitable to each. It is recognized that in some cases this system could have a
detrimental effect on the 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.
During the year ended April 30, 1996, the Fund owned securities issued by Alex
Brown, Inc., Bankers Trust of New York Corp., Goldman Sachs Group L.P., Lehman
Brothers Holdings and Prudential Insurance Co., regular broker-dealers of the
Fund in the amounts of $4,527,630, $2,620,188, $2,744,844, $13,702,761 and
$9,075,357, respectively as of April 30, 1996.
5. SHAREHOLDER SERVICES
INVESTMENT AND WITHDRAWAL PROGRAMS -- The Fund makes available the following
programs designed to enable shareholders to add to their investment or withdraw
from it with a minimum of paper work. These are described below and, in certain
cases, in the Prospectus. The programs involve no extra charge to shareholders
(other than a sales charge in the case of certain Class A share purchases) and
may be changed or discontinued at any time by a shareholder or the Fund.
LETTER OF INTENT: If a shareholder (other than a group purchaser described
below) anticipates purchasing $100,000 or more of Class A shares of the Fund
alone or in combination with shares of 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 the Shareholder Servicing Agent) within 90 days of
the commencement of purchases. Subject to acceptance by MFD and the conditions
mentioned below, each purchase will be made at a public offering price
applicable to a single transaction of the dollar amount specified in the Letter
of Intent application. The shareholder or his dealer must inform MFD that the
Letter of Intent is in effect each time shares are purchased. The shareholder
makes no commitment to purchase additional shares, but if his purchases within
13 months (or 36 months in the case of purchases of $1 million or more) plus the
value of shares credited toward completion of the Letter of Intent do not total
the sum specified, he will pay the increased amount of the sales charge as
described below. Instructions for issuance of shares in the name of a person
other than the person signing the Letter of Intent application must be
accompanied by a written statement from the dealer stating that the shares were
paid for by the person signing such Letter. Neither income dividends nor capital
gain distributions taken in additional shares will apply toward the completion
of the Letter of Intent. Dividends and distributions of other MFS Funds
automatically reinvested in shares of the Fund pursuant to the Distribution
Investment Program will also not apply toward completion of the Letter of
Intent.
Out of the shareholder's initial purchase (or subsequent purchases if
necessary), 5% of the dollar amount specified in the Letter of Intent
application shall be held in escrow by the Shareholder Servicing Agent in the
form of shares registered in the shareholder's name. All income dividends and
capital gain distributions on escrowed shares will be paid to the shareholder or
to his order. When the minimum investment so specified is completed (either
prior to or by the end of the 13-month period or 36-month period, as
applicable), the shareholder will be notified and the escrowed shares will be
released.
If the intended investment is not completed, the Shareholder Servicing Agent
will redeem an appropriate number of the escrowed shares in order to realize
such difference. Shares remaining after any such redemption will be released by
the Shareholder Servicing Agent. By completing and signing the Account
Application or separate Letter of Intent application the shareholder irrevocably
appoints the Shareholder Servicing Agent his attorney to surrender for
redemption any or all escrowed shares with full power of substitution in the
premises.
RIGHT OF ACCUMULATION: A shareholder qualifies for cumulative quantity
discounts on the purchase of Class A shares when his new investment, together
with the current offering price value of all holdings of all classes of 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 purchases.
For example, if a shareholder owns shares valued at $75,000 and purchases an
additional $25,000 of Class A shares of the Fund, the sales charge for the
$25,000 purchase would be at the rate of 4% (the rate applicable to single
transactions of $100,000). A shareholder must provide the Shareholder Servicing
Agent (or his investment dealer must provide MFD) with information to verify
that the quantity sales charge discount is applicable at the time the investment
is made.
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 such fund are available for sale. Such investments will be
subject to additional purchase minimums. Distributions will be invested at net
asset value (exclusive of any sales charge) and not subject to any CDSC.
Distributions will be invested at the close of business on the payable date for
the distribution. A shareholder considering the Distribution Investment Program
should obtain and read the prospectus of the other fund and consider the
differences in objectives and policies before making any investment.
SYSTEMATIC WITHDRAWAL PLAN: A shareholder may direct the Shareholder Servicing
Agent to send him (or anyone he designates) regular periodic payments based upon
the value of his account. Such payments under a Systematic Withdrawal Plan
("SWP") must be at least $100, except in certain limited circumstances. The
aggregate withdrawals of Class B and Class C shares in any year pursuant to a
SWP generally are limited to 10% of the value of the account at the time of the
establishment of the SWP. SWP payments are drawn from the proceeds of share
redemptions (which would be a return of principal and, if reflecting a gain,
would be taxable). Redemptions of Class B and Class C shares will be made in the
following order: (i) any "Free Amount"; (ii) to the extent necessary, any
"Reinvested Shares"; and (iii) to the extent necessary, the "Direct Purchase"
subject to the lowest CDSC (as such terms are defined in "Contingent Deferred
Sales Charge" in the Prospectus). The CDSC will be waived in the case of
redemptions of Class B and Class C shares pursuant to a SWP, but will not be
waived in the case of SWP redemptions of Class A shares. 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 dividends and capital gain
distributions for an account with a SWP will be reinvested in additional full
and fractional shares of the Fund at the net asset value in effect at the close
of business on the record date for such distributions. To initiate this service,
shares having an aggregate value of at least $5,000 either must be held on
deposit by, or certificates for such shares must be deposited with, the
Shareholder Servicing Agent. With respect to Class A shares, maintaining a
withdrawal plan concurrently with an investment program would be disadvantageous
because of the sales charges included in share purchases and the imposition of a
CDSC on certain redemptions. The shareholder may deposit into his account
additional shares of the Fund, change the payee or change the dollar amount of
each payment. The Shareholder Servicing Agent may charge the account for
services rendered and expenses incurred beyond those normally assumed by the
Fund with respect to the liquidation of shares. No charge is currently assessed
against the account, but one could be instituted by the Shareholder Servicing
Agent on 60 days' notice in writing to the shareholder in the event that the
Fund ceases to assume the cost of these services. The Fund may terminate any SWP
for an account if the value of the account falls below $5,000 as a result of
share redemptions (other than as a result of a SWP) or an exchange of shares of
the Fund for shares of another MFS Fund. Any SWP may be terminated at any time
by either the shareholder or the Fund.
INVEST BY MAIL: Additional investments of $50 or more may be made at any time
by mailing a check payable to the Fund directly to the Shareholder Servicing
Agent. The shareholder's account number and the name of his investment dealer
must be included with each investment.
GROUP PURCHASES: A bona fide group and all its members may be treated as a
single purchaser and, under the Right of Accumulation (but not a Letter of
Intent), obtain quantity sales charge discounts on the purchase of Class A
shares if the group (1) gives its endorsement or authorization to the investment
program so it may be used by the investment dealer to facilitate solicitation of
the membership, thus effecting economies of sales effort; (2) has been in
existence for at least six months and has a legitimate purpose other than to
purchase mutual fund shares at a discount; (3) is not a group of individuals
whose sole organizational nexus is as credit cardholders of a company,
policyholders of an insurance company, customers of a bank or broker-dealer,
clients of an investment adviser or other similar group; and (4) agrees to
provide certification of membership of those members investing money in the MFS
Funds upon the request of MFD.
AUTOMATIC EXCHANGE PLAN: Shareholders having account balances of at least
$5,000 in any MFS Fund may exchange their shares for the same class of shares of
other MFS Funds (if available for sale) under the Automatic Exchange Plan, a
dollar cost averaging program. The Automatic Exchange Plan provides for
automatic exchanges of funds from the shareholder's account in an MFS Fund for
investment in the same class of shares of other MFS Funds selected by the
shareholder. Under the Automatic Exchange Plan, exchanges of at least $50 each
may be made to up to four different funds effective on the seventh day of each
month or of every third month, depending on whether monthly or quarterly
exchanges are elected by the shareholder. If the seventh day of the month is not
a business day, the transaction will be processed on the next business day.
Generally, the initial exchange will occur after receipt and processing by the
Shareholder Servicing Agent of an application in good order. Exchanges will
continue to be made from a shareholder's account in any MFS Fund as long as the
balance of the account is sufficient to complete the exchanges. Additional
payments made to a shareholder's account in that Fund will extend the period
that exchanges will continue to be made under the Automatic Exchange Plan.
However, if additional payments are added to an account subject to the Automatic
Exchange Plan shortly before an exchange is scheduled, such funds may not be
available for exchanges until the following month; therefore, care should be
used to avoid inadvertently terminating the Automatic Exchange Plan through
exhaustion of the account balance.
No transaction fee for exchanges will be charged in connection with the
Automatic Exchange Plan. However, exchanges of shares of MFS Money Market Fund,
MFS Government Money Market Fund and Class A shares of MFS Cash Reserve Fund
will be subject to any applicable sales charge. Changes in amounts to be
exchanged to each fund, the funds to which exchanges are to be made and the
timing of exchanges (monthly or quarterly), or termination of a shareholder's
participation in the Automatic Exchange Plan will be made after instructions in
writing or by telephone (an "Exchange Change Request") are received by the
Shareholder Servicing Agent in proper form (i.e., if in writing -- signed by the
record owner(s) exactly as shares of the Fund are registered; if by telephone --
proper account identification is given by the dealer or shareholder of record).
Each Exchange Change Request (other than termination of participation in the
program) must involve at least $50. Generally, if an Exchange Change Request is
received 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 exhanges 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 shares of MFS Money Market Fund, MFS Government Money
Market Fund and holders of Class A shares of MFS Cash Reserve Fund in the case
where such shares are acquired through direct purchase or reinvested dividends)
who have redeemed their shares have a one-time right to reinvest the redemption
proceeds in the same class of shares of any of the MFS Funds (if shares of the
fund are available for sale) at net asset value (without a sales charge) and, if
applicable, with credit for any CDSC paid. In the case of proceeds invested in
shares of MFS Money Market Fund, MFS Government Money Market Fund and Class A
shares of MFS Cash Reserve Fund, the shareholder has the right to exchange such
shares for shares of the same class of another MFS Fund at net asset value
pursuant to the exchange privilege described below. Such a reinvestment must be
made within 90 days of the redemption and is limited to the amount of the
redemption proceeds. If the shares credited for any CDSC paid are then redeemed
within six years of their initial purchase in the case of Class B shares or
within 12 months of the initial purchase of Class C shares and certain Class A
shares, a CDSC will be imposed upon redemption. Although redemptions and
repurchases of shares are taxable events, a reinvestment within a certain period
of time in the same fund may be considered a "wash sale" and may result in the
inability to recognize currently all or a portion of a loss realized on the
original redemption for federal income tax purposes. Please consult your tax
adviser for further information.
EXCHANGE PRIVILEGE -- Subject to the requirements set forth below, some or all
of the shares for which payment has been received by the Fund (i.e., an
established account) may be exchanged for shares of the same class of any of the
other MFS Funds at net asset value (if available for sale). Exchanges will be
made after instructions in writing or by telephone (an "Exchange Request") are
received for an established account by the Shareholder Servicing Agent.
Each Exchange Request must be in proper form (i.e., 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 (except that the minimum is $50 for accounts of retirement plan
participants whose sponsoring organizations subscribe to the MFS FUNDamental
401(k) Plan or another similar 401(k) recordkeeping system made available by the
Shareholder Servicing Agent) or all the shares in the account. Each exchange
involves the redemption of shares of the Fund to be exchanged and the purchase
at net asset value (i.e., without a sales charge) of shares of the same class of
the other MFS Fund. Any gain or loss on the redemption of the shares exchanged
is reportable on the shareholder's federal income tax return, unless both the
shares received and the shares surrendered in the exchange are held in a
tax-deferred retirement plan or other tax-exempt account. No more than five
exchanges may be made in any one Exchange Request by telephone.If an Exchange
Request is received by the Shareholder Servicing Agent prior to the close of
regular trading on the Exchange the exchange usually will occur on that day if
all 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 the Shareholder
Servicing Agent by facsimile subject to the restrictions and requirements set
forth above.
No CDSC is imposed on exchanges among MFS Funds, although liability for the CDSC
is carried forward to the exchanged shares. For purposes of calculating the CDSC
upon redemption of shares acquired in an exchange, the purchase of shares
acquired in one or more exchanges is deemed to have occurred at the time of the
original purchase of the exchanged shares. Any gain or loss on the redemption of
the shares exchanged is reportable in the shareholders federal income tax
return, unless such shares were held in a tax-deferred retirement plan.
Additional information with respect to any of the MFS Funds, including a copy of
its current prospectus, may be obtained from investment dealers or the
Shareholder Servicing Agent. A shareholder considering an exchange should obtain
and read the prospectus of the other MFS Fund and consider the differences in
objectives and policies before making any exchange. Shareholders of the other
MFS Funds (except shares of MFS Money Market Fund, MFS Government Money Market
Fund and Class A shares of MFS Cash Reserve Fund acquired through direct
purchase and dividends reinvested prior to June 1, 1992) have the right to
exchange their shares for shares of the Fund, subject to the conditions, if any,
set forth in their respective prospectuses. In addition, unitholders of the MFS
Fixed Fund have the right to exchange their units (except units acquired through
direct purchases) for shares of the Fund, subject to the conditions, if any,
imposed upon such unitholders by the MFS Fixed Fund.
Any state income tax advantages for investment in shares of each state-specific
series of MFS Municipal Series Trust may only benefit residents of such states.
Investors should consult with their own tax advisers to be sure this is an
appropriate investment, based on their residency and each state's income tax
laws.
The exchange privilege (or any aspect of it) may be changed or discontinued and
is subject to certain limitations, including certain restrictions on purchases
by market timer accounts (see "Purchases" in the Prospectus).
TAX-DEFERRED RETIREMENT PLANS -- Except as noted below, shares of the Fund may
be purchased by all types of tax-deferred retirement plans. MFD makes available
through investment dealers plans and/or custody agreements for the following:
Individual Retirement Accounts ("IRAs") (for individuals and their
non-employed spouses who desire to make limited contributions to a
tax-deferred retirement program and, if eligible, to receive a federal income
tax deduction for amounts contributed);
Simplified Employee Pension (SEP-IRA) Plans;
Retirement Plans Qualified under Section 401(k) of the Internal Revenue Code
of 1986, as amended (the "Code");
403(b) Plans (deferred compensation arrangements for employees of public
school systems and certain non-profit organizations); and
Other qualified pension and profit-sharing plans.
The plan documents provided by MFD designate a trustee or custodian (unless
another trustee or custodian is designated by the individual or group
establishing the plan) and contain specific information about the plans. Each
plan provides that dividends and distributions will be reinvested automatically.
For further details with respect to any plan, including fees charged by the
trustee, custodian or MFD, tax consequences and redemption information, see the
specific documents for that plan. Plan documents other than those provided by
MFD may be used to establish any of the plans described above. Third party
administrative services, available for some corporate plans, may limit or delay
the processing of transactions.
Investors should consult with their tax advisers 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 401(a) or 403(b) recordkeeping program made available by
the Shareholder Servicing Agent.
6. TAX STATUS
The Fund has elected to be treated and intends to qualify each year as a
"regulated investment company" under Subchapter M of the Code, by meeting all
applicable requirements of Subchapter M, including requirements as to the nature
of the Fund's gross income, the amount of Fund distributions, and the
composition and holding period of the Fund's portfolio assets. Because the Fund
intends to distribute all of its net investment income and net realized capital
gains to shareholders in accordance with the timing requirements imposed by the
Code, it is not expected that the Fund will be required to pay any federal
income or excise taxes, although the Fund's foreign-source income may be subject
to foreign withholding taxes. If the Fund should fail to qualify as a "regulated
investment company" in any year, the Fund would incur a regular corporate
federal income tax upon its taxable income and Fund distributions would
generally be taxable as ordinary dividend income to the shareholders.
Shareholders of the Fund normally will have to pay federal income taxes, and any
state or local taxes, on the dividends and capital gain distributions they
receive from the Fund. Dividends from ordinary income (including certain foreign
gains), and any distributions from net short-term capital gains are taxable to
the Fund's shareholders as ordinary income for federal income tax purposes,
whether paid in cash or in additional shares. Because the Fund expects to earn
primarily interest income, it is expected that no Fund dividends will qualify
for the dividends received deduction for corporations. Distributions of net
capital gains (i.e., the excess of net long-term capital gains over net
short-term capital losses), whether made in cash or in additional shares, are
taxable to shareholders as long-term capital gains without regard to the length
of time the shareholders have held their shares. Any Fund dividend that is
declared in October, November, or December, that is payable to shareholders of
record in such a month, and that is paid the following January will be treated
as if received by the shareholders on December 31 of the year in which the
dividend is declared.
Any Fund distribution will have the effect of reducing the per share net asset
value of shares in the Fund by the amount of the distribution. Shareholders
purchasing shares shortly before the record date of any distribution may thus
pay the full price for the shares and then effectively receive a portion of the
purchase price back as a taxable distribution.
In general, any gain or loss realized upon a taxable disposition of shares of
the Fund by a shareholder that holds such shares as a capital asset will be
treated as a long-term capital gain or loss if the shares have been held for
more than 12 months and otherwise as a short-term capital gain or loss. However,
any loss realized upon a disposition of shares in the Fund held for six months
or less will be treated as a long-term capital loss to the extent of any
distributions of net capital gain made with respect to those shares. Any loss
realized upon a disposition of shares may also be disallowed under rules
relating to wash sales. Gain may be increased (or loss reduced) upon a
redemption of Class A shares of the Fund within ninety days after their purchase
followed by any purchase (including purchases by exchange or by reinvestment) of
Class A shares of the Fund or of another MFS Fund (or of any other shares of an
MFS Fund generally sold subject to a sales charge) without payment of an
additional sales charge.
The Fund's current dividend and accounting policies will affect the amount,
timing and character of distributions to shareholders and may, under certain
circumstances, make an economic return of capital taxable to shareholders. Any
investment in zero coupon bonds, deferred interest bonds, PIK bonds, certain
stripped securities and certain securities purchased at a market discount will
cause the Fund to recognize income prior to the receipt of cash payments with
respect to those securities. In order to distribute this income and avoid a tax
on the Fund, the Fund may be required to liquidate portfolio securities that it
might otherwise have continued to hold, potentially resulting in additional
taxable gain or loss to the Fund. An investment in residual interests of a CMO
that has elected to be treated as a real estate mortgage investment conduit, or
"REMIC", can create complex tax problems, especially if the Fund has state or
local governments or other tax-exempt organizations as shareholders.
The Fund's transactions in options, Futures Contracts and Forward Contracts will
be subject to special tax rules that may affect the amount, timing and character
of Fund income and distributions to shareholders. For example, certain positions
held by the Fund on the last business day of each taxable year will be marked to
market (i.e., treated as if closed out) on that day, and any gain or loss
associated with the positions will be treated as 60% long-term and 40%
short-term capital gain or loss. Certain positions held by the Fund that
substantially diminish its risk of loss with respect to other positions in its
portfolio may constitute "straddles," and may be subject to special tax rules
that would cause deferral of Fund losses, adjustments in the holding periods of
Fund securities and conversion of short-term into long-term capital losses.
Certain tax elections exist for straddles that may alter the effects of these
rules. The Fund will limit its activities in options, Futures Contracts, Forward
Contracts, and swaps and related transactions to the extent necessary to meet
the requirements of Subchapter M of the Code.
Special tax considerations apply with respect to foreign investments of the
Fund. Foreign exchange gains and losses realized by the Fund will generally be
treated as ordinary income and losses. Use of foreign currencies for non-hedging
purposes and investment, if any, by the Fund in certain "passive foreign
investment companies" may be limited in order to avoid taxes on the Fund.
Investment income received by the Fund from foreign securities may be subject to
foreign income taxes withheld at the source; the Fund does not expect to be able
to pass through to shareholders foreign tax credits with respect to such foreign
taxes. The United States has entered into tax treaties with many foreign
countries that may entitle the Fund to a reduced rate of tax or an exemption
from tax on such income; the Fund intends to qualify for treaty reduced rates
where available. It is not possible, however, to determine the effective rate of
foreign tax in advance since the amount of the Fund's assets to be invested
within various countries is not known.
Dividends and certain other payments to persons who are not citizens or
residents of the U.S. or U.S. entities ("Non-U.S. Persons") are generally
subject to U.S. tax withholding at a rate of 30%. The Fund intends to withhold
U.S. federal income tax at the rate of 30% on taxable dividends and other
payments made to Non-U.S. Persons that are subject to such withholding,
regardless of whether a lower rate may be permitted under an applicable treaty.
Any amounts overwithheld may be recovered by such persons by filing a claim for
refund with the U.S. Internal Revenue Service within the time period appropriate
to such claims. Distributions received from the Fund by Non-U.S. Persons also
may be subject to tax under the laws of their own jurisdictions.
The Fund is also required in certain circumstances to apply backup withholding
at a rate of 31% on taxable dividends and redemption proceeds paid to any
shareholder (including a Non-U.S. Person) who does not furnish to the Fund
certain information and certifications or who is otherwise subject to backup
withholding. Backup withholding will not, however, be applied to payments that
have been subject to 30% withholding.
As long as it qualifies as a regulated investment company under the Code, the
Fund will not be required to pay Massachusetts income or excise taxes.
Distributions of the Fund that are derived from interest on obligations of the
U.S. Government and certain of its agencies and instrumentalities (but not from
capital gains realized upon the disposition of such obligations) may be exempt
from state and local taxes. The Fund intends to advise shareholders of the
extent, if any, to which its distributions consist of such interest.
Shareholders are urged to consult their tax advisers regarding the possible
exclusion of such portion of their dividends for state and local income tax
purposes as well as regarding the tax consequences of an investment in the Fund.
7. DETERMINATION OF NET ASSET VALUE AND PERFORMANCE
NET ASSET VALUE -- The net asset value per share of each class of the Fund is
determined each day during which the Exchange is open for trading. (As of the
date of this Statement of Additional Information, the Exchange is open for
trading every week day except for the following holidays or the days on which
they are observed: New Year's Day, Presidents' Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day and Christmas Day.) This
determination is made once 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. If acquired,
preferred stocks, common stocks and warrants will be valued at the last sale
price on an exchange on which they are primarily traded or at the last quoted
bid price for unlisted securities. Debt securities (other than short-term
obligations) in the Fund's portfolio are valued on the basis of valuations
furnished by pricing services which utilize both dealer-supplied valuations and
electronic data processing techniques which take into account 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, because such valuations are believed to reflect more
accurately the fair value of such securities. Use of the pricing services has
been approved by the Board of Trustees. Short-term obligations with a remaining
maturity in excess of 60 days will be valued based upon dealer supplied
valuations. Other short-term obligations are valued at amortized cost, which
constitutes fair value as determined by the Board of Trustees. Positions in
listed options, Futures Contracts and Options on Futures Contracts will normally
be valued at the settlement price on the exchange on which they are primarily
traded. Positions in over-the-counter options will be valued using dealer
supplied valuations. Forward Contracts will be valued using a pricing model
taking into consideration market data from an external pricing source. Portfolio
securities for which there are no such quotations or valuations are valued at
fair value as determined in good faith by or at the direction of the Board of
Trustees.
PERFORMANCE INFORMATION
TOTAL RATE OF RETURN: The Fund will calculate its total rate of return for each
class of shares for certain periods by determining the average annual compounded
rates of return over those periods that would cause an investment of $1,000
(made with all distributions reinvested and reflecting the CDSC or the maximum
public offering price) to reach the value of that investment at the end of the
periods. The Fund may also calculate (i) a total return, which is not reduced by
the CDSC (4% maximum for Class B shares and 1% maximum for Class C shares
purchased after April 1, 1996) and therefore may result in a higher rate of
return, (ii) a total rate of return assuming an initial account value of $1,000,
which will result in a higher rate of return since the value of the initial
account will not be reduced by the current maximum sales charge (currently
4.75%), and/or (iii) total rates of return which represent aggregate performance
over a period or year-by-year performance, and which may or may not reflect the
effect of the maximum or other sales charge or CDSC. The Fund's average annual
total rate of return for Class A shares, reflecting the initial investment at
the current maximum public offering price, for the one-, five- and ten-year
periods ended April 30, 1996 was, respectively, 3.54%, 7.77% and 8.00%. The
Fund's average annual total rate of return for Class A shares, not giving effect
to the sales charge on the initial investment for the one-, five- and ten-year
periods ended April 30, 1996 was, respectively, 8.67%, 8.83% and 8.53%. The
Fund's average annual total rate of return for Class B shares reflecting the
CDSC for the one-year period ended April 30, 1996 and the period September 7,
1993 through the Fund's fiscal year ended April 30, 1995 was 3.90% and 2.11%,
respectively. The Fund's average annual total rate of return for Class B shares,
not giving effect to the CDSC, for the one-year period ended April 30, 1996 and
the period September 7, 1993 through the Fund's fiscal year ended April 30, 1996
was 7.90% and 3.34%, respectively. The Fund's average annual total rate of
return for Class C shares reflecting the CDSC for the one-year period ended
April 30, 1996 and the period January 3, 1994 through the Fund's fiscal year
ended April 30, 1996, was 6.90% and 4.26%, respectively. The Fund's average
annual total rate of return for Class C shares, not giving effect to the CDSC,
for the one-year period ended April 30, 1996 and the period January 3, 1994
through the Fund's fiscal year ended April 30, 1996, was 7.90% and 4.26%,
respectively.
PERFORMANCE RESULTS: The performance results for Class A shares below, based on
an assumed initial investment of $10,000 in Class A shares, cover the period
from January 1, 1986 to December 31, 1995. It has been assumed that dividends
and capital gain distributions were reinvested in additional shares. These
performance results, as well as any yield or total rate of return quotation
provided by the Fund, should not be considered as representative of the
performance of the Fund in the future since the net asset value and public
offering price of shares of the Fund will vary based not only on the type,
quality and maturities of the securities held in the Fund's portfolio, but also
on changes in the current value of such securities and on changes in the
expenses of the Fund. These factors and possible differences in the methods used
to calculate yields and total rates of return should be considered when
comparing the yield and total rate of return published for other investment
companies or other investment vehicles. Total rate of return reflects the
performance of both principal and income. Current net asset value as well as
account balance information may be obtained by calling 1-800-MFS-TALK
(637-8255).
MFS BOND FUND
-------------
VALUE OF
VALUE OF REINVESTED/ VALUE OF
YEAR ENDED INITIAL $10,000 CAPITAL GAIN REINVESTED TOTAL
DECEMBER 31, INVESTMENT DISTRIBUTIONS DIVIDENDS VALUE
------------ --------------- ------------- ---------- -----
1986 9,760 295 1,036 11,091
1987 8,568 576 1,885 11,029
1988 8,488 571 2,889 11,948
1989 8,814 593 4,156 13,563
1990 8,695 585 5,266 14,546
1991 9,354 629 7,180 17,163
1992 9,187 681 8,375 18,243
1993 9,074 1,870 9,827 20,771
1994 8,075 1,664 10,105 19,844
1995 9,107 1,877 13,121 24,105
EXPLANATORY NOTES: The results assume that the initial investment was reduced by
the current maximum applicable sales charge of 4.75%. No adjustment has been
made for any income taxes payable by shareholders.
YIELD: Any yield quotation for a class of shares of the Fund is based on the
annualized net investment income per share 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 expenses 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 for Class A
shares assume a maximum sales charge of 4.75%. The yield calculation for Class B
and Class C shares assumes no CDSC is paid. The yield for Class A shares of the
Fund for the 30-day period ended April 30, 1996 was 6.56%. The yield for Class B
shares of the Fund for the 30-day period ended April 30, 1996 was 6.11%. The
yield for Class C shares of the Fund for the 30-day period ended April 30, 1996
was 6.18%.
CURRENT DISTRIBUTION RATE: Yield, which is calculated according to a formula
prescribed by the SEC, is not indicative of the amounts which were or will be
paid to the Fund's shareholders. Amounts paid to shareholders of each class are
reflected in the quoted "current distribution rate" for that class. The current
distribution rate for a class is computed by dividing the total amount of
dividends per share paid by the Fund to shareholders of that class during the
past 12 months by the maximum public offering price of that class at the end of
such period. Under certain circumstances, such as when there has been a change
in the amount of dividend payout, or a fundamental change in investment
policies, it might be appropriate to annualize the dividends paid over the
period such policies were in effect, rather than using the dividends during the
past 12 months. The current distribution rate differs from the yield computation
because it may include distributions to shareholders from sources other than
dividends and interest, such as premium income for option writing, short-term
capital gains and return of invested capital, and is calculated over a different
period of time. The Fund's current distribution rate calculation for Class A
shares assumes a maximum sales charge of 4.75%. The Fund's current distribution
rate calculation for Class B and Class C shares assumes no CDSC is paid. The
current distribution rate for Class A shares of the Fund for the 12-month period
ended on April 30, 1996 was 7.12%. The current distribution rate for Class B
shares of the Fund for the 12-month period ended April 30, 1996 was 6.90%. The
current distribution rate for Class C shares of the Fund for the 12-month period
ended April 30, 1996 was 6.99%.
GENERAL: From time to time each Fund may, as appropriate, quote Fund rankings or
reprint all or a portion of evaluations of fund performance and operations
appearing in various independent publications, including but not limited to the
following: Money, Fortune, U.S. News and World Report, Kiplinger's Personal
Finance, The Wall Street Journal, Barron's, Investors Business Daily, Newsweek,
Financial World, Financial Planning, Investment Advisor, USA Today, Pensions and
Investments, SmartMoney, Forbes, Global Finance, Registered Representative,
Institutional Investor, the Investment Company Institute, Johnson's Charts,
Morningstar, Lipper Analytical Services, Inc., CDA Wiesenberger, Shearson Lehman
and Salomon Bros. Indices, Ibbotson, Business Week, Lowry Associates, Media
General, Investment Company Data, The New York Times, Your Money, Strangers
Investment Advisor, Financial Planning on Wall Street, Standard and Poor's,
Individual Investor, The 100 Best Mutual Funds You Can Buy, by Gordon K.
Williamson, Consumer Price Index, and Sanford C. Bernstein & Co. Fund
performance may also be compared to the performance of other mutual funds
tracked by financial or business publications or periodicals.
From time to time, the Fund may discuss or quote its current portfolio manager
as well as other investment personnel, including such persons' views on: the
economy; securities markets; portfolio securities and their issuers; investment
philosophies, strategies, techniques and criteria used in the selection of
securities to be purchased or sold for the Fund; the Fund's portfolio holdings;
the investment research and analysis process; the formulation and evaluation of
investment recommendations; and the assessment and evaluation of credit,
interest rate, market and economic risks and similar or related matters.
The Fund may also quote evaluations mentioned in independent radio or television
broadcasts.
From time to time the Fund may use charts and graphs to illustrate the past
performance of various indices such as those mentioned above and illustrations
using hypothetical rates of return to illustrate the effects of compounding and
tax-deferral.
From time to time the Fund may also discuss or quote the views of its
distributor, its investment adviser and other financial planning, legal, tax,
accounting, insurance, estate planning and other professionals, or from surveys,
regarding individual and family financial planning. Such views may include
information regarding: retirement planning; tax management strategies; estate
planning; general investment techniques (e.g., asset allocation and disciplined
saving and investing); business succession; ideas and information provided
through the MFS Heritage Planningsm program, an inter-generational financial
planning assistance program; issues with respect to insurance (e.g., disability
and life insurance and Medicare supplemental insurance); issues regarding
financial and health care management for elderly family members; and other
similar or related matters.
The Fund may advertise examples of the effects of periodic investment plans,
including the principle of dollar cost averaging. In such a program, an investor
invests a fixed dollar amount in a fund at periodic intervals, thereby
purchasing fewer shares when prices are high and more shares when prices are
low. While such a strategy does not assure a profit or guard against a loss in a
declining market, the investor's average cost per share can be lower than if
fixed numbers of shares are purchased at the same intervals.
MFS FIRSTS: MFS has a long history of innovations.
-- 1924 -- Massachusetts Investors Trust is established
as the first open-end mutual fund in America.
-- 1924 -- Massachusetts Investors Trust is the first mutual fund
to make full public disclosure of its operations in shareholder
reports.
-- 1932 -- One of the first internal research departments is
established to provide in-house analytical capability for an
investment management firm.
-- 1933 -- Massachusetts Investors Trust is the first mutual fund
to register under the Securities Act of 1933 ("Truth in
Securities Act" or "Full Disclosure Act").
-- 1936 -- Massachusetts Investors Trust is the first mutual fund
to allow shareholders to take capital gain distributions either
in additional shares or cash.
-- 1976 -- MFS(R) Municipal Bond Fund is among the first municipal
bond funds established.
-- 1979 -- Spectrum becomes the first combination fixed/ variable
annuity with no initial sales charge.
-- 1981 -- MFS(R) World Governments Fund is established as
America's first globally diversified fixed-income mutual fund.
-- 1984 -- MFS(R) Municipal High Income Fund is the first open-end
mutual fund to seek high tax-free income from lower-rated
municipal securities.
-- 1986 -- MFS(R) Managed Sectors Fund becomes the first mutual
fund to target and shift investments among industry sectors for
shareholders.
-- 1986 -- MFS(R) Municipal Income Trust is the first closed-end,
high-yield municipal bond fund traded on the New York Stock
Exchange.
-- 1987 -- MFS(R) Multimarket Income Trust is the first
closed-end, multimarket high income fund listed on the New York
Stock Exchange.
-- 1989 -- MFS(R) Regatta becomes America's first non-qualified
market-value-adjusted fixed/variable annuity.
-- 1990 -- MFS(R) World Total Return Fund is the first
global balanced fund.
-- 1993 -- MFS(R) World Growth Fund is the first global emerging
markets fund to offer the expertise of two sub-advisers.
-- 1993 -- MFS becomes money manager of MFS(R) Union Standard
Trust, the first Trust to invest in companies deemed to be
union-friendly by an Advisory Board of senior labor officials,
senior managers of companies with significant labor contracts,
academics and other national labor leaders or experts.
8. DISTRIBUTION PLANS
The Trustees have adopted a Distribution Plan for each of Class A, Class B and
Class C shares (the "Distribution Plans") pursuant to Section 12(b) of the 1940
Act and Rule 12b-1 thereunder (the "Rule") after having concluded that there is
a reasonable likelihood that each Distribution Plan would benefit the Fund and
the respective class of shareholders. The Distribution Plans are designed to
promote sales, thereby increasing the net assets of the Fund. Such an increase
may reduce the expense ratio to the extent the Fund's fixed costs are spread
over a larger net asset base. Also, an increase in net assets may lessen the
adverse effects that could result were the Fund required to liquidate portfolio
securities to meet redemptions. There is, however, no assurance that the net
assets of the Fund will increase or that the other benefits referred to above
will be realized.
The Distribution Plans are described in the Prospectus under the caption
"Distribution Plans," which is incorporated herein by reference. The following
information supplements this Prospectus discussion.
SERVICE FEES: With respect to the Class A Distribution Plan, no service fees
will be paid: (i) to any dealer who is the holder or dealer of record for
investors who own Class A shares having an aggregate net asset value less than
$750,000, or such other amount as may be determined from time to time by MFD
(MFD, however, may waive this minimum amount requirement from time to time); or
(ii) to any insurance company which has entered into an agreement with the Fund
and MFD that permits such insurance company to purchase Class A shares from the
Fund at their net asset value in connection with annuity agreements issued in
connection with the insurance company's separate accounts. Dealers may from time
to time be required to meet certain other criteria in order to receive service
fees.
With respect to the Class B Distribution Plan, except in the case of the first
year service fee, no service fees will be paid to any securities dealer who is
the holder or dealer of record for investors who own Class B shares having an
aggregate net asset value of less than $750,000 or such other amount as may be
determined by MFD from time to time. MFD, however, may waive this minimum amount
requirement from time to time. Dealers may from time to time be required to meet
certain other criteria in order to receive service fees.
MFD or its affiliates shall be entitled to receive any service fee payable under
any Distribution Plan for which there is no dealer of record or for which
qualification standards have not been met as partial consideration for personal
services and/or account maintenance services performed by MFD or its affiliates
for shareholder accounts.
DISTRIBUTION FEES: The purpose of distribution payments to MFD under the
Distribution Plans is to compensate MFD for its distribution services to the
Fund. MFD pays commissions to dealers as well as expenses of printing
prospectuses and reports used for sales purposes, expenses with respect to the
preparation and printing of sales literature and other distribution related
expenses, including, without limitation, the cost necessary to provide
distribution-related services, or personnel, travel, office expenses and
equipment.
DISTRIBUTION AND SERVICE FEES PAID DURING THE FUND'S LAST FISCAL YEAR:During the
fiscal year ended April 30, 1996, the Fund paid the following Distribution Plan
expenses:
AMOUNT OF AMOUNT OF AMOUNT OF
DISTRIBUTION DISTRIBUTION DISTRIBUTION
AND SERVICE AND SERVICE AND SERVICE
FEES PAID FEES RETAINED FEES RECEIVED
DISTRIBUTION PLANS BY FUND BY MFD BY DEALERS
- - ------------------ ------- ------------- -------------
Class A Distribution Plan $1,385,639 $357,529 $1,028,110
Class B Distribution Plan $ 976,749 $748,140 $ 228,609
Class C Distribution Plan $ 143,794 $ 2,463 $ 141,331
GENERAL: Each of the Distribution Plans will remain in effect until August 1,
1997, and will continue in effect thereafter only if such continuance is
specifically approved at least annually by vote of both the Trustees and a
majority of the Trustees who are not "interested persons" or financially
interested parties to such Plan ("Distribution Plan Qualified Trustees"). Each
of the Distribution Plans also requires that the Fund and MFD each shall provide
to the Trustees, and the Trustees shall review, at least quarterly, a written
report of the amounts expended (and purposes therefor) under such Plan. Each of
the Distribution Plans may be terminated at any time by vote of a majority of
the Distribution Plan Qualified Trustees or by vote of the holders of a majority
of the respective class of the Fund's shares (as defined in "Investment
Restrictions"). All agreements relating to any of the Distribution Plans entered
into between the Fund or MFD and other organizations must be approved by the
Board of Trustees, including a majority of the Distribution Plan Qualified
Trustees. Agreements under any of the Distribution Plans must be in writing,
will be terminated automatically if assigned, and may be terminated at any time
without payment of any penalty, by vote of a majority of the Distribution Plan
Qualified Trustees or by vote of the holders of a majority of the respective
class of the Fund's shares. None of the Distribution Plans may be amended to
increase materially the amount of permitted distribution expenses without the
approval of a majority of the respective class of the Fund's shares (as defined
in "Investment Restrictions") or may be materially amended in any case without a
vote of the Trustees and a majority of the Distribution Plan Qualified Trustees.
The selection and nomination of Distribution Plan Qualified Trustees shall be
committed to the discretion of the non-interested Trustees then in office. No
Trustee who is not an "interested person" has any financial interest in any of
the Distribution Plans or in any related agreement.
9. DESCRIPTION OF SHARES, VOTING RIGHTS AND LIABILITIES
The Trust's Declaration of Trust permits the Trustees to issue an unlimited
number of full and fractional Shares of Beneficial Interest (without par value)
of one or more separate series and to divide or combine the shares into a
greater or lesser number of shares without thereby changing the proportionate
beneficial interests in that series. The Trustees have currently authorized
shares of the Fund and two other series. The Declaration of Trust further
authorizes the Trustees to classify or reclassify the shares of the Fund into
one or more classes. Pursuant thereto, the Trustees have authorized the issuance
of three classes of shares of the Fund, Class A, Class B and Class C shares.
Each share of a class of the Fund represents an equal proportionate interest in
the assets of the Fund allocable to that class. Upon liquidation of the Fund,
shareholders of each class of the Fund are entitled to share pro rata in the net
assets of the Fund allocable to such class available for distribution to
shareholders. The Trust reserves the right to create and issue additional series
or classes of shares, in which case the shares of each class of a series would
participate equally in the earnings, dividends and assets allocable to that
class of the particular series.
Shareholders are entitled to one vote for each share held and may vote in the
election of Trustees and on other matters submitted to meetings of shareholders.
Although Trustees are not elected annually by the shareholders, shareholders
have under certain circumstances the right to remove one or more Trustees in
accordance with the provisions of section 16(c) of the 1940 Act. No material
amendment may be made to the Declaration of Trust without the affirmative vote
of a majority of the Trust's shares. Shares have no preemptive or conversion
rights (except as described in "Purchases -- Conversion of Class B Shares" in
the Prospectus). Shares when issued are fully paid and non-assessable. The Trust
may enter into a merger or consolidation, or sell all or substantially all of
its assets (or all or substantially all of the assets belonging to any series of
the Trust), if approved by the vote of the holders of two-thirds of the Trust's
outstanding shares voting as a single class, or of the affected series of the
Trust, as the case may be, except that if the Trustees of the Trust recommend
such merger, consolidation or sale, the approval by vote of the holders of a
majority of the Trust's or the affected series' outstanding shares (as defined
in "Investment Restrictions") will be sufficient. The Trust or any series of the
Trust may also be terminated (i) upon liquidation and distribution of its
assets, if approved by the vote of the holders of two-thirds of its outstanding
shares, or (ii) by the Trustees by written notice to the shareholders of the
Trust or the affected series. If not so terminated, the Trust will continue
indefinitely.
The Trust is an entity of the type commonly known as a "Massachusetts business
trust". Under Massachusetts law, shareholders of such a trust may, under certain
circumstances, be held personally liable as partners for its obligations.
However, the Declaration of Trust contains an express disclaimer of shareholder
liability for acts or obligations of the Trust and provides for indemnification
and reimbursement of expenses out of the Trust property for any shareholder held
personally liable for the obligations of the Trust. The Declaration of Trust
also provides that the Trust shall maintain appropriate insurance (for example,
fidelity bonding and errors and omissions insurance) for the protection of the
Trust, its shareholders, Trustees, officers, employees and agents covering
possible tort and other liabilities. Thus, the risk of a shareholder incurring
financial loss on account of shareholder liability is limited to circumstances
in which both inadequate insurance existed and the Trust itself was unable to
meet its obligations.
The Declaration of Trust further provides that obligations of the Trust are not
binding upon the Trustees individually but only upon the property of the Trust
and that the Trustees will not be liable for any action or failure to act, but
nothing in the Declaration of Trust protects a Trustee against any liability to
which he would otherwise be subject by reason of willful misfeasance, bad faith,
gross negligence, or reckless disregard of the duties involved in the conduct of
his office.
10. INDEPENDENT AUDITORS AND FINANCIAL STATEMENTS
Deloitte & Touche LLP are the Trust's independent auditors providing audit
services, tax preparation, and assistance and consultation with respect to the
preparation of filings with the SEC.
The Portfolio of Investments at April 30, 1996, the Statement of Assets and
Liabilities at April 30, 1996, the Statement of Operations for the year ended
April 30, 1996, the Statement of Changes in Net Assets for each of the two years
in the period ended April 30, 1996, the Notes to Financial Statements and the
Independent Auditors' Report, each of which is included in the Annual Report to
shareholders of the Fund, are incorporated by reference into this SAI and have
been so incorporated in reliance upon the report of Deloitte & Touche LLP,
independent auditors, as experts in accounting and auditing. A copy of the
Annual Report accompanies this SAI.
<PAGE>
APPENDIX A
<TABLE>
<CAPTION>
TRUSTEE COMPENSATION TABLE
RETIREMENT BENEFIT ESTIMATED TOTAL TRUSTEE FEES
TRUSTEE FEES ACCRUED AS PART OF CREDITED YEARS FROM FUND AND
TRUSTEE FROM FUND(1) FUND EXPENSE(1) OF SERVICE(2) FUND COMPLEX(3)
- - ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Richard B. Bailey $4,070 $ 680 8 $263,815
A. Keith Brodkin --0-- --0-- N/A --0--
Peter G. Harwood 4,645 402 5 111,366
J. Atwood Ives 4,310 712 17 101,356
Lawrence T. Perera 4,475 1,775 26 102,546
William Poorvu 4,645 1,855 25 111,366
Charles W. Schmidt 4,475 1,767 20 105,411
Arnold D. Scott --0-- --0-- N/A --0--
Jeffrey L. Shames --0-- --0-- N/A --0--
Elaine R. Smith 4,475 707 27 105,411
David B. Stone 4,845 1,677 14 115,521
(1) For fiscal year ended April 30, 1996.
(2) Based on normal retirement age of 73.
(3) For calendar year 1995. All Trustees receiving compensation served as Trustees of 23 funds within the MFS fund complex
(having aggregate net assets at December 31, 1995, of approximately $17.6 billion) except Mr. Bailey, who served as Trustee
of 73 funds within the MFS fund complex (having aggregate net assets at December 31, 1995, of approximately $31.7 billion).
ESTIMATED ANNUAL BENEFITS PAYABLE BY FUND UPON RETIREMENT(4)
<CAPTION>
YEARS OF SERVICE
------------------------------------------------------------------------
AVERAGE TRUSTEE FEES 3 5 7 10 OR MORE
- - -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$3,663 $549 $ 916 $1,282 $1,832
3,996 599 999 1,399 1,998
4,330 649 1,082 1,515 2,165
4,663 699 1,166 1,632 2,331
4,996 749 1,249 1,749 2,498
5,330 799 1,332 1,865 2,665
(4) Other funds in the MFS fund complex provide similar retirement benefits to the Trustees.
</TABLE>
<PAGE>
INVESTMENT ADVISER
Massachusetts Financial Services Company
500 Boylston Street, Boston, MA 02116
(617) 954-5000
DISTRIBUTOR
MFS Fund Distributors, Inc.
500 Boylston Street, Boston, MA 02116
(617) 954-5000
CUSTODIAN
Investors Bank & Trust Company
89 South Street, Boston, MA 02111
DIVIDEND DISBURSING AGENT
State Street Bank and Trust Company
225 Franklin Street, Boston, MA 02110
SHAREHOLDER SERVICING AGENT
MFS Service Center, Inc.
500 Boylston Street, Boston, MA 02116
Toll free: (800) 225-2606
Mailing Address:
P.O. Box 2281, Boston, MA 02107-9906
INDEPENDENT AUDITORS
Deloitte & Touche LLP
125 Summer Street, Boston, MA 02110
MFS(R)
BOND FUND
500 BOYLSTON STREET
BOSTON, MA 02116
[LOGO]
THE FIRST NAME IN MUTUAL FUNDS
MFB-13-9/96/500 11/211/311
<PAGE>
<PAGE>
[MFS LOGO] ANNUAL REPORT FOR
THE FIRST NAME IN MUTUAL FUNDS YEAR ENDED
APRIL 30, 1996
MFS [Register Mark] BOND FUND
[A photo of steel drums]
MFS [Register Mark] BOND FUND
TRUSTEES
A. Keith Brodkin* - Chairman and President
Richard B. Bailey* - Private Investor; Former Chairman and Director (until
1991), Massachusetts Financial Services Company; Director, Cambridge Bancorp;
Director, Cambridge Trust Company
Peter G. Harwood - Private Investor
J. Atwood Ives - Chairman and Chief Executive Officer, Eastern Enterprises
Lawrence T. Perera - Partner, Hemenway & Barnes
William J. Poorvu - Adjunct Professor, Harvard University Graduate School of
Business Administration
Charles W. Schmidt - Private Investor; Former Senior Vice President and Group
Executive (until 1990), Raytheon Company
Arnold D. Scott* - Senior Executive Vice President, Director and Secretary,
Massachusetts Financial Services Company
Jeffrey L. Shames* - President and Director, Massachusetts Financial Services
Company
Elaine R. Smith - Independent Consultant
David B. Stone - Chairman, North American Management Corp. (investment advisers)
INVESTMENT ADVISER
Massachusetts Financial Services Company
500 Boylston Street
Boston, MA 02116-3741
DISTRIBUTOR
MFS Fund Distributors, Inc.
500 Boylston Street
Boston, MA 02116-3741
PORTFOLIO MANAGER
Geoffrey L. Kurinsky*
TREASURER
W. Thomas London*
ASSISTANT TREASURER
James O. Yost*
SECRETARY
Stephen E. Cavan*
ASSISTANT SECRETARY
James R. Bordewick, Jr.*
CUSTODIAN
Investors Bank & Trust Company
AUDITORS
Deloitte & Touche LLP
INVESTOR INFORMATION
For MFS stock and bond market outlooks, call toll free: 1-800-637-4458 anytime
from a touch-tone telephone.
For information on MFS mutual funds, call your financial adviser or, for an
information kit, call toll free: 1-800-637-2929 any business day from 9 a.m. to
5 p.m. Eastern time (or leave a message anytime).
INVESTOR SERVICE
MFS Service Center, Inc.
P.O. Box 2281
Boston, MA 02107-9906
For current account service, call toll free: 1-800-225-2606 any business day
from 8 a.m. to 8 p.m. Eastern time.
For service to speech- or hearing-impaired, call toll free: 1-800-637-6576 any
business day from 9 a.m. to 5 p.m. Eastern time. (To use this service, your
phone must be equipped with a Telecommunications Device for the Deaf.)
For share prices, account balances and exchanges, call toll free:
1-800-MFS-TALK (1-800-637-8255) anytime from a touch-tone telephone.
TOP-RATED SERVICE
For the second year in a row, MFS earned a #1 ranking in DALBAR, Inc.'s
Broker/Dealer Survey, Main Office Operations Service Quality category. The firm
achieved a 3.49 overall score - on a scale of 1 to 4 - in the 1995 survey. A
total of 71 firms responded, offering input on the quality of service they
receive from 36 mutual fund companies nationwide. The survey contained questions
about service quality in 17 categories, including "knowledge of phone service
contacts," "accuracy of transaction processing," and "overall ease of doing
business with the firm."
*Affiliated with the Investment Adviser
<PAGE>
LETTER TO SHAREHOLDERS
Dear Shareholders:
Despite the rise in interest rates during the last three months of the Fund's
fiscal year, the past year was, on balance, positive for the fixed-income market
as interest rates on 10-year Treasury notes fell from 7% on May 1, 1995 to
around 6-1/2% on April 30, 1996. The market's performance was helped by the
slower rate of economic growth during the first part of the Fund's fiscal year
and good news on the inflation front. For the year, Class A shares of the Fund
provided a total return of 8.67%, Class B shares 7.90%, and Class C shares
7.90%. These returns assume the reinvestment of distributions but exclude the
effects of any sales charges. Although the returns of the Fund's Class B and
Class C shares underperformed the return of the Lehman Brothers
Government/Corporate Bond Index (the Lehman Index), which was 8.65% over the
same period, the return of the Fund's Class A shares essentially matched the
Index. The Lehman Index is an unmanaged, market-value-weighted index of U.S.
Treasury and government agency securities (excluding mortgage-backed securities)
and investment-grade debt obligations of domestic corporations. Class A shares
ranked 34th, and Class B and Class C shares ranked 61st, out of the 86 funds
ranking based on NAV returns in the corporate bond fund category tracked by
Lipper Analytical Services, an independent firm which reports mutual fund
performance. For the five years ended April 30, 1996, the Fund's Class A shares
ranked 14th out of 27 funds in this Lipper category and, for the past 10 years,
ninth out of 18 funds. A discussion of the Fund's performance may be found in
the Portfolio Performance and Strategy section of this letter.
Economic Environment
We believe the U.S. economy will continue to show moderate growth in 1996,
although this growth may be somewhat uneven as we move from quarter to quarter.
Thus, while one quarter may experience an annualized rate of growth in gross
domestic product of less than 1%, another quarter may see annualized growth in
excess of 3% - but, for the year, we believe growth could stay within our
expected range of 2% to 2-1/2%. While some increase in consumer spending took
place in the early months of this year, consumers, who represent two-thirds of
the economy, remain in a somewhat weakened position, due in part to an increase
in consumer installment debt in excess of 30% over the past two years.
Meanwhile, growth is also being constrained by ongoing economic doldrums in
Europe and Japan, important markets for U.S. exports. Here again, we are seeing
a few tentative signs, particularly in Japan, of modest recoveries that could
lead to improved prospects for U.S. exporters. Also, the "lag effect" of
increases in short-term interest rates by the Federal Reserve Board in 1994 and
into 1995 is helping to keep growth in check. This lag effect can last up to two
years, and although the Fed did reduce short-term rates late last year and
earlier this year,
1
<PAGE>
LETTER TO SHAREHOLDERS - continued
we expect it to continue its diligent anti-inflationary policies. Finally, it
appears that inflation is likely to remain under control this year, due in part
to a continued moderation in wage pressures and the subdued level of economic
growth. At the same time, we believe the current upward pressure on energy
prices bears close scrutiny, as energy is an important component of the
inflation outlook.
Bond Markets
Persistent signs of economic weakness led to decreases in short-term interest
rates by the Federal Reserve in late 1995 and early 1996. However, should signs
of economic growth and, particularly, of higher inflation continue, we would
expect the Fed to maintain its anti-inflationary stance. This would likely mean
no further reductions in short-term interest rates, and could lead to some
modest increases. In the beginning of the year, bond markets were trading in a
narrow range, as investors shifted between concern about the lack of a budget
resolution in Washington and hopes that sluggish economic reports and low
inflation might lead to lower interest rates. Later, fixed-income markets began
reacting to conflicting signals regarding the strength of the economy with
more-volatile trading patterns marked by an upward bias in interest rates.
Interest rates may move even higher over the coming months, but we believe the
current rise in bond yields is reaching a point where fixed-income markets are
becoming attractively valued.
Portfolio Performance and Strategy
The Fund's strong performance over the past year resulted mainly from being
overweighted in investment grade corporate securities for most of the year.
These securities outperformed Treasury securities by approximately 100 basis
points (1%) during the Fund's fiscal year (although principal value and interest
on Treasury securities are guaranteed by the U.S. government if held to
maturity). As the U.S. economy entered its fifth year of growth in the current
economic cycle, the past year's performance by corporate bonds was consistent
with the general rule that corporate securities outperform Treasury securities
during periods of positive economic growth. Credit fundamentals of corporations
generally improve during periods of economic growth and deteriorate during
periods of recession. The Fund's weighting in investment-grade corporate
securities varied in a range of 50% to 70% of the portfolio, which is nearly
twice that of the average corporate debt BBB-rated fund and the Fund's normal
position.
Within sectors of the corporate bond market, the Fund benefited from an
overweighted position in the cable/media and airline sectors. Owning securities
in Time Warner, News America Holdings, and Telecommunications, Inc. allowed the
Fund to participate in a sector which had a total return of 12% for the period,
compared to a return of 9.65% for the corporate bond market as
2
<PAGE>
LETTER TO SHAREHOLDERS - continued
represented by the Lehman Brothers Corporate Bond Index, an unmanaged index of
investment-grade domestic corporate debt. While this sector is going through a
major technological evolution, the ability of these companies to reduce their
debt load has resulted in their debt status improving from the top tier of the
high-yield market to one of solid investment-grade securities. The Fund took
advantage of the 16-1/4% return of the airline sector through its holdings in
Delta Airlines, United Airlines, and Qantas Airways. These airlines benefited
from their ability to raise prices as the travel industry continued its strong
recovery, as well as from stable energy prices.
The Fund's performance was negatively affected by its holdings in Niagara
Mohawk Corp. and Long Island Lighting which, as a result of high electric rates,
are under pressure to reduce their high cost structures. We liquidated our
position in Niagara Mohawk given what we see as an uncertain outlook, but have
maintained our positions in Long Island Lighting based upon expectations of a
positive outcome from a likely takeover by the Long Island Power Authority.
Looking forward, we are maintaining our significant exposure to the
corporate bond market based on our outlook for continued economic growth through
the end of 1996. We have reduced the interest rate sensitivity of the portfolio,
however, as recent concerns of a potential pickup in inflation have given us a
more cautious outlook for the future of interest rates. The duration of the Fund
is currently around 5-3/8 years, compared to a normal position of around 5-3/4
years.
We appreciate your support and welcome any questions or comments you may
have.
Respectfully,
[Signature of A. Keith Brodkin] [Signature of Geoffrey L. Kurinsky]
A. Keith Brodkin Geoffrey L. Kurinsky
Chairman and President Portfolio Manager
May 10, 1996
PORTFOLIO MANAGER PROFILE
Geoffrey Kurinsky began his career at MFS in 1987 in the Fixed Income
Department. A graduate of the University of Massachusetts and Boston
University's Graduate School of Management, he was named Assistant Vice
President in 1988, Vice President in 1989 and Senior Vice President in 1993. In
1992, he became Portfolio Manager of MFS Bond Fund.
3
<PAGE>
OBJECTIVE AND POLICIES
The Fund primarily seeks to provide as high a level of current income as is
believed to be consistent with prudent investment risk. The secondary objective
of the Fund is to protect shareholders' capital.
The Fund seeks to achieve its objectives by investing, under normal market
conditions, at least 65% of its total assets in convertible and non-convertible
debt securities and preferred stocks, securities issued or guaranteed by the
U.S. government or its agencies or instrumentalities, and commercial paper,
repurchase agreements and cash equivalents. Up to 20% of the Fund's net assets
may be invested in non-investment-grade debt securities. The Fund may also enter
into options and futures transactions and forward foreign currency exchange
contracts.
PERFORMANCE
The information below and on the following page illustrates the historical
performance of MFS Bond Fund Class A shares in comparison to various market
indicators. Fund results in the graph reflect the deduction of the 4.75% maximum
sales charge; benchmark comparisons are unmanaged and do not reflect any fees or
expenses. You cannot invest in an index. All results reflect the reinvestment of
all dividends and capital gains.
Class B shares were offered effective September 7, 1993. Information on Class B
share performance appears on the next page.
Please note that effective January 3, 1994, Class C shares were offered.
Information on Class C share performance appears on the next page.
Please note that the performance of other classes will be greater than or less
than the line shown, based on the differences in loads and fees paid by
shareholders investing in the different classes.
GROWTH OF A HYPOTHETICAL $10,000 INVESTMENT
(For the 5-Year Period Ended April 30, 1996)
Lehman Brothers
Days MFS Bond Fund-A Gov't/Corp Bond Index CPI
================================================================================
5/1/91 0 9,525 10,000 10,000
- - --------------------------------------------------------------------------------
4/30/92 366 10,706 11,077 10,318
- - --------------------------------------------------------------------------------
4/30/93 730 12,152 12,683 10,651
- - --------------------------------------------------------------------------------
4/30/94 1095 12,410 12,828 10,902
- - --------------------------------------------------------------------------------
4/30/95 1460 13,375 13,716 11,235
- - --------------------------------------------------------------------------------
4/30/96 1826 14,535 14,902 11,561
- - --------------------------------------------------------------------------------
4
<PAGE>
GROWTH OF A HYPOTHETICAL $10,000 INVESTMENT
(For the 10-Year Period Ended April 30, 1996)
Lehman Brothers
Days MFS Bond Fund-A Gov't/Corp Bond Index CPI
================================================================================
5/1/86 0 9,525 10,000 10,000
- - --------------------------------------------------------------------------------
4/30/87 365 10,167 10,475 10,381
- - --------------------------------------------------------------------------------
4/30/88 731 10,761 11,172 10,784
- - --------------------------------------------------------------------------------
4/30/89 1095 11,426 12,049 11,336
- - --------------------------------------------------------------------------------
4/30/90 1460 12,384 13,058 11,870
- - --------------------------------------------------------------------------------
4/30/91 1825 14,151 14,996 12,450
- - --------------------------------------------------------------------------------
4/30/92 2191 15,906 16,611 12,846
- - --------------------------------------------------------------------------------
4/30/93 2556 18,053 19,019 13,261
- - --------------------------------------------------------------------------------
4/30/94 2921 18,437 19,237 13,574
- - --------------------------------------------------------------------------------
4/30/95 3286 19,871 20,568 13,988
- - --------------------------------------------------------------------------------
4/30/96 3652 21,594 22,347 14,393
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS
1 Year 3 Years 5 Years 10 Years
===========================================================================================
<S> <C> <C> <C> <C>
MFS Bond Fund (Class A) including
4.75% sales charge +3.54% +4.44% +7.77% +8.00%
- - -------------------------------------------------------------------------------------------
MFS Bond Fund (Class A) at net asset value +8.67% +6.15% +8.83% +8.53%
- - -------------------------------------------------------------------------------------------
MFS Bond Fund (Class B) with CDSC+ +3.90% -- -- +2.42%*
- - -------------------------------------------------------------------------------------------
MFS Bond Fund (Class B) without CDSC +7.90% -- -- +3.34%*
- - -------------------------------------------------------------------------------------------
MFS Bond Fund (Class C) with CDSC# +6.90% -- -- +4.26%##
- - -------------------------------------------------------------------------------------------
MFS Bond Fund (Class C) without CDSC +7.90% -- -- +4.26%##
- - -------------------------------------------------------------------------------------------
Average corporate debt BBB-rated fund** +8.95% +6.02% +9.11% +8.48%
- - -------------------------------------------------------------------------------------------
Lehman Brothers Government/Corporate Bond Index** +8.65% +5.52% +8.30% +8.37%
- - -------------------------------------------------------------------------------------------
Consumer Price Index[ss]** +2.90% +2.77% +2.94% +3.71%
- - -------------------------------------------------------------------------------------------
<FN>
+ These returns reflect the current Class B contingent deferred sales charge (CDSC) of 4%
for the 1-year period and 3% for the period commencing September 7, 1993.
* For the period from the commencement of offering of Class B shares, September 7, 1993 to
April 30, 1996.
# Class C shares have no initial sales charge but, along with Class B shares, have higher
annual fees and expenses than Class A shares. Class C share purchases made on or after
April 1, 1996, will be subject to a 1% CDSC if redeemed within 12 months of purchase.
## For the period from the commencement of offering of Class C shares, January 3, 1994 to
April 30, 1996.
** Source: Lipper Analytical Services, Inc.
[ss] The Consumer Price Index is a popular measure of change in prices.
</FN>
</TABLE>
In the above table, we have included the average annual total returns of all
corporate debt BBB-rated funds (including the Fund) tracked by Lipper Analytical
Services, Inc. for the applicable time periods.
All results are historical and are not an indication of future results. The
investment return and principal value of an investment in a mutual fund will
vary with changes in market conditions, and shares, when redeemed, may be worth
more or less than their original cost.
5
<PAGE>
<TABLE>
PORTFOLIO OF INVESTMENTS - April 30, 1996
<CAPTION>
BONDS - 97.9%
===========================================================================================
S & P
Bond Rating Principal Amount
(Unaudited) Issuer (000 Omitted) Value
- - -------------------------------------------------------------------------------------------
<S> <C> <C>
U.S. Dollar Denominated - 88.6%
Corporate Asset Backed - 0.5%
NR MBNA Credit Card Trust, 5.5875s, 2003 $ 3,000 $ 3,000,000
- - -------------------------------------------------------------------------------------------
Financial Institutions - 12.4%
Financial Services - 7.7%
BBB Advanta National Bank Corp., 6.82s, 2001 $ 1,000 $ 986,810
BBB Advanta National Bank Corp., 6.88s, 2001 3,675 3,635,567
BBB Alex Brown, Inc., 7.625s, 2005 4,500 4,527,630
A- Bankers Trust of New York Corp., 7.375s, 2008 2,650 2,620,188
BBB- Capital One Bank, 6.875s, 2000 5,000 4,975,100
BB+ Centerbank Financial Corp., 8.375s, 2002 4,000 3,970,000
BB- Coastal Bancorp, Inc., 10s, 2002 450 443,813
BB+ First USA Bank Corp. (Bank of Wilmington),
7.65s, 2003 5,000 4,901,650
A+ Goldman Sachs Group L.P., 6.25s, 2003## 1,375 1,280,469
A+ Goldman Sachs Group L.P., 7.25s, 2005## 1,500 1,464,375
A Lehman Brothers Holdings, 8.5s, 2007 12,990 13,702,761
BB- Riggs National Corp. (Washington), 8.5s, 2006 4,000 4,040,000
BB+ Sovereign Bancorp, Inc., 6.75s, 2000 2,600 2,505,750
------------
$ 49,054,113
- - ------------------------------------------------------------------------------------------
Insurance - 4.7%
BBB Arkwright CSN Trust, 9.625s, 2026## $ 3,000 $ 3,016,860
BBB+ Fairfax Financial Holdings Ltd., 8.3s, 2026 2,750 2,705,065
AA- Metropolitan Life Insurance Co., 7.7s, 2015## 3,000 2,872,044
A+ Nationwide Mutual Insurance Co., 7.5s, 2024## 6,440 5,805,724
A Prudential Insurance Co., 7.65s, 2007## 6,575 6,510,171
A Prudential Insurance Co., 8.3s, 2025 2,600 2,565,186
A Travelers-Aetna, Property and
Casualty Corp., 7.75s, 2026 2,300 2,279,617
A+ Travelers Group, Inc., 7.875s, 2025 4,240 4,250,812
------------
$ 30,005,479
- - ------------------------------------------------------------------------------------------
Total Financial Institutions $ 79,059,592
- - ------------------------------------------------------------------------------------------
Foreign - U.S. Dollar Denominated - 6.3%
AA- Export-Import Bank of Korea, 6.375s, 2006 $ 2,000 $ 1,847,500
BBB- Financiara Ener Nacional-Colombia,
6.625s, 1996## 3,040 3,040,000
A+ Hanson Overseas B.V., 6.75s, 2005 4,160 3,963,149
NR Hidroelectrica Alicura, 8.375s, 1999## 4,325 4,087,125
NR Republic of Argentina - Global, 9.25s, 2001 1,560 1,485,900
BBB- Republic of Colombia, 8.75s, 1999 110 113,575
BBB- Republic of Colombia, 7.25, 2004 7,230 6,760,050
BBB- Republic of Colombia, 8.7s, 2016 6,200 5,711,750
A+ Santander Financial Issuances, 7s, 2006+ 2,000 1,943,080
A+ Santander Financial Issuances, 6.375s, 2011 4,500 3,993,165
NR United Mexican States, 9.75s, 2001 6,875 6,780,469
------------
$ 39,725,763
- - ------------------------------------------------------------------------------------------
</TABLE>
6
<PAGE>
<TABLE>
PORTFOLIO OF INVESTMENTS - continued
<CAPTION>
BONDS - continued
===========================================================================================
S & P
Bond Rating Principal Amount
(Unaudited) Issuer (000 Omitted) Value
- - -------------------------------------------------------------------------------------------
<S> <C> <C>
U.S. Dollar Denominated - continued
Industrials - 39.9%
Airlines - 6.3%
BB Airplane Pass-Through Trust (GPA
Group Lease), 10.875s, 2019 $ 1,500 $ 1,530,000
BB+ Delta Airlines, 9.75s, 2021 1,000 1,148,050
BB+ Delta Airlines, 9.25s, 2022 5,000 5,500,300
A Jet Equipment Trust, "B", 8.64s, 2012## 2,091 2,228,636
BBB- Jet Equipment Trust, "C", 10.69s, 2015## 2,390 2,663,822
BB+ Jet Equipment Trust, "D", 11.44s, 2014## 3,500 3,802,330
AA Northwest Airlines Trust, 9.25s, 2014 2,317 2,583,427
BBB+ Qantas Airways Ltd., 7.5s, 2003## 5,000 5,010,300
BB United Airlines, 10.67s, 2004 4,815 5,581,596
BB United Airlines, 9.125s, 2012 1,500 1,613,745
BB+ United Airlines, 7.27s, 2013 3,000 2,842,410
BB United Airlines, 9.75s, 2021 3,000 3,399,660
A+ USAir, Inc., 6.76s, 2008 2,000 1,872,360
------------
$ 39,776,636
- - -------------------------------------------------------------------------------------------
Automotive - 1.6%
A- Auburn Hills Trust (Chrysler Corp.), 12s, 2020 $ 3,000 $ 4,318,260
BB+ Mark IV Industries, Inc., 7.75s, 2006## 6,000 5,790,000
------------
$ 10,108,260
- - -------------------------------------------------------------------------------------------
Building - 1.2%
BBB- Owens-Corning Fiberglass Corp., 8.875s, 2002 $ 5,650 $ 5,997,306
NR Owens-Corning Fiberglass Corp. (Toledo),
9.9s, 2015## 1,500 1,631,250
------------
$ 7,628,556
- - -------------------------------------------------------------------------------------------
Consumer Goods and Services - 3.7%
BBB- Black & Decker Corp., 8.44s, 1999 $ 1,500 $ 1,575,660
BB+ Borden, Inc., 9.875s, 1997 3,000 3,118,020
BBB+ Laidlaw, Inc., 8.75s, 2025 5,000 5,307,250
BBB Nabisco, Inc., 7.55s, 2015 7,850 7,438,425
A Philip Morris Cos., Inc., 6.375s, 2006 3,000 2,778,750
BBB- RJR Nabisco, Inc., 8.75s, 2007 3,205 3,122,247
------------
$ 23,340,352
- - -------------------------------------------------------------------------------------------
Entertainment - 4.6%
BBB News America Holdings, Inc., 10.125s, 2012 $ 6,825 $ 7,651,712
BBB News America Holdings, Inc., 8.875s, 2023 5,000 5,185,750
BBB News America Holdings, Inc., 7.75s, 2045 2,250 1,997,197
BBB- Time Warner, Inc., 8.11s, 2006 10,730 10,741,481
BBB- Time Warner, Inc., 8.18s, 2007 3,750 3,716,250
------------
$ 29,292,390
- - -------------------------------------------------------------------------------------------
</TABLE>
7
<PAGE>
<TABLE>
PORTFOLIO OF INVESTMENTS - continued
<CAPTION>
BONDS - continued
===========================================================================================
S & P
Bond Rating Principal Amount
(Unaudited) Issuer (000 Omitted) Value
- - -------------------------------------------------------------------------------------------
<S> <C> <C>
U.S. Dollar Denominated - continued
Industrials - continued
Forest and Paper Products - 4.5%
NR Canadian Pacific Forest Products, 9.25s, 2002 $ 7,500 $ 7,967,100
BBB- Georgia-Pacific Corp., 9.875s, 2021 7,850 8,630,683
BBB- Georgia-Pacific Corp., 8.125s, 2023 1,000 933,740
BBB- Georgia-Pacific Corp., 8.625s, 2025 5,000 4,943,700
BBB- James River Corp., 7.75s, 2023 5,500 5,139,970
B+ Stone Container Corp., 9.875s, 2001 1,250 1,196,875
------------
$ 28,812,068
- - -------------------------------------------------------------------------------------------
Lodging - 0.7%
BBB RHG Financing Corp., 8.875s, 2005 $ 4,260 $ 4,389,248
- - -------------------------------------------------------------------------------------------
Machinery - 2.4%
BBB- Case Corp., 7.25s, 2016 $ 10,145 $ 9,462,404
BBB- Case Credit Corp., 6.125s, 2003 3,500 3,290,980
BBB Fisher Scientific International, Inc.,
7.125s, 2005 3,000 2,835,540
------------
$ 15,588,924
- - -------------------------------------------------------------------------------------------
Medical and Health Technology and Services - 0.7%
A- Olsten Corp., 7s, 2006 $ 1,625 $ 1,587,739
B+ Tenet Healthcare Corp., 10.125s, 2005 2,740 2,931,800
------------
$ 4,519,539
- - -------------------------------------------------------------------------------------------
Metals and Minerals - 1.0%
BBB Asarco, Inc., 8.5s, 2025 $ 4,200 $ 4,328,142
BB+ Cominco Ltd., 6.875s, 2006 2,000 1,849,060
------------
$ 6,177,202
- - -------------------------------------------------------------------------------------------
Oil - 6.0%
BBB Apache Corp., 7.95s, 2026 $ 1,100 $ 1,078,902
BB+ Coastal Corp., 10.375s, 2000 5,905 6,640,113
BB+ Coastal Corp., 10.25s, 2004 3,835 4,470,498
BB+ Coastal Corp., 7.75s, 2035 5,900 5,693,500
BBB- Mitchell Energy & Development Corp., 8s, 1999 1,500 1,514,580
BBB- Mitchell Energy & Development Corp., 9.25s, 2002 1,665 1,728,120
BB Oryx Energy Co., 10s, 1999 3,500 3,714,235
BB Oryx Energy Co., 10s, 2001 6,500 7,051,070
BBB- Parker & Parsley Petroleum, 8.25s, 2007 5,900 6,118,418
------------
$ 38,009,436
- - -------------------------------------------------------------------------------------------
Oil Services - 0.2%
B+ Chesapeake Energy Corp., 9.125s, 2006 $ 1,500 $ 1,500,000
- - -------------------------------------------------------------------------------------------
Real Estate - 1.0%
BBB- Rouse Co., 8.5s, 2003 $ 2,970 $ 3,060,852
BBB- Rouse Co., 8.55s, 2005 2,890 3,109,207
------------
$ 6,170,059
- - -------------------------------------------------------------------------------------------
Stores - 0.7%
BBB- Woolworth Corp., 7s, 2000 $ 4,545 $ 4,454,236
- - -------------------------------------------------------------------------------------------
</TABLE>
8
<PAGE>
<TABLE>
PORTFOLIO OF INVESTMENTS - continued
<CAPTION>
BONDS - continued
===========================================================================================
S & P
Bond Rating Principal Amount
(Unaudited) Issuer (000 Omitted) Value
- - -------------------------------------------------------------------------------------------
<S> <C> <C>
U.S. Dollar Denominated - continued
Industrials - continued
Telecommunications - 5.3%
BB+ Continental Cablevision, Inc., 8.875s, 2005 $ 2,000 $ 2,130,000
BB+ Continental Cablevision, Inc., 8.3s, 2006## 5,000 5,112,500
BB+ Lenfest Communications Corp., 8.375s, 2005 7,745 7,396,475
BBB- Tele-Communications, Inc., 7.38s, 2001 2,750 2,712,188
BBB- Tele-Communications, Inc., 10.125s, 2022 2,000 2,160,000
BBB- Tele-Communications, Inc., 9.25s, 2023 10,830 10,463,729
BBB- Tele-Communications, Inc., 7.875s, 2026 4,500 3,924,300
------------
$ 33,899,192
- - -------------------------------------------------------------------------------------------
Total Industrials $253,666,098
- - ------------------------------------------------------------------------------------------
Mortgage-Backed Pass-Throughs - 1.2%
NR Merrill Lynch Mortgage Investors, Inc.,
9.7s, 2008 $ 251 $ 254,654
NR Merrill Lynch Mortgage Investors, Inc.,
10.25s, 2009+ 702 707,159
NR Merrill Lynch Mortgage Investors, Inc.,
8.3s, 2011 1,972 2,000,212
NR Merrill Lynch Mortgage Investors, Inc.,
9s, 2011 1,307 1,337,915
NR Merrill Lynch Mortgage Investors, Inc.,
10s, 2011 1,725 1,796,576
NR Merrill Lynch Mortgage Investors, Inc.,
8.063s, 2022+ 2,000 1,485,625
------------
$ 7,582,141
- - -------------------------------------------------------------------------------------------
U.S. Federal Agencies - 3.5%
Federal Home Loan Mortgage Corporation - 1.1%
GOV FHLMC, 9.5s, 2001 $ 11 $ 11,923
GOV FHLMC, 8.5s, 2025 6,370 6,545,411
------------
$ 6,557,334
- - -------------------------------------------------------------------------------------------
Federal National Mortgage Association - 2.4%
GOV FNMA, 9s, 2004 $ 3 $ 3,126
GOV FNMA, 7.5s, 2010 7,324 7,369,888
GOV FNMA, 7.5s, 2011 5,601 5,634,666
GOV FNMA, Stripped Mortgage Backed Security,
240, 7s, 2023 7,335 2,458,407
------------
$ 15,466,087
- - ------------------------------------------------------------------------------------------
Total U.S. Federal Agencies $ 22,023,421
- - ------------------------------------------------------------------------------------------
U.S. Government Guaranteed - 7.9%
Government National Mortgage Association - 1.5%
GOV GNMA, 7.5s, 2008 $ 757 $ 767,438
GOV GNMA, 7.5s, 2009 6,000 6,078,720
GOV GNMA, 7.5s, 2011 2,020 2,046,502
GOV GNMA, 13.25s, 2023 687 767,085
------------
$ 9,659,745
- - -------------------------------------------------------------------------------------------
U.S. Treasury Obligations - 6.4%
GOV U.S. Treasury Notes, 6.25s, 2001 $ 5,000 $ 4,968,750
GOV U.S. Treasury Notes, 5.625s, 2006 12,475 11,566,695
GOV U.S. Treasury Bonds, 12s, 2005 650 880,750
GOV U.S. Treasury Bonds, 12s, 2013 9,515 13,451,831
</TABLE>
9
<PAGE>
<TABLE>
PORTFOLIO OF INVESTMENTS - continued
<CAPTION>
BONDS - continued
===========================================================================================
S & P
Bond Rating Principal Amount
(Unaudited) Issuer (000 Omitted) Value
- - -------------------------------------------------------------------------------------------
<S> <C> <C>
U.S. Dollar Denominated - continued
U.S. Government Guaranteed - continued
U.S. Treasury Obligations - continued
GOV U.S. Treasury Bonds, 6.875s, 2025 $ 9,050 $ 8,939,219
GOV U.S. Treasury Bonds, 6s, 2026 1,000 888,590
------------
$ 40,695,835
- - -------------------------------------------------------------------------------------------
Total U.S. Government Guaranteed $ 50,355,580
- - -------------------------------------------------------------------------------------------
Utilities - 16.9%
Electric - 13.1%
BBB Arkansas Power & Light Co., 8.75s, 2026 $ 1,135 $ 1,109,054
BB Central Maine Power Co., 7.45s, 1999 1,500 1,464,330
BB Cleveland Electric Co., 8.68s, 2001 3,500 3,393,285
BBB Commonwealth Edison Co., 8.5s, 2022 2,000 1,972,280
BBB Commonwealth Edison Co., 8.375s, 2023 11,290 11,078,538
BBB+ Empresa Electric Co. (Pehuenche), 7.3s, 2003 3,385 3,357,582
BBB Empresa Electric del Norte, 7.75s, 2006## 1,150 1,131,313
B+ First PV Funding Corp., 10.3s, 2014 6,839 7,239,560
B+ First PV Funding Corp., 10.15s, 2016 3,508 3,683,400
BBB Illinois Power Co., 8.75s, 2021 5,000 5,299,200
BBB- Long Island Lighting Co., 7.85s, 1999 5,490 5,466,503
BB+ Long Island Lighting Co., 8.9s, 2019 5,410 4,927,699
BBB- Long Island Lighting Co., 9.75s, 2021 1,310 1,318,135
BBB- Long Island Lighting Co., 9.625s, 2024 9,500 9,480,715
BBB- Louisiana Power & Light Co., 10.67s, 2017 1,940 2,086,160
BBB Louisiana Power & Light Co., 8.75s, 2026 1,135 1,109,463
BB- Midland Corp., 10.33s, 2002 3,032 3,180,051
BBB- Ohio Edison Co., 7.375s, 2002 5,900 5,894,867
BBB+ PacifiCorp Holdings, Inc., 7.2s, 2006## 4,820 4,723,600
BBB- Salton Sea Funding Corp., 7.37s, 2005 2,655 2,597,811
BBB- Salton Sea Funding Corp., 7.84s, 2010 2,775 2,737,260
------------
$ 83,250,806
- - -------------------------------------------------------------------------------------------
Gas - 3.8%
BBB- ANR Pipeline Co., 7.375s, 2024 $ 800 $ 741,848
BB- California Energy Co., 0s to 1997,
10.25s to 2004 3,100 2,976,000
BBB Louisiana Land & Exploration Co., 7.65s, 2023 4,425 4,248,044
BBB- NGC Corp., 6.75s, 2005 7,725 7,357,908
BBB- Panhandle Eastern Corp., 8.625s, 2025 1,875 1,893,431
BBB- Tenneco, Inc., 7.25s, 2025 4,980 4,457,100
BBB- Williams Holdings of Delaware, Inc., 6.25s, 2006 2,900 2,671,625
------------
$ 24,345,956
- - -------------------------------------------------------------------------------------------
Total Utilities $107,596,762
- - -------------------------------------------------------------------------------------------
Total U.S. Dollar Denominated $563,009,357
- - ------------------------------------------------------------------------------------------
</TABLE>
10
<PAGE>
PORTFOLIO OF INVESTMENTS - continued
<TABLE>
PORTFOLIO OF INVESTMENTS - continued
<CAPTION>
BONDS - continued
===========================================================================================
S & P
Bond Rating Principal Amount
(Unaudited) Issuer (000 Omitted) Value
- - -------------------------------------------------------------------------------------------
<S> <C> <C>
Foreign - Non-U.S. Dollar Denominated - 9.3%
Australia - 0.2%
AA Commonwealth of Australia, 7s, 1998 AUD 700 $ 537,682
AA Commonwealth of Australia, 7s, 2000 1,200 901,929
------------
$ 1,439,611
- - -------------------------------------------------------------------------------------------
Canada - 6.2%
AA+ Government of Canada, 7.5s, 2003 CAD 5,500 $ 4,012,815
AA+ Government of Canada, 8.75s, 2005 43,520 33,989,513
A+ Province of Quebec, 6.5s, 2006 1,875 1,766,267
------------
$ 39,768,595
- - -------------------------------------------------------------------------------------------
Denmark - 0.7%
AA+ Kingdom of Denmark, 9s, 2000 DKK 8,580 $ 1,623,911
AA+ Kingdom of Denmark, 8s, 2001 13,800 2,513,763
------------
$ 4,137,674
- - -------------------------------------------------------------------------------------------
Germany - 1.1%
AAA German Unity Fund, 8.5s, 2001 DEM 2,662 $ 1,970,307
AAA Treuhandanstalt Obligationen, 6.375s, 1999 7,085 4,874,088
------------
$ 6,844,395
- - -------------------------------------------------------------------------------------------
Italy - 0.3%
AA Republic of Italy, 8.5s, 1999 ITL 1,400,000 $ 891,895
AA Republic of Italy, 9.5s, 1999 500,000 326,024
AA Republic of Italy, 9.5s, 1999 725,000 471,111
AA Republic of Italy, 8.5s, 2004 415,000 250,940
------------
$ 1,939,970
- - -------------------------------------------------------------------------------------------
New Zealand - 0.2%
AA+ Government of New Zealand, 8s, 2001 NZD 2,200 $ 1,458,728
- - -------------------------------------------------------------------------------------------
Spain - 0.5%
AA Kingdom of Spain, 8.3s, 1998 ESP 200,000 $ 1,585,057
AA Kingdom of Spain, 10s, 2005 160,000 1,322,029
------------
$ 2,907,086
- - -------------------------------------------------------------------------------------------
Sweden - 0.1%
AA+ Kingdom of Sweden, 10.25s, 2000 SEK 4,200 $ 680,819
- - -------------------------------------------------------------------------------------------
Total Foreign - Non-U.S. Dollar Denominated $ 59,176,878
- - -------------------------------------------------------------------------------------------
Total Bonds (Identified Cost, $635,678,783) $622,186,235
- - -------------------------------------------------------------------------------------------
PREFERRED STOCK - 0.5%
===========================================================================================
Shares
- - ------------------------------------------------------------------------------------------
BB+ Bank United, TX, Federal Savings Bank, 9.6s, "B"
(Identified Cost, $3,000,000) 120,000 $ 3,045,000
- - -------------------------------------------------------------------------------------------
</TABLE>
11
<PAGE>
<TABLE>
PORTFOLIO OF INVESTMENTS - continued
<CAPTION>
REPURCHASE AGREEMENT - 0.1%
===========================================================================================
Principal Amount
Issuer (000 Omitted) Value
- - -------------------------------------------------------------------------------------------
<S> <C> <C>
Goldman Sachs Group L.P., dated 4/30/96, due 5/01/96,
total to be received $600,089 (secured by $133,531 par,
FNMA at 7.58s, due 4/19/06, market value $133,480;
$80,579 par, FNMA at 6.17s, due 12/30/03, market value
$76,286; $59,568 par, FNMA at 5.3s, due 12/10/98, market
value $58,004; $288,904 par, FHLMC at 0s, due 5/23/96,
market value $287,900; and $51,853 par, FHLB at 7.65s, due
3/25/97, market value $52,757), at Amortized Cost and Value $ 600 $ 600,000
- - -------------------------------------------------------------------------------------------
Total Investments (Identified Cost, $639,278,783) $625,831,235
- - -------------------------------------------------------------------------------------------
OTHER ASSETS, LESS LIABILITIES - 1.5% 9,304,563
- - -------------------------------------------------------------------------------------------
Net Assets - 100.0% $635,135,798
- - -------------------------------------------------------------------------------------------
</TABLE>
Abbreviations have been used throughout this report to indicate amounts shown in
currencies other than the U.S. dollar. A list of abbreviations is shown below.
AUD = Australian Dollars DKK = Danish Kroner JPY = Japanese Yen
CAD = Canadian Dollars ESP = Spanish Pesetas NZD = New Zealand Dollars
CZK = Czech Republic Korunas ITL = Italian Lire SEK = Swedish Kronor
DEM = Deutsche Marks
+ Restricted security.
## SEC Rule 144A restriction.
See notes to financial statements
12
<PAGE>
FINANCIAL STATEMENTS
Statement of Assets and Liabilities
================================================================================
April 30, 1996
- - --------------------------------------------------------------------------------
Assets:
Investments, at value (identified cost, $639,278,783) $625,831,235
Cash 95,927
Receivable for investments sold 28,445,580
Receivable for Fund shares sold 1,581,611
Net receivable for forward foreign currency
exchange contracts sold 298,144
Receivable for daily variation margin on
open futures contracts 335,875
Interest receivable 13,594,434
Other assets 24,344
------------
Total assets $670,207,150
------------
Liabilities:
Payable for investments purchased $ 33,011,709
Payable for Fund shares reacquired 1,420,231
Net payable for forward foreign currency
exchange contracts purchased 90,262
Net payable for forward foreign currency exchange contracts 91,131
Payable to affiliates -
Management fee 21,759
Shareholder servicing agent fee 8,636
Distribution fee 197,754
Accrued expenses and other liabilities 229,870
------------
Total liabilities $ 35,071,352
------------
Net assets $635,135,798
============
Net assets consist of:
Paid-in capital $659,724,647
Unrealized depreciation on investments and translation of
assets and liabilities in foreign currencies (11,384,415)
Accumulated net realized loss on investments and foreign
currency transactions (12,975,480)
Accumulated distributions in excess of net investment
income (228,954)
------------
Total $635,135,798
============
Shares of beneficial interest outstanding 49,465,896
============
Class A shares:
Net asset value and redemption price per share
(net assets of $514,892,352 / 40,067,641 shares of
beneficial interest outstanding) $ 12.85
=======
Offering price per share (100/95.25) $ 13.49
==== ===== =======
Class B shares:
Net asset value and offering price per share
(net assets of $102,913,572 / 8,043,577 shares of
beneficial interest outstanding) $ 12.79
=======
Class C shares:
Net asset value, redemption price, and offering price per share
(net assets of $17,329,874 / 1,354,678 shares of
beneficial interest outstanding) $ 12.79
=======
On sales of $100,000 or more, the offering price of Class A shares is reduced.
A contingent deferred sales charge may be imposed on redemptions of Class A,
Class B and Class C shares.
See notes to financial statements
13
<PAGE>
FINANCIAL STATEMENTS - continued
Statement of Operations
================================================================================
Year Ended April 30, 1996
- - --------------------------------------------------------------------------------
Net investment income:
Interest income $ 50,999,182
------------
Expenses -
Management fee $ 2,531,652
Trustees' compensation 48,117
Shareholder servicing agent fee (Class A) 772,316
Shareholder servicing agent fee (Class B) 214,791
Shareholder servicing agent fee (Class C) 21,533
Distribution and service fee (Class A) 1,385,639
Distribution and service fee (Class B) 976,749
Distribution and service fee (Class C) 143,794
Custodian fee 316,621
Postage 188,916
Printing 82,755
Auditing fees 78,125
Legal fees 5,965
Miscellaneous 399,860
------------
Total expenses $ 7,166,833
------------
Fees paid indirectly (92,219)
------------
Net expenses $ 7,074,614
------------
Net investment income $ 43,924,568
------------
Realized and unrealized gain (loss) on investments:
Realized gain (loss) (identified cost basis) -
Investment transactions $ 20,730,035
Written option transactions (25,359)
Foreign currency transactions and forward foreign
currency exchange contracts and other transactions
denominated in foreign currency 873,737
Futures contracts (2,385,960)
------------
Net realized gain on investments $ 19,192,453
------------
Change in unrealized appreciation (depreciation) -
Investments $(16,879,986)
Written options 65,995
Foreign currency and forward foreign currency exchange
contracts and other transactions denominated
in foreign currency (318,714)
Futures contracts 1,955,578
------------
Net unrealized loss on investments $(15,177,127)
------------
Net realized and unrealized gain on
investments and foreign currency $ 4,015,326
------------
Increase in net assets from operations $ 47,939,894
------------
See notes to financial statements
14
<PAGE>
FINANCIAL STATEMENTS - continued
Statement of Changes in Net Assets
================================================================================
Year Ended April 30, 1996 1995
- - --------------------------------------------------------------------------------
Increase (decrease) in net assets:
From operations -
Net investment income $ 43,924,568 $ 39,867,272
Net realized gain (loss) on investments and
foreign currency transactions 19,192,453 (35,439,392)
Net unrealized gain (loss) on investments and
foreign currency translation (15,177,127) 34,798,721
------------ ------------
Increase in net assets from operations $ 47,939,894 $ 39,226,601
------------ ------------
Distributions declared to shareholders -
From net investment income (Class A) $(36,559,090) $(32,067,842)
From net investment income (Class B) (6,140,409) (3,235,246)
From net investment income (Class C) (908,862) (481,518)
In excess of net investment income (Class B) (66,320) --
In excess of net investment income (Class C) (26,175) --
From paid-in capital (835,015) (3,268,079)
------------ ------------
Total distributions declared to shareholders $(44,535,871) $(39,052,685)
------------ ------------
Fund share (principal) transactions -
Net proceeds from sale of shares $345,474,743 $155,634,237
Net asset value of shares issued to shareholders
in reinvestment of distributions 30,698,182 25,974,677
Cost of shares reacquired (305,118,806) (121,456,901)
------------ ------------
Increase in net assets from Fund share transact 71,054,119 $ 60,152,013
------------ ------------
Total increase in net assets $ 74,458,142 $ 60,325,929
------------ ------------
Net assets:
At beginning of period 560,677,656 500,351,727
------------ ------------
At end of period (including accumulated
distributions in excess of net investment
income of $228,954 and $931,468, respectively) $635,135,798 $560,677,656
============ ============
See notes to financial statements
15
<PAGE>
FINANCIAL STATEMENTS - continued
<TABLE>
<CAPTION>
Financial Highlights
===========================================================================================================
Year Ended April 30, 1996 1995 1994 1993 1992
- - -----------------------------------------------------------------------------------------------------------
Class A
- - -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value - beginning of period $ 12.71 $ 12.75 $ 14.39 $ 13.70 $ 13.25
-------- -------- -------- -------- --------
Income from investment operations# -
Net investment income[ss] $ 0.95 $ 0.98 $ 1.02 $ 1.04 $ 1.13
Net realized and unrealized gain (loss)
on investments 0.15 (0.05) (0.63) 0.74 0.45
-------- -------- -------- -------- --------
Total from investment operations $ 1.10 $ 0.93 $ 0.39 $ 1.78 $ 1.58
-------- -------- -------- -------- --------
Less distributions declared to shareholders -
From net investment income $ (0.94) $ (0.89) $ (1.06) $ (1.04) $ (1.13)
In excess of net investment income -- -- (0.02) -- --
From net realized gain on investments -- -- (0.80) (0.05) --
In excess of net realized gain on
investments -- -- (0.01) -- --
From paid-in capital (0.02) (0.08) (0.14) -- --
-------- -------- -------- -------- --------
Total distributions declared
to shareholders $ (0.96) $ (0.97) $ (2.03) $ (1.09) $ (1.13)
-------- -------- -------- -------- --------
Net asset value - end of period $ 12.85 $ 12.71 $ 12.75 $ 14.39 $ 13.70
======== ======== ======== ======== ========
Total return+++ 8.67% 7.78% 2.12% 13.42% 12.39%
Ratios (to average net assets)/Supplemental data[ss]:
Expenses## 1.00% 1.00% 0.96% 0.88% 0.91%
Net investment income 7.10% 7.91% 7.17% 7.82% 8.39%
Portfolio turnover 377% 306% 410% 330% 243%
<S> <C> <C> <C> <C> <C>
Net assets at end of period (000 omitted) $514,892 $477,056 $459,311 $490,417 $448,261
<FN>
+++ Total returns for Class A shares do not include the applicable sales charge (except for reinvestment
dividends prior to March 1, 1991). If the charge had been included, the results would have been lower.
# Per share data for the periods subsequent to April 30, 1993 is based on average shares outstanding.
## For fiscal years ending after September 1, 1995, the Fund's expenses are calculated without reduction for
fees paid indirectly.
[ss] The distributor did not impose a portion of its distribution fee for the periods indicated. If this fee
had been incurred by the Fund, the net investment income per share and the ratios would have been:
Net investment income -- $ 0.97 $ 1.01 -- --
Ratios (to average net assets):
Expenses -- 1.10% 1.02% -- --
Net investment income -- 7.81% 7.10% -- --
</FN>
</TABLE>
See notes to financial statements
16
<PAGE>
FINANCIAL STATEMENTS - continued
<TABLE>
<CAPTION>
Financial Highlights - continued
==============================================================================================================
Year Ended April 30, 1991 1990 1989 1988 1987
- - --------------------------------------------------------------------------------------------------------------
Class A
- - --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value - beginning of period $ 12.69 $ 12.80 $ 13.20 $ 14.04 $ 14.62
-------- -------- -------- -------- --------
Income from investment operations -
Net investment income $ 1.14 $ 1.20 $ 1.15 $ 1.16 $ 1.24
Net realized and unrealized gain (loss)
on investments 0.59 (0.14) (0.38) (0.42) (0.27)
-------- -------- -------- -------- --------
Total from investment operations $ 1.73 $ 1.06 $ 0.77 $ 0.74 $ 0.97
-------- -------- -------- -------- --------
Less distributions declared to shareholders -
From net investment income $ (1.17) $ (1.17) $ (1.17) $ (1.15) $ (1.15)
From net realized gain on investments -- -- -- (0.43) (0.40)
-------- -------- -------- -------- --------
Total distributions declared
to shareholders $ (1.17) $ (1.17) $ (1.17) $ (1.58) $ (1.55)
-------- -------- -------- -------- --------
Net asset value - end of period $ 13.25 $ 12.69 $ 12.80 $ 13.20 $ 14.04
-------- -------- -------- -------- --------
Total return+++ 13.65% 7.69% 5.49% 5.18% 6.15%
Ratios (to average net assets)/Supplemental data:
Expenses 0.79% 0.75% 0.83% 0.76% 0.68%
Net investment income 8.82% 9.10% 8.93% 8.85% 8.44%
Portfolio turnover 189% 186% 160% 287% 334%
Net assets at end of period (000 omitted) $315,722 $293,242 $299,485 $310,403 $318,329
<FN>
+++ Total returns for Class A shares do not include the applicable sales charge (except for reinvestment
dividends prior to March 1, 1991). If the charge had been included, the results would have been lower.
</FN>
</TABLE>
See notes to financial statements
17
<PAGE>
FINANCIAL STATEMENTS - continued
<TABLE>
<CAPTION>
Financial Highlights - continued
==========================================================================================================================
Year Ended April 30, 1996 1995 1994* 1996 1995 1994**
- - --------------------------------------------------------------------------------------------------------------------------
Class B Class C
- - --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value - beginning of period $ 12.69 $ 12.73 $ 14.99 $ 12.68 $ 12.72 $ 13.57
-------- -------- -------- -------- -------- --------
Income from investment operations# -
Net investment income $ 0.85 $ 0.88 $ 0.56 $ 0.85 $ 0.88 $ 0.29
Net realized and unrealized gain
(loss) on investments 0.13 (0.05) (1.30) 0.15 (0.05) (0.90)
-------- -------- -------- -------- -------- --------
Total from investment
operations $ 0.98 $ 0.83 $ (0.74) $ 1.00 $ 0.83 $ (0.61)
-------- -------- -------- -------- -------- --------
Less distributions declared to shareholders -
From net investment income $ (0.85) $ (0.80) $ (0.59) $ (0.85) $ (0.80) $ (0.22)
In excess of net investment income (0.01) -- (0.02) (0.02) -- --
From net realized gain on
investments -- -- (0.80) -- -- --
In excess of net realized gain on
investments -- -- (0.01) -- -- --
From paid-in capital (0.02) (0.07) (0.10) (0.02) (0.07) (0.02)
-------- -------- -------- -------- -------- --------
Total distributions declared
to shareholders $ (0.88) $ (0.87) $ (1.52) $ (0.89) $ (0.87) $ (0.24)
-------- -------- -------- -------- -------- --------
Net asset value - end of period $ 12.79 $ 12.69 $ 12.73 $ 12.79 $ 12.68 $ 12.72
-------- -------- -------- -------- -------- --------
Total return 7.90% 6.90% (5.42)%++ 7.90% 7.00% 4.57%++
Ratios (to average net assets)/
Supplemental data:
Expenses## 1.81% 1.84% 1.83%+ 1.74% 1.75% 1.80%+
Net investment income 6.29% 7.17% 6.39%+ 6.35% 7.17% 6.57%+
Portfolio turnover 377% 306% 410% 377% 306% 410%
Net assets at end of period (000 omitted) $102,914 $ 75,451 $ 33,413 $ 17,330 $ 8,171 $ 7,627
<FN>
* For the period from the commencement of offering of Class B shares, September 7, 1993 to April 30, 1994.
** For the period from the commencement of offering of Class C shares, January 3, 1994 to April 30, 1994.
+ Annualized.
++ Not annualized.
# Per share data for the periods subsequent to April 30, 1993 is based on average shares outstanding.
## For fiscal years ending after September 1, 1995, the Fund's expenses are calculated without reduction for fees paid
indirectly.
</FN>
</TABLE>
See notes to financial statements
18
<PAGE>
NOTES TO FINANCIAL STATEMENTS
(1) Business and Organization
MFS Bond Fund (the Fund) is a diversified series of MFS Series Trust IX (the
Trust). The Trust is organized as a Massachusetts business trust and is
registered under the Investment Company Act of 1940, as amended, as an open-end
management investment company.
(2) Significant Accounting Policies
General - The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. Investments
in foreign securities are vulnerable to the effects of changes in the relative
values of the local currency and the U.S. dollar and to the effects of changes
in each country's legal and economic environment.
Investment Valuations - Debt securities (other than short-term obligations which
mature in 60 days or less), including listed issues and forward contracts, are
valued on the basis of valuations furnished by dealers or by a pricing service
with consideration to factors such as institutional-size trading in similar
groups of securities, yield, quality, coupon rate, maturity, type of issue,
trading characteristics and other market data, without exclusive reliance upon
exchange or over-the-counter prices. Short-term obligations, which mature in 60
days or less, are valued at amortized cost, which approximates market value.
Non-U.S. dollar denominated short-term obligations are valued at amortized cost
as calculated in the base currency and translated into U.S. dollars at the
closing daily exchange rate. Futures contracts, options and options on futures
contracts listed on commodities exchanges are valued at closing settlement
prices. Over-the-counter options are valued by brokers through the use of a
pricing model which takes into account closing bond valuations, implied
volatility and short-term repurchase rates. Equity securities listed on
securities exchanges or reported through the NASDAQ system are valued at last
sale prices. Unlisted equity securities or listed equity securities for which
last sale prices are not available are valued at last quoted bid prices.
Securities for which there are no such quotations or valuations are valued at
fair value as determined in good faith by or at the direction of the Trustees.
Repurchase Agreements - The Fund may enter into repurchase agreements with
institutions that the Fund's investment adviser has determined are creditworthy.
Each repurchase agreement is recorded at cost. The Fund requires that the
securities purchased in a repurchase transaction be transferred to the custodian
in a manner sufficient to enable the Fund to obtain those securities in the
event of a default under the repurchase agreement. The Fund monitors, on a daily
basis, the value of the securities transferred to ensure that the value,
including accrued interest, of the securities under each repurchase agreement is
greater than amounts owed to the Fund under each such repurchase agreement.
19
<PAGE>
NOTES TO FINANCIAL STATEMENTS - continued
Foreign Currency Translation - Investment valuations, other assets, and
liabilities initially expressed in foreign currencies are converted each
business day into U.S. dollars based upon current exchange rates. Purchases and
sales of foreign investments, income and expenses are converted into U.S.
dollars based upon currency exchange rates prevailing on the respective dates of
such transactions. Gains and losses attributable to foreign currency exchange
rates on sales of securities are recorded for financial statement purposes as
net realized gains and losses on investments. Gains and losses attributable to
foreign exchange rate movements on income and expenses are recorded for
financial statement purposes as foreign currency transaction gains and losses.
That portion of both realized and unrealized gains and losses on investments
that results from fluctuations in foreign currency exchange rates is not
separately disclosed.
Written Options - The Fund may write covered call or put options for which
premiums are received and are recorded as liabilities, and are subsequently
adjusted to the current value of the options written. Premiums received from
writing options which expire are treated as realized gains. Premiums received
from writing options which are exercised or are closed are offset against the
proceeds or amount paid on the transaction to determine the realized gain or
loss. If a put option is exercised, the premium reduces the cost basis of the
security purchased by the Fund. The Fund, as writer of an option, may have no
control over whether the underlying securities may be sold (call) or purchased
(put) and, as a result, bears the market risk of an unfavorable change in the
price of the securities underlying the written option. In general, written call
options may serve as a partial hedge against decreases in value in the
underlying securities to the extent of the premium received. Written options may
also be used as part of an income producing strategy reflecting the view of the
Fund's management on the direction of interest rates.
Futures Contracts - The Fund may enter into futures contracts for the delayed
delivery of securities, currency or contracts based on financial indices at a
fixed price on a future date. In entering such contracts, the Fund is required
to deposit either in cash or securities an amount equal to a certain percentage
of the contract amount. Subsequent payments are made or received by the Fund
each day, depending on the daily fluctuations in the value of the underlying
security, and are recorded for financial statement purposes as unrealized gains
or losses by the Fund. The Fund's investment in futures contracts is designed to
hedge against anticipated future changes in interest or exchange rates or
securities prices. Investments in interest rate futures for purposes other than
hedging may be made to modify the duration of the portfolio without incurring
the additional transaction costs involved in buying and selling the underlying
securities. Investments in currency futures for purposes other than hedging may
be made to change the Fund's relative position in one or more currencies without
buying and selling portfolio assets. Should interest or exchange rates or
securities prices move unexpectedly, the Fund may not achieve the anticipated
benefits of the futures contracts and may realize a loss.
Forward Foreign Currency Exchange Contracts - The Fund may enter into forward
foreign currency exchange contracts for the purchase or sale of a specific
foreign currency at a fixed price on a future date. Risks may arise upon
entering these contracts from the
20
<PAGE>
NOTES TO FINANCIAL STATEMENTS - continued
potential inability of counterparties to meet the terms of their contracts and
from unanticipated movements in the value of a foreign currency relative to the
U.S. dollar. The Fund will enter into forward contracts for hedging purposes.
The Fund may enter into contracts to deliver or receive foreign currency it will
receive from or require for its normal investment activities. It may also use
contracts in a manner intended to protect foreign currency-denominated
securities from declines in value due to unfavorable exchange rate movements.
The forward foreign currency exchange contracts are adjusted by the daily
exchange rate of the underlying currency and any gains or losses are recorded
for financial statement purposes as unrealized until the contract settlement
date.
Investment Transactions and Income - Investment transactions are recorded on the
trade date. Interest income is recorded on the accrual basis. All premium and
original issue discount are amortized or accreted for financial statement and
tax reporting purposes as required by federal income tax regulations. Dividend
income is recorded on the ex-dividend date for dividends received in cash.
Dividend and interest payments received in additional securities are recorded on
the ex-dividend or ex-interest date in an amount equal to the value of the
security on such date.
The Fund uses the effective interest method for reporting interest income on
payment-in-kind (PIK) bonds, whereby interest income on PIK bonds is recorded
ratably by the Fund at a constant yield to maturity. Legal fees and other
related expenses incurred to preserve and protect the value of a security owned
are added to the cost of the security; other legal fees are expensed. Capital
infusions, which are generally non-recurring, incurred to protect or enhance the
value of high-yield debt securities, are reported as an addition to the cost
basis of the security. Costs that are incurred to negotiate the terms or
conditions of capital infusions or that are expected to result in a plan of
reorganization are reported as realized losses. Ongoing costs incurred to
protect or enhance an investment, or costs incurred to pursue other claims or
legal actions, are reported as operating expenses.
Fees Paid Indirectly - The Fund's custodian bank calculates its fee based on the
Fund's average daily net assets. This fee is reduced according to an expense
offset arrangement with State Street Bank, the dividend disbursing agent, which
provides for partial reimbursement of custody fees based on a formula developed
to measure the value of cash deposited by the Fund with the custodian and with
the dividend disbursing agent. This amount is shown as a reduction of expenses
on the Statement of Operations.
Tax Matters and Distributions - The Fund's policy is to comply with the
provisions of the Internal Revenue Code (the Code) applicable to regulated
investment companies and to distribute to shareholders all of its taxable
income, including any net realized gain on investments. Accordingly, no
provision for federal income or excise tax is provided. The Fund files a tax
return annually using tax accounting methods required under provisions of the
Code which may differ from generally accepted accounting principles, the basis
on which these financial statements are prepared. Accordingly, the amount of net
investment income and net realized gain reported on these financial statements
may differ from
21
<PAGE>
NOTES TO FINANCIAL STATEMENTS - continued
that reported on the Fund's tax return and, consequently, the character of
distributions to shareholders reported in the financial highlights may differ
from that reported to shareholders on Form 1099-DIV.
Foreign taxes have been provided for on interest and dividend income earned on
foreign investments in accordance with the applicable country's tax rates and to
the extent unrecoverable are recorded as a reduction of investment income.
Distributions to shareholders are recorded on the ex-dividend date.
The Fund distinguishes between distributions on a tax basis and a financial
reporting basis and requires that only distributions in excess of tax basis
earnings and profits are reported in the financial statements as a tax return of
capital. Differences in the recognition or classification of income between the
financial statements and tax earnings and profits which result in temporary
over-distributions for financial statement purposes, are classified as
distributions in excess of net investment income or accumulated net realized
gains. During the year ended April 30, 1996, $478,802 and $835,015 was
reclassified from accumulated net realized gain on investments and paid-in
capital, respectively, to undistributed net investment income due to differences
between book and tax accounting for mortgage-backed securities and currency
transactions. This change had no effect on the net assets or net asset value per
share.
At April 30, 1996, the Fund, for federal income tax purposes, had a capital loss
carryforward of $9,844,270, which may be applied against any net taxable
realized gains of each succeeding year until the earlier of its utilization or
expiration on April 30, 2003.
Multiple Classes of Shares of Beneficial Interest - The Fund offers Class A,
Class B, and Class C shares. The three classes of shares differ in their
respective shareholder servicing agent, distribution and service fees. All
shareholders bear the common expenses of the Fund pro rata based on the average
daily net assets of each class, without distinction between share classes.
Dividends are declared separately for each class. No class has preferential
dividend rights; differences in per share dividend rates are generally due to
differences in separate class expenses.
(3) Transactions with Affiliates
Investment Adviser - The Fund has an investment advisory agreement with
Massachusetts Financial Services Company (MFS) to provide overall investment
advisory and administrative services, and general office facilities. The
management fee is computed daily and paid monthly at an effective annual rate of
0.20% of average daily net assets and 2.47% of investment income. The Fund pays
no compensation directly to its Trustees who are officers of the investment
adviser, or to officers of the Fund, all of whom receive remuneration for their
services to the Fund from MFS. Certain of the officers and Trustees of the Fund
are officers or directors of MFS, MFS Fund Distributors, Inc. (MFD) and MFS
Service Center, Inc. (MFSC). The Fund has an unfunded defined benefit plan for
all of its independent Trustees and Mr. Bailey. Included in Trustees'
compensation is a net periodic pension expense of $12,177 for the year ended
April 30, 1996.
22
<PAGE>
NOTES TO FINANCIAL STATEMENTS - continued
Distributor - MFD, a wholly owned subsidiary of MFS, as distributor, received
$172,391 for the year ended April 30, 1996, as its portion of the sales charge
on sales of Class A shares of the Fund. The Trustees have adopted separate
distribution plans for Class A, Class B and Class C shares pursuant to Rule
12b-1 of the Investment Company Act of 1940 as follows:
The Class A distribution plan provides that the Fund will pay MFD up to 0.35%
per annum of its average daily net assets attributable to Class A shares in
order that MFD may pay expenses on behalf of the Fund related to the
distribution and servicing of its shares. These expenses include a service fee
to each securities dealer that enters into a sales agreement with MFD of up to
0.25% per annum of the Fund's average daily net assets attributable to Class A
shares which are attributable to that securities dealer, a distribution fee to
MFD of up to 0.10% per annum of the Fund's average daily net assets attributable
to Class A shares, commissions to dealers and payments to MFD wholesalers for
sales at or above a certain dollar level, and other such distribution-related
expenses that are approved by the Fund. MFD retains the servic fee for accounts
not attributable to a securities dealer which amounted to $270,406 for the year
ended April 30, 1996. A portion of the 0.10% distribution fee equal to 0.05% is
currently being paid by the Fund; payment of the remaining 0.05% will become
payable on such date as the Trustees of the Trust may determine. Fees incurred
under the distribution plan during the year ended April 30, 1996 were 0.27% of
average daily net assets attributable to Class A shares on an annualized basis.
The Class B and Class C distribution plans provide that the Fund will pay MFD a
distribution fee of 0.75% per annum, and a service fee of up to 0.25% per annum,
of the Fund's average daily net assets attributable to Class B and Class C
shares. MFD will pay to securities dealers that enter into a sales agreement
with MFD all or a portion of the service fee attributable to Class B and Class C
shares, and will pay to such securities dealers all of the distribution fee
attributable to Class C shares. The service fee is intended to be additional
consideration for services rendered by the dealer with respect to Class B and
Class C shares. MFD retains the service fee for accounts not attributable to a
securities dealer, which amounted to $15,898 and $2,463 for Class B and Class C
shares, respectively, for the year ended April 30, 1996. Fees incurred under the
distribution plans during the year ended April 30, 1996 were 1.00% of average
daily net assets attributable to Class B and Class C shares on an annualized
basis.
Purchases of over $1 million into Class A shares and certain purchases into
retirement plans are subject to a contingent deferred sales charge in the event
of a shareholder redemption within twelve months following such purchase. A
contingent deferred sales charge is imposed on shareholder redemptions of Class
B shares in the event of a shareholder redemption within six years of purchase.
A contingent deferred sales charge is imposed on shareholder redemptions of
Class C shares in the event of a shareholder redemption within twelve months of
purchase made on or after April 30, 1996. MFD receives all contingent deferred
sales charges. Contingent deferred sales charges imposed
23
<PAGE>
NOTES TO FINANCIAL STATEMENTS - continued
during the year ended April 30, 1996 were $4,707, $217,113 and $7 for Class A,
Class B and Class C shares, respectively.
Shareholder Servicing Agent - MFSC, a wholly owned subsidiary of MFS, earns a
fee for its services as shareholder servicing agent. The fee is calculated as a
percentage of the average daily net assets of each class of shares at an
effective annual rate of up to 0.15%, up to 0.22%, and up to 0.15% attributable
to Class A, Class B, and Class C shares, respectively.
(4) Portfolio Securities
Purchases and sales of investments, other than purchased option transactions and
short-term obligations, were as follows:
Purchases Sales
================================================================================
U.S. government securities $1,103,103,221 $1,172,919,642
-------------- --------------
Investments (non-U.S. government securities) $1,333,241,878 $1,123,569,652
-------------- --------------
The cost and unrealized appreciation or depreciation in value of the investments
owned by the Fund, as computed on a federal income tax basis, are as follows:
Aggregate cost $ 639,823,909
=============
Gross unrealized depreciation $ (17,706,135)
Gross unrealized appreciation 3,713,461
-------------
Net unrealized depreciation $ (13,992,674)
=============
(5) Shares of Beneficial Interest
The Fund's Declaration of Trust permits the Trustees to issue an unlimited
number of full and fractional shares of beneficial interest (without par value).
Transactions in Fund shares were as follows:
<TABLE>
<CAPTION>
Class A Shares
Year Ended April 30, 1996 1995
------------------------------ ----------------------------
Shares Amount Shares Amount
=======================================================================================================
<S> <C> <C> <C> <C>
Shares sold 13,392,544 $ 177,853,643 7,570,354 $ 93,377,941
Shares issued to shareholders
in reinvestment of distributions 1,990,650 26,407,792 1,937,817 23,874,476
Shares reacquired (12,850,236) (170,615,920) (7,998,695) (98,722,760)
----------- ------------ ---------- -----------
Net increase 2,532,958 $ 33,645,515 1,509,476 $ 18,529,657
----------- ------------ ---------- -----------
</TABLE>
<TABLE>
<CAPTION>
Class B Shares
Year Ended April 30, 1996 1995
------------------------------ ----------------------------
Shares Amount Shares Amount
=======================================================================================================
<S> <C> <C> <C> <C>
Shares sold 10,686,248 $ 141,536,278 4,205,737 $ 51,952,884
Shares issued to shareholders
in reinvestment of distributions 278,128 3,686,196 147,546 1,814,601
Shares reacquired (8,868,575) (117,295,920) (1,029,710) (12,650,424)
---------- ------------- --------- ------------
Net increase 2,095,801 $ 27,926,554 3,323,573 $ 41,117,061
---------- ------------- --------- ------------
</TABLE>
24
<PAGE>
NOTES TO FINANCIAL STATEMENTS - continued
<TABLE>
<CAPTION>
Class C Shares
Year Ended April 30, 1996 1995
------------------------------ ----------------------------
Shares Amount Shares Amount
=======================================================================================================
<S> <C> <C> <C> <C>
Shares sold 1,964,041 $ 26,084,822 835,445 $ 10,303,412
Shares issued to shareholders in
reinvestment of distributions 45,429 604,194 23,176 285,600
Shares reacquired (1,299,139) (17,206,966) (813,659) (10,083,717)
----------- ------------- ---------- ------------
Net increase 710,331 $ 9,482,050 44,962 $ 505,295
---------- ------------- --------- ------------
</TABLE>
(6) Line of Credit
The Fund entered into an agreement which enables it to participate with other
funds managed by MFS in an unsecured line of credit with a bank which permits
borrowings up to $350 million, collectively. Borrowings may be made to
temporarily finance the repurchase of Fund shares. Interest is charged to each
fund, based on its borrowings, at a rate equal to the bank's base rate. In
addition, a commitment fee, based on the average daily unused portion of the
line of credit, is allocated among the participating funds at the end of each
quarter. The commitment fee allocated to the Fund for the year ended April 30,
1996 was $7,683.
(7) Financial Instruments
The Fund trades financial instruments with off-balance sheet risk in the normal
course of its investing activities in order to manage exposure to market risks
such as interest rates and foreign currency exchange rates. These financial
instruments include written options, forward foreign currency exchange contracts
and futures contracts. The notional or contractual amounts of these instruments
represent the investment the Fund has in particular classes of financial
instruments and does not necessarily represent the amounts potentially subject
to risk. The measurement of the risks associated with these instruments is
meaningful only when all related and offsetting transactions are considered. A
summary of obligations under these financial instruments at April 30, 1996, is
as follows:
25
<PAGE>
NOTES TO FINANCIAL STATEMENTS - continued
<TABLE>
<CAPTION>
Written Option Transactions 1996 Calls 1996 Puts
------------------------------ ------------------------------
Principal Amounts Principal Amounts
of Contracts of Contracts
(000 Omitted) Premiums (000 Omitted) Premiums
=====================================================================================================
<S> <C> <C> <C> <C>
Outstanding, beginning of period -
British Pounds 1,016 $ 17,524 947 $ 17,524
German Marks 2,259 15,668 -- --
German Marks/British Pounds 1,678 10,900 -- --
Japanese Yen 479,624 182,108 258,736 35,489
Options written -
Japanese Yen 387,000 158,991 827,000 123,131
Options terminated in closing transactions -
British Pounds (1,016) -- --
German Marks/British Pounds (1,678) -- --
Japanese Yen (866,624) (341,099) (1,085,736) (158,620)
Options expired -
British Pounds -- -- (947) (17,524)
German Marks (2,259) -- --
-------- --------- ---------- ---------
Outstanding, end of period -- $ -- -- $ --
-------- --------- ---------- ---------
</TABLE>
At April 30, 1996, the Fund had no outstanding written options transactions.
<TABLE>
<CAPTION>
Forward Foreign Currency Exchange Contracts
In Net Unrealized
Contracts to Exchange Contracts Appreciation
Settlement Date Deliver/Receive for at Value (Depreciation)
==================================================================================================
<S> <C> <C> <C> <C> <C>
Sales 5/07/96 - 5/20/96 AUD 5,821,592 $ 4,508,666 $ 4,571,268 $ (62,602)
5/31/96 CAD 51,367,388 37,737,118 37,744,420 (7,302)
5/15/96 - 5/31/96 DEM 13,385,875 8,940,810 8,749,805 191,005
5/31/96 DKK 24,805,633 4,359,514 4,205,824 153,690
5/28/96 ESP 361,745,362 2,902,739 2,839,755 62,984
5/06/96 ITL 11,319,148,466 7,188,780 7,232,697 (43,917)
5/20/96 NZD 2,165,145 1,485,289 1,486,372 (1,083)
5/02/96 - 8/02/96 SEK 9,735,747 1,438,215 1,432,846 5,369
----------- ------------ ---------
$68,561,131 $ 68,262,987 $ 298,144
=========== ============ =========
Purchases 5/20/96 AUD 6,188,237 $ 4,875,507 $ 4,859,168 $ (16,339)
5/15/96 CZK 136,481,150 5,000,000 4,903,575 (96,425)
5/06/96 - 5/31/96 ITL 17,340,578,900 11,055,540 11,077,026 21,486
5/31/96 JPY 1,194,411 11,514 11,439 (75)
5/07/96 NZD 2,165,145 1,487,563 1,486,372 (1,191)
5/02/96 SEK 4,867,873 714,813 717,095 2,282
----------- ------------ ---------
$23,144,937 $ 23,054,675 $ (90,262)
=========== ============ =========
</TABLE>
Forward foreign currency purchases and sales under master netting arrangements
and closed forward foreign currency exchange contracts excluded above amounted
to a net payable of $91,131 at April 30, 1996.
At April 30, 1996, the Fund had sufficient cash and/or securities to cover any
commitments under these contracts.
26
<PAGE>
NOTES TO FINANCIAL STATEMENTS - continued
Futures Contracts Unrealized
Appreciation/
Expiration Contracts Position (Depreciation)
================================================================================
June 1996 118 Treasury Notes Long $ (334,791)
June 1996 516 Treasury Notes Short 856,199
June 1996 250 Treasury Bonds Short 1,434,170
-----------
$ 1,955,578
At April 30, 1996, the Fund had sufficient cash and/or securities to cover
margin requirements on open futures contracts.
(8) Restricted Securities
The Fund may invest not more than 10% of its net assets in securities which are
subject to legal or contractual restrictions on resale, excluding securities
that are determined by the Board of Trustees to be liquid. At April 30, 1996,
the Fund owned the following restricted securities (constituting 9.34% of net
assets, excluding liquid securities) which may not be publicly sold without
registration under the Securities Act of 1933 (the 1933 Act). The Fund does not
have the right to demand that such securities be registered. The value of these
securities is determined by valuations supplied by a pricing service or brokers
or, if not available, in good faith by or at the direction of the Trustees.
Certain of these securities may be offered and sold to "qualified institutional
buyers" under Rule 144A of the 1933 Act.
<TABLE>
<CAPTION>
Date of
Description Acquisition Par Amount Cost Value
================================================================================================================
<S> <C> <C> <C> <C>
Arkwright CSN Trust, 9.625s, 2006 4/17/96 $3,000,000 $2,999,040 $ 3,016,860
Continental Cablevision, 8.3s, 2006 4/03/96 5,000,000 5,249,050 5,112,500
Empresa Electric del Norte, 7.75s, 2006 3/22/96 1,150,000 1,143,687 1,131,313
Financiara Ener National-Colombia, 6.625s, 1996 3/22/95 3,040,000 2,996,029 3,040,000
Goldman Sachs Group L.P., 6.25s, 2003 1/03/96 1,375,000 1,371,384 1,280,469
Goldman Sachs Group L.P., 7.25s, 2005 9/22/95 1,500,000 1,498,605 1,464,375
Hidroelectrica Alicura, 8.375s, 1999 4/12/94 4,325,000 4,176,652 4,087,125
Jet Equipment Trust, "B", 8.64s, 2012 02/02/96 2,090,535 2,377,524 2,228,636
Jet Equipment Trust, "C", 10.69s, 2015 4/07/95 2,390,000 2,390,000 2,663,822
Jet Equipment Trust, "D", 11.44s, 2014 02/09/96 3,500,000 4,051,635 3,802,330
Mark IV Industries, Inc., 7.75s, 2006 3/05/96 6,000,000 5,961,600 5,790,000
Merrill Lynch Mortgage Investors, Inc., 10.25s, 2009 4/07/92 701,679 721,852 707,159
Merrill Lynch Mortgage Investors, Inc., 8.063s, 2022 6/22/94 2,000,000 1,386,250 1,485,625
Metropolitan Life Insurance Co., 7.7s, 2015 11/08/95 3,000,000 2,989,560 2,872,044
Nationwide Mutual Insurance Co.,
7.5s, 2024 3/28/96 - 4/10/96 6,440,000 5,847,209 5,805,724
Owens Corning Fiberglass Corp. (Toledo),
9.9s, 2015 3/07/95 1,500,000 1,500,000 1,631,250
Pacificorp Holdings, Inc., 7.2s, 2006 3/28/96 4,820,000 4,792,912 4,723,600
Prudential Insurance Co., 7.65s, 2007 4/17/96 6,575,000 6,578,748 6,510,171
Qantas Airways Ltd., 7.5s, 2003* 6/24/93 5,000,000 4,961,000 5,010,300
Santander Financial Issuances, 7s, 2006 3/29/96 2,000,000 1,985,160 1,943,080
-----------
$64,306,383
===========
</TABLE>
*Liquid security.
27
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Trustees of MFS Series Trust IX and Shareholders of MFS Bond Fund:
We have audited the accompanying statement of assets and liabilities, including
the portfolio of investments, of MFS Bond Fund (one of the series constituting
MFS Series Trust IX) as of April 30, 1996, the related statement of operations
for the year then ended, the statement of changes in net assets for the years
ended April 30, 1996 and 1995, and the financial highlights for each of the
years in the ten-year period ended April 30, 1996. These financial statements
and financial highlights are the responsibility of the Fund's management. Our
responsibility is to express an opinion on these financial statements and
financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of the securities owned at
April 30, 1996 by correspondence with the custodian and brokers; where replies
were not received from brokers, we performed other auditing procedures. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of MFS Bond Fund at
April 30, 1996, the results of its operations, the changes in its net assets,
and its financial highlights for the respective stated periods in conformity
with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Boston, Massachusetts
June 7, 1996
------------------------------------------------------------
This report is prepared for the general information of shareholders. It is
authorized for distribution to prospective investors only when preceded or
accompanied by a current prospectus.
28
<PAGE>
THE MFS FAMILY OF FUNDS [Registration Mark]
America's Oldest Mutual Fund Group
The members of the MFS Family of Funds are grouped below according to the types
of securities in their portfolios. For free prospectuses containing more
complete information, including the exchange privilege and all charges and
expenses, please contact your financial adviser or call MFS at 1-800-637-2929
any business day from 9 a.m. to 5 p.m. Eastern time (or leave a message
anytime). This material should be read carefully before investing or sending
money.
Stock
================================================================================
Massachusetts Investors Trust
- - --------------------------------------------------------------------------------
Massachusetts Investors Growth Stock Fund
- - --------------------------------------------------------------------------------
MFS [Registration Mark] Capital Growth Fund
- - --------------------------------------------------------------------------------
MFS [Registration Mark] Emerging Growth Fund
- - --------------------------------------------------------------------------------
MFS [Registration Mark] Gold & Natural Resources Fund
- - --------------------------------------------------------------------------------
MFS [Registration Mark] Growth Opportunities Fund
- - --------------------------------------------------------------------------------
MFS [Registration Mark] Managed Sectors Fund
- - --------------------------------------------------------------------------------
MFS [Registration Mark] OTC Fund
- - --------------------------------------------------------------------------------
MFS [Registration Mark] Research Fund
- - --------------------------------------------------------------------------------
MFS [Registration Mark] Value Fund
- - --------------------------------------------------------------------------------
Stock and Bond
================================================================================
MFS [Registration Mark] Total Return Fund
- - --------------------------------------------------------------------------------
MFS [Registration Mark] Utilities Fund
- - --------------------------------------------------------------------------------
Bond
================================================================================
MFS [Registration Mark] Bond Fund
- - --------------------------------------------------------------------------------
MFS [Registration Mark] Government Mortgage Fund
- - --------------------------------------------------------------------------------
MFS [Registration Mark] Government Securities Fund
- - --------------------------------------------------------------------------------
MFS [Registration Mark] High Income Fund
- - --------------------------------------------------------------------------------
MFS [Registration Mark] Intermediate Income Fund
- - --------------------------------------------------------------------------------
MFS [Registration Mark] Strategic Income Fund
- - --------------------------------------------------------------------------------
Limited Maturity Bond
================================================================================
MFS [Registration Mark] Government Limited Maturity Fund
- - --------------------------------------------------------------------------------
MFS [Registration Mark] Limited Maturity Fund
- - --------------------------------------------------------------------------------
MFS [Registration Mark] Municipal Limited Maturity Fund
- - --------------------------------------------------------------------------------
World
================================================================================
MFS [Registration Mark]/Foreign & Colonial Emerging Markets Equity Fund
- - --------------------------------------------------------------------------------
MFS [Registration Mark]/Foreign & Colonial International Growth Fund
- - --------------------------------------------------------------------------------
MFS [Registration Mark]/Foreign & Colonial International Growth and Income Fund
- - --------------------------------------------------------------------------------
MFS [Registration Mark] World Asset Allocation Fund [Service Mark]
- - --------------------------------------------------------------------------------
MFS [Registration Mark] World Equity Fund
- - --------------------------------------------------------------------------------
MFS [Registration Mark] World Governments Fund
- - --------------------------------------------------------------------------------
MFS [Registration Mark] World Growth Fund
- - --------------------------------------------------------------------------------
MFS [Registration Mark] World Total Return Fund
- - --------------------------------------------------------------------------------
National Tax-Free Bond
================================================================================
MFS [Registration Mark] Municipal Bond Fund
- - --------------------------------------------------------------------------------
MFS [Registration Mark] Municipal High Income Fund
(closed to new investors)
- - --------------------------------------------------------------------------------
MFS [Registration Mark] Municipal Income Fund
- - --------------------------------------------------------------------------------
State Tax-Free Bond
================================================================================
Alabama, Arkansas, California, Florida, Georgia, Maryland, Massachusetts,
Mississippi, New York, North Carolina, Pennsylvania, South Carolina, Tennessee,
Virginia, West Virginia
- - --------------------------------------------------------------------------------
Money Market
================================================================================
MFS [Registration Mark] Cash Reserve Fund
- - --------------------------------------------------------------------------------
MFS [Registration Mark] Government Money Market Fund
- - --------------------------------------------------------------------------------
MFS [Registration Mark] Money Market Fund
- - --------------------------------------------------------------------------------
<PAGE>
MFS [Register Mark] BOND FUND [Dalbar Logo] BULK RATE
500 Boylston Street U.S. POSTAGE
Boston, MA 02116 PAID
PERMIT #55638
[MFS Logo] BOSTON, MA
The First Name in Mutual Funds
MFB-3 6/96 50M 11/211/311
<PAGE>
<PAGE>
MFS LIMITED MATURITY FUND
SUPPLEMENT TO THE SEPTEMBER 1, 1996 PROSPECTUS AND
STATEMENT OF ADDITIONAL INFORMATION
THE FOLLOWING INFORMATION SHOULD BE READ IN CONJUNCTION WITH THE FUND'S
PROSPECTUS AND STATEMENT OF ADDITIONAL INFORMATION ("SAI"), DATED SEPTEMBER 1,
1996, AND CONTAINS A DESCRIPTION OF CLASS P SHARES.
CLASS P SHARES ARE AVAILABLE FOR PURCHASE ONLY BY CERTAIN RETIREMENT
PLANS ESTABLISHED FOR THE BENEFIT OF EMPLOYEES OF MASSACHUSETTS FINANCIAL
SERVICES COMPANY ("MFS"), THE FUND'S INVESTMENT ADVISER, AND EMPLOYEES OF MFS'
AFFILIATES ("MFS RETIREMENT PLANS"). CLASS P SHARES MAY NOT BE OFFERED OR SOLD
OUTSIDE OF THE COMMONWEALTH OF MASSACHUSETTS, AND THIS SUPPLEMENT DOES NOT
CONSTITUTE AN OFFER OF CLASS P SHARES TO ANY PERSON WHO RESIDES OUTSIDE OF THE
COMMONWEALTH OF MASSACHUSETTS.
EXPENSE SUMMARY
SHAREHOLDER TRANSACTION EXPENSES: CLASS P
Maximum Initial Sales Charge Imposed on Purchases of Fund
Shares (as a percentage of offering price)........................ None
Maximum Contingent Deferred Sales Charge (as a percentage
of original purchase price or redemption proceeds, as applicable). None
ANNUAL OPERATING EXPENSES OF THE FUND (AS A PERCENTAGE OF AVERAGE NET ASSETS):
Management Fees..................................................... 0.40%
Rule 12b-1 Fees..................................................... None
Other Expenses(1)(2)................................................ 0.40%
-----
Total Operating Expenses............................................ 0.80%
- - --------
(1) Except for the shareholder servicing agent fee component, "Other Expenses"
is based on Class A expenses incurred during the fiscal year ended April
30, 1996. The shareholder servicing agent fee component of "Other Expenses"
is a predetermined percentage based upon the Fund's net assets attributable
to each class.
(2) The Fund has an expense offset arrangement which reduces the Fund's
custodian fee based upon the amount of cash maintained by the Fund with its
custodian and dividend disbursing agent, and may enter into other such
arrangements and directed brokerage arrangements (which would also have the
effect of reducing the Fund's expenses). Any such fee reductions are not
reflected under "Other Expenses."
EXAMPLE OF EXPENSES
An investor would pay the following dollar amounts of expenses on a
$1,000 investment in the Fund, assuming (a) a 5% annual return and (b)
redemption at the end of each of the time periods indicated (unless otherwise
noted):
PERIOD CLASS P
1 year........................................ $ 8
3 years....................................... 26
The purpose of the expense table above is to assist investors in
understanding the various costs and expenses that a shareholder of the Fund will
bear directly or indirectly. A more complete description of the Fund's
management fee is set forth under the caption "Management of the Fund" in the
Prospectus.
THE "EXAMPLE" SET FORTH ABOVE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST
OR FUTURE EXPENSES OF THE FUND; ACTUAL EXPENSES MAY BE GREATER OR LESS THAN
THOSE SHOWN.
THE FUND
Four classes of shares of the Fund currently are offered for sale,
Class A shares, Class B shares, Class C shares and Class P shares. Class P
shares are available for purchase only by the MFS Retirement Plans and are
described in this Supplement. Class A shares, Class B shares and Class C shares
are described in the Fund's Prospectus and are available for purchase by the
general public.
Class A shares are offered at net asset value plus an initial sales
charge up to a maximum of 2.50% of the offering price (or a contingent deferred
sales charge (a "CDSC") upon redemption of 1.00% during the first year in the
case of purchases of $1 million or more and certain purchases by retirement
plans), and are subject to an annual distribution fee and service fee up to a
maximum of 0.35% per annum. Class B shares are offered at net asset value
without an initial sales charge but are subject to a CDSC upon redemption
(declining from 4.00% during the first year to 0% after six years) and an annual
distribution fee and service fee up to a maximum of 1.00% per annum; Class B
shares will convert to Class A shares approximately eight years after purchase.
Class C shares are offered at net asset value without an initial sales charge
but are subject to a CDSC upon redemption of 1.00% during the first year and an
annual distribution fee and service fee up to a maximum of 1.00% per annum.
Class P shares are offered at net asset value without an initial sales charge or
CDSC and are not subject to a distribution or service fee. Class C and Class P
shares do not convert to any other class of shares of the Fund.
INFORMATION CONCERNING CLASS P SHARES OF THE FUND
As noted above, Class P shares are offered at net asset value without
an initial sales charge or a CDSC and are not subject to a distribution fee or
service fee. Class P shares are offered only to MFS Retirement Plans.
MFS Retirement Plans may exchange Class P shares of the Fund for Class
P shares of any other Fund available for purchase by such Plans at their net
asset value (if available for sale), and may redeem Class P shares of the Fund
at net asset value. Distributions paid by the Fund with respect to Class P
shares generally will be greater than those paid with respect to Class A, Class
B and Class C shares because expenses attributable to Class A, Class B and Class
C shares generally will be higher.
The Adviser has agreed to pay certain expenses of the Fund (except for
the fees paid under the Advisory Agreement) until February 28, 2002 and to pay
the expenses relating to the organization of the Fund, all subject to
reimbursement by the Fund. To accomplish such reimbursement, the Adviser
receives an expense reimbursement fee from the Fund in addition to the
investment advisory fee, computed and paid monthly at a rate of 0.40% per annum
of the average daily net assets of the Fund. The expense reimbursement agreement
terminates for the Fund on the earlier of either (i) the date on which the
payments made thereunder by the Fund equal the prior payment of such
reimbursable expenses by the Adviser or (ii) February 28, 2002. The Adviser may
also terminate the expense reimbursement agreement at any time by written notice
to the Trust.
THE DATE OF THIS SUPPLEMENT IS SEPTEMBER 1, 1996
<PAGE>
PROSPECTUS
September 1, 1996
Class A Shares of
Beneficial Interest
Class B Shares of
MFS(R) LIMITED Beneficial Interest
MATURITY FUND Class C Shares of
(A member of the MFS Family of Funds(R)) Beneficial Interest
- - -------------------------------------------------------------------------------
Page
----
1. Expense Summary ................................................ 2
2. The Fund ....................................................... 3
3. Condensed Financial Information ................................ 4
4. Investment Objectives and Policies ............................. 6
5. Investment Techniques .......................................... 6
6. Additional Risk Factors ........................................ 11
7. Management of the Fund ......................................... 12
8. Information Concerning Shares of the Fund ...................... 13
Purchases .................................................. 13
Exchanges .................................................. 17
Redemptions and Repurchases ................................ 18
Distribution Plans ......................................... 21
Distributions .............................................. 23
Tax Status ................................................. 23
Net Asset Value ............................................ 23
Description of Shares, Voting Rights and Liabilities ....... 24
Performance Information .................................... 24
Expenses ................................................... 25
9. Shareholder Services ........................................... 25
Appendix A ..................................................... A-1
Appendix B ..................................................... B-1
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
MFS LIMITED MATURITY FUND
500 Boylston St., Boston, MA 02116 (617) 954-5000
MFS Limited Maturity Fund (the "Fund") is a diversified series of MFS(R)
Series Trust IX (the "Trust"), an open-end management investment company
presently consisting of three series. The primary investment objective of the
Fund is to provide as high a level of current income as is believed to be
consistent with prudent investment risk. The secondary objective of the Fund
is to protect shareholders' capital. See "Investment Objectives and Policies"
below. The minimum initial investment is generally $1,000 per account (see
"Information Concerning Shares of the Fund -- Purchases") below.
The Fund's investment adviser and distributor are Massachusetts Financial
Services Company ("MFS" or the "Adviser") and MFS Fund Distributors, Inc.
("MFD"), respectively, both of which are located at 500 Boylston Street,
Boston, Massachusetts 02116.
INVESTMENT PRODUCTS ARE NOT INSURED BY THE FDIC OR ANY OTHER GOVERNMENT
AGENCY, AND ARE NOT DEPOSITS OR OTHER OBLIGATIONS OF, OR GUARANTEED BY, ANY
FINANCIAL INSTITUTION. SHARES OF MUTUAL FUNDS ARE SUBJECT TO INVESTMENT RISK,
INCLUDING POSSIBLE LOSS OF THE PRINCIPAL AMOUNT INVESTED, AND WILL FLUCTUATE
IN VALUE. YOU MAY RECEIVE MORE OR LESS THAN YOU PAID WHEN YOU REDEEM YOUR
SHARES.
This Prospectus sets forth concisely the information concerning the Trust and
the Fund that a prospective investor ought to know before investing. The Trust
on behalf of the Fund has filed with the Securities and Exchange Commission
(the "SEC") a Statement of Additional Information, dated September 1, 1996, as
amended or supplemented from time to time (the "SAI"), which contains more
detailed information about the Trust and the Fund and is incorporated into
this Prospectus by reference. See page 26 for a further description of the
information set forth in the SAI. A copy of the SAI may be obtained without
charge by contacting the Shareholder Servicing Agent (see back cover for
address and phone number). The SEC maintains an Internet World Wide Web site
that contains the SAI, materials that are incorporated by reference into this
Prospectus and the SAI, and other information regarding the Fund. This
Prospectus is available on the Adviser's Internet World Wide Web site at
http://www.mfs.com.
INVESTORS SHOULD READ THIS PROSPECTUS AND RETAIN IT FOR FUTURE REFERENCE.
<PAGE>
1. EXPENSE SUMMARY
CLASS A CLASS B CLASS C
------- ------- -------
SHAREHOLDER TRANSACTION EXPENSES:
Maximum Initial Sales Charge Imposed on
Purchases of Fund Shares
(as a percentage of offering price) ..... 2.50% 0.00% 0.00%
Maximum Contingent Deferred Sales Charge
(as a percentage of original purchase price
or redemption proceeds, as applicable) .. See below(1) 4.00% 1.00%
ANNUAL OPERATING EXPENSES (AS A PERCENTAGE OF AVERAGE NET ASSETS):
Management Fees ........................... 0.40% 0.40% 0.40%
Rule 12b-1 Fees ........................... 0.15%(2) 0.95%(3) 1.00%(3)
Other Expenses(6) ......................... 0.40%(4) 0.40%(4) 0.40%(4)
----- ----- -----
Total Operating Expenses(5) ............... 0.95% 1.75% 1.80%
- - ----------
(1) Purchases of $1 million or more and certain retirement plans are not
subject to an initial sales charge; however, a contingent deferred sales
charge ("CDSC") of 1% will be imposed on such purchases in the event of
certain redemption transactions within 12 months following such purchases
(see "Information Concerning Shares of the Fund -- Purchases" below).
(2) The Fund has adopted a Distribution Plan for its Class A shares in
accordance with Rule 12b-1 under the Investment Company Act of 1940, as
amended (the "1940 Act"), which provides that it will pay distribution/
service fees aggregating up to (but not necessarily all of) 0.35% per
annum of the average daily net assets attributable to Class A shares (see
"Information Concerning Shares of the Fund -- Distribution Plans" below).
Payment of the 0.10% per annum Class A distribution fee will commence on
such date as the Trustees of the Trust may determine. Service fee payments
in the amount of 0.15% of the average daily net assets of the Fund
attributable to Class A shares are currently being paid by the Fund;
payment of the remaining portion of the Class A service fee, equal to
0.10% per annum, will become payable on such date as the Trustees of the
Trust may determine. Distribution expenses paid under this Plan, together
with the initial sales charge, may cause long-term shareholders to pay
more than the maximum sales charge that would have been permissible if
imposed entirely as an initial sales charge.
(3) The Fund has adopted separate Distribution Plans for its Class B and its
Class C shares in accordance with Rule 12b-1 under the 1940 Act, which
provide that it will pay distribution/service fees aggregating up to (but
not necessarily all of) 1.00% per annum of the average daily net assets
attributable to the Class B shares under the Class B Distribution Plan and
the Class C shares under the Class C Distribution Plan (see "Information
Concerning Shares of the Fund -- Distribution Plans" below). 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, the Class B service fee is currently set at 0.15%
per annum and may be increased to a maximum of 0.25% per annum on such
date as the Trustees of the Trust may determine. Distribution expenses
paid under these Plans, together with any CDSC payable upon redemption of
Class B shares, may cause long-term shareholders to pay more than the
maximum sales charge that would have been permissible if imposed entirely
as an initial sales charge.
(4) MFS has voluntarily agreed to pay the Fund's operating expenses, exclusive
of distribution and management fees, such that aggregate operating
expenses of the Fund's Class A, Class B and Class C shares do not exceed
0.40% per annum of its average daily net assets. Absent this expense
arrangement, "Other Expenses" would have been 0.42% for Class B shares.
See "Information Concerning Shares of the Fund -- Expenses" below.
(5) Absent a reduction in the Fund's expense reimbursement arrangements
described above, "Total Operating Expenses" for Class B shares would have
been 1.77% of average daily net assets.
(6) 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>
EXAMPLE OF EXPENSES
-------------------
An investor would pay the following dollar amounts of expenses on a $1,000
investment in the Fund, assuming (a) 5% annual return and (b) redemption at
the end of each of the time periods indicated (unless otherwise noted):
PERIOD CLASS A CLASS B CLASS C
- - ------ ------- ------------------ ------------------
(1) (1)
1 year ................ $ 57 $ 58 $ 18 $ 28 $ 18
3 years ............... 76 85 55 57 57
5 years ............... 98 115 95 97 97
10 years ............... 159 185(2) 185(2) 212 212
- - ----------
(1) Assumes no redemption.
(2) Class B shares convert to Class A shares approximately eight years after
purchase; therefore, years nine and ten reflect Class A expenses.
The purpose of the expense table above is to assist investors in understanding
the various costs and expenses that a shareholder of the Fund will bear
directly or indirectly. More complete descriptions of the following expenses
are set forth in the following sections of the Prospectus: (i) varying sales
charges on share purchases -- "Purchases"; (ii) varying CDSCs -- "Purchases";
(iii) management fees -- "Management of the Fund"; and (iv) Rule 12b-1 (i.e.,
distribution plan) fees -- "Distribution Plans."
THE ABOVE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES OF THE FUND; ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.
2. THE FUND
The Fund is a diversified series of the Trust, an open-end, management
investment company which was organized as a trust under the laws of The
Commonwealth of Massachusetts in 1985. The Trust presently consists of three
series, each of which represents a portfolio with separate investment
policies. Shares of the Fund are continuously sold to the public and the Fund
uses the proceeds to buy securities for its portfolio. Three classes of shares
of the Fund currently are offered for sale to the general public. Class A
shares are offered at net asset value plus an initial sales charge up to a
maximum of 2.50% of the offering price (or a CDSC upon redemption of 1.00%
during the first year in the case of purchases of $1 million or more and
certain purchases by retirement plans) and subject to an annual distribution
and service fee up to a maximum of 0.35% per annum. Class B shares are offered
at net asset value without an initial sales charge but subject to a CDSC upon
redemption (declining from 4.00% during the first year to 0% after six years)
and an annual distribution fee and service fee up to a maximum of 1.00% per
annum. Class B shares will convert to Class A shares approximately eight years
after purchase. Class C shares are offered at net asset value without an
initial sales charge but subject to an annual distribution fee and service fee
up to a maximum of 1.00% per annum. Class C shares do not convert to any other
class of shares of the Fund.
The Trust's Board of Trustees provides broad supervision over the affairs of
the Fund. The Adviser is responsible for the management of the Fund's assets
and the officers of the Trust are responsible for the Fund's operations. The
Adviser manages the portfolio from day to day in accordance with the Fund's
investment objectives and policies. A majority of the Trustees are not
affiliated with the Adviser. The selection of investments and the way they are
managed depend on the conditions and trends in the economy and the financial
marketplaces. The Fund also offers to buy back (redeem) its shares from its
shareholders at any time at net asset value, less any applicable CDSC.
<PAGE>
3. CONDENSED FINANCIAL INFORMATION
The following information has been audited since inception of the Fund and
should be read in conjunction with the financial statements included in the
Fund's Annual Report to shareholders which are incorporated by reference into
the SAI in reliance upon the report of the Fund's independent auditors, given
upon their authority as experts in accounting and auditing. The Fund's current
independent auditors are Deloitte & Touche, LLP.
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS
CLASS A
--------------------------------------------------
YEAR ENDED APRIL 30,
--------------------------------------------------
1996 1995 1994 1993 1992<F1>
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
PER SHARE DATA (FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD):
Net asset value --
beginning of period . $ 7.10 $ 7.14 $ 7.46 $ 7.29 $ 7.31
------ ------ ------ ------ ------
Income from investment operations<F3><F8> --
Net investment
income .......... $ 0.48 $ 0.46 $ 0.44 $ 0.48 $ 0.08
Net realized and
unrealized gain
(loss) on
investments ...... 0.03 (0.04) (0.32) 0.17II (0.02)<F5>
------ ------ ------ ------ ------
Total from
investment
operations .... $ 0.51 $ 0.42 $ 0.12 $ 0.65 $ 0.06
------ ------ ------ ------ ------
Less distributions
declared to
shareholders<F7><F7>
From net investment
income .......... $(0.48) $(0.46) $(0.42) $(0.48) $(0.08)
In excess of net
investment income (0.01) -- (0.02) -- --
------ ------ ------ ------ ------
Total
distributions
declared to
shareholders .. $(0.49) $(0.46 ) $(0.44) $(0.48) $(0.08)
------ ------ ------ ------ ------
Net asset value --
end of period ..... $ 7.12 $ 7.10 $ 7.14 $ 7.46 $ 7.29
====== ====== ====== ====== ======
TOTAL RETURN<F6> ... 7.50% 6.09% 1.61% 9.17% 4.98%<F2>
RATIOS (TO AVERAGE NET ASSETS)/SUPPLEMENTAL DATA<F8>:
Expenses<F4>...... 0.95% 0.95% 0.85% 0.60% 0.55%<F2>
Net investment
income .......... 6.73% 6.54% 5.99% 6.40% 6.22%<F2>
PORTFOLIO TURNOVER . 385% 498% 861% 472% 72%
NET ASSETS AT END OF
PERIOD (000 OMITTED) $98,582 $85,773 $100,297 $67,470 $4,924
<FN>
- - ----------
<F1>For the period from the commencement of investment operations,
February 26, 1992 to April 30, 1992.
<F2>Annualized.
<F3>Per share data for the periods subsequent to April 30, 1994 is based on
average shares outstanding.
<F4>For periods ending after September 1, 1995, the Fund's expenses are
calculated without reduction for fees paid indirectly.
<F5>The per share amount is not in accord with the net realized and unrealized
gain (loss) for the period because of the timing of sales of Fund shares
and the amount of per share realized and unrealized gains and losses at
such time.
<F6>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.
<F7>For the year ended April 30, 1993, the per share distribution from net
realized gain on investments was $0.0021.
<F8>The investment adviser did not impose all or a portion of its management
fee and/or assumed some of the operating expenses of the Fund for certain
of the periods indicated. If these fees and expenses had been incurred by
the Fund and if the expense reimbursement agreement had not been in effect,
the net investment income per share and the ratios would have been:
</FN>
Net investment
income ....... $ 0.48 $ 0.46 $ 0.42 $ 0.43 $ 0.07
RATIOS (TO AVERAGE NET ASSETS):
Expenses .... 0.91% 0.97% 1.07% 1.29% 1.44%<F2>
Net investment
income ..... 6.77% 6.52% 5.77% 5.70% 5.33%<F2>
<PAGE>
<CAPTION>
FINANCIAL HIGHLIGHTS -- CONTINUED
CLASS B CLASS C
---------------------------- ----------------
YEAR ENDED APRIL 30,
-------------------------------------------------
1996 1995 1994<F1> 1996 1995<F2>
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
PER SHARE DATA (FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD):
Net asset value --
beginning of period .... $ 7.10 $ 7.14 $ 7.50 $ 7.11 $ 7.08
------ ------ -------- ------- ------
Income from investment operations<F5><F7> --
Net investment
income ............... $ 0.42 $ 0.41 $ 0.21 $ 0.41 $ 0.37
Net realized and
unrealized gain (loss)
on investments ....... 0.03 (0.05) (0.33) 0.04 (0.01)
------ ------ -------- ------- ------
Total from
investment
operations ......... $ 0.45 $ 0.36 $ (0.12) $ 0.45 $ 0.36
------ ------ -------- ------- ------
Less distributions declared
to shareholders --
From net investment
income ............... $(0.42) $(0.40) $ (0.23) $ (0.41) $(0.33)
In excess of net
investment income .... (0.02) -- (0.01) (0.02) --
------ ------ -------- ------- ------
Total distributions
declared to
shareholders ....... $(0.44) $(0.40) $ (0.24) $ (0.43) $(0.33)
------ ------ -------- ------- ------
Net asset value -- end
of period .............. $ 7.11 $ 7.10 $ 7.14 $ 7.13 $ 7.11
====== ====== ======== ======= ======
TOTAL RETURN ......... 6.52% 5.20% (1.69)%<F4> 6.44% 5.25%<F4>
RATIOS (TO AVERAGE NET ASSETS)/SUPPLEMENTAL DATA<F7>:
Expenses<F6>........ 1.75% 1.81% 1.74%<F3> 1.80% 1.85%<F3>
Net investment
income ............ 5.90% 5.73% 4.90%<F3> 5.76% 6.01%<F3>
PORTFOLIO TURNOVER ... 385% 498% 861% 385% 498%
NET ASSETS AT END OF
PERIOD (000 OMITTED). $26,464 $17,334 $12,072 $13,482 $4,450
<FN>
- - ----------
<F1>For the period from the commencement of offering of Class B shares,
September 7, 1993 to April 30, 1994.
<F2>For the period from the commencement of offering of Class C shares,
July 1, 1994 to April 30, 1995.
<F3>Annualized.
<F4>Not annualized.
<F5>Per share data for the periods subsequent to April 30, 1994 is based on
average shares outstanding.
<F6>For periods ending after September 1, 1995, the Fund's expenses are
calculated without reduction for fees paid indirectly.
<F7>The investment adviser assumed some of the operating expenses of the Fund
for certain of the periods indicated. If these
fees and expenses had been incurred by the Fund and if the expense
reimbursement agreement had not been in effect, the net
investment income per share and the ratios would have been:
</FN>
Net investment
income ........ $ 0.42 $ 0.41 $ 0.20 $ 0.41 $ 0.37
RATIOS (TO AVERAGE NET ASSETS):
Expenses ...... 1.77% 1.82% 1.96%<F3> 1.75% 1.88%<F3>
Net investment
income ....... 5.88% 5.72% 4.68%<F3> 5.81% 5.98%<F3>
</TABLE>
<PAGE>
4. INVESTMENT OBJECTIVES AND POLICIES
INVESTMENT OBJECTIVES -- The Fund's primary investment objective is to provide
as high a level of current income as is believed to be consistent with prudent
investment risk. The Fund's secondary objective is to protect shareholders'
capital. Any investment involves risk and there can be no assurance that the
Fund will achieve its investment objectives. The Fund's investment objectives
and policies are not fundamental and may be changed without shareholder
approval. A change in the Fund's investment objective may result in the Fund
having an investment objective different from the objective which the
shareholder considered appropriate at the time of investment in the Fund.
INVESTMENT POLICIES -- In seeking to achieve its investment objectives, the
Fund invests, under normal market conditions, substantially all of its assets
in the following securities:
1. Debt securities (including corporate asset-backed securities and
mortgage pass-through securities discussed below) which have a rating
within the four highest grades as determined by Standard & Poor's
Ratings Service ("S&P") (AAA, AA, A or BBB) or by Fitch Investors
Service, Inc. ("Fitch") or Moody's Investors Service, Inc. ("Moody's")
(Aaa, Aa, A or Baa) and comparable unrated securities; for a
description of these rating categories, see Appendix B to this
Prospectus;
2. Debt securities issued or guaranteed by the United States ("U.S.")
Government or its agencies, authorities or instrumentalities ("U.S.
Government Securities"); or
3. Commercial paper, repurchase agreements and cash or cash equivalents
(such as certificates of deposit and bankers' acceptances).
The Fund will only invest in securities rated within the four highest grades,
as determined by S&P, Fitch or Moody's, and comparable unrated securities. In
addition, the dollar weighted average quality of the Fund will be within the
three highest grades, as determined by S&P, Fitch or Moody's (or the Adviser
in the case of unrated securities).
Under normal market conditions, substantially all the securities in the Fund's
portfolio will have remaining maturities of five years or less or estimated
remaining average lives of five years or less. In the case of mortgage-backed
and corporate asset-backed securities as well as collateralized mortgage
obligations, the average life is likely to be substantially shorter than
stated final maturity as a result of unscheduled principal prepayments.
For purposes of the foregoing investment policy, securities having a certain
maturity will be deemed to include securities with an equivalent "duration" of
such securities. "Duration" is a commonly used measure of the longevity of a
debt instrument that takes into account the full stream of payments received
on the instrument, including both interest and principal payments, based on
their present values. A debt instrument's duration is derived by discounting
principal and interest payments to their present value using the instrument's
current yield to maturity and taking the dollar-weighted average time until
those payments will be received. Contractual rights to dispose of a security
will be considered in calculating duration because such rights limit the
period during which the Trust bears a market risk with respect to the
security.
5. INVESTMENT TECHNIQUES
Consistent with the Fund's investment objectives and policies, the Fund may
engage in the following investment techniques, many of which are described
more fully in the SAI. See "Investment Objectives, Policies and Restrictions"
in the SAI.
CORPORATE ASSET-BACKED SECURITIES: The Fund may invest in corporate asset-
backed securities. These securities, issued by trusts and special purpose
corporations, are backed by a pool of assets, such as credit card and
automobile loan receivables, representing the obligations of a number of
different parties.
Corporate asset-backed securities present certain risks. For instance, in the
case of credit card receivables, these securities may not have the benefit of
any security interest in the related collateral. Credit card receivables are
generally unsecured and the debtors are entitled to the protection of a number
of state and federal consumer credit laws, many of which give such debtors the
right to set off certain amounts owed on the credit cards, thereby reducing
the balance due. Most issuers of automobile receivables permit the servicers
to retain possession of the underlying obligations. If the servicer were to
sell these obligations to another party, there is a risk that the purchaser
would acquire an interest superior to that of the holders of the related
automobile receivables. In addition, because of the large number of vehicles
involved in a typical issuance and technical requirements under state laws,
the trustee for the holders of the automobile receivables may not have a
proper security interest in all of the obligations backing such receivables.
Therefore, there is the possibility that recoveries on repossessed collateral
may not, in some cases, be available to support payments on these securities.
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 often 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.
U.S. GOVERNMENT SECURITIES: The U.S. Government Securities in which the Fund
may invest include (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 Government National
Mortgage Association ("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 Federal National Mortgage Association ("FNMA").
U.S. Government Securities also include interest in trusts or other entities
representing interests in obligations that are issued or guaranteed by the
U.S. Government, its agencies, authorities or instrumentalities.
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
prepayments generally increase with falling interest rates and decrease with
rising interest rates. Like other fixed income securities, when interest rates
rise the value of a mortgage pass-through security generally will decline;
however, when interest rates are declining, the value of mortgage pass-through
securities with prepayment features may not increase as much as that of other
fixed-income securities.
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 GNMA); or guaranteed by agencies or instrumentalities of the
U.S. Government (such as the 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.
REPURCHASE AGREEMENTS: The Fund may enter into repurchase agreements in order
to earn income on available cash or as a temporary defensive measure. Under a
repurchase agreement, the Fund acquires securities subject to the seller's
agreement to repurchase at a specified time and price. If the seller becomes
subject to a proceeding under the bankruptcy laws or its assets are otherwise
subject to a stay order, the Fund's right to liquidate the securities may be
restricted (during which time the value of the securities could decline). As
discussed in the SAI, the Fund has adopted certain procedures intended to
minimize risk.
LENDING OF SECURITIES: The Fund may seek to increase its income by lending
portfolio securities. Such loans will usually be made to member firms (and
subsidiaries thereof) of the New York Stock Exchange (the "Exchange") and to
member banks of the Federal Reserve System, and would be required to be
secured continuously by collateral in cash, U.S. Government securities or an
irrevocable letter of credit maintained on a current basis at an amount at
least equal to the market value of the securities loaned. The Fund will
continue to collect the equivalent of interest on the securities loaned and
will also receive either interest (through investment of cash collateral) or a
fee (if the collateral is U.S. government securities or an irrevocable letter
of credit). 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 entities
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.
DOLLAR-DENOMINATED FOREIGN DEBT SECURITIES: The Fund may invest in dollar-
denominated foreign debt securities. Investing in securities of foreign
issuers generally involves risks not ordinarily associated with investing in
securities of domestic issuers. These risks include changes in governmental
administration or economic or monetary policy (in the U.S. or abroad) or
circumstances in dealings between nations. Special considerations may also
include more limited information about foreign issuers and different
accounting standards. Foreign securities markets may also be less subject to
government supervision than in the U.S. Investments in foreign countries could
be affected by other factors including expropriation, confiscatory taxation
and potential difficulties in enforcing contractual obligations.
EMERGING MARKET SECURITIES: Consistent with the Fund's objectives and
policies, the Fund may invest in securities of issuers whose principal
activities are located in emerging market countries. Emerging market countries
include any country determined by the Adviser to have an emerging market
economy, taking into account a number of factors, including whether the
country has a low- to middle-income economy according to the International
Bank for Reconstruction and Development, the country's foreign currency debt
rating, its political and economic stability and the development of its
financial and capital markets. The Adviser determines whether an issuer's
principal activities are located in an emerging market country by considering
such factors as its country of organization, the principal trading market for
its securities and the source of its revenues and assets. The issuer's
principal activities generally are deemed to be located in a particular
country if: (a) the security is issued or guaranteed by the government of that
country or any of its agencies, authorities or instrumentalities; (b) the
issuer is organized under the laws of, and maintains a principal office in,
that country; (c) the issuer has its principal securities trading market in
that country; (d) the issuer derives 50% or more of its total revenues from
goods sold or services performed in that country; or (e) the issuer has 50% or
more of its assets in that country.
BRADY BONDS: The Fund may invest in Brady Bonds, which are securities created
through the exchange of existing commercial bank loans to public and private
entities in certain emerging markets for new bonds in connection with debt
restructurings under a debt restructuring plan introduced by former U.S.
Secretary of the Treasury, Nicholas F. Brady (the "Brady Plan"). Brady Plan
debt restructurings have been implemented to date in Argentina, Brazil,
Bulgaria, Costa Rica, Dominican Republic, Ecuador, Mexico, Jordan, Nigeria,
Panama, the Philippines, Poland, Uruguay and Venezuela. Brady Bonds have been
issued only recently, and for that reason do not have a long payment history.
Brady Bonds may be collateralized or uncollateralized, are issued in various
currencies (but primarily the U.S. dollar) and are actively traded in over-
the-counter secondary markets. U.S. dollar-denominated, collateralized Brady
Bonds, which may be fixed rate bonds or floating-rate bonds, are generally
collateralized in full as to principal by U.S. Treasury zero coupon bonds
having the same maturity as the bonds. Brady Bonds are often viewed as having
three or four valuation components: the collateralized repayment of principal
at final maturity; the collateralized interest payments; the uncollateralized
interest payments; and any uncollateralized repayment of principal at maturity
(these uncollateralized amounts constituting the "residual risk"). In light of
the residual risk of Brady Bonds and the history of defaults of countries
issuing Brady Bonds with respect to commercial bank loans by public and
private entities, investments in Brady Bonds may be viewed as speculative.
ZERO COUPON BONDS: Fixed income securities in which the Fund may invest also
include zero coupon bonds. Zero coupon bonds are debt obligations which are
issued or purchased at a significant discount from face value. The discount
approximates the total amount of interest the bonds will accrue and compound
over the period until maturity, at a rate of interest reflecting the market
rate of the security at the time of issuance. Zero coupon bonds do not require
the periodic payment of interest. Such investments may experience greater
volatility in market value due to changes in interest rates than debt
obligations which make regular payments of interest.
MORTGAGE "DOLLAR ROLL" TRANSACTIONS: The Fund may enter into mortgage "dollar
roll" transactions with selected banks and broker-dealers pursuant to which
the Fund sells mortgage-backed securities for delivery in the future
(generally within 30 days) and simultaneously contracts to repurchase
substantially similar (same type, coupon and maturity) securities on a
specified future date. The Fund will only enter into covered rolls. A "covered
roll" is a specific type of dollar roll for which there is an offsetting cash
position or a cash equivalent security position which matures on or before the
forward settlement date of the dollar roll transaction.
COLLATERALIZED MORTGAGE OBLIGATIONS AND MULTICLASS PASS-THROUGH SECURITIES:
The Fund may invest a portion of its assets in collateralized mortgage
obligations or "CMOs", which are debt obligations collateralized by mortgage
loans or mortgage pass-through securities. Typically, CMOs are collateralized
by certificates issued by GNMA, FNMA or FHLMC, but also may be collateralized
by whole loans or private mortgage pass-through securities (such collateral
collectively referred to as "Mortgage Assets"). The Fund may also invest a
portion of its assets in multiclass pass-through securities which are
interests in a trust composed of Mortgage Assets. CMOs (which include
multiclass pass-through securities) may be issued by agencies or
instrumentalities of the U.S. Government or by private originators of, or
investors in, mortgage loans, including savings and loan associations,
mortgage banks, commercial banks, investment banks and special purpose
subsidiaries of the foregoing. Payments of principal of and interest on the
Mortgage Assets, and any reinvestment income thereon, provide the funds to pay
debt service on the CMOs or make scheduled distributions on the multiclass
pass-through securities. In a CMO, a series of bonds or certificates are
usually issued in multiple classes with different maturities. Each class of
CMOs, often referred to as a "tranche", is issued at a specific fixed or
floating coupon rate and has a stated maturity or final distribution date.
Principal prepayments on the Mortgage Assets may cause the CMOs to be retired
substantially earlier than their stated maturities or final distribution
dates, resulting in a loss of all or part of the premium if any has been paid.
Certain classes of CMOs have priority over others with respect to the receipt
of prepayments on the mortgages. Therefore, depending on the type of CMOs in
which the Fund invests, the investment may be subject to a greater or lesser
risk of prepayment than other types of mortgage-related securities.
The Fund may also invest in parallel pay CMOs and Planned Amortization Class
CMOs ("PAC Bonds"). Parallel pay CMOs are structured to provide payments of
principal on each payment date to more than one class. PAC Bonds generally
require payments of a specified amount of principal on each payment date. PAC
Bonds are always parallel pay CMOs with the required principal payment on such
securities having the highest priority after interest has been paid to all
classes.
"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, the Fund will normally invest in cash,
cash equivalents and high grade debt securities.
INDEXED SECURITIES: The Fund may invest in indexed securities whose value is
linked to foreign currencies, interest rates, commodities, indices or other
financial indicators. Most indexed securities are short to intermediate term
fixed-income securities whose values at maturity (i.e., principal value) or
interest rates rise or fall according to the change in one or more specified
underlying instruments. Indexed securities may be positively or negatively
indexed (i.e., their principal value or interest rates may increase or
decrease if the underlying instrument appreciates), and may have return
characteristics similar to direct investments in the underlying instrument or
to one or more options on the underlying instrument. Indexed securities may be
more volatile than the underlying instrument itself.
FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS: The Fund may purchase and
sell futures contracts on fixed income securities or indices of such
securities, including municipal bond indices and any other indices of fixed
income securities which may become available for trading ("Futures
Contracts"). The Fund may also purchase and write options on such Futures
Contracts ("Options on Futures Contracts"). These instruments will be used to
hedge against anticipated future changes in interest rates which otherwise
might either adversely affect the value of the Fund's portfolio securities or
adversely affect the prices of securities which the Fund intends to purchase
at a later date. Such transactions may also be used for non-hedging purposes
to the extent permitted by applicable law. Should interest rates move in an
unexpected manner, the Fund may not achieve the anticipated benefits of the
hedging transactions and may realize a loss.
The Fund has adopted the additional restriction that it will not enter into a
Futures Contract if, immediately thereafter, the value of securities and other
obligations underlying all such Futures Contracts would exceed 50% of the
value of the Fund's total assets. Moreover, the Fund will not purchase Options
on Futures Contracts, if as a result, more than 5% of its total assets would
be so invested. Futures Contracts and Options on Futures Contracts that are
entered into by the Fund may be traded on U.S. and foreign exchanges.
Although the Fund will enter into certain transactions in Futures Contracts,
for hedging purposes, such transactions nevertheless involve risks. For
example, a lack of correlation between the instrument underlying a Futures
Contract and the assets being hedged, or unexpected adverse price movements,
could render the Fund's hedging strategy unsuccessful and could result in
losses. The SAI contains a further description of Futures Contracts including
a discussion of the risks related to transactions therein. Transactions
entered into for non-hedging purposes involve greater risks and could result
in losses which are not offset by gains on other portfolio assets.
RESTRICTED SECURITIES: The Fund may also 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"). The Trust's Board of Trustees determines, based upon a
continuing review of the trading markets for a specific 144A security, whether
such security is liquid and thus not subject to the Fund's limitation on
investing not more than 15% of its net assets in illiquid investments. The
Board of Trustees has adopted guidelines and delegated to MFS the daily
function of determining and monitoring the liquidity of Rule 144A securities.
The Board, however, will retain sufficient oversight and be ultimately
responsible for the determinations. The Board will carefully monitor the
Fund's investments in Rule 144A securities, focusing on such important
factors, among others, as valuation, liquidity and availability of
information. Investing in restricted securities could have the effect of
decreasing the level of liquidity in the Fund to the extent that qualified
institutional buyers become for a time uninterested in purchasing Rule 144A
securities held in the Fund's portfolio. Subject to the Fund's 15% limitation
on investments in illiquid investments, the Fund may also invest in restricted
securities that may not be sold under Rule 144A, which presents certain risks.
As a result, the Fund might not be able to sell these securities when the
Adviser wishes to do so, or might have to sell them at less than fair value.
In addition, market quotations are less readily available. Therefore, judgment
may at times play a greater role in valuing these securities than in the case
of unrestricted securities.
PORTFOLIO TRADING: The Fund intends to engage in portfolio trading rather than
holding portfolio securities to maturity. In trading portfolio securities, the
Fund seeks to take advantage of market developments, yield disparities and
variations in the creditworthiness of issuers. For the fiscal year ended April
30, 1996, the Fund had a portfolio turnover rate of over 100%. Transaction
costs incurred by the Fund and the realized capital gains and losses of the
Fund may be greater than that of a fund with a lesser portfolio turnover rate.
The primary consideration in placing portfolio security transactions with
broker-dealers is to obtain, and maintain the availability of, execution at
the most favorable prices. Consistent with the foregoing primary
consideration, the Rules of Fair Practice of the National Association of
Securities Dealers, Inc. (the "NASD") and such other policies as the Trustees
may determine, the Adviser may consider sales of shares of the Fund and of the
other investment company clients of MFD, as a factor in the selection of
broker-dealers to execute the Fund's portfolio transactions. From time to
time, the Adviser may direct certain portfolio transactions to broker-dealer
firms which, in turn, have agreed to pay a portion of the Fund's operating
expenses (e.g., fees charged by the custodian of the Fund's assets).
------------------------
The SAI includes a discussion of other investment policies and a listing of
specific investment restrictions which govern the Fund's investment policies.
The specific investment restrictions listed in the SAI may be changed without
shareholder approval unless otherwise indicated. (See "Investment
Restrictions" in the SAI). The Fund's limitations, policies and rating
restrictions are adhered to at the time of purchase or utilization of assets;
a subsequent change in circumstances will not be considered to result in a
violation of policy.
6. ADDITIONAL RISK FACTORS
The following discussion of additional risk factors supplements the risk
factors described above. Additional information concerning risk factors can be
found under the caption "Investment Objectives, Policies and Restrictions" in
the SAI.
FIXED INCOME SECURITIES: The net asset value of the shares of an open-end
investment company, such as the Fund, which invests primarily in fixed income
securities, changes with the general level of interest rates. When interest
rates decline, the market value of the portfolio can be expected to rise.
Conversely, when interest rates rise, the market value of the portfolio can be
expected to decline.
FIXED INCOME SECURITIES RATED BBB/BAA: The Fund may invest in fixed income
securities rated Baa by Moody's or BBB by S&P or Fitch and comparable unrated
securities. These securities, while normally exhibiting adequate protection
parameters, have speculative characteristics and changes in economic
conditions or other circumstances are more likely to lead to a weakened
capacity to make principal and interest payments than in the case of higher
grade fixed income securities.
EMERGING MARKET SECURITIES: The risks of investing in foreign securities may
be intensified in the case of investments in emerging markets. Securities of
many issuers in emerging markets may be less liquid and more volatile than
securities of comparable domestic issuers. Emerging markets also have
different clearance and settlement procedures, and in certain markets there
have been times when settlements have been unable to keep pace with the volume
of securities transactions, making it difficult to conduct such transactions.
Delays in settlement could result in temporary periods when a portion of the
assets of the Fund is uninvested and no return is earned thereon. The
inability of the Fund to make intended security purchases due to settlement
problems could cause the Fund to miss attractive investment opportunities.
Inability to dispose of portfolio securities due to settlement problems could
result in losses to the Fund due to subsequent declines in value of the
portfolio security, a decrease in the level of liquidity in the Fund's
portfolio, or, if the Fund has entered into a contract to sell the security,
in possible liability to the purchaser. Certain markets may require payment
for securities before delivery and in such markets, the Fund bears the risk
that the securities will not be delivered and that the Fund's payments will
not be returned. Securities prices in emerging markets can be significantly
more volatile than in the more developed nations of the world, reflecting the
greater uncertainties of investing in less established markets and economies.
In particular, countries with emerging markets may have relatively unstable
governments, present the risk of nationalization of businesses, restrictions
on foreign ownership, or prohibitions of repatriation of assets, and may have
less protection of property rights than more developed countries. The
economies of countries with emerging markets may be predominantly based on
only a few industries, may be highly vulnerable to changes in local or global
trade conditions, and may suffer from extreme and volatile debt burdens or
inflation rates. Local securities markets may trade a small number of
securities and may be unable to respond effectively to increases in trading
volume, potentially making prompt liquidation of substantial holdings
difficult or impossible at times. Securities of issuers located in countries
with emerging markets may have limited marketability and may be subject to
more abrupt or erratic price movements.
Certain emerging markets may require governmental approval for the
repatriation of investment income, capital or the proceeds of sales of
securities by foreign investors. In addition, if a deterioration occurs in an
emerging market's balance of payments or for other reasons, a country could
impose temporary restrictions on foreign capital remittances. The Fund could
be adversely affected by delays in, or a refusal to grant, any required
governmental approval for repatriation of capital, as well as by the
application to the Fund of any restrictions on investments.
Investment in certain foreign emerging market debt obligations may be
restricted or controlled to varying degrees. These restrictions or controls
may at times preclude investment in certain foreign emerging market debt
obligations and increase the expenses of the Fund.
7. MANAGEMENT OF THE FUND
INVESTMENT ADVISER -- MFS manages the Fund pursuant to an Investment Advisory
Agreement, dated January 8, 1992 (the "Advisory Agreement"). The Adviser
provides the Fund with overall investment advisory and administrative
services, as well as general office facilities. Geoffrey L. Kurinsky, a Senior
Vice President of the Adviser, has been the Fund's portfolio manager since the
Fund's inception in 1992 and has been employed as a portfolio manager by the
Adviser since 1987. Subject to such policies as the Trustees may determine,
the Adviser makes investment decisions for the Fund. For its services and
facilities, the Adviser receives a management fee, computed and paid monthly,
at the rate of 0.40% per annum of the Fund's average daily net assets. For the
Fund's fiscal year ended April 30, 1996, MFS received management fees under
the Advisory Agreement of $489,030 (equivalent to 0.40% of the Fund's average
daily net assets).
MFS also serves as investment adviser to each of the other funds in the MFS
Family of Funds (the "MFS Funds") and to MFS Municipal Income Trust, MFS
Multimarket Income Trust, MFS Government Markets Income Trust, MFS
Intermediate Income Trust, MFS Charter Income Trust, MFS Special Value Trust,
MFS Institutional Trust, MFS Union Standard Trust, MFS Variable Insurance
Trust, MFS/Sun Life Series Trust, Sun Growth Variable Annuity Fund, Inc. and
seven variable accounts, each of which is a registered investment company
established by Sun Life Assurance Company of Canada (U.S.) ("Sun Life of
Canada (U.S.)") in connection with the sale of various fixed/variable annuity
contracts. MFS and its wholly owned subsidiary, MFS Asset Management, Inc.,
provide investment advice to substantial private clients.
MFS is America's oldest mutual fund organization. MFS and its predecessor
organizations have a history of money management dating from 1924 and the
founding of the first mutual fund in the United States, Massachusetts
Investors Trust. Net assets under the management of the MFS organization were
approximately $45.9 billion on behalf of approximately 2.1 million accounts as
of July 31, 1996. As of such date, the MFS organization managed approximately
$22.1 billion of assets invested in equity securities and approximately $19.5
billion of assets invested in fixed income securities. Approximately $4.0
billion of the assets managed by MFS are invested in securities of foreign
issuers and non-U.S. dollar denominated securities of U.S. issuers. MFS is a
subsidiary of Sun Life of Canada (U.S.), which in turn is a wholly owned
subsidiary of Sun Life Assurance Company of Canada ("Sun Life"). The Directors
of MFS are A. Keith Brodkin, Jeffrey L. Shames, Arnold D. Scott, John D.
McNeil and John R. Gardner. Mr. Brodkin is the Chairman, Mr. Shames is the
President and Mr. Scott is the Secretary and a Senior Executive Vice President
of MFS. Messrs. McNeil and Gardner are the Chairman and the President,
respectively, of Sun Life. Sun Life, a mutual life insurance company, is one
of the largest international life insurance companies and has been operating
in the United States since 1895, establishing a headquarters office here in
1973. The executive officers of MFS report directly to the Chairman of Sun
Life.
A. Keith Brodkin, the Chairman and a Director of MFS, is the Chairman,
President and Trustee of the Trust. W. Thomas London, Stephen E. Cavan, James
R. Bordewick, Jr., Robert A. Dennis, Geoffrey L. Kurinsky and James O. Yost,
all of whom are officers of MFS, are officers of the Trust.
MFS has established a strategic alliance with Foreign & Colonial Management
Ltd. ("Foreign & Colonial"). Foreign & Colonial is a subsidiary of two of the
world's oldest financial services institutions, the London-based Foreign &
Colonial Investment Trust PLC, which pioneered the idea of investment
management in 1868, and HYPO-BANK (Bayerische Hypotheken-und Wechsel-Bank AG),
the oldest publicly listed bank in Germany, founded in 1835. As part of this
alliance, the portfolio managers and investment analysts of MFS and Foreign &
Colonial share their views on a variety of investment related issues such as
the economy, securities markets, portfolio securities and their issuers,
investment recommendations, strategies and techniques, risk analysis, trading
strategies and other portfolio management matters. MFS has access to the
extensive international equity investment expertise of Foreign & Colonial, and
Foreign & Colonial has access to the extensive U.S. equity investment
expertise of MFS. MFS and Foreign & Colonial each have investment personnel
working in each other's offices in Boston and London, respectively.
In certain instances there may be securities which are suitable for the Fund's
portfolio as well as for portfolios of other clients of MFS or clients of
Foreign & Colonial. Some simultaneous transactions are inevitable when several
clients receive investment advice from MFS and Foreign & Colonial,
particularly when the same security is suitable for more than one client.
While in some cases this arrangement could have a detrimental effect on the
price or availability of the security as far as the Fund is concerned, in
other cases, however, it may produce increased investment opportunities for
the Fund.
DISTRIBUTOR -- MFD, a wholly owned subsidiary of MFS, is the distributor of
shares of the Fund and also serves as distributor for each of the other MFS
Funds.
SHAREHOLDER SERVICING AGENT -- MFS Service Center, Inc. (the "Shareholder
Servicing Agent"), a wholly owned subsidiary of MFS, performs transfer agency,
certain dividend disbursing agency and other services for the Fund.
8. INFORMATION CONCERNING SHARES OF THE FUND
PURCHASES -- Shares of the Fund may be purchased at the public offering price
through any dealer or other financial institution ("dealers") having a selling
agreement with MFD. Dealers may also charge their customers fees relating to
investments in the Fund.
The Fund offers three classes of shares (Class A, B and C shares) which bear
sales charges and distribution fees in different forms and amounts, as
described below:
CLASS A SHARES: Class A shares are generally offered at net asset value plus
an initial sales charge, but in certain cases are offered at net asset value
without an initial sales charge but subject to a CDSC.
PURCHASES SUBJECT TO INITIAL SALES CHARGE. Class A shares are offered at
net asset value plus an initial sales charge as follows:
SALES CHARGE* AS PERCENTAGE OF:
------------------------------- ALLOWANCE
NET AMOUNT A PERCENTAGE
AMOUNT OF PURCHASE OFFERING PRICE INVESTED OF OFFERING PRICE
- - ------------------ -------------- ---------- ------------------
Less Than $50,000 ............... 2.50% 2.56% 2.25%
$50,000 but less than $100,000 .. 2.25 2.30 2.00
$100,000 but less than $250,000 . 2.00 2.04 1.75
$250,000 but less than $500,000 . 1.75 1.78 1.50
$500,000 but less than $1,000,000 1.50 1.52 1.25
$1,000,000 or more .............. None** None** See Below**
- - ----------
*Because of rounding in the calculation of offering price, actual sales
charges may be more or less than those calculated using the percentages
above.
**A CDSC will apply to such purchases, as discussed below.
MFD allows discounts to dealers (which are alike for all dealers) from the
applicable public offering price, as shown in the above table. In the case of
the maximum sales charge, the dealer retains 2.25% and MFD retains
approximately 1/4 of 1% of the public offering price. The sales charge may
vary depending on the number of shares of the Fund as well as certain other
MFS Funds owned or being purchased, the existence of an agreement to purchase
additional shares during a 13-month period (or 36-month period for purchases
of $1 million or more) or other special purchase programs. A description of
the Right of Accumulation, Letter of Intent and Group Purchase privileges by
which the sales charge may be reduced is set forth in the SAI.
PURCHASES SUBJECT TO A CDSC (but not an initial sales charge). In the
following four circumstances, Class A shares are offered at net asset value
without an initial sales charge, but subject to a CDSC equal to 1% of the
lesser of the value of the shares redeemed (exclusive of reinvested dividend
and capital gain distributions) or the total cost of such shares, in the event
of a share redemption within 12 months following the purchase:
(i) on investments of $1 million or more in Class A shares;
(ii) on investments in Class A shares by certain retirement plans subject
to the Employee Retirement Income Security Act of 1974, as amended
("ERISA"), if: (a) the plan had established an account with the
Shareholder Servicing Agent prior to July 1, 1996 and (b) the
sponsoring organization has demonstrated to the satisfaction of MFD
that either (i) the employer has at least 25 employees or (ii) the
aggregate purchases by the retirement plan of Class A shares of
Funds in the MFS Funds will be in an aggregate amount of at least
$250,000 within a reasonable period of time, as determined by MFD in
its sole discretion;
(iii) on investments in Class A shares by certain retirement plans subject
to ERISA, if: (a) the retirement plan and/or sponsoring organization
subscribes to the MFS FUNDamental 401(k) Program or any similar
recordkeeping system made available by the Shareholder Servicing
Agent (the "MFS Participant Recordkeeping System"); (b) the plan
establishes an account with the Shareholder Servicing Agent on or
after July 1, 1996; and (c) the aggregate purchases by the
retirement plan of Class A shares of the MFS Funds will be in an
aggregate amount of at least $500,000 within a reasonable period of
time, as determined by MFD in its sole discretion; and
(iv) on investments in Class A shares by certain retirement plans subject
to ERISA, if: (a) the plan establishes an account with the
Shareholder Servicing Agent on or after July 1, 1996 and (b) the plan
has, at the time of purchase, a market value of $500,000 or more
invested in shares of any class or classes of the MFS Funds. THE
RETIREMENT PLAN WILL QUALIFY UNDER THIS CATEGORY ONLY IF THE PLAN OR
ITS SPONSORING ORGANIZATION INFORMS THE SHAREHOLDER SERVICING AGENT
PRIOR TO THE PURCHASES THAT THE PLAN HAS A MARKET VALUE OF $500,000
OR MORE INVESTED IN SHARES OF ANY CLASS OR CLASSES OF THE MFS FUNDS.
THE SHAREHOLDER SERVICING AGENT HAS NO OBLIGATION INDEPENDENTLY TO
DETERMINE WHETHER SUCH A PLAN QUALIFIES UNDER THIS CATEGORY.
In the case of all such purchases, MFD will pay commissions to dealers on new
investments in Class A shares made through such dealers as follows:
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
For purposes of determining the level of commissions to be paid to dealers
with respect to a shareholder's new investment in Class A shares made on or
after April 1, 1996, purchases for each shareholder account (and certain other
accounts for which the shareholder is a record or beneficial holder) will be
aggregated over a 12-month period (commencing from the date of the first such
purchases).
See "Redemptions and Repurchases -- Contingent Deferred Sales Charge" in the
Prospectus for further discussion of the CDSC.
WAIVERS OF INITIAL SALES CHARGE AND CDSC. In certain circumstances, the
initial sales charge imposed upon purchases of Class A shares and the CDSC
imposed upon redemption of Class A shares is waived. These circumstances are
described in Appendix A to this Prospectus. In addition to these
circumstances, the CDSC imposed upon the redemption of Class A shares is
waived with respect to shares held by certain retirement plans qualified under
Section 401(a) or 403(b) of the Internal Revenue Code of 1986, as amended (the
"Code"), and subject to ERISA, where:
(i) the retirement plan and/or sponsoring organization does not subscribe to
the MFS Participant Recordkeeping System; and
(ii) the retirement plan and/or sponsoring organization demonstrates to the
satisfaction of, and certifies to the Shareholder Servicing Agent that
the retirement plan has, at the time of certification or will have
pursuant to a purchase order placed with the certification, a market
value of $500,000 or more invested in shares of any class or classes of
the MFS Funds and aggregate assets of at least $10 million;
provided, however, that the CDSC will not be waived (i.e., it will be imposed)
in the event that there is a change in law or regulations which results in a
material adverse change to the tax advantaged nature of the plan, or in the
event that the plan and/or sponsoring organization: (i) becomes insolvent or
bankrupt; (ii) is terminated or partially terminated under ERISA or is
liquidated or dissolved; or (iii) is acquired by, merged into, or consolidated
with, any other entity.
CLASS B SHARES: Class B shares are offered at net asset value without an
initial sales charge but subject to a CDSC upon redemption as follows:
YEAR OF CONTINGENT
REDEMPTION DEFERRED SALES
AFTER PURCHASE CHARGE
-------------- --------------
First .................................................... 4%
Second ................................................... 4%
Third .................................................... 3%
Fourth ................................................... 3%
Fifth .................................................... 2%
Sixth .................................................... 1%
Seventh and following .................................... 0%
The CDSC imposed is assessed against the lesser of the value of the shares
redeemed (exclusive of reinvested dividends and capital gain distributions) or
the total cost of such shares. No CDSC is assessed against shares acquired
through the automatic reinvestment of dividends or capital gain distributions.
Except as described below, MFD will pay commissions to dealers of 3.75% of the
purchase price of Class B shares purchased through dealers. MFD will also
advance to dealers the first year service fee payable under the Fund's Class B
Distribution Plan (see "Distribution Plans" below) at a rate equal to 0.25% of
the purchase price of such shares. Therefore, the total amount paid to a
dealer upon the sale of Class B shares is 4% of the purchase price of the
shares (commission rate of 3.75% plus a service fee equal to 0.25% of the
purchase price).
Class B shares purchased by a retirement plan whose sponsoring organization
subscribes to the MFS Participant Recordkeeping System and which has
established its account with the Shareholder Servicing Agent on or after July
1, 1996, will be subject to the CDSC described above, only under limited
circumstances, as explained below under "Waivers of CDSC." With respect to
such purchases, MFD pays an amount to dealers equal to 3.00% of the amount
purchased through such dealers (rather than the 4.00% payment described
above), which is comprised of a commission of 2.75% plus the advancement of
the first year service fee equal to 0.25% of the purchase price payable under
the Class B Distribution Plan. As discussed above, such retirement plans are
eligible to purchase Class A shares of the Fund at net asset value without an
initial sales charge but subject to a 1% CDSC if the plan has, at the time of
purchase, a market value of $500,000 or more invested in shares of any class
or classes of the MFS Funds. IN THIS EVENT, THE PLAN OR ITS SPONSORING
ORGANIZATION SHOULD INFORM THE SHAREHOLDER SERVICING AGENT THAT THE PLAN IS
ELIGIBLE TO PURCHASE CLASS A SHARES UNDER THIS CATEGORY; THE SHAREHOLDER
SERVICING AGENT HAS NO OBLIGATION INDEPENDENTLY TO DETERMINE WHETHER SUCH A
PLAN QUALIFIES UNDER THIS CATEGORY FOR THE PURCHASE OF CLASS A SHARES.
See "Redemptions and Repurchases -- Contingent Deferred Sales Charge" for
further discussion of the CDSC.
WAIVERS OF CDSC. In certain circumstances, the CDSC imposed upon
redemption of Class B shares is waived. These circumstances are described in
Appendix A to this Prospectus. In addition to these circumstances, the CDSC
imposed upon the redemption of Class B shares is waived with respect to shares
held by a retirement plan whose sponsoring organization subscribes to the MFS
Participant Recordkeeping System and which has established an account with the
Shareholder Servicing Agent on or after July 1, 1996; provided, however, that
the CDSC will not be waived (i.e., it will be imposed) in the event that there
is a change in law or regulations which results in a material adverse change
to the tax advantaged nature of the plan, or in the event that the plan and/or
sponsoring organization: (i) becomes insolvent or bankrupt; (ii) is terminated
or partially terminated under ERISA or is liquidated or dissolved; or (iii) is
acquired by, merged into, or consolidated with, any other entity.
CONVERSION OF CLASS B SHARES. Class B shares of the Fund that remain
outstanding for approximately eight years will convert to Class A shares of
the same Fund. Shares purchased through the reinvestment of distributions paid
in respect of Class B shares will be treated as Class B shares for purposes of
the payment of the distribution and service fees under the Distribution Plan
applicable to Class B shares. See "Information Concerning Shares of the Fund
- - -- Distribution Plans" below. However, for purposes of conversion to Class A
shares, all shares in a shareholder's account that were purchased through the
reinvestment of dividends and distributions paid in respect of Class B shares
(and which have not converted to Class A shares as provided in the following
sentence) will be held in a separate sub-account. Each time any Class B shares
in the shareholder's account (other than those in the sub-account) convert to
Class A shares, a portion of the Class B shares then in the sub-account will
also convert to Class A shares. The portion will be determined by the ratio
that the shareholder's Class B shares not acquired through reinvestment of
dividends and distributions that are converting to Class A shares bear to the
shareholder's total Class B shares not acquired through reinvestment. The
conversion of Class B shares to Class A shares is subject to the continuing
availability of a ruling from the Internal Revenue Service or an opinion of
counsel that such conversion will not constitute a taxable event for federal
tax purposes. There can be no assurance that such ruling or opinion will be
available, and the conversion of Class B shares to Class A shares will not
occur if such ruling or opinion is not available. In such event, Class B
shares would continue to be subject to higher expenses than Class A shares for
an indefinite period.
CLASS C SHARES: Class C shares are offered at net asset value without an
initial sales charge but are subject to a CDSC upon redemption of 1.00% during
the first year. Class C shares do not convert to any other class of shares of
the Fund. The maximum investment in Class C shares that may be made is up to
$1,000,000 per transaction.
The CDSC imposed is assessed against the lesser of the value of the shares
redeemed (exclusive of reinvested dividend and capital gain distributions) or
the total cost of such shares. No CDSC is assessed against shares acquired
through the automatic reinvestment of dividend or capital gain distributions.
See "Redemptions and Repurchases -- Contingent Deferred Sales Charge" below
for further discussion of the CDSC.
MFD will pay dealers 1.00% of the purchase price of Class C shares purchased
through dealers and, as compensation therefor, MFD will retain the 1.00% per
annum distribution and service fee paid under the Class C Distribution Plan by
the Fund to MFD for the first year after purchase (see "Distribution Plans"
below).
Class C shares are not currently available for purchase by any retirement plan
qualified under Sections 401(a) or 403(b) of the Internal Revenue Code of
1986, as amended (the "Code") if the retirement plan and/or the sponsoring
organization subscribe to the MFS FUNDamental 401(k) Plan or another similar
recordkeeping program made available by the Shareholder Servicing Agent.
WAIVER OF CDSC. In certain circumstances, the CDSC imposed upon redemption
of Class C shares is waived. These circumstances are described in Appendix A
to this Prospectus.
GENERAL: The following information applies to purchases of all classes of the
Fund's shares.
MINIMUM INVESTMENT. Except as described below, the minimum initial
investment is $1,000 per account and the minimum additional investment is $50
per account. Accounts being established for monthly automatic investments and
under payroll savings programs and tax-deferred retirement programs (other
than IRAs) involving the submission of investments by means of group remittal
statements are subject to a $50 minimum on initial and additional investments
per account. The minimum initial investment for IRAs is $250 per account and
the minimum additional investment is $50 per account. Accounts being
established for participation in the Automatic Exchange Plan are subject to a
$50 minimum on initial and additional investments per account. There are also
other limited exceptions to these minimums for certain tax-deferred retirement
programs. Any minimums may be changed at any time at the discretion of MFD.
The Fund reserves the right to cease offering its shares at any time.
RIGHT TO REJECT PURCHASE ORDERS/MARKET TIMING. Purchases and exchanges
should be made for investment purposes only. The Fund and MFD each reserve the
right to reject any specific purchase order or to restrict purchases by a
particular purchaser (or group of related purchasers). The Fund or MFD may
reject or restrict any purchases by a particular purchaser or group, for
example, when such purchase is contrary to the best interests of the Fund's
other shareholders or otherwise would disrupt the management of the Fund.
MFD may enter into an agreement with shareholders who intend to make exchanges
among certain classes of shares of certain MFS Funds (as determined by MFD)
which follow a timing pattern, and with individuals or entities acting on such
shareholders' behalf (collectively, "market timers"), setting forth the terms,
procedures and restrictions with respect to such exchanges. In the absence of
such an agreement, it is the policy of the Fund and MFD to reject or restrict
purchases by market timers if (i) more than two exchange purchases are
effected in a timed account in the same calendar quarter or (ii) a purchase
would result in shares being held in timed accounts by market timers
representing more than (x) one percent of the Fund's net assets or (y)
specified dollar amounts in the case of certain MFS Funds which may include
the Fund and which may change from time to time. The Fund and MFD each reserve
the right to request market timers to redeem their shares at net asset value,
less any applicable CDSC, if either of these restrictions is violated.
DEALER CONCESSIONS. Dealers may receive different compensation with
respect to sales of Class A, Class B and Class C shares. In addition, from
time to time, MFD may pay dealers 100% of the applicable sales charge on sales
of Class A shares of certain specified MFS Funds sold by such dealer during a
specified sales period. In addition, MFD or its affiliates may, from time to
time, pay dealers an additional commission equal to 0.50% of the net asset
value of all of the Class B and/or Class C shares of certain specified MFS
Funds sold by such dealer during a specified sales period. In addition, from
time to time, MFD, at its expense, may provide additional commissions,
compensation or promotional incentives ("concessions") to dealers which sell
shares of the Fund. Such concessions provided by MFD may include financial
assistance to dealers in connection with preapproved conferences or seminars,
sales or training programs for invited registered representatives, payment for
travel expenses, including lodging, incurred by registered representatives for
such seminars or training programs, seminars for the public, advertising and
sales campaigns regarding one or more MFS Funds, and/or other dealer-sponsored
events. From time to time, MFD may make expense reimbursements for special
training of a dealer's registered representatives in group meetings or to help
pay the expenses of sales contests. Other concessions may be offered to the
extent not prohibited by state laws or any self-regulatory agency, such as the
NASD.
SPECIAL INVESTMENT PROGRAMS. For shareholders who elect to participate in
certain investment programs (e.g., the Automatic Investment Plan) or other
shareholder services, MFD or its affiliates may either (i) give a gift of
nominal value, such as a hand-held calculator, or (ii) make a nominal
charitable contribution on their behalf.
RESTRICTIONS ON ACTIVITIES OF NATIONAL BANKS. The Glass-Steagall Act
prohibits national banks from engaging in the business of underwriting,
selling or distributing securities. Although the scope of the prohibition has
not been clearly defined, MFD believes that such Act should not preclude banks
from entering into agency agreements with MFD. If, however, a bank were
prohibited from so acting, the Trustees would consider what actions, if any,
would be necessary to continue to provide efficient and effective shareholder
services in respect of shareholders who invested in the Fund through a
national bank. It is not expected that shareholders would suffer any adverse
financial consequence as a result of these occurrences. In addition, state
securities laws on this issue may differ from the interpretation of federal
law expressed herein and banks and financial institutions may be required to
register as broker-dealers pursuant to state law.
----------------
A shareholder whose shares are held in the name of, or controlled by, a dealer
might not receive many of the privileges and services from the Fund (such as
Right of Accumulation, Letter of Intent and certain recordkeeping services)
that the Fund ordinarily provides.
EXCHANGES
Subject to the requirements set forth below, some or all of the shares in an
account with the Fund for which payment has been received by the Fund (i.e.,
an established account) may be exchanged for shares of the same class of any
of the other MFS Funds in the MFS Family of Funds (the "MFS Funds") at net
asset value (if available for sale). Shares of one class may not be exchanged
for shares of any other class.
EXCHANGES AMONG MFS FUNDS (EXCLUDING MFS MONEY MARKET FUNDS): No initial sales
charges or CDSC will be imposed in connection with an exchange from shares of
an MFS Fund to shares of any other MFS Fund, except with respect to exchanges
from an MFS money market fund to another MFS Fund which is not an MFS money
market fund (discussed below). With respect to an exchange involving shares
subject to a CDSC, the CDSC will be unaffected by the exchange and the holding
period for purposes of calculating the CDSC will carry over to the acquired
shares.
EXCHANGES FROM AN MFS MONEY MARKET FUND: Special rules apply with respect to
the imposition of an initial sales charge or a CDSC for exchanges from an MFS
money market fund to another MFS Fund which is not an MFS money market fund.
These rules are described under the caption "Exchanges" in the Prospectuses of
those MFS money market funds.
EXCHANGES INVOLVING THE MFS FIXED FUND: Class A shares of any MFS Fund held by
certain qualified retirement plans may be exchanged for units of participation
of the MFS Fixed Fund (a bank collective investment fund) (the "Units"), and
Units may be exchanged for Class A shares of any MFS Fund. With respect to
exchanges between of 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 in this paragraph above.
GENERAL: A shareholder should read the prospectus of the other MFS Fund and
consider the differences in objectives, policies and restrictions before
making any exchange. Exchanges will be made only after instructions in writing
or by telephone (an "Exchange Request") are received for an established
account by the Shareholder Servicing Agent in proper form (i.e., if in writing
- - -- signed by the record owner(s) exactly as the shares are registered; if by
telephone -- proper account identification is given by the dealer or
shareholder of record) and each exchange must involve either shares having an
aggregate value of at least $1,000 ($50 in the case of retirement plan
participants whose sponsoring organizations subscribe to the MFS FUNDamental
401(k) Plan or another similar 401(k) recordkeeping system made available by
the Shareholder Servicing Agent) or all the shares in the account. If an
Exchange Request is received by the Shareholder Servicing Agent on any
business day prior to the close of regular trading on the New York Stock
Exchange (generally, 4:00 p.m., Eastern time) (the "Exchange"), the exchange
will occur on that day if all the requirements set forth above have been
complied with at that time and subject to the Fund's right to reject purchase
orders. No more than five exchanges may be made in any one Exchange Request by
telephone. Additional information concerning this exchange privilege and
prospectuses for any of the other MFS Funds may be obtained from dealers or
the Shareholder Servicing Agent. For federal and (generally) state income tax
purposes, an exchange is treated as a sale of the shares exchanged and,
therefore, an exchange could result in a gain or loss to the shareholder
making the exchange. Exchanges by telephone are automatically available to
most non-retirement plan accounts and certain retirement plan accounts. For
further information regarding exchanges by telephone, see "Redemptions by
Telephone." The exchange privilege (or any aspect of it) may be changed or
discontinued and is subject to certain limitations, including certain
restrictions on purchases by market timers. Special procedures, privileges and
restrictions with respect to exchanges may apply to market timers who enter
into an agreement with MFD, as set forth in such agreement. See "Purchases --
General -- Right to Reject Purchase Orders/Market Timing."
REDEMPTIONS AND REPURCHASES
A shareholder may withdraw all or any portion of the value of his account on
any date on which the Fund is open for business by redeeming shares at their
net asset value (a redemption) or by selling such shares to the Fund through a
dealer (a repurchase). Certain redemptions and repurchases are, however,
subject to a CDSC. See "Contingent Deferred Sales Charge" below. Because the
net asset value of shares of the account fluctuates, redemptions or
repurchases, which are taxable transactions, are likely to result in gains or
losses to the shareholder. When a shareholder withdraws an amount from his
account, the shareholder is deemed to have tendered for redemption a
sufficient number of full and fractional shares in his account to cover the
amount withdrawn. The proceeds of a redemption or repurchase will normally be
available within seven days, except for shares purchased or received in
exchange for shares purchased by check (including certified checks or
cashier's checks). Payment of redemption proceeds may be delayed for up to 15
days from the purchase date in an effort to assure that such check has
cleared. See "Tax Status" below.
REDEMPTION BY MAIL: Each shareholder may redeem all or any portion of the
shares in his account by mailing or delivering to the Shareholder Servicing
Agent (see back cover for address) a stock power with a written request for
redemption or letter of instruction, together with his share certificates (if
any were issued), all in "good order" for transfer. "Good order" generally
means that the stock power, written request for redemption, letter of
instruction or certificate must be endorsed by the record owner(s) exactly as
the shares are registered and the signature(s) must be guaranteed in the
manner set forth below under the caption "Signature Guarantee." In addition,
in some cases "good order" will require the furnishing of additional
documents. The Shareholder Servicing Agent may make certain de minimis
exceptions to the above requirements for redemption. Within seven days after
receipt of a redemption request in "good order" by the Shareholder Servicing
Agent, the Fund will make payment in cash of the net asset value of the shares
next determined after such redemption request was received, reduced by the
amount of any applicable CDSC described above and the amount of any income tax
required to be withheld, except during any period in which the right of
redemption is suspended or date of payment is postponed because the Exchange
is closed or trading on such Exchange is restricted or to the extent otherwise
permitted by the 1940 Act if an emergency exists.
REDEMPTION BY TELEPHONE: Each shareholder may redeem an amount from his
account by telephoning the Shareholder Servicing Agent toll-free at (800) 225-
2606. Shareholders wishing to avail themselves of this telephone redemption
privilege must so elect on their Account Application, designate thereon a bank
and account number to receive the proceeds of such redemption, and sign the
Account Application Form with the signature(s) guaranteed in the manner set
forth below under the caption "Signature Guarantee." The proceeds of such a
redemption, reduced by the amount of any applicable CDSC and the amount of any
income tax required to be withheld, are mailed by check to the designated
account, without charge if the redemption proceeds do not exceed $1,000 and
are wired in federal funds to the designated account if the redemption
proceeds exceed $1,000. If a telephone redemption request is received by the
Shareholder Servicing Agent by the close of regular trading on the Exchange on
any business day, shares will be redeemed at the closing net asset value of
the Fund on that day. Subject to the conditions described in this section,
proceeds of a redemption are normally mailed or wired on the next business day
following the date of receipt of the order for redemption. The Shareholder
Servicing Agent will not be responsible for any losses resulting from
unauthorized telephone transactions if it follows reasonable procedures
designed to verify the identity of the caller. The Shareholder Servicing Agent
will request personal or other information from the caller, and will normally
also record calls. Shareholders should verify the accuracy of confirmation
statements immediately after their receipt.
REPURCHASE THROUGH A DEALER: If a shareholder desires to sell his shares
through his dealer (a repurchase), the shareholder can place a repurchase
order with his dealer, who may charge the shareholder a fee. IF THE DEALER
RECEIVES THE SHAREHOLDER'S ORDER PRIOR TO THE CLOSE OF REGULAR TRADING ON THE
EXCHANGE AND COMMUNICATES IT TO MFD BEFORE THE CLOSE OF BUSINESS ON THE SAME
DAY, THE SHAREHOLDER WILL RECEIVE THE NET ASSET VALUE CALCULATED ON THAT DAY,
REDUCED BY THE AMOUNT OF ANY APPLICABLE CDSC AND THE AMOUNT OF ANY INCOME TAX
REQUIRED TO BE WITHHELD.
REDEMPTION BY CHECK: Only Class A and Class C shares may be redeemed by
check. A shareholder owning Class A or Class C shares of the Fund may elect to
have a special account with State Street Bank and Trust Company (the "Bank")
for the purpose of redeeming Class A or Class C shares from his or her account
by check. The Bank will provide each Class A or Class C shareholder, upon
request, with forms of checks drawn on the Bank. Only shareholders having
accounts in which no share certificates have been issued will be permitted to
redeem shares by check. Checks may be made payable in any amount not less than
$500. Shareholders wishing to avail themselves of this redemption by check
privilege should so request on their Account Application, must execute
signature cards (for additional information, see the Account Application) with
signature guaranteed in the manner set forth under the caption "Signature
Guarantee" below, and must return any Class A or Class C share certificates
issued to them. Additional documentation will be required from corporations,
partnerships, fiduciaries or other such institutional investors. All checks
must be signed by the shareholder(s) of record exactly as the account is
registered before the Bank will honor them. The shareholders of joint accounts
may authorize each shareholder to redeem by check. The check may not draw on
monthly dividends which have been declared but not distributed. SHAREHOLDERS
WHO PURCHASE CLASS A AND CLASS C SHARES BY CHECK (INCLUDING CERTIFIED CHECKS
OR CASHIER'S CHECKS) MAY WRITE CHECKS AGAINST THOSE SHARES ONLY AFTER THEY
HAVE BEEN ON THE FUND'S BOOKS FOR 15 DAYS. WHEN SUCH A CHECK IS PRESENTED TO
THE BANK FOR PAYMENT, A SUFFICIENT NUMBER OF FULL AND FRACTIONAL SHARES WILL
BE REDEEMED TO COVER THE AMOUNT OF THE CHECK, ANY APPLICABLE CDSC AND THE
AMOUNT OF ANY INCOME TAX REQUIRED TO BE WITHHELD. IF THE AMOUNT OF THE CHECK,
PLUS ANY APPLICABLE CDSC AND THE AMOUNT OF ANY INCOME TAX REQUIRED TO BE
WITHHELD IS GREATER THAN THE VALUE OF CLASS A OR CLASS C SHARES HELD IN THE
SHAREHOLDER'S ACCOUNT, THE CHECK WILL BE RETURNED UNPAID, AND THE SHAREHOLDER
MAY BE SUBJECT TO EXTRA CHARGES. TO AVOID DISHONOR OF CHECKS DUE TO
FLUCTUATIONS IN ACCOUNT VALUE, SHAREHOLDERS ARE ADVISED AGAINST REDEEMING ALL
OR MOST OF THEIR ACCOUNT BY CHECK. CHECKS SHOULD NOT BE USED TO CLOSE A FUND
ACCOUNT BECAUSE WHEN THE CHECK IS WRITTEN, THE SHAREHOLDER WILL NOT KNOW THE
EXACT TOTAL VALUE OF THE ACCOUNT ON THE DAY THE CHECK CLEARS. There is
presently no charge to the shareholder for the maintenance of this special
account or for the clearance of any checks, but the Fund and the Bank reserve
the right to impose such charges or to modify or terminate the redemption by
check privilege at any time.
CONTINGENT DEFERRED SALES CHARGE: Investments in Class A, Class B or Class C
shares ("Direct Purchases") will be subject to a CDSC for a period of (i) with
respect to Class A and Class C shares, 12 months (however, the CDSC on Class A
shares is only imposed with respect to purchases of $1 million or more of
Class A shares or purchases by certain retirement plans of Class A shares) or
(ii) with respect to Class B shares, six years. Purchases of Class A shares
made during a calendar month, regardless of when during the month the
investment occurred, will age one month on the last day of the month and each
subsequent month. Class C shares and Class B shares purchased on or after
January 1, 1993 will be aggregated on a calendar month basis -- all
transactions made during a calendar month, regardless of when during the month
they have occurred, will age one year at the close of business on the last day
of such month in the following calendar year and each subsequent year. For
Class B shares of the Fund purchased prior to January 1, 1993, transactions
will be aggregated on a calendar year basis -- all transactions made during a
calendar year, regardless of when during the year they have occurred, will age
one year at the close of business on December 31 of that year and each
subsequent year. Prior to April 1, 1996, Class C shares of the MFS Funds were
not subject to a CDSC upon redemption. In no event will Class C shares of the
MFS Funds purchased prior to this date be subject to a CDSC. For the purpose
of calculating the CDSC upon redemption of shares acquired in an exchange on
or after April 1, 1996, the purchase of shares acquired in one or more
exchanges is deemed to have occurred at the time of the original purchase of
the exchanged shares (if such original purchase occurred prior to April 1,
1996, then no CDSC would be imposed upon such a redemption).
At the time of a redemption, the amount by which the value of a shareholder's
account for a particular class of shares represented by Direct Purchases
exceeds the sum of the six calendar year aggregations (12 months in the case
of purchases of Class C shares and of purchases of $1 million or more of Class
A shares or purchases by certain retirement plans of Class A shares) of Direct
Purchases may be redeemed without charge ("Free Amount"). Moreover, no CDSC is
ever assessed on additional shares acquired through the automatic reinvestment
of dividends or capital gain distributions ("Reinvested Shares"). Therefore,
at the time of redemption of a particular class, (i) any Free Amount is not
subject to the CDSC and (ii) the amount of the redemption equal to the then-
current value of Reinvested Shares is not subject to the CDSC, but (iii) any
amount of the redemption in excess of the aggregate of the then-current value
of Reinvested Shares and the Free Amount is subject to a CDSC. The CDSC will
first be applied against the amount of Direct Purchases which will result in
any such charge being imposed at the lowest possible rate. The CDSC to be
imposed upon redemptions of shares will be calculated as set forth in
"Purchases" above.
The applicability of a CDSC will be unaffected by exchanges or transfers of
registration, except as described in Appendix A hereto.
GENERAL: The following information applies to redemptions and repurchases of
all classes of the Fund's shares.
SIGNATURE GUARANTEE. In order to protect shareholders against fraud, the
Fund requires, in certain instances as indicated above, that the shareholder's
signature be guaranteed. In these cases the shareholder's signature must be
guaranteed by an eligible bank, broker, dealer, credit union, national
securities exchange, registered securities association, clearing agency or
savings association. Signature guarantees shall be accepted in accordance with
policies established by the Shareholder Servicing Agent.
REINSTATEMENT PRIVILEGE. Shareholders of the Fund who have redeemed their
shares have a one-time right to reinvest the redemption proceeds in the same
class of shares of any of the MFS Funds (if shares of such Fund are available
for sale) at net asset value (with a credit for any CDSC paid) within 90 days
of the redemption pursuant to the Reinstatement Privilege. If the shares
credited for any CDSC paid are then redeemed within six years of the initial
purchase in the case of Class B shares or within 12 months of the initial
purchase for Class C shares and certain Class A share purchases, a CDSC will
be imposed upon redemption. Such purchases under the Reinstatement Privilege
are subject to all limitations in the SAI regarding this privilege.
IN-KIND DISTRIBUTIONS. The Trust agrees to redeem shares of the Fund
solely in cash up to the lesser of $250,000 or 1% of the net asset value of
the Fund during any 90-day period for any one shareholder. The Fund has
reserved the right to pay other redemptions, either totally or partially, by a
distribution in-kind of securities (instead of cash) from the Fund's
portfolio. The securities distributed in such a distribution would be valued
at the same amount as that assigned to them in calculating the net asset value
for the shares being sold. If a shareholder received a distribution in-kind,
the shareholder could incur brokerage or transaction charges when converting
the securities to cash.
INVOLUNTARY REDEMPTIONS/SMALL ACCOUNTS. Due to the relatively high cost of
maintaining small accounts, the Fund reserves the right to redeem shares in
any account for their then-current value if at any time the total investment
in such account drops below $500 because of redemptions, except in the case of
accounts being established for monthly automatic investments and certain
payroll savings programs, Automatic Exchange Plan accounts and tax-deferred
retirement plans, for which there is a lower minimum investment requirement.
See "Purchases -- General -- Minimum Investment." Shareholders will be
notified that the value of their account is less than the minimum investment
requirement and allowed 60 days to make an additional investment before the
redemption is processed.
DISTRIBUTION PLANS
The Trustees have adopted separate Distribution Plans for Class A, Class B and
Class C shares pursuant to Section 12(b) of the 1940 Act and Rule 12b-1
thereunder (the "Distribution Plans"), after having concluded that there is a
reasonable likelihood that the Distribution Plans would benefit the Fund and
its shareholders.
In certain circumstances, the fees described below may not be imposed or are
being waived. These circumstances, if any, are described below under the
heading "Current Level of Distribution and Service Fees."
FEATURES COMMON TO EACH DISTRIBUTION PLAN: The Distribution Plans have certain
common features, as described below.
SERVICE FEES. Each Distribution Plan provides that the Fund may pay MFD a
service fee of up to 0.25% of the average daily net assets attributable to the
class of shares to which the Distribution Plan relates (i.e., Class A, 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 each
Distribution Plan for which there is no dealer of record or for which
qualification standards have not been met as partial consideration for
personal services and/or account maintenance services performed by MFD or its
affiliates to shareholder accounts.
DISTRIBUTION FEES. Each Distribution Plan provides that the Fund may pay
MFD a distribution fee based on the average daily net assets attributable to
the Designated Class as partial consideration for distribution services
performed and expenses incurred in the performance of MFD's obligations under
its distribution agreement with the Fund. See "Management of the Fund --
Distributor" in the SAI. The amount of the distribution fee paid by the Fund
with respect to each class differs under the Distribution Plans, as does the
use by MFD of such distribution fees. Such amounts and uses are described
below in the discussion of the separate Distribution Plans.
OTHER COMMON FEATURES. Fees payable under each Distribution Plan are
charged to, and therefore reduce, income allocated to shares of the Designated
Class. The Distribution Plans have substantially identical provisions with
respect to their operating policies and their initial approval, renewal,
amendment and termination.
FEATURES UNIQUE TO EACH DISTRIBUTION PLAN: The Distribution Plans have certain
features that are unique to each class of shares, as described below.
CLASS A DISTRIBUTION PLAN. Class A shares are generally offered pursuant
to an initial sales charge, a substantial portion of which is paid to or
retained by the dealer making the sale (the remainder of which is paid to
MFD). See "Purchases -- Class A Shares" above. In addition to the initial
sales charge, the dealer also generally receives the ongoing 0.25% per annum
service fee, as discussed above.
The distribution fee paid to MFD under the Class A Distribution Plan is equal,
on an annual basis, to 0.10% of the Fund's average daily net assets
attributable to Class A shares. As noted above, MFD may use the distribution
fee to cover distribution-related expenses incurred by it under its
distribution agreement with the Fund, including commissions to dealers and
payments to wholesalers employed by MFD (e.g., MFD pays commission to dealers
with respect to purchases of $1 million or more and purchases by certain
retirement plans of Class A shares which are sold at net asset value but which
are subject to a 1% CDSC for one year after purchase). See "Purchases -- Class
A Shares" above. In addition, to the extent that the aggregate service and
distribution fees paid under the Class A Distribution Plan do not exceed 0.35%
per annum of the average daily net assets of the Fund attributable to Class A
shares, the Fund is permitted to pay such distribution-related expenses or
other distribution-related expenses.
CLASS B DISTRIBUTION PLAN. Class B shares are offered at net asset value
without an initial sales charge but subject to a CDSC. See "Purchases -- Class
B Shares" above. MFD will advance to dealers the first year service fee
described above at a rate equal to 0.25% of the purchase price of such shares
and, as compensation therefore, MFD may retain the service fee paid by the
Fund with respect to such shares for the first year after purchase. Dealers
will become eligible to receive the ongoing 0.25% per annum service fee with
respect to such shares commencing in the thirteenth month following purchase.
Under the Class B Distribution Plan, the Fund pays MFD a distribution fee
equal, on an annual basis, to 0.75% of the Fund's average daily net assets
attributable to Class B shares. As noted above, this distribution fee may be
used by MFD to cover its distribution-related expenses under its distribution
agreement with the Fund (including the 3.75% commission it pays to dealers
upon purchase of Class B shares, as described under "Purchases -- Class B
Shares" above).
CLASS C DISTRIBUTION PLAN. Class C shares are offered at net asset value
without an initial sales charge but subject to a CDSC. See "Purchases -- Class
C Shares" above. MFD will pay a commission to dealers of 1.00% of the purchase
price of Class C shares purchased through dealers at the time of purchase. In
compensation for this 1.00% commission paid by MFD to dealers, MFD will retain
the 1.00% per annum Class C distribution and service fees paid by the Fund
with respect to such shares for the first year after purchase, and dealers
will become eligible to receive from MFD the ongoing 1.00% per annum
distribution and service fees paid by the Fund to MFD with respect to such
shares commencing in the thirteenth month following purchase.
This ongoing 1.00% fee is comprised of the 0.25% per annum service fee paid to
MFD under the Class C Distribution Plan (which MFD in turn pays to dealers),
as discussed above, and a distribution fee paid to MFD (which MFD also in turn
pays to dealers) under the Class C Distribution Plan equal, on an annual
basis, to 0.75% of the Fund's average daily net assets attributable to Class C
shares.
CURRENT LEVEL OF DISTRIBUTION AND SERVICE FEES: The Fund's Class A, Class B
and Class C distribution and service fees for its current fiscal year are
0.15%, 0.95% and 1.00% per annum, respectively. Payment of the 0.10% per annum
Class A distribution fee will commence on such date as the Trustees of the
Trust may determine. Service fee payments in the amount of 0.15% of the
average daily net assets of the Fund attributable to Class A shares are
currently being paid by the Fund. Payment of the remaining portion of the
service fee, equal to 0.10% per annum, will become payable on such date as the
Trustees of the Trust may determine. Except in the case of the first year
service fee, the Class B service fee is currently set at 0.15% per annum and
may be increased to a maximum of 0.25% per annum on such date as the Trustees
of the Trust may determine.
DISTRIBUTIONS
The Fund intends to declare dividends daily and pay to its shareholders
substantially all of its net investment income as dividends on a monthly
basis. The Fund may make one or more distributions during the calendar year to
its shareholders from any long-term capital gains and also may make one or
more distributions during the calendar year to its shareholders from short-
term capital gains. Shareholders may elect to receive dividends and capital
gain distributions in either cash or additional shares of the same class with
respect to which the distribution is made. See "Tax Status" and "Shareholder
Services -- Distribution Options" below. Distributions paid by the Fund with
respect to Class A shares will generally be greater than those paid with
respect to Class B and Class C shares because expenses attributable to Class B
and Class C shares will generally be higher.
TAX STATUS
The Fund is treated as an entity separate from the other series of the Trust
for federal income tax purposes. In order to minimize the taxes the Fund would
otherwise be required to pay, the Fund intends to qualify each year as a
"regulated investment company" under Subchapter M of the Code and to make
distributions to its shareholders in accordance with the timing requirements
imposed by the Code. It is expected that the Fund will not be required to pay
any federal income or excise taxes, although the Fund's foreign-source income
may be subject to foreign withholding taxes.
Shareholders of the Fund normally will have to pay federal income taxes, and
any state or local taxes, on the dividends and capital gain distributions they
receive from the Fund, whether paid in cash or reinvested in additional
shares. The Fund expects that none of its distributions will be eligible for
the dividends-received deduction for corporations. Shareholders may not have
to pay state and local taxes on dividends derived from interest on U.S.
Government obligations; investors should consult with their tax advisers in
this regard. Shortly after the end of each calendar year, each shareholder
will receive a statement setting forth the federal income tax status of all
dividends and distributions for that year, including the portion taxable as
ordinary income, the portion taxable as long-term capital gains, the portion,
if any, representing a return of capital (which is free of current taxes but
results in a basis reduction), the portion representing interest on U.S.
government obligations, and the amount, if any, of federal income tax
withheld.
Fund distributions will reduce the Fund's net asset value per share.
Shareholders who buy shares shortly before the Fund makes a distribution of
net capital gains or net short-term capital gains may thus pay the full price
for the shares and then effectively receive a portion of the purchase price
back as a taxable distribution.
The Fund intends to withhold U.S. federal income tax at the rate of 30% on
dividends and other payments that are subject to such withholding and that
are made to persons who are neither citizens nor residents of the U.S.,
regardless of whether a lower rate may be permitted under an applicable
treaty. The Fund is also required in certain circumstances to apply backup
withholding at the rate of 31% on taxable dividends and certain redemption
proceeds paid to any shareholder (including a shareholder who is neither a
citizen nor a resident of the U.S.) who does not furnish to the Fund certain
information and certifications or who is otherwise subject to backup
withholding. Backup withholding will not, however, be applied to payments that
have been subject to 30% withholding. Prospective investors should read the
Fund's Account Application for additional information regarding backup
withholding of federal income tax and should consult their own tax advisers as
to the tax consequences to them of an investment in the Fund.
NET ASSET VALUE
The net asset value per share of each class of the Fund is determined each day
during which the Exchange is open for trading. This determination is made once
during each such day as of the close of regular trading on the Exchange by
deducting the amount of the liabilities attributable to the class from the
value of the Fund's assets attributable to the class and dividing the
difference by the number of shares of the class outstanding. Assets in the
Fund's portfolio are valued on the basis of their market or other fair value,
as described in the SAI. The net asset value per share of each class of shares
is effective for orders received in "good order" by the dealer prior to its
calculation and received by MFD prior to the close of that business day.
DESCRIPTION OF SHARES, VOTING RIGHTS AND LIABILITIES
The Fund, one of three series of the Trust, has three classes of shares,
entitled Class A, Class B and Class C Shares of Beneficial Interest (without
par value). The Trust has reserved the right to create and issue additional
classes and series of shares, in which case each class of shares of a series
would participate equally in the earnings, dividends and assets attributable
to that class of shares of that particular series. Shareholders are entitled
to one vote for each share held and shares of each series would be entitled to
vote separately to approve investment advisory agreements or changes in
investment restrictions, but shares of all series vote together in the
election of Trustees and selection of accountants. Additionally, each class of
shares of a series will vote separately on any material increases in the fees
under its Distribution Plan or on any other matter that affects solely that
class of shares, but will otherwise vote together with all other classes of
shares of the series on all other matters. The Trust does not intend to hold
annual shareholder meetings. The Declaration of Trust provides that a Trustee
may be removed from office in certain instances (see "Description of Shares,
Voting Rights and Liabilities" in the SAI).
Each share of a class of the Fund represents an equal proportionate interest
in the Fund with each other class share, subject to the liabilities of the
particular class. Shares have no pre-emptive or conversion rights (except as
set forth above in "Purchases -- Conversion of Class B Shares"). Shares are
fully paid and non-assessable. Should the Fund be liquidated, shareholders of
each class are entitled to share pro rata in the net assets attributable to
that class available for distribution to shareholders. Shares will remain on
deposit with the Shareholder Servicing Agent and certificates will not be
issued except in connection with pledges and assignments and in certain other
limited circumstances.
The Trust is an entity of the type commonly known as a "Massachusetts business
trust." Under Massachusetts law, shareholders of such a trust may, under
certain circumstances, be held personally liable as partners for its
obligations. However, the risk of a shareholder incurring financial loss on
account of shareholder liability is limited to circumstances in which both
inadequate insurance (e.g., fidelity bonding and errors and omissions
insurance) existed and the Trust itself was unable to meet its obligations.
PERFORMANCE INFORMATION
From time to time, the Fund will provide yield, current distribution rate and
total rate of return quotations for each class of shares and may also quote
fund rankings in the relevant fund category from various sources, such as the
Lipper Analytical Services, Inc. and Wiesenberger Investment Companies
Service. Yield quotations are based on the annualized net investment income
per share allocated to each class of the Fund over a 30-day period stated as a
percent of the maximum public offering price on the last day of that period.
Yield calculations for Class B and Class C shares assume no CDSC is paid. The
current distribution rate for each class is generally based upon the total
amount of dividends per share paid by the Fund to shareholders of that class
during the past 12 months and is computed by dividing the amount of such
dividends by the maximum public offering price of that class at the end of
such period. Current distribution rate calculations for Class B and Class C
shares assume no CDSC is paid. The current distribution rate differs from the
yield calculation because it may include distributions to shareholders from
sources other than dividends and interest, such as premium income from option
writing, short-term capital gains, and return of invested capital, and is
calculated over a different period of time. Total rate of return quotations
will reflect the average annual percentage change over stated periods in the
value of an investment in each class of shares of the Fund made at the maximum
public offering price of shares of that class with all distributions
reinvested and which will give effect to the imposition of any applicable CDSC
assessed upon redemptions of the Fund's Class B and Class C shares. Such total
rate of return quotations may be accompanied by quotations which do not
reflect the reduction in value of the initial investment due to the sales
charge or the deduction of a CDSC, and which will thus be higher. All
performance quotations are based on historical performance and are not
intended to indicate future performance. Yield reflects only net portfolio
income as of a stated period of time and current distribution rate reflects
only the rate of distributions paid by the Fund over a stated period of time,
while total rate of return reflects all components of investment return over a
stated period of time. The Fund's quotations may from time to time be used in
advertisements, shareholder reports or other communications to shareholders.
For a discussion of the manner in which the Fund will calculate its yield,
current distribution rate and total rate of return, see the SAI. For further
information about the Fund's performance for the fiscal year ended April 30,
1996, please see the Fund's Annual Report. A copy of the Annual Report may be
obtained without charge by contacting the Shareholder Servicing Agent (see
back cover for address and phone number). In addition to information provided
in shareholder reports, the Fund may, in its discretion from time to time,
make a list of all or a portion of its holdings available to investors upon
request.
EXPENSES
The Adviser has agreed to pay certain expenses of the Fund (except for the
fees paid under the Advisory Agreement and any Distribution Plan) until
February 28, 2002 and to pay the expenses relating to the organization of the
Fund, all subject to reimbursement by the Fund. To accomplish such
reimbursement, the Adviser receives an expense reimbursement fee from the Fund
in addition to the investment advisory and distribution fees, computed and
paid monthly at a rate of 0.40% per annum of the average daily net assets of
the Fund. The expense reimbursement agreement terminates for the Fund on the
earlier of either (i) the date on which the payments made thereunder by the
Fund equal the prior payment of such reimbursable expenses by the Adviser or
(ii) February 28, 2002. The Adviser may also terminate the expense
reimbursement agreement at any time by written notice to the Trust. See
"Investment Adviser" in the SAI for further information.
9. SHAREHOLDER SERVICES
Shareholders with questions concerning the shareholder services described
below or concerning other aspects of the Fund, should contact the Shareholder
Servicing Agent (see back cover for address and phone number).
ACCOUNT AND CONFIRMATION STATEMENTS -- Each shareholder will receive
confirmation statements showing the transaction activity in his account.
Cancelled checks, if any, will be sent to shareholders monthly. At the end of
each calendar year, each shareholder will receive income tax information
regarding reportable dividends and capital gain distributions for that year
(see "Tax Status").
DISTRIBUTION OPTIONS -- The following options are available to all accounts
(except Systematic Withdrawal Plan accounts), and may be changed as often as
desired by notifying the Shareholder Servicing Agent:
-- Dividends and capital gain distributions reinvested in additional
shares. This option will be assigned if no other option is
specified.
-- Dividends in cash; capital gain distributions reinvested in
additional shares.
-- Dividends and capital gain distributions in cash.
Reinvestments (net of any tax withholding) will be made in additional full and
fractional shares of the same class of shares at the net asset value in effect
at the close of business on the last business day of the month. Dividends and
capital gain distributions in amounts less than $10 will automatically be
reinvested in additional shares of the Fund. If a shareholder has elected to
receive dividends and/or capital gain distributions in cash and the postal or
other delivery service is unable to deliver checks to the shareholder's
address of record, or the shareholder does not respond to mailings from the
Shareholder Servicing Agent with regard to uncashed distribution checks, such
shareholder's distribution option will automatically be converted to having
all dividends and other distributions reinvested in additional shares. Any
request to change a distribution option must be received by the Shareholder
Servicing Agent a reasonable time prior to the next business day of the month
for a dividend or distribution in order to be effective for that dividend or
distribution. No interest will accrue on amounts represented by uncashed
distribution or redemption checks.
INVESTMENT AND WITHDRAWAL PROGRAMS -- For the convenience of shareholders,
the Fund makes available the following programs designed to enable
shareholders to add to their investment in an account with the Fund or
withdraw from it with a minimum of paper work. The programs involve no extra
charge to shareholders (other than a sales charge in the case of certain Class
A share purchases) and may be changed or discontinued at any time by a
shareholder or the Fund.
LETTER OF INTENT: If a shareholder (other than a group purchaser as
described in the SAI) anticipates purchasing $50,000 or more of Class A shares
of the Fund alone or in combination with shares of any class of other MFS
Funds or MFS Fixed Fund (a bank collective investment fund) within a 13-month
period (or 36-month period for purchases of $1 million or more), the
shareholder may obtain such shares at the same reduced sales charge as though
the total quantity were invested in one lump sum, subject to escrow agreements
and the appointment of an attorney for redemptions from the escrow amount if
the intended purchases are not completed, by completing the Letter of Intent
section of the Account Application.
RIGHT OF ACCUMULATION: A shareholder qualifies for cumulative quantity
discounts on the purchase of Class A shares when his new investment, together
with the current offering price value of all holdings of all classes of shares
of that shareholder in the MFS Funds or MFS Fixed Fund reaches a discount
level.
DISTRIBUTION INVESTMENT PROGRAM: Shares of a particular class of the Fund
may be sold at net asset value (and without any applicable CDSC) through the
automatic reinvestment of dividend and capital gain distributions from the
same class of any other MFS Fund. Furthermore, distributions made by the Fund
may be automatically invested at net asset value (and without any applicable
CDSC) in shares of the same class of another MFS Fund, if shares of such Fund
are available for sale.
SYSTEMATIC WITHDRAWAL PLAN: A shareholder may direct the Shareholder
Servicing Agent to send him (or anyone he designates) regular periodic
payments based upon the value of his account. Each payment under a Systematic
Withdrawal Plan (a "SWP") must be at least $100, except in certain limited
circumstances. The aggregate withdrawals of Class B and Class C shares in any
year pursuant to a SWP will not be subject to a CDSC and are generally limited
to 10% of the value of the account at the time of the establishment of the
SWP. The CDSC will not be waived in the case of SWP redemptions of Class A
shares which are subject to a CDSC.
DOLLAR COST AVERAGING PROGRAMS --
AUTOMATIC INVESTMENT PLAN: Cash investments of $50 or more may be made
through a shareholder's checking account twice monthly, monthly or quarterly.
Required forms are available from the Shareholder Servicing Agent or
investment dealers.
AUTOMATIC EXCHANGE PLAN: Shareholders having account balances of at least
$5,000 in any MFS Fund may exchange their shares for the same class of shares
of other MFS Funds (and, in the case of Class C shares, for shares of MFS
Money Market Fund) under the Automatic Exchange Plan. The Automatic Exchange
Plan provides for automatic monthly or quarterly exchanges of funds from the
shareholder's account in an MFS Fund for investment in the same class of
shares of other MFS Funds selected by the shareholder if such fund is
available for sale. Under the Automatic Exchange Plan, exchanges of at least
$50 each may be made to up to four different funds. A shareholder should
consider the objectives and policies of a fund and review its prospectus
before electing to exchange money into such fund through the Automatic
Exchange Plan. No transaction fee is imposed in connection with exchange
transactions under the Automatic Exchange Plan. However, exchanges of shares
of MFS Money Market Fund, MFS Government Money Market Fund or Class A shares
of MFS Cash Reserve Fund will be subject to any applicable sales charge. For
federal and (generally) state income tax purposes, an exchange is treated as a
sale of shares exchanged and, therefore, could result in a capital gain or
loss to the shareholder making the exchange. See the SAI for further
information concerning the Automatic Exchange Plan. Investors should consult
their tax advisers for information regarding the potential capital gain and
loss consequences of transactions under the Automatic Exchange Plan.
Because a dollar cost averaging program involves periodic purchases of shares
regardless of fluctuating share offering prices, a shareholder should consider
his financial ability to continue his purchases through periods of low price
levels. Maintaining a dollar cost averaging program concurrently with a
withdrawal program could be disadvantageous because of the sales charges
included in share purchases the case of Class A shares and because of the
assessment of the CDSC for certain share redemptions in the case of Class A
Shares.
TAX-DEFERRED RETIREMENT PLANS -- Except as noted under "Purchases -- Class C
Shares" shares of the Fund may be purchased by all types of tax-deferred
retirement plans, including IRAs, SEP-IRA plans, 401(k) plans, 403(b) plans,
and other corporate pension and profit-sharing plans. Investors should consult
with their tax adviser before establishing any of these tax-deferred
retirement plans.
The Fund's SAI, dated September 1, 1996, as amended or supplemented from time
to time, contains more detailed information about the Fund, including, but not
limited to, information related to (i) the Fund's investment objective,
policies and restrictions, (ii) the Trustees, officers and investment adviser,
(iii) portfolio transactions and brokerage commissions, (iv) the method used
to calculate performance quotations, (v) the Fund's Class A, Class B and Class
C Distribution Plans and (vi) various services and privileges offered by the
Fund for the benefit of its shareholders, including additional information
with respect to the exchange privilege.
<PAGE>
APPENDIX A
WAIVERS OF SALES CHARGES
This Appendix sets forth the various circumstances in which all applicable
sales charges are waived (Section I), the initial sales charge and the
contingent deferred sales charge ("CDSC") for Class A shares are waived
(Section II), and the CDSC for Class B and Class C shares is waived (Section
III).
I. WAIVERS OF ALL APPLICABLE SALES CHARGES
In the following circumstances, the initial sales charge imposed on
purchases of Class A shares and the CDSC imposed on certain redemptions of
Class A shares and on redemptions of Class B and Class C shares, as
applicable, are waived:
1. DIVIDEND REINVESTMENT
* Shares acquired through dividend or capital gain reinvestment; and
* Shares acquired by automatic reinvestment of distributions of
dividends and capital gains of any MFS Fund in the MFS Family of
Funds ("MFS Funds") pursuant to the Distribution Investment Program.
2. CERTAIN ACQUISITIONS/LIQUIDATIONS
* Shares acquired on account of the acquisition or liquidation of
assets of other investment companies or personal holding companies.
3. AFFILIATES OF AN MFS FUND/CERTAIN DEALERS. SHARES ACQUIRED BY:
* Officers, eligible directors, employees (including retired employees)
and agents of Massachusetts Financial Services Company ("MFS"), Sun
Life Assurance Company of America ("Sun Life") or any of their
subsidiary companies;
* Trustees and retired trustees of any investment company for which MFS
Fund Distributors, Inc. ("MFD") serves as distributor;
* Employees, directors, partners, officers and trustees of any
sub-adviser to any MFS Fund;
* Employees or registered representatives of dealers and other
financial institution ("dealers") which have a sales agreement with
MFD;
* Certain family members of any such individual and their spouses
identified above and certain trusts, pension, profit-sharing or other
retirement plans for the sole benefit of such persons, provided the
shares are not resold except to the MFS Fund which issued the shares;
and
* Institutional Clients of MFS or MFS Asset Management, Inc. ("AMI").
4. INVOLUNTARY REDEMPTIONS (CDSC WAIVER ONLY)
* Shares redeemed at an MFS Fund's direction due to the small size of a
shareholder's account. See "Redemptions and Repurchases -- General --
Involuntary Redemptions/Small Accounts" in the Prospectus.
5. RETIREMENT PLANS (CDSC WAIVER ONLY). Shares redeemed on account of
distributions made under the following circumstances:
INDIVIDUAL RETIREMENT ACCOUNTS ("IRA'S")
* Death or disability of the IRA owner.
SECTION 401(A) PLANS ("401(A) PLANS") AND SECTION 403(B) EMPLOYER
SPONSORED PLANS ("ESP PLANS")
* Death, disability or retirement of 401(a) or ESP Plan participant;
* Loan from 401(a) or ESP Plan (repayment of loans, however, will
constitute new sales for purposes of assessing sales charges);
* Financial hardship (as defined in Treasury Regulation Section
1.401(k)-1 (d)(2), as amended from time to time);
* Termination of employment of 401(a) or ESP Plan participant
(excluding, however, a partial or other termination of the Plan);
* Tax-free return of excess 401(a) or ESP Plan contributions;
* To the extent that redemption proceeds are used to pay expenses (or
certain participant expenses) of the 401(a) or ESP Plan (e.g.,
participant account fees), provided that the Plan sponsor subscribes
to the MFS FUNDamental 401(k) Plan or another similar recordkeeping
system made available by the Shareholder Servicing Agent; and
* Distributions from a 401(a) or ESP Plan that has invested its assets
in one or more of the MFS Funds for more than 10 years from the later
to occur of: (i) January 1, 1993 or (ii) the date such 401(a) or ESP
Plan first invests its assets in one or more of the MFS Funds. The
sales charges will be waived in the case of a redemption of all of
the 401(a) or ESP Plan's shares in all MFS Funds (i.e., all the
assets of the 401 (a) or ESP Plan invested in the MFS Funds are
withdrawn), unless immediately prior to the redemption, the aggregate
amount invested by the 401(a) or ESP Plan in shares of the MFS Funds
(excluding the reinvestment of distributions) during the prior four
years equals 50% or more of the total value of the 401(a) or ESP
Plan's assets in the MFS Funds, in which case the sales charges will
not be waived.
SECTION 403(B) SALARY REDUCTION ONLY PLANS ("SRO PLANS")
* Death or disability of SRO Plan participant.
6. CERTAIN TRANSFERS OF REGISTRATION (CDSC WAIVER ONLY). Shares
transferred:
* To an IRA rollover account from an existing IRA account where any
sales charges with respect to the shares being reregistered would
have been waived had they been redeemed; and
* From a single account maintained for a 401(a) Plan to multiple
accounts maintained by the Shareholder Servicing Agent on behalf of
individual participants of such Plan, provided that the Plan sponsor
subscribes to the MFS FUNDamental 401(k) Plan or another similar
recordkeeping system made available by the Shareholder Servicing
Agent.
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 redemption of Class A shares are
waived:
1. INVESTMENT OF REDEMPTION PROCEEDS FROM UNAFFILIATED MUTUAL FUNDS
* Shares acquired through the investment of redemption proceeds from
another open-end management investment company not distributed or
managed by MFD or its affiliates if: (i) the investment is made
through a dealer and appropriate documentation is submitted to MFD;
(ii) the redeemed shares were subject to an initial sales charge or
deferred sales charge (whether or not actually imposed); (iii) the
redemption occurred no more than 90 days prior to the purchase of
Class A shares; and (iv) the MFS Fund, MFD or its affiliates have not
agreed with such company or its affiliates, formally or informally,
to waive sales charges on Class A shares or provide any other
incentive with respect to such redemption and sale.
2. WRAP ACCOUNT INVESTMENTS
* Shares acquired by investments through certain dealers which have
entered into an agreement with MFD which includes a requirement that
such shares be sold for the sole benefit of clients participating in
a "wrap" account or a similar program under which such clients pay a
fee to such dealer.
3. INVESTMENT BY INSURANCE COMPANY SEPARATE ACCOUNTS
* Shares acquired by insurance company separate accounts.
4. RETIREMENT PLANS
ADMINISTRATIVE SERVICES ARRANGEMENTS
* Shares acquired by retirement plans whose third party administrators
or dealers have entered into an administrative services agreement
with MFD or one of its affiliates to perform certain administrative
services, subject to certain operational and minimum size
requirements specified from time to time by MFD or one or more of its
affiliates.
REINVESTMENT OF DISTRIBUTIONS FROM QUALIFIED RETIREMENT PLANS
* Shares acquired through the automatic reinvestment in Class A shares
of Class A or Class B distributions which constitute required
withdrawals from qualified retirement plans.
SHARES REDEEMED ON ACCOUNT OF DISTRIBUTIONS MADE UNDER THE FOLLOWING
CIRCUMSTANCES:
IRA'S
* Distributions made on or after the IRA owner has attained the age
of 59 1/2 years old; and
* Tax-free returns of excess IRA contributions.
401(A) PLANS
* Distributions made on or after the 401(a) Plan participant has
attained the age of 59 1/2 years old; and
* Certain involuntary redemptions and redemptions in connection with
certain automatic withdrawals from a 401(a) Plan.
ESP PLANS AND SRO PLANS
* Distributions made on or after the ESP or SPO Plan participant has
attained the age of 59 1/2 years old.
III. WAIVERS OF CLASS B AND CLASS C SALES CHARGES
In addition to the waivers set forth in Section I above, in the following
circumstances the CDSC imposed on redemptions of Class B and Class C
shares is waived:
1. SYSTEMATIC WITHDRAWAL PLAN
* Systematic Withdrawal Plan redemptions with respect to up to 10% per
year of the account value at the time of establishment.
2. DEATH OF OWNER
* Shares redeemed on account of the death of the account owner if the
shares are held solely in the deceased individual's name or in a
living trust for the benefit of the deceased individual.
3. DISABILITY OF OWNER
* Shares redeemed on account of the disability of the account owner if
shares are held either solely or jointly in the disabled individual's
name or in a living trust for the benefit of the disabled individual
(in which case a disability certification form is required to be
submitted to the Shareholder Servicing Agent.).
4. RETIREMENT PLANS. Shares redeemed on account of distributions made
under the following circumstances:
IRA'S, 401(A) PLANS, AND 403(B) PLANS ESP PLANS AND SRO PLANS
* Distributions made on or after the IRA owner or the 401(a), ESP or
SRO Plan participant, as applicable, has attained the age of 70 1/2
years old, but only with respect to the minimum distribution under
applicable Internal Revenue Code ("Code") rules.
SALARY REDUCTION SIMPLIFIED EMPLOYEE PENSION PLANS ("SAR-SEP PLANS")
* Distributions made on or after the SAR-SEP Plan participantowner has
attained the age of 70 1/2 years old, but only with respect to the
minimum distribution under applicable Code rules;
* Death or disability of a SAR-SEP Plan participant
<PAGE>
APPENDIX B
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
Aaa: Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt edged." Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized
are most unlikely to impair the fundamentally strong position of such issues.
Aa: Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known
as high grade bonds. They are rated lower than the best bonds because margins
of protection may not be as large as in Aaa securities or fluctuation of
protective elements may be of greater amplitude or there may be other elements
present which make the long term risks appear somewhat larger than in Aaa
securities.
A: Bonds which are rated A possess many favorable investment attributes and
are to be considered as upper medium grade obligations. Factors giving
security to principal and interest are considered adequate but elements may be
present which suggest a susceptibility to impairment sometime in the future.
Baa: Bonds which are rated Baa are considered as medium grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
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 other good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B: Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Caa: Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal
or interest.
Ca: Bonds which are rated Ca represent obligations which are speculative in a
high degree. Such issues are often in default or have other marked
shortcomings.
C: Bonds which are rated C are the lowest rated class of bonds and issues so
rated can be regarded as having extremely poor prospects of ever attaining any
real investment standing.
ABSENCE OF RATING: Where no rating has been assigned or where a rating has
been suspended or withdrawn, it may be for reasons unrelated to the quality of
the issue.
Should no rating be assigned, the reason may be one of the following:
1. An application for rating was not received or accepted.
2. The issue or issuer belongs to a group of securities or companies that
are not rated as a matter of policy.
3. There is a lack of essential data pertaining to the issue or issuer.
4. The issue was privately placed, in which case the rating is not
published in Moody's publications.
Suspension or withdrawal may occur if new and material circumstances arise,
the effects of which preclude satisfactory analysis; if there is no longer
available reasonable up-to-date data to permit a judgment to be formed; if a
bond is called for redemption; or for other reasons.
S&P
AAA: Debt rated AAA has the highest rating assigned by S&P. Capacity to pay
interest and repay principal is extremely strong.
AA: Debt rated AA has a very strong capacity to pay interest and repay
principal and differs from the higher rated issues only in small degree.
A: Debt rated A has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher rated categories.
BBB: Debt rated BBB is regarded as having an adequate capacity to pay interest
and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories.
BB, B, CCC, CC AND C: Debt rated BB, B, CCC, CC and C is regarded, on balance,
as predominantly speculative with respect to capacity to pay interest and
repay principal in accordance with the terms of the obligation. BB indicates
the lowest degree of speculation and C the highest degree of speculation.
While such debt will likely have some quality and protective characteristics,
these are outweighed by large uncertainties or major risk exposures to adverse
conditions.
CI: The rating CI is reserved for income bonds on which no interest is being
paid.
D: Debt rated D is in payment default. The D rating category is used when
interest payments or principal payments are not made on the date due even if
the applicable grace period has not expired, unless S&P 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 if debt service payments 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.
NR: indicates that no public rating has been requested, that there is
insufficient information on which to base a rating, or that S&P does not rate
a particular type of obligation as a matter of policy.
FITCH INVESTORS SERVICE, INC.
AAA: Bonds considered to be investment grade and of the highest credit
quality. The obligor has an exceptionally strong ability to pay interest and
repay principal, which is unlikely to be affected by reasonably foreseeable
events.
AA: Bonds considered to be investment grade and of very high credit quality.
The obligor's ability to pay interest and repay principal is very strong,
although not quite as strong as bonds rated "AAA". Because bonds rated in the
"AAA" and "AA" categories are not significantly vulnerable to foreseeble
future developments, short-term debt of these issuers is generally rated "F-
1pl ".
A: Bonds considered to be investment grade and of high credit quality. The
obligor's ability to pay interest and repay principal is considered to be
strong, but may be more vulnerable to adverse changes in economic conditions
and circumstances than bonds with higher ratings.
BBB: Bonds considered to be investment grade and of satisfactory credit
quality. The obligor's ability to pay interest and repay principal is
considered to be adequate. Adverse changes in economic conditions, however,
are more likely to have adverse impact on these bonds, and therefore impair
timely payment. The likelihood that the ratings of these bonds will fall below
investment grade is higher than for bonds with higher ratings.
BB: Bonds are considered speculative. The obligor's ability to pay interest
and repay principal may be affected over time by adverse economic changes.
However, business and financial alternatives can be identified which could
assist the obligor in satisfying its debt service requirements.
B: Bonds are considered highly speculative. While bonds in this class are
currently meeting debt service requirements, the probability of continued
timely payment of principal and interest reflects the obligor's limited margin
of safety and the need for reasonable business and economic activity
throughout the life of the issue.
CCC: Bonds have certain identifiable characteristics which, if not remedied,
may lead to default. The ability to meet obligations requires an advantageous
business and economic environment.
CC: Bonds are minimally protected. Default in payment of interest and/or
principal seems probable over time.
C: Bonds are in imminent default in payment of interest or principal.
PLUS (+) MINUS (-): Plus and minus signs are used with a rating symbol to
indicate the relative position of a credit within the rating category. Plus and
minus signs, however, are not used in the "AAA" category.
NR: Indicates that Fitch does not rate the specific issue.
CONDITIONAL: A conditional rating is premised on the successful completion of
a project or the occurrence of a specific event.
SUSPENDED: A rating is suspended when Fitch deems the amount of information
available from the issuer to be indadequate for rating purposes.
WITHDRAWN: A rating will be withdrawn when an issue matures or is called or
refinanced, and, at Fitch's discretion, when an issuer fails to furnish proper
and timely information.
FITCHALERT: Ratings are placed on FitchAlert to notify investors of an
occurrence that is likely to result in a rating change and the likely
direction of such change. These are designated as "Positive", indicating a
potential upgrade, "Negative", for potential downgrade, or "Evolving", where
ratings may be raised or lowered. FitchAlert is relatively short-term, and
should be resolved within 12 months.
<PAGE>
Investment Adviser
Massachusetts Financial Services Company
500 Boylston Street
Boston, MA 02116
(617) 954-5000
Distributor
MFS Fund Distributors, Inc.
500 Boylston Street
Boston, MA 02116
(617) 954-5000
Custodian
Investors Bank & Trust Company
89 South Street
Boston, MA 02111
Dividend Disbursing Agent
State Street Bank and Trust Company
225 Franklin Street
Boston, MA 02110
Shareholder Servicing Agent
MFS Service Center, Inc.
500 Boylston Street
Boston, MA 02116
Toll-free: (800) 225-2606
Mailing Address:
P.O. Box 2281
Boston, MA 02107-9906
Independent Auditors
Deloitte & Touche LLP
125 Summer Street
Boston, MA 02110
[LOGO]
MFS(R) LIMITED MATURITY FUND
Prospectus
September 1, 1996
[LOGO]
MFS(R) Limited Maturity Fund
500 Boylston Street
Boston, MA 02116
MLM-1-9/96/65M 36/236/336
<PAGE>
[LOGO]
THE FIRST NAME IN MUTUAL FUNDS
MFS(R) LIMITED STATEMENT OF
MATURITY FUND ADDITIONAL INFORMATION
(A Member of the MFS Family of Funds(R)) September 1, 1996
- - -----------------------------------------------------------------------------
Page
----
1. Definitions ................................................... 2
2. Investment Objectives, Policies and Restrictions .............. 2
3. Management of the Fund ........................................ 7
Trustees .................................................... 7
Officers .................................................... 8
Investment Adviser .......................................... 8
Custodian ................................................... 9
Shareholder Servicing Agent ................................. 9
Distributor ................................................. 10
4. Portfolio Transactions and Brokerage Commissions .............. 10
5. Shareholder Services .......................................... 11
Investment and Withdrawal Programs .......................... 11
Exchange Privilege .......................................... 13
Tax-Deferred Retirement Plans ............................... 13
6. Tax Status .................................................... 14
7. Determination of Net Asset Value and Performance .............. 15
8. Distribution Plans ............................................ 17
9. Description of Shares, Voting Rights and Liabilities .......... 18
10. Independent Auditors and Financial Statements ................. 18
Appendix A .................................................... 20
MFS LIMITED MATURITY FUND
A Series of MFS Series Trust IX
500 Boylston Street, Boston, Massachusetts 02116
(617) 954-5000
This Statement of Additional Information, as amended or supplemented from time
to time (the "SAI"), sets forth information which may be of interest to
investors but which is not necessarily included in the Fund's Prospectus, dated
September 1, 1996. This SAI should be read in conjunction with the Prospectus, a
copy of which may be obtained without charge by contacting the Shareholder
Servicing Agent (see last page for address and phone number).
THIS SAI IS NOT A PROSPECTUS AND IS AUTHORIZED FOR DISTRIBUTION TO PROSPECTIVE
INVESTORS ONLY IF PRECEDED OR ACCOMPANIED BY A CURRENT PROSPECTUS.
<PAGE>
1. DEFINITIONS
"Trust" -- MFS Series Trust IX, a
Massachusetts business trust. The
Trust was known as MFS Fixed Income
Trust prior to January 18, 1995,
and as Massachusetts Financial Bond
Fund prior to January 7, 1992.
"Fund" -- MFS Limited Maturity Fund, a
diversified series of the Trust.
The Fund was known as MFS Quality
Limited Maturity Fund prior to
August 3, 1992.
"MFS" or the "Adviser" -- Massachusetts Financial Services
Company, a Delaware corporation.
"MFD" -- MFS Fund Distributors, Inc., a
Delaware corporation.
"Prospectus" -- The Prospectus of the Fund, dated
September 1, 1996, as amended or
supplemented from time to time.
2. INVESTMENT OBJECTIVES, POLICIES AND RESTRICTIONS
INVESTMENT OBJECTIVES. The primary investment objective of the Fund is to
provide as high a level of current income as is believed to be consistent with
prudent investment risk. The secondary objective of the Fund is to protect
shareholders' capital. Any investment involves risk and there can be no
assurance that the Fund will achieve its investment objectives.
INVESTMENT POLICIES. The investment policies of the Fund are described in the
Prospectus. In addition, certain of the Fund's investment policies are
described in greater detail below.
LADDERING: As one way of managing the Fund's exposure to interest rate
fluctuations, the Adviser will engage in a portfolio management strategy known
as "laddering". Under this strategy, the Fund will allocate a portion of its
assets in securities with remaining maturities of less than 1 year, a portion of
its assets in securities with remaining maturities of 1 to 2 years, a portion of
its assets in securities with remaining maturities of 2 to 3 years, a portion of
its assets in securities with remaining maturities of 3 to 4 years and a portion
of its assets in securities with remaining maturities of 4 to 5 years. Under
normal market conditions, approximately 50% or more of the assets of the Fund
will be devoted to this strategy. The Adviser will actively manage securities
within each rung of the "ladder". "Laddering" does not require that individual
bonds are held to maturity.
The Adviser believes that "laddering" provides additional stability to the
Fund's portfolio by allocating the Fund's assets across a range of securities
with shorter-term maturities. For example, in periods of rising interest rates
and falling bond prices, the bonds with one- and two-year remaining maturities
generally lose less of their value than bonds with four- and five-year remaining
maturities; conversely, in periods of falling interest rates and corresponding
rising bond prices, the principal value of the bonds with four- and five-year
remaining maturities generally increase more than the bonds with one- and
two-year remaining maturities. Furthermore, with the passage of time, individual
bonds held in the Fund's portfolio tend to become less volatile as the time of
their remaining maturity decreases. In addition, bonds with four- and five-year
remaining maturities generally provide higher income than bonds with one- and
two-year remaining maturities.
"Laddering" does not assure profit and does not protect against loss in a
declining market.
REPURCHASE AGREEMENTS: As described in the Prospectus, the Fund may enter into
repurchase agreements with sellers who are member firms (or a subsidiary
thereof) of the New York Stock Exchange (the "Exchange") or members of the
Federal Reserve System, recognized primary U.S. Government securities dealers or
institutions which the Adviser has determined to be of comparable
creditworthiness. The securities that the Fund purchases and holds through its
agent are securities that are issued or guaranteed as to principal and interest
by the U.S. Government, its agencies, authorities or instrumentalities
("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
price agreed upon on the agreed upon delivery date or upon demand, as the case
may be, the Fund will have the right to liquidate the securities. If at the time
the Fund is contractually entitled to exercise its right to liquidate the
securities, the seller is subject to a proceeding under the bankruptcy laws or
its assets are otherwise subject to a stay order, the Fund's exercise of its
right to liquidate the securities may be delayed and result in certain losses
and costs to the Fund. The Fund has adopted and follows procedures which are
intended to minimize the risks of repurchase agreements. For example, the Fund
only enters into repurchase agreements after the Adviser has determined that the
seller is creditworthy, and the Adviser monitors that seller's creditworthiness
on an ongoing basis. Moreover, under such agreements, the value of the
securities (which are marked to market every business day) is required to be
greater than the repurchase price, and the Fund has the right to make margin
calls at any time if the value of the securities falls below the agreed upon
margin.
MORTGAGE PASS-THROUGH SECURITIES. The Fund may invest in mortgage pass-through
securities as described in the Prospectus. Interests in pools of
mortgage-related securities differ from other forms of debt securities, which
normally provide for periodic payment of interest in fixed amounts with
principal payments at maturity or specified call dates. Instead, these
securities provide a monthly payment which consists of both interest and
principal payments. In effect, these payments are a "pass-through" of the
monthly payments made by the individual borrowers on their mortgage loans, net
of any fees paid to the issuer or guarantor of such securities. Additional
payments are caused by prepayments of principal resulting from the sale,
refinancing or foreclosure of the underlying property, net of fees or costs
which may be incurred. Some mortgage pass-through securities (such as securities
issued by the Government National Mortgage Association ("GNMA")) are described
as "modified pass-through." These securities entitle the holder to receive all
interest and principal payments owed on the mortgages in the mortgage pool, net
of certain fees, at the scheduled payment dates regardless of whether the
mortgagor actually makes the payment.
The principal governmental guarantor of mortgage pass-through securities is the
GNMA. 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 FHA-insured or VA-guaranteed mortgages. These guarantees, however, do
not apply to the market value or yield of mortgage pass-though 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., those whose guarantees are not backed by
the full faith and credit of the U.S. Government) include the Federal National
Mortgage Association ("FNMA") and the Federal Home Loan Mortgage Corporation
("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 was created by Congress in 1970 as a corporate instrumentality of the U.S.
Government for the purpose of increasing the availability of mortgage credit for
residential housing. FHLMC issues Participation Certificates ("PCs") which
represent interests in conventional mortgages (i.e., not federally insured or
guaranteed) from 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.
COLLATERALIZED MORTGAGE OBLIGATIONS AND MULTICLASS PASS-THROUGH SECURITIES: As
described in the Prospectus, 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 semiannual basis. The principal of and interest on the Mortgage Assets may be
allocated among the several classes of a series of a CMO in innumerable ways. In
a common structure, payments of principal, including any principal prepayments,
on the Mortgage Assets are applied to the classes of the series of a CMO in the
order of their respective stated maturities or final distribution dates, so that
no payment of principal will be made on any class of CMOs until all other
classes having an earlier stated maturity or final distribution date have been
paid in full.
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.
DOLLAR-DENOMINATED FOREIGN DEBT SECURITIES: The Fund may invest in
dollar-denominated foreign debt securities as discussed in the Prospectus.
Investing in dollar-denominated foreign debt securities generally 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.
MORTGAGE "DOLLAR ROLL" TRANSACTIONS: As described in the Prospectus, the Fund
may enter into mortgage "dollar roll" transactions pursuant to which it sells
mortgage-backed securities for delivery in the future and simultaneously
contracts to repurchase substantially similar securities on a specified future
date. During the roll period, the Fund foregoes principal and interest paid on
the mortgage-backed securities. The Fund is compensated for the lost interest by
the difference between the current sales price and the lower price for the
future purchase (often referred to as the "drop") as well as by the interest
earned on the cash proceeds of the initial sale. The Fund may also be
compensated by receipt of a commitment fee.
ZERO COUPON BONDS: As described in the Prospectus, fixed income securities in
which the Fund may invest also include zero coupon bonds. 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. 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.
LENDING OF PORTFOLIO SECURITIES: As described in the Prospectus, the Fund may
seek to increase its income by lending portfolio securities. The Fund would have
the right to call a loan and obtain the securities loaned at any time on
customary industry settlement notice (which will usually not exceed five days).
The Fund would not, however, have the right to vote any securities having voting
rights during the existence of the loan, but would call the loan in anticipation
of an important vote to be taken among holders of the securities or of the
giving or withholding of their consent on a material matter affecting the
investment.
"WHEN-ISSUED" SECURITIES: As described in the Prospectus, the Fund may purchase
debt securities on a "when-issued" or on a "forward delivery" basis. When the
Fund commits to purchase these securities on such basis, it will set up
procedures consistent with the General Statement of Policy of the Securities and
Exchange Commission (the "SEC") concerning such purchases. Since that policy
currently recommends that an amount of the Fund's assets equal to the amount of
the purchase be held aside or segregated to be used to pay for the commitment,
the Fund will always have cash, short-term money market instruments or high
quality debt securities sufficient to cover any commitments or to limit any
potential risk. Although the Fund does not intend to make such purchases for
speculative purposes and intends to adhere to the provisions of the SEC policy,
purchases of securities on such bases may involve more risk than other types of
purchases. For example, the Fund may have to sell assets which have been set
aside in order to meet redemptions. Also, if the Fund determines it is necessary
to sell the "when-issued" or "forward delivery" securities before delivery, the
Fund may incur a loss because of market fluctuations since the time the
commitment to purchase such securities was made.
INDEXED SECURITIES: The Fund may purchase securities whose prices are indexed to
the prices of other securities, securities indices, currencies, precious metals
or other commodities, or other financial indicators. Indexed securities
typically, but not always, are debt securities or deposits whose value at
maturity (i.e., principal value) or coupon rate is determined by reference to a
specific instrument or statistic. Currency-indexed securities typically are
short-term to intermediate-term debt securities whose maturity values or
interest rates are determined by reference to the values of one or more
specified foreign currencies, and may offer higher yields than U.S.
dollar-denominated securities of equivalent issuers. Currency-indexed securities
may be positively or negatively indexed; that is, their maturity value may
increase when the specified currency value increases, resulting in a security
that performs similarly to a foreign-denominated instrument, or their maturity
value may decline when foreign currencies increase, resulting in a security
whose price characteristics are similar to a put on the underlying currency.
Currency-indexed securities may also have prices that depend on the values of a
number of different foreign currencies relative to each other.
The performance of indexed securities depends to a great extent on the
performance of the security, currency, or other instrument to which they are
indexed, and may also be influenced by interest rate changes in the U.S. and
abroad. At the same time, indexed securities are subject to the credit risks
associated with the issuer of the security, and their values may decline
substantially if the issuer's creditworthiness deteriorates. Recent issuers of
indexed securities have included banks, corporations, and certain U.S.
government agencies.
The policies described above and the policies with respect to Futures Contracts,
Options on Futures Contracts, portfolio trading and the lending of portfolio
securities described below are not fundamental and may be changed without
shareholder approval, as may be the Fund's investment objectives.
FUTURES CONTRACTS: The Fund may enter into contracts for hedging purposes for
the future delivery of domestic or foreign fixed income securities or contracts
based on other financial indices including any index of domestic or foreign
fixed income securities, as such contracts become available for trading
("Futures Contracts"). Such transactions may also be used for non-hedging
purposes, to the extent permitted by applicable law. A "sale" of a Futures
Contract means a contractual obligation to deliver the securities called for by
the contract at a specified price in a fixed delivery month or, in the case of a
Futures Contract, on an index of securities, to make or receive a cash
settlement. A "purchase" of a Futures Contract means a contractual obligation to
acquire the securities called for by the contract at a specified price in a
fixed delivery month or, in the case of a Futures Contract on an index of
securities, to make or receive a cash settlement. U.S. Futures Contracts have
been designed by exchanges which have been designated as "contract markets" by
the Commodity Futures Trading Commission (the "CFTC"), and must be executed
through a futures commission merchant, or brokerage firm, which is a member of
the relevant contract market. Existing contract markets include the Chicago
Board of Trade and the International Monetary Market of the Chicago Mercantile
Exchange. Futures Contracts are traded on these markets, and, through their
clearing corporations, the exchanges guarantee performance of the contracts as
between the clearing members of the exchange. Futures Contracts purchased or
sold by the Fund are also traded on foreign exchanges which are not regulated by
the CFTC.
At the same time a Futures Contract is purchased or sold, the Fund must allocate
cash or securities as a deposit payment ("initial deposit"). The initial deposit
varies but may be as low as 5% or less of the value of the contract. Daily
thereafter, the Futures Contract is valued and the payment of "variation margin"
may be required since each day the Fund would provide or receive cash that
reflects any decline or increase in the contract's value.
At the time of delivery of securities pursuant to a Futures Contract based on
fixed income securities, adjustments are made to recognize differences in value
arising from the delivery of securities with a different interest rate from that
specified in the contract. In some (but not many) cases, securities called for
by a Futures Contract may not have been issued when the contract was written.
A Futures Contract based on an index of securities, such as a municipal bond
index Futures Contract, provides for a cash payment, equal to the amount, if
any, by which the value of the index at maturity is above or below the value of
the index at the time the contract was entered into, times a fixed index
"multiplier". The index underlying such a Futures Contract is generally a broad
based index of securities designed to reflect movements in the relevant market
as a whole. The index assigns weighted values to the securities included in the
index, and its composition is changed periodically.
Although Futures Contracts call for the actual delivery or acquisition of
securities or, in the case of Futures Contracts based on an index, the making or
acceptance of a cash settlement at a specified future time, the contractual
obligation is usually fulfilled before such date by buying or selling, as the
case may be, on a commodities exchange, an identical Futures Contract calling
for settlement in the same month, subject to the availability of a liquid
secondary market. The Fund incurs brokerage fees when it purchases and sells
Futures Contracts.
The purpose of the acquisition or sale of a Futures Contract, in the case of a
portfolio such as that of the Fund, which holds or intends to acquire fixed
income securities, is to attempt to protect the Fund from fluctuations in
interest rates without actually buying or selling fixed income securities. For
example, if the Fund owns bonds, and interest rates were expected to increase,
the Fund might enter into Futures Contracts for the sale of debt securities.
Such a sale would have much the same effect as selling an equivalent value of
the long-term bonds owned by the Fund. If interest rates did increase, the value
of the debt securities in the portfolio would decline, but the value of the
Futures Contracts would increase at approximately the same rate, thereby keeping
the net asset value of the Fund from declining as much as it otherwise would
have. The Fund could accomplish similar results by selling bonds with long
maturities and investing in bonds with short maturities when interest rates are
expected to increase. However, since the futures market is more liquid than the
cash market, the use of Futures Contracts as an investment technique allows the
Fund to maintain a hedging position without having to sell its portfolio
securities.
Similarly, when it is expected that interest rates may decline, Futures
Contracts may be purchased to attempt to hedge against anticipated purchases of
bonds at higher prices. Since the fluctuations in the value of Futures Contracts
should be similar to that of bonds, the Fund could take advantage of the
anticipated rise in the value of bonds without actually buying them until the
market had stabilized. At that time, the Futures Contracts could be liquidated
and the Fund could then buy long-term bonds on the cash market. To the extent
the Fund enters into Futures Contracts for this purpose, the assets in the
segregated asset account maintained to cover the Fund's obligations with respect
to such Futures Contracts will consist of cash, cash equivalents, or short-term
money market instruments from its portfolio in an amount equal to the difference
between the fluctuating market value of such Futures Contracts and the aggregate
value of the initial and variation margin payments made by the Fund with respect
to such Futures Contracts.
The ordinary spreads between prices in the cash and futures markets, due to
differences in the nature of those markets, are subject to distortions. First,
all participants in the futures market are subject to initial deposit and
variation margin requirements. Rather than meeting additional variation margin
requirements, investors may close out Futures Contracts through offsetting
transactions which could distort the normal relationship between the cash and
futures markets. Second, the liquidity of the futures market depends on
participants entering into offsetting transactions rather than making or taking
delivery. To the extent participants decide to make or take delivery, liquidity
in the futures market could be reduced, thus producing distortion. Third, from
the point of view of speculators, the margin deposit requirements in the futures
market are less onerous than margin requirements in the securities market.
Therefore, increased participation by speculators in the futures market may
cause temporary price distortions. Due to the possibility of distortion, a
correct forecast of general interest rate trends by the Adviser may still not
result in a successful transaction.
In addition, Futures Contracts entail risks. Although the Fund believes that use
of such contracts will benefit the Fund, if the Adviser's investment judgment
about the general direction of interest rates is incorrect, the Fund's overall
performance would be poorer than if it had not entered into any such contract.
For example, if the Fund has hedged against the possibility of an increase in
interest rates which would adversely affect the price of bonds held in its
portfolio and interest rates decrease instead, the Fund will lose part or all of
the benefit of the increased value of its bonds which it has hedged because it
will have offsetting losses in its futures positions. In addition, in such
situations, if the Fund has insufficient cash, it may have to sell bonds from
its portfolio to meet daily variation margin requirements. Such sales of bonds
may be, but will not necessarily be, at increased prices which reflect the
rising market. The Fund may have to sell securities at a time when it may be
disadvantageous to do so. Transactions in Futures Contracts for non-hedging
purposes involves greater risks, and could result in losses which are not offset
by gains on other portfolio assets.
OPTIONS ON FUTURES CONTRACTS: The Fund intends to purchase and write options on
Futures Contracts ("Options on Futures Contracts") for hedging purposes and for
non-hedging purposes, to the extent permitted by applicable law. An Option on a
Futures Contract provides the holder with the right to enter into a "long"
position in the underlying Futures Contract (in the case of a call option) or a
"short" position in the underlying Futures Contract, in the case of a put
option, at a fixed exercise price up to a stated expiration date or (in the case
of certain options) on such date. Such Options on Futures Contracts will be
traded on U.S. contract markets regulated by the CFTC as well as on foreign
exchanges. Depending on the pricing of the option compared to either the price
of the Futures Contract upon which it is based or the price of the underlying
debt securities, it may or may not be less risky than ownership of the Futures
Contract or underlying debt securities. As with the purchase of Futures
Contracts, when the Fund is not fully invested it may purchase a call Option on
a Futures Contract to hedge against a market advance due to declining interest
rates.
The writing of a call Option on a Futures Contract constitutes a partial hedge
against declining prices of the securities which are deliverable upon exercise
of the Futures Contract. If the futures price at expiration of the option is
below the exercise price, the Fund will retain the full amount of the option
premium which provides a partial hedge against any decline that may have
occurred in the Fund's portfolio holdings. The writing of a put Option on a
Futures Contract constitutes a partial hedge against increasing prices of the
securities which are deliverable upon exercise of the Futures Contract. If the
futures price at expiration of the option is higher than the exercise price, the
Fund will retain the full amount of the option premium, less related transaction
costs, which provides a partial hedge against any increase in the price of
securities which the Fund intends to purchase. If a put or call option the Fund
has written is exercised, the Fund will incur a loss which will be reduced by
the amount of the premium it receives, less related transaction costs. Depending
on the degree of correlation between changes in the value of its portfolio
securities and changes in the value of its futures positions, the Fund's losses
from existing Options on Futures Contracts may to some extent be reduced or
increased by changes in the value of portfolio securities. The writer of an
Option on a Futures Contract is subject to the requirement of initial and
variation margin payments. The Fund will cover the writing of call Options on
Futures Contracts through purchases of the underlying Futures Contract or
through ownership of the security, or securities included in the index,
underlying the Futures Contract. The Fund may also cover the writing of call
Options on Futures Contracts through the purchase of such Options, provided that
the exercise price of the call purchased (a) is equal to or less than the
exercise price of the call written; or (b) is greater than the exercise price of
the call written if the difference is maintained by the Fund in cash, short-term
money market instruments or high quality debt securities in a segregated account
with the Fund's custodian. The Fund may cover the writing of put Options on
Futures Contracts through sales of the underlying Futures Contract or through
segregation of cash, short-term money market instruments or high quality debt
securities in an amount equal to the value of the security or index underlying
the Futures Contract. The Fund may also cover the writing of put Options on
Futures Contracts through the purchase of such Options, provided that the
exercise price of the put purchased is equal to or greater than the exercise
price of the put written, or is less than the exercise price of the put written
if the difference is maintained by the Fund in cash, short-term money market
instruments or high quality debt securities in a segregated account with its
custodian. In addition, the Fund may cover put and call Options on Futures
Contracts in accordance with the requirements of the exchange on which the
option is traded and applicable laws and regulations.
The Fund may also purchase straddles on Options on Futures Contracts in order to
protect against risk of loss arising as a result of anticipated changes in
volatility in the interest rate or fixed income markets. Under such
circumstances, if the anticipated changes in volatility in the market do not
occur, the Fund could be required to forfeit one or both of the premiums paid
for the Options.
The purchase of a put Option on a Futures Contract is similar in some respects
to the purchase of protective put options on portfolio securities. The Fund will
purchase a put Option on a Futures Contract to hedge the Fund's portfolio
against the risk of rising interest rates.
The amount of risk the Fund assumes when it purchases an Option on a Futures
Contract is the premium paid for the Option plus related transaction costs,
although in order to realize a profit it may be necessary to exercise the Option
and close out the underlying Futures Contract. In addition to the correlation
risks discussed above, the purchase of an Option also entails the risk that
changes in the value of the underlying Futures Contract will not be fully
reflected in the value of the option purchased.
ADDITIONAL RISKS OF INVESTING IN FUTURES CONTRACTS AND OPTIONS ON FUTURES
CONTRACTS: Various additional risks exist with respect to the trading of Futures
Contracts and Options on Futures Contracts. For example, the Fund's ability
effectively to hedge all or a portion of its portfolio through transactions in
such instruments will depend on the degree to which price movements in the
underlying index or instrument correlate with price movements in the relevant
portion of the Fund's portfolio. The trading of futures entails the additional
risk of imperfect correlation between movements in the futures and the price of
the underlying index or obligation. The anticipated spread between the prices
may be distorted because of various factors, which are set forth under "Futures
Contracts" above. When the Fund purchases or sells Futures Contracts based on an
index of securities, the securities comprising such index will not be the same
as the portfolio securities being hedged, thereby creating a risk that changes
in the value of the index will not correlate with changes in the value of such
portfolio securities.
The Fund's ability to engage in futures strategies will also depend on the
availability of liquid markets in such instruments. The liquidity of a secondary
market in a Futures Contract or option thereon may be adversely affected by
"daily price fluctuation limits", established by exchanges, which limit the
amount of fluctuation in the price of a contract during a single trading day and
prohibit trading beyond such limit. In addition, the exchanges on which futures
are traded may impose limitations governing the maximum number of positions on
the same side of the market and involving the same underlying instrument which
may be held by a single investor, whether acting alone or in concert with others
(regardless of whether such contracts are held on the same or different
exchanges or held or written in one or more accounts or through one or more
brokers).
In addition, Futures Contracts and Options on Futures Contracts may be traded on
foreign exchanges. Such transactions are subject to the risk of governmental
actions affecting trading in or the prices of foreign currencies or securities.
The value of such positions also could be adversely affected by (i) other
complex foreign, political and economic factors, (ii) lesser availability than
in the U.S. of data on which to make trading decisions, (iii) delays in the
Fund's ability to act upon economic events occuring in foreign markets during
non-business hours in the U.S., (iv) the imposition of different exercise and
settlement terms and procedures and margin requirements than in the United
States, and (v) lesser trading volume.
RESTRICTIONS ON THE USE OF OPTIONS AND FUTURES: In order to assure that the Fund
will not be deemed to be a "commodity pool" for purposes of the Commodity
Exchange Act, regulations of the CFTC require that the Fund enter into
transactions in Futures Contracts and Options on Futures Contracts only (i) for
bona fide hedging purposes (as defined in CFTC regulations), or (ii) for
non-hedging purposes, provided that the aggregate initial margin and premiums on
such non-hedging positions does not exceed 5% of the liquidation value of the
Fund's assets. In addition, the Fund must comply with the requirements of
various state securities laws in connection with such transactions.
PORTFOLIO TRADING: As described in the Prospectus, the Fund intends to engage in
portfolio trading rather than holding portfolio securities to maturity. Such
trading may involve the selling of securities held for a short time, ranging
from several months to less than a day and may be limited by tax restrictions.
In trading portfolio securities, the Fund may use the following strategies:
(1) shortening the average maturity of its portfolio in anticipation of a
rise in interest rates so as to minimize depreciation of principal;
(2) lengthening the average maturity of its portfolio in anticipation of a
decline in interest rates so as to maximize appreciation of principal;
(3) changing the average coupon of its portfolio when yield disparities
reflect a change in investment value among securities trading at differing
levels of premiums or discounts;
(4) selling one type of debt security (e.g., industrial bonds) and buying
another (e.g., utility bonds) when disparities arise in the relative values of
each; and
(5) changing from one debt security to an essentially similar debt security
when their respective yields are distorted due to market factors.
These strategies may result in minor temporary increases or decreases in the
Fund's current income available for distribution to its shareholders, and in its
holding debt securities which sell at moderate to substantial premiums or
discounts from face value. If the Fund's expectations of changes in interest
rates or the Fund's evaluation of the normal yield relationship between two
securities proves to be incorrect, the Fund's income, net asset value and
potential capital gain may be reduced or its potential capital loss may be
increased.
The Fund's limitations, policies and rating restrictions are adhered to at the
time of purchase or utilization of assets; a subsequent change in circumstances
will not be considered to result in a violation of policy.
INVESTMENT RESTRICTIONS. The Fund has adopted the following restrictions which
cannot be changed without the approval of the holders of a majority of the
Fund's shares (which, as used in this SAI, means the lesser of (i) more than 50%
of the outstanding shares of the Trust or a series or class, as applicable, or
(ii) 67% or more of the outstanding shares of the Trust or a series or class, as
applicable, present at a meeting if the holders of more than 50% of the
outstanding shares of the Trust or a series or class, as applicable, are
represented in person or by proxy).
The Fund may not:
(1) borrow money in an amount in excess of 33 1/3% of its gross assets, and
then only as a temporary measure for extraordinary or emergency purposes, or
pledge, mortgage or hypothecate an amount of its assets (taken at market
value) in excess of 33 1/3% of its gross assets, in each case taken at the
lower of cost or market value and subject to a 300% asset coverage requirement
(for the purpose of this restriction, collateral arrangements with respect to
options, Futures Contracts, Options on Futures Contracts, foreign currency,
forward foreign currency contracts and options on foreign currencies and
payments of initial and variation margin in connection therewith are not
considered a pledge of assets);
(2) underwrite securities issued by other persons except insofar as the Fund
may technically be deemed an underwriter under the Securities Act of 1933 in
selling a portfolio security;
(3) concentrate its investments in any particular industry, but if it is
deemed appropriate for the achievement of its investment objectives, the Fund
may invest up to 25% of its assets (taken at market value at the time of each
investment) in securities of issuers in any one industry;
(4) purchase or sell real estate (including limited partnership interests
but excluding securities of companies, such as real estate investment trusts,
which deal in real estate or interests therein), or mineral leases,
commodities or commodity contracts (except options, Futures Contracts, Options
on Futures Contracts, foreign currency, forward foreign currency contracts and
options on foreign currencies) in the ordinary course of its business. The
Fund reserves the freedom of action to hold and to sell real estate or mineral
leases, commodities or commodity contracts (including options, Futures
Contracts, Options on Futures Contracts, foreign currency, forward foreign
currency contracts and options on foreign currencies) acquired as a result of
the ownership of securities. The Fund will not purchase securities for the
purpose of acquiring real estate or mineral leases, commodities or commodity
contracts (except options, Futures Contracts, Options on Futures Contracts,
foreign currency, forward foreign currency contracts and options on foreign
currencies);
(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 in accordance with its investment objectives and policies, the
lending of portfolio securities, or the investment of the Fund's assets in
repurchase agreements, shall not be considered the making of a loan;
(6) invest for the purpose of exercising control or management;
(7) purchase any securities or evidences of interest therein on margin,
except to make deposits on margin in connection with options, Futures
Contracts, Options on Futures Contracts, foreign currency, forward foreign
currency contracts and options on foreign currencies, and except that the Fund
may obtain such short-term credit as may be necessary for the clearance of
purchases and sales of securities;
(8) 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; or
(9) purchase or sell any put or call option or any combination thereof,
provided, that this shall not prevent the purchase, ownership, holding or sale
of warrants where the grantor of the warrants is the issuer of the underlying
securities or the writing, purchasing and selling of puts, calls or
combinations thereof with respect to securities, Futures Contracts and foreign
currencies.
As a non-fundamental policy, the Fund will not 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 unaudited 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 assets (taken at market value) would be invested in such securities.
STATE AND FEDERAL RESTRICTIONS: In order to comply with certain federal and
state statutes and regulatory policies, as a matter of operating policy of the
Fund, the Fund will not: (a) invest more than 5% of the Fund's total assets at
the time of investment in unsecured obligations of issuers which, including
predecessors, controlling persons, sponsoring entities, general partners and
guarantors, have a record of less than three years' continuous business
operation or relevant business experience; (b) purchase voting securities of any
issuer if such purchase, at the time thereof, would cause more than 10% of the
outstanding voting securities of such issuer to be held by the Fund; (c)
purchase securities issued by any other 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 the Fund shall not purchase
such securities if such purchase at the time thereof would cause (i) more than
5% of the Fund's total assets (taken at market value) to be invested in the
securities of any one issuer or (ii) more than 10% of the Fund's total assets
(taken at market value) to be invested in the securities of such issuers or
(iii) more than 3% of the outstanding voting securities of any such issuer to be
held by the Fund; and, provided further, that the Fund shall not purchase
securities issued by any open-end investment company; (iv) 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 an officer or Director of the Adviser if, after the purchase of the
securities of such issuer by the Fund, one or more of such persons owns
beneficially more than 1/2 of 1% of the shares or securities, or both, of such
issuer, and such persons owning more than 1/2 of 1% of such shares or securities
together own beneficially more than 5% of such shares or securities, or both.
In addition, as a non-fundamental policy, 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. Furthermore, purchases of
warrants will not exceed 5% of the Fund's net assets. Included within that
amount, but not exceeding 2% of the Fund's net assets, may be warrants not
listed on the New York or American Stock Exchange.
As a "diversified" investment portfolio under the Investment Company Act of 1940
(the "1940 Act"), the Fund will maintain at least 75% of its assets in (i) cash,
(ii) cash items, (iii) U.S. Government Securities and (iv) other securities,
limited per issuer to blocks of less than 5% of the Fund's total assets.
The investment policies described under "State and Federal Restrictions" are not
fundamental and may not be changed without shareholder approval.
3. MANAGEMENT OF THE FUND
The Trust's Board of Trustees provides broad supervision over the affairs of the
Fund. The Adviser is responsible for the investment management of the Fund's
assets and the officers of the Trust are responsible for its operations. The
Trustees and officers of the Trust are listed below, together with their
principal occupations during the past five years. (Their titles may have varied
during that period.)
TRUSTEES
A. KEITH BRODKIN,* Chairman and President
Massachusetts Financial Services Company, Chairman
RICHARD B. BAILEY*
Private Investor; Massachusetts Financial Services Company, former Chairman
(prior to September 30, 1991); Cambridge Bancorp, Director; Cambridge Trust
Company, Director
PETER G. HARWOOD
Private Investor
Address: 211 Lindsay Pond Road, Concord, Massachusetts
J. ATWOOD IVES
Eastern Enterprises (diversified holding company), Chairman and Chief Executive
Officer (since December 1991); General Cinema Corporation, Vice Chairman and
Chief Financial Officer (prior to December 1991); The Neiman Marcus Group,
Inc., Vice Chairman and Chief Financial Officer (prior to February, 1992)
Address: 9 Riverside Road, Weston, Massachusetts
LAWRENCE T. PERERA
Hemenway & Barnes (attorneys), Partner
Address: 60 State Street, Boston, Massachusetts
WILLIAM J. POORVU
Harvard University Graduate School of Business Administration, Adjunct
Professor; CBL & Associates Properties, Inc. (a real estate investment trust),
Director; The Baupost Fund (a registered investment company), Vice Chairman
(since November 1993), Chairman and Trustee (prior to November 1993)
Address: Harvard Business School, Soldiers Field Road, Cambridge,
Massachusetts
CHARLES W. SCHMIDT
Private Investor; OHM Corporation Director; The Boston Company, Director;
Boston Safe Deposit and Trust Company, Director; Mohawk Paper Company,
Director
Address: 30 Colpitts Road, Weston, Massachusetts
ARNOLD D. SCOTT*
Massachusetts Financial Services Company, Senior Executive Vice President,
Secretary and Director
JEFFREY L. SHAMES*
Massachusetts Financial Services Company, President and Director
ELAINE R. SMITH
Independent Consultant; Brigham and Women's Hospital, Executive Vice President
and Chief Operating Officer (prior to September 1992)
Address: Weston, Massachusetts
DAVID B. STONE
North American Management Corp. (investment adviser), Chairman and Director;
Eastern Enterprises, Director
Address: 10 Post Office Square, Suite 300, Boston, Massachusetts
OFFICERS
W. THOMAS LONDON,* Treasurer
Massachusetts Financial Services Company, Senior Vice President
JAMES O. YOST,* Assistant Treasurer
Massachusetts Financial Services Company, Vice President
STEPHEN E. CAVAN,* Secretary and Clerk
Massachusetts Financial Services Company, Senior Vice President, General
Counsel and Assistant Secretary
JAMES R. BORDEWICK, JR.,* Assistant Secretary
Massachusetts Financial Services Company, Vice President and Associate General
Counsel
ROBERT A. DENNIS,* Vice President
Massachusetts Financial Services Company, Senior Vice President
GEOFFREY L. KURINSKY,* Vice President
Massachusetts Financial Services Company, Senior Vice President
- - ----------
*"Interested persons" (as defined in the 1940 Act) of the Adviser, whose address
is 500 Boylston Street, Boston, Massachusetts.
Each Trustee and officer holds comparable positions with certain affiliates of
MFS or with certain other funds of which MFS or a subsidiary is the investment
adviser or distributor. Mr. Brodkin, the Chairman of MFD, Messrs. Shames and
Scott, Directors of MFD, and Mr. Cavan, the Secretary of MFD, and hold similar
positions with certain other MFS affiliates. Mr. Bailey is a Director of Sun
Life Assurance Company of Canada (U.S.) ("Sun Life of Canada (U.S.)"), the
corporate parent of MFS.
The Fund pays the compensation of non-interested Trustees and Mr. Bailey (who
currently receive a fee of $1,000 per year plus $65 per meeting and $50 per
committee meeting attended, together with such Trustee's out-of-pocket expenses)
and has adopted a retirement plan for non-interested Trustees and Mr. Bailey.
Under this plan, a Trustee will retire upon reaching age 73 and if the Trustee
has completed at least five years of service, he would be entitled to annual
payments during his lifetime of up to 50% of such Trustee's average annual
compensation (based on the three years prior to his retirement) depending on his
length of service. A Trustee may also retire prior to age 73 and receive reduced
payments if he has completed at least five years of service. Under the plan, a
Trustee (or his beneficiaries) will also receive benefits for a period of time
in the event the Trustee is disabled or dies. These benefits will also be based
on the Trustee's average annual compensation and length of service. There is no
retirement plan provided by the Trust for Messrs. Brodkin, Scott and Shames. The
Fund will accrue its allocable share of compensation expenses each year to cover
current year's service and amortize past service cost.
Set forth in Appendix A hereto is certain information concerning the cash
compensation paid to the Trustees and benefits accrued, and estimated benefits
payable, under the retirement plan.
As of July 31, 1996, all Trustees and officers as a group owned 2.8% of the
outstanding Class A shares of the Fund. As of July 31, 1996, Merrill Lynch,
Pierce, Fenner & Smith Inc., P.O. Box 45286, Jacksonville, FL 32232-5286, was
the owner of approximately 11.06% of the outstanding Class B shares of the Fund.
As of July 31, 1996 NFSC FEBO #OWC-698784, The Somerset Group Inc., Attn: Joseph
M. Richter, 135 N. Pennsylvania Street, Suite 2800, Indianapolis, Indiana
46204-4408, was the owner of approximately 20.58% of the outstanding Class C
shares of the Fund.
The Declaration of Trust provides that the Trust will indemnify its Trustees and
officers against liabilities and expenses incurred in connection with litigation
in which they may be involved because of their offices with the Trust, unless,
as to liabilities to the Trust or its shareholders, it is finally adjudicated
that they engaged in willful misfeasance, bad faith, gross negligence or
reckless disregard of the duties involved in their offices, or with respect to
any matter unless it is adjudicated that they did not act in good faith in the
reasonable belief that their actions were in the best interest of the Trust. In
the case of settlement, such indemnification will not be provided unless it has
been determined pursuant to the Declaration of Trust, that such officers or
Trustees have not engaged in willful misfeasance, bad faith, gross negligence or
reckless disregard of their duties.
INVESTMENT ADVISER
MFS and its predecessor organizations have a history of money management dating
from 1924. MFS is a subsidiary of Sun Life of Canada (U.S.) which in turn is a
wholly owned subsidiary of Sun Life Assurance Company of Canada ("Sun Life").
The Adviser manages the assets of the Fund pursuant to an Investment Advisory
Agreement, dated January 8, 1992 (the "Advisory Agreement"). The Adviser
provides the Fund with overall investment advisory and administrative services,
as well as general office facilities. Subject to such policies as the Trustees
may determine, the Adviser makes investment decisions for the Fund. For its
services and facilities, the Adviser receives a management fee, computed and
paid monthly, at the rate of 0.40% per annum of the Fund's average daily net
assets.
The Adviser has agreed to pay certain expenses of the Fund (except for the fees
paid under the Advisory Agreement and the Distribution Plans) until February 28,
2002 and to pay the expenses relating to the organization of the Fund, all
subject to reimbursement by the Fund. To accomplish such reimbursement, the
Adviser receives an expense reimbursement fee from the Fund in addition to the
investment advisory and distribution fees, computed and paid monthly at a rate
of 0.40% per annum of the average daily net assets of the Fund. The expense
reimbursement agreement terminates for the Fund on the earlier of either (i) the
date on which the payments made thereunder by the Fund equal the prior payment
of such reimbursable expenses by the Adviser or (ii) February 28, 2002. The
Adviser may also terminate the expense reimbursement agreement at any time by
written notice to the Trust.
For the Fund's fiscal year ended April 30, 1996, the Fund received fees under
the Advisory Agreement of $489,030 (equivalent on an annualized basis to 0.40%
of average net assets).
For the Fund's fiscal year ended April 30, 1995, MFS received fees under the
Advisory Agreement of $453,367 (equivalent on an annualized basis to 0.40% of
average net assets).
For the Fund's fiscal year ended April 30, 1994, the Fund incurred fees under
the Advisory Agreement of $478,523 (equivalent on an annualized basis to 0.51%
of average net assets) of which $192,571 (equivalent on an annualized basis to
0.20% of average net assets) was not imposed. For the same period, MFS paid
expenses of the Fund amounting to $391,561 (equivalent to 0.42% of the Fund's
average daily net assets) for which the Fund reimbursed MFS $373,831 (equivalent
to 0.40% of the Fund's average daily net assets).
In order to comply with the expense limitations of certain state securities
commissions, the Adviser will reduce its management fee or otherwise reimburse
the Fund for any expenses, exclusive of interest, taxes and brokerage
commissions, incurred by the Fund in any fiscal year to the extent such expenses
exceed the most restrictive of such state expense limitations. The Adviser will
make appropriate adjustments to such reductions and reimbursements in response
to any amendment or rescission of the various state requirements.
The Fund pays all of the Fund's expenses (other than those assumed by the
Adviser or MFD) including: governmental fees; interest charges; taxes;
membership dues in the Investment Company Institute allocable to the Fund; fees
and expenses of independent auditors, of legal counsel, and of any transfer
agent, registrar or dividend disbursing agent of the Fund; expenses of
repurchasing and redeeming shares; expenses of preparing, printing and mailing
share certificates, periodic reports, notices and proxy statements to
shareholders and to governmental officers and commissions; brokerage and other
expenses connected with the execution, recording and settlement of portfolio
security transactions; insurance premiums; fees and expenses of Investors Bank &
Trust Company, the 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 Fund's Distribution Agreement
with MFD requires MFD to pay for prospectuses that are to be used for sales
purposes. Expenses of the Trust which are not attributable to a specific series
are allocated among the series in a manner believed by management of the Trust
to be fair and equitable. MFS has agreed to pay the foregoing expenses of the
Fund (except for the fees paid under the Advisory Agreement and the Distribution
Plans) subject to reimbursement by the Fund as described in the Prospectus. For
a list of expenses, including the compensation paid to the Trustees who are not
officers of Adviser, for the fiscal year ended April 30, 1996, see "Statement of
Operations" in the Annual Report to the Fund's shareholders.
MFS pays the compensation of the Trust's officers and of any Trustee who is an
officer of MFS. The Adviser also furnishes at its own expense all necessary
administrative services, including office space, equipment, clerical personnel,
investment advisory facilities, and all executive and supervisory personnel
necessary for managing the Fund's investments, effecting the Fund's portfolio
transactions and, in general, administering the Fund's affairs.
The Advisory Agreement will remain in effect until August 1, 1997, and will
continue in effect thereafter only if such continuance is specifically approved
at least annually by the Board of Trustees or by vote of a majority of the
Fund's shares (as defined in "Investment Restrictions") and, in either case, by
a majority of the Trustees who are not parties to the Advisory Agreement or
interested persons of any such party. The Advisory Agreement terminates
automatically if it is assigned and may be terminated without penalty by vote of
a majority of the Fund's shares (as defined in "Investment Restrictions") or by
either party on not more than 60 days' nor less than 30 days' written notice.
The Advisory Agreement 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." The
Advisory Agreement further provides that MFS may render services to others. 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.
CUSTODIAN
Investors Bank & Trust Company (the "Custodian") is the custodian of the Trust'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 Trustees have reviewed and approved as in the best interest of
the Fund and its shareholders custodial arrangements with The Chase Manhattan
Bank for securities of the Fund held outside the United States. The Custodian
has contracted with the Adviser for the Adviser to perform certain accounting
functions related to options transactions for which the Adviser receives
remuneration on a cost basis.
SHAREHOLDER SERVICING AGENT
MFS Service Center, Inc. (the "Shareholder Servicing Agent"), a wholly owned
subsidiary of MFS, is the Fund's shareholder servicing agent, pursuant to a
Shareholder Servicing Agreement, dated December 2, 1985 (the "Agency
Agreement"). The Shareholder Servicing Agent's responsibilities under the Agency
Agreement include administering and performing transfer agent functions and
keeping records in connection with the issuance, transfer and redemption of each
class of shares of the Fund. For these services, the Shareholder Servicing Agent
will receive a fee calculated as a percentage of the average daily net assets of
each class of shares at an effective annual rate of up to 0.15%, up to 0.22% and
up to 0.15% attributable to Class A, Class B and Class C shares, respectively.
In addition, the Shareholder Servicing Agent will be reimbursed by the Fund for
certain expenses incurred by the Shareholder Servicing Agent on behalf of the
Fund. The Custodian has contracted with the Shareholder Servicing Agent to
perform certain dividend and distribution disbursing functions for the Fund.
DISTRIBUTOR
MFD, a wholly owned subsidiary of MFS, serves as distributor for the continuous
offering of shares of the Fund pursuant to a distribution agreement, dated as of
January 1, 1995 (the "Distribution Agreement"). Prior to January 1, 1995, MFS
Financial Services, Inc. ("FSI"), another wholly owned subsidiary of MFS, was
the Fund's distributor. Where this SAI refers to MFD in relation to the receipt
or payment of money with respect to a period or periods prior to January 1,
1995, such reference shall be deemed to include FSI, as the predecessor in
interest to MFD.
CLASS A SHARES: MFD acts as agent in selling Class A Shares of the Fund to
dealers. The public offering price of the Class A shares of the Fund is their
net asset value next computed after the sale plus a sales charge which varies
based upon the quantity purchased. The public offering price of a Class A share
of the Fund is calculated by dividing the net asset value of a Class A share by
the difference (expressed as a decimal) between 100% and the sales charge
percentage of offering price applicable to the purchase (see "Purchases" in the
Prospectus). The sales charge scale set forth in the Prospectus applies to
purchases of Class A shares of the Fund alone or in combination with shares of
all classes of certain other funds in the MFS Family of Funds (the "MFS Funds")
and other funds (as noted under Right of Accumulation) by any person, including
members of a family unit (e.g., husband, wife and minor children) and bona fide
trustees for the benefit of such persons, and also applies to purchases made
under the Right of Accumulation or a Letter of Intent (see "Investment and
Withdrawal Programs" below. A group might qualify to obtain quantity sales
charge discounts (see "Investment and Withdrawal Programs" below.
Class A shares of the Fund may be sold at their net asset value to certain
persons and in certain transactions as described in the Prospectus. Such sales
are made without a sales charge to promote good will with employees and others
with whom MFS, MFD and/or the Fund have business relationships, and because the
sales effort, if any, involved in making such sales is negligible.
MFD allows discounts to dealers (which are alike for all dealers) from the
applicable public offering price of Class A shares. Dealer allowances expressed
as a percentage of offering price for all offering prices are set forth in the
Prospectus (see "Purchases" in the Prospectus). The difference between the total
amount invested and the sum of (a) the net proceeds to the Fund and (b) the
dealer commission is the commission paid to the distributor. Because of rounding
in the computation of offering price, the portion of the sales charge paid to
the distributor may vary and the total sales charge may be more or less than the
sales charge calculated using the sales charge expressed as a percentage of
offering price or as a percentage of the net amount invested as listed in the
Prospectus. In the case of the maximum sales charge, the dealer retains 2 1/4%
and MFD retains approximately 1/4 of 1% of the public offering price. In
addition, MFD pays a commission to dealers who initiate and are responsible for
purchases of $1 million or more as described in the Prospectus.
CLASS B AND CLASS C SHARES: MFD acts as agent in selling Class B and Class C
shares of the Fund to dealers. The public offering price of Class B and Class C
shares is their net asset value next computed after the sale (see "Purchases" in
the Prospectus).
GENERAL: Neither MFD nor dealers are permitted to delay placing orders to
benefit themselves by a price change. On occasion, MFD may obtain brokers loans
from various banks, including the custodian banks for the MFS Funds, to
facilitate the settlement of sales of shares of the Fund to dealers. MFD may
benefit from its temporary holding of funds paid to it by investment dealers for
the purchase of Fund shares.
During the Fund's fiscal year ended April 30, 1996, MFD received sales charges
of $40,392 and dealers received sales charges of $361,224 (as their concession
on gross sales charges of $401,666) for selling Class A shares of the Fund; the
Fund received $41,285,343 representing the aggregate net asset value of such
shares.
During the Fund's fiscal year ended April 30, 1995, MFD received sales charges
of $32,223 and dealers received sales charges of $284,007 (as their concession
on gross sales charges of $316,230) for selling Class A shares of the Fund; the
Fund received $27,804,903 representing the aggregate net asset value of such
shares.
During the Fund's fiscal year ended April 30, 1994, MFD received sales charges
of $72,561 and dealers received sales charges of $1,044,318 (as their concession
on gross sales charges of $1,116,879) for selling Class A shares of the Fund;
the Fund received $85,507,092 representing the aggregate net asset value of such
shares.
During the fiscal years ended April 30, 1994, 1995 and 1996, the contingent
deferred sales charge ("CDSC") imposed on redemptions of Class B shares was
$5,136, $54,304 and $43,291, respectively. For the fiscal year ended April 30,
1996, the contingent deferred sales charge ("CDSC") imposed on redemption of
Class A and Class C shares was $412, and $-0-, respectively.
The Distribution Agreement will remain in effect until August 1, 1997, and will
continue in effect thereafter only if such continuance is specifically approved
at least annually by the Board of Trustees or by vote of a majority of the
Trust's shares (as defined in "Investment Restrictions") and, in either case, by
a majority of the Trustees who are not parties to such Distribution Agreement or
interested persons of any such party. The Distribution Agreement terminates
automatically if it is assigned and may be terminated without penalty by either
party on not more than 60 days' nor less than 30 days' notice.
4. PORTFOLIO TRANSACTIONS AND BROKERAGE COMMISSIONS
Specific decisions to purchase or sell securities for the Fund are made by a
portfolio manager who is an employee of the Adviser and who is appointed and
supervised by its senior officers. Changes in the Fund's investments are
reviewed by its Board of Trustees. The Fund's portfolio manager may serve other
clients of the Adviser or any subsidiary of the Adviser in a similar capacity.
The primary consideration in placing portfolio security transactions is
execution at the most favorable prices. The Adviser has complete freedom as to
the markets in and the broker-dealers through which it seeks this result. Debt
securities are traded principally in the over-the-counter market on a net basis
through dealers acting for their own account and not as brokers. The cost of
securities purchased from underwriters includes an underwriter's commission or
concession, and the prices at which securities are purchased and sold from and
to dealers include a dealer's mark-up or mark-down. The Adviser normally seeks
to deal directly with the primary market-makers unless, in its opinion, better
prices are available elsewhere. Securities firms or futures commission merchants
may receive brokerage commissions on transactions involving Futures Contracts
and Options on Futures Contracts. Subject to the requirement of seeking
execution at the best available price, securities may, as authorized by the
Advisory Agreement, be bought from or sold to dealers who have furnished
statistical, research and other information or services to the Adviser. At
present no recapture arrangements are in effect.
Consistent with the foregoing primary consideration, the Rules of Fair Practice
of the NASD and such other policies as the Trustees may determine, the Adviser
may consider sales of shares of the Fund and of the other investment company
clients of MFD as a factor in the selection of broker-dealers to execute the
Fund's portfolio transactions.
In certain instances there may be securities which are suitable for the Fund's
portfolio as well as for that of one or more of the other clients of the Adviser
or any subsidiary of the Adviser. Investment decisions for the Fund and for such
other clients are made with a view to achieving their respective investment
objectives. It may develop that a particular security is bought or sold for only
one client even though it might be held by, or bought or sold for, other
clients. Likewise, a particular security may be bought for one or more clients
when one or more other clients are selling that same security. Some simultaneous
transactions are inevitable when several clients receive investment advice from
the same investment adviser, particularly when the same security is suitable for
the investment objectives of more than one client. When two or more clients are
simultaneously engaged in the purchase or sale of the same security, the
securities are allocated among clients in a manner believed by the Adviser to be
equitable to each. It is recognized that in some cases this system could have a
detrimental effect on the price or volume of the security as far as the Fund is
concerned. In other cases, however, the Fund believes that the Fund's ability to
participate in volume transactions will produce better executions for the Fund.
For the fiscal year ended April 30, 1996, the Fund did not acquire or sell
securities issued by regular broker-dealers of the Fund.
5. SHAREHOLDER SERVICES
INVESTMENT AND WITHDRAWAL PROGRAMS -- The Fund makes available the following
programs designed to enable shareholders to add to their investment or withdraw
from it with a minimum of paper work. These are described below and, in certain
cases, in the Prospectus. The programs involve no extra charge to shareholders
(other than a sales charge in the case of certain Class A share purchases) and
may be changed or discontinued at any time by a shareholder or the Fund.
LETTER OF INTENT: If a shareholder (other than a group purchaser described
below) anticipates purchasing $50,000 or more of Class A shares of the Fund
alone or in combination with shares of 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 the Shareholder Servicing Agent) within 90 days of
the commencement of purchases. Subject to acceptance by MFD and the conditions
mentioned below, each purchase will be made at a public offering price
applicable to a single transaction of the dollar amount specified in the Letter
of Intent application. The shareholder or his dealer must inform MFD that the
Letter of Intent is in effect each time shares are purchased. The shareholder
makes no commitment to purchase additional shares, but if his purchases within
13 months (or 36 months in the case of purchases of $1 million or more) plus the
value of shares credited toward completion of the Letter of Intent do not total
the sum specified, he will pay the increased amount of the sales charge as
described below. Instructions for issuance of shares in the name of a person
other than the person signing the Letter of Intent application must be
accompanied by a written statement from the dealer stating that the shares were
paid for by the person signing such Letter. Neither income dividends nor capital
gain distributions taken in additional shares will apply toward the completion
of the Letter of Intent. Dividends and distributions of other MFS Funds
automatically reinvested in shares of the Fund pursuant to the Distribution
Investment Program will also not apply toward completion of the Letter of
Intent.
Out of the shareholder's initial purchase (or subsequent purchases if
necessary), 5% of the dollar amount specified in the Letter of Intent
application shall be held in escrow by the Shareholder Servicing Agent in the
form of shares registered in the shareholder's name. All income dividends and
capital gain distributions on escrowed shares will be paid to the shareholder or
to his order. When the minimum investment so specified is completed (either
prior to or by the end of the 13-month period or 36-month period, as
applicable), the shareholder will be notified and the escrowed shares will be
released.
If the intended investment is not completed the Shareholder Servicing Agent will
redeem an appropriate number of the escrowed shares in order to realize such
difference. Shares remaining after any such redemption will be released by the
Shareholder Servicing Agent. By completing and signing the Account Application
or separate Letter of Intent application, the shareholder irrevocably appoints
the Shareholder Servicing Agent his attorney to surrender for redemption any or
all escrowed shares with full power of substitution in the premises.
RIGHT OF ACCUMULATION: A shareholder qualifies for cumulative quantity
discounts on the purchase of Class A shares when that shareholder's new
investment, together with the current offering price value of all holdings of
all classes of 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 purchases. For example, if a shareholder owns shares with a
current offering price value of $37,500 and purchases an additional $12,500 of
Class A shares of the Fund, the sales charge for the $12,500 purchase would be
at the rate of 2.25% (the rate applicable to single transactions of $50,000). A
shareholder must provide the Shareholder Servicing Agent (or his investment
dealer must provide MFD) with information to verify that the quantity sales
charge discount is applicable at the time the investment is made.
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 such fund are available for sale. Such investments will be
subject to additional purchase minimums. Distributions will be invested at net
asset value (exclusive of any sales charge) and not subject to any contingent
deferred sales charge ("CDSC"). Distributions will be invested at the close of
business on the payable date for the distribution. A shareholder considering the
Distribution Investment Program should obtain and read the prospectus of the
other fund and consider the differences in objectives and policies before making
any investment.
SYSTEMATIC WITHDRAWAL PLAN: A shareholder may direct the Shareholder Servicing
Agent to send him (or anyone he designates) regular periodic payments based upon
the value of his account. Such payments under a Systematic Withdrawal Plan
("SWP") must be at least $100, except in certain limited circumstances. The
aggregate withdrawals of Class B shares and Class C shares in any year pursuant
to a SWP generally are limited to 10% of the value of the account at the time of
the establishment of the SWP. SWP payments are drawn from the proceeds of share
redemptions (which would be a return of principal and, if reflecting a gain,
would be taxable). Redemptions of Class B and Class C shares will be made in the
following order: (i) any "Free Amount"; (ii) to the extent necessary, any
"Reinvested Shares"; (iii) to the extent necessary, the earliest "Direct
Purchase" subject to the lowest CDSC (as such terms are defined in "Contingent
Deferred Sales Charge" in the Prospectus). The CDSC will be waived in the case
of redemptions of Class B and Class C shares pursuant to a SWP but will not be
waived in the case of SWP redemptions of Class A shares. To the extent that
redemptions for such periodic withdrawals exceed dividend income reinvested in
the account, such redemptions will reduce and may eventually exhaust the number
of shares in the shareholder's account. All dividend and capital gain
distributions for an account with a SWP will be reinvested in additional full
and fractional shares of the Fund at the net asset value in effect at the close
of business on the record date for such distributions. To initiate this service,
shares having an aggregate value of at least $5,000 either must be held on
deposit by, or certificates for such shares must be deposited with, the
Shareholder Servicing Agent. With respect to Class A shares, maintaining a
withdrawal plan concurrently with an investment program would be disadvantageous
because of the sales charges included in share purchases and 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 amount of each
payment. The Shareholder Servicing Agent may charge the account for services
rendered and expenses incurred beyond those normally assumed by the Fund with
respect to the liquidation of shares. No charge is currently assessed against
the account, but one could be instituted by the Shareholder Servicing Agent on
60 days' notice in writing to the shareholder in the event that the Fund ceases
to assume the cost of these services. The Fund may terminate any SWP for an
account if the value of the account falls below $5,000 as a result of share
redemptions (other than as a result of a SWP) or an exchange of shares of the
Fund for shares of another MFS Fund. Any SWP may be terminated at any time by
either the shareholder or the Fund.
INVEST BY MAIL: Additional investments of $50 or more may be made at any time
by mailing a check payable to the Fund directly to the Shareholder Servicing
Agent. The shareholder's account number and the name of his investment dealer
must be included with each investment.
GROUP PURCHASES: A bona fide group and all its members may be treated as a
single purchaser and, under the Right of Accumulation (but not a Letter of
Intent), obtain quantity sales charge discounts on the purchase of Class A
shares if the group: (1) gives its endorsement or authorization to the
investment program so it may be used by the investment dealer to facilitate
solicitation of the membership, thus effecting economies of sales effort; (2)
has been in existence for at least six months and has a legitimate purpose other
than to purchase mutual fund shares at a discount; (3) is not a group of
individuals whose sole organizational nexus is as credit cardholders of a
company, policyholders of an insurance company, customers of a bank or
broker-dealer, clients of an investment adviser or other similar group; and (4)
agrees to provide certification of membership of those members investing money
in the MFS Funds upon the request of MFD.
AUTOMATIC EXCHANGE PLAN: Shareholders having account balances of at least
$5,000 in any MFS Fund may exchange their shares for the same class of shares of
other MFS Funds under the Automatic Exchange Plan, a dollar cost averaging
program (if available for sale). The Automatic Exchange Plan provides for
automatic exchanges of funds from the shareholder's account in an MFS Fund for
investment in the same class of shares of other MFS Funds selected by the
shareholder. Under the Automatic Exchange Plan, exchanges of at least $50 each
may be made to up to four different funds effective on the seventh day of each
month or of every third month, depending whether monthly or quarterly exchanges
are elected by the shareholder. If the seventh day of the month is not a
business day, the transaction will be processed on the next business day.
Generally, the initial exchange will occur after receipt and processing by the
Shareholder Servicing Agent of an application in good order. Exchanges will
continue to be made from a shareholder's account in any MFS Fund, as long as the
balance of the account is sufficient to complete the 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 each fund, the funds to which exchanges are to be made and the
timing of exchanges (monthly or quarterly), or termination of a shareholder's
participation in Automatic Exchange Plan will be made after instructions in
writing or by telephone (an "Exchange Change Request") are received by the
Shareholder Servicing Agent in proper form (i.e., if in writing --signed by the
record owner(s) exactly as shares of the Fund are registered; if by telephone --
proper account identification is given by the dealer or shareholder of record).
Each Transfer 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 exhanges 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 shares of MFS Money Market Fund, MFS Government Money
Market Fund and holders of Class A shares of MFS Cash Reserve Fund in the case
where such shares are acquired through direct purchase or reinvested dividends)
who have redeemed their shares have a one-time right to reinvest the redemption
proceeds in the same class of shares of any of the MFS Funds (if shares of the
fund are available for sale) at net asset value (without a sales charge) and, if
applicable, with credit for any CDSC paid. In the case of proceeds invested in
shares of MFS Money Market Fund, MFS Government Money Market Fund and Class A
shares of MFS Cash Reserve Fund the shareholder has the right to exchange the
acquired shares for shares of another MFS Fund at net asset value pursuant to
the exchange privilege described below. Such a reinvestment must be made within
90 days of the redemption and is limited to the amount of the redemption
proceeds. If the shares credited for any CDSC paid are then redeemed within six
years of the initial purchase in the case of Class B shares or within 12 months
of the initial purchase of Class C shares and certain Class A shares, such CDSC
will be imposed upon redemption. Although redemptions and repurchases of shares
are taxable events, a reinvestment within a certain period of time in the same
fund may be considered a "wash sale" and may result in the inability to
recognize currently all or a portion of any loss realized on the original
redemption for federal income tax purposes. Please see your tax adviser for
further information.
EXCHANGE PRIVILEGE -- Subject to the requirements set forth below, some or all
of the shares in an account for which payment has been received by the Fund
(i.e., an established account) may be exchanged for shares of the same class of
any of the other MFS Funds (if available for sale) at net asset value. Exchanges
will be made only after instructions in writing or by telephone (an "Exchange
Request") are received for an established account by the Shareholder Servicing
Agent.
Each Exchange Request must be in proper form (i.e., 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 (except that the minimum is $50 for accounts of retirement plan
participants whose sponsoring organizations subscribe to the MFS FUNDamental
401(k) Plan or another similar 401(k) recordkeeping system made available by the
Shareholder Servicing Agent) or all the shares in the account. Each exchange
involves the redemption of shares of the Fund to be exchanged and the purchase
at net asset value (i.e., without a sales charge) of shares of the same class of
the other MFS Fund. Any gain or loss on the redemption of the shares exchanged
is reportable on the shareholder's federal income tax return, unless both the
shares received and the shares surrendered in the exchange are held in a
tax-deferred retirement plan or other tax-exempt account. No more than five
exchanges may be made in any one Exchange Request by telephone. If an Exchange
Request is received by the Shareholder Servicing Agent 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 the Shareholder
Servicing Agent by facsimile subject to the requirements set forth above.
No CDSC is imposed on exchanges among the MFS Funds, although liability for the
CDSC is carried forward to the exchanged shares. For purposes of calculating the
CDSC upon redemption of shares acquired in an exchange, the purchase of shares
acquired in one or more exchanges is deemed to have occurred at the time of the
original purchase of the exchanged shares. Any gain or loss on the redemption of
the shares exchanged is reportable in the shareholders federal income tax
return, unless such shares were held in a tax-deferred retirement plan.
Additional information with respect to any of the MFS Funds, including a copy of
its current prospectus, may be obtained from investment dealers or the
Shareholder Servicing Agent. A shareholder considering an exchange should obtain
and read the prospectus of the other MFS Fund and consider the differences in
objectives and policies before making any exchange. Shareholders of the other
MFS Funds (except holders of shares of MFS Money Market Fund, MFS Government
Money Market Fund and Class A shares of Cash Reserve Fund acquired through
direct purchase and dividends reinvested prior to June 1, 1992) have the right
to exchange their shares for shares of the Fund, subject to the conditions, if
any, set forth in their respective prospectuses. In addition, unitholders of the
MFS Fixed Fund have the right to except their units (exchange units acquired
through direct purchases) for shares of the Fund, subject to the conditions, if
any, imposed upon such unitholders by the MFS Fixed Fund.
Any state income tax advantages for investment in each state-specific series of
MFS Municipal Series Trust may only benefit residents of such states. Investors
should consult with their own tax advisors to be sure that this is an
appropriate investment, based on their residency and each state's income tax
laws.
The exchange privilege (or any aspect of it) may be changed or discontinued and
is subject to certain limitations (see "Purchases" in the Prospectus).
TAX-DEFERRED RETIREMENT PLANS -- Except as noted below, shares of the Fund may
be purchased by all types of tax-deferred retirement plans. FSI makes available
through investment dealers plans and/or custody agreements for the following:
Individual Retirement Accounts ("IRAs") (for individuals and their
non-employed spouses who desire to make limited contributions to a
tax-deferred retirement program and, if eligible, to receive a federal income
tax deduction for amounts contributed);
Simplified Employee Pension (SEP-IRA) Plans;
Retirement Plans Qualified under Section 401(k) of the Internal Revenue Code
of 1986, as amended (the "Code");
403(b) Plans (deferred compensation arrangements for employees of public
school systems and certain non-profit organizations); and
Certain 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 and forms other than those
provided by MFD may be used to establish any of the plans described above. Third
party administrative services, available for some corporate plans, may limit or
delay the processing of transactions.
Investors should consult with their tax advisers before establishing any of the
tax-deferred retirement plans described above.
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 401(a) or 403(b) recordkeeping program made available by
the Shareholder Servicing Agent.
6. TAX STATUS
The Fund has elected to be treated and intends to qualify each year as a
"regulated investment company" under Subchapter M of the Code, by meeting all
applicable requirements of Subchapter M, including requirements as to the nature
of the Fund's gross income, the amount of Fund distributions, and the
composition and holding period of the Fund's portfolio assets. Because the Fund
intends to distribute all of its net investment income and net realized capital
gains to shareholders in accordance with the timing requirements imposed by the
Code, it is not expected that the Fund will be required to pay any federal
income or excise taxes, although the Fund's foreign-source income may be subject
to foreign withholding taxes. If the Fund should fail to qualify as a "regulated
investment company" in any year, the Fund would incur a regular corporate
federal income tax upon its taxable income and Fund distributions would
generally be taxable as ordinary dividend income to the shareholders.
Shareholders of the Fund normally will have to pay federal income taxes, and any
state or local taxes, on the dividends and capital gain distributions they
receive from the Fund. Dividends from ordinary income and any distributions from
net short-term capital gains, are taxable to shareholders as ordinary income for
federal income tax purposes whether paid in cash or reinvested in additional
shares. Because the Fund expects to earn primarily interest income, it is
expected that no Fund dividends will qualify for the dividends received
deduction for corporations. Distributions of net capital gains (i.e., the excess
of net long-term capital gains over net short-term capital losses), whether paid
in cash or reinvested in additional shares, are taxable to shareholders as
long-term capital gains without regard to the length of time shareholders have
held their shares. Any Fund dividend that is declared in October, November, or
December of any calendar year, that is payable to shareholders of record in such
a month, and that is paid the following January will be treated as if received
by the shareholders on December 31 of the year in which the dividend is
declared. The Fund will notify shareholders regarding the federal tax status of
its distributions after the end of each calendar year.
Any Fund distribution of net capital gains or net short-term capital gains will
have the effect of reducing the per share net asset value of shares in the Fund
by the amount of the distribution. Shareholders purchasing shares shortly before
the record date of any such distribution may thus pay the full price for the
shares and then effectively receive a portion of the purchase price back as a
taxable distribution.
In general, any gain or loss realized upon a taxable disposition of shares of
the Fund by a shareholder that holds such shares as a capital asset will be
treated as long-term capital gain or loss if the shares have been held for more
than twelve months and otherwise as a short-term capital gain or loss. However,
any loss realized upon a disposition of shares in the Fund held for six months
or less will be treated as a long-term capital loss to the extent of any
distributions of net capital gain made with respect to those shares. Any loss
realized upon a disposition of shares may also be disallowed under rules
relating to wash sales. Gain may be increased (or loss reduced) upon a
redemption of Class A shares of the Fund within ninety days after their purchase
followed by any purchase (including purchases by exchange or by reinvestment)
without payment of an additional sales charge of Class A shares of the Fund or
of another MFS Fund (or any other shares of an MFS Fund generally sold subject
to a sales charge).
The Fund's current dividend and accounting policies will affect the amount,
timing and character of distributions to shareholders. Any investment in zero
coupon bonds and certain securities purchased at a market discount will cause
the Fund to recognize income prior to the receipt of cash payments with respect
to those securities. In order to distribute this income and avoid a tax on the
Fund, the Fund may be required to liquidate portfolio securities that it might
otherwise have continued to hold, potentially resulting in additional taxable
gain or loss to the Fund.
An Investment in residual interests of a CMO that has elected to be treated as a
real estate mortgage investment conduit, or "REMIC," can create complex tax
problems, especially if the Fund has state or local governments or other
tax-exempt organizations as shareholders.
The Fund's transactions in Futures Contracts and Options on Futures Contracts
will be subject to special tax rules that may affect the amount, timing and
character of Fund income and distributions to shareholders. For example, certain
positions held by the Fund on the last business day of each taxable year will be
marked to market (i.e., treated as if closed out) on 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 holding in Futures Contracts and Options on
Futures Contracts to the extent necessary to meet the requirements of Subchapter
M of the Code.
Special tax considerations apply with respect to foreign investments of the
Fund. Foreign exchange gains and losses realized by the Fund will generally be
treated as ordinary income and losses.
Investment income received by the Fund from foreign securities may be subject to
foreign income taxes withheld at the source; the Fund does not expect to be able
to pass through to shareholders foreign tax credits with respect to such foreign
taxes. The United States has entered into tax treaties with many foreign
countries that may entitle the Fund to a reduced rate of tax or an exemption
from tax on such income; the Fund intends to qualify for treaty reduced rates
where available. It is not possible, however, to determine the effective rate of
foreign tax in advance since the amount of the Fund's assets to be invested
within various countries is not known.
Dividends and certain other payments to persons who are not citizens or
residents of the U.S. or U.S. entities ("Non-U.S. Persons") are generally
subject to U.S. tax withholding at a rate of 30%. The Fund intends to withhold
U.S. federal income tax at the rate of 30% on any taxable dividends and other
payments made to Non-U.S. Persons that are subject to such withholding,
regardless of whether a lower rate may be permitted under an applicable treaty.
Any amounts overwithheld may be recovered by such persons by filing a claim for
refund with the U.S. Internal Revenue Service within the time period appropriate
to such claims. Distributions received from the Fund by Non-U.S. Persons may
also be subject to tax under the laws of their own jurisdictions. The Fund is
also required in certain circumstances to apply backup withholding at a rate of
31% on taxable dividends and redemption proceeds paid to any shareholder
(including a Non-U.S. Person) who does not furnish to the Fund certain
information and certifications or who is otherwise subject to backup
withholding. Backup withholding will not, however, be applied to payments that
have been subject to 30% withholding.
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.
Distributions of the Fund that are derived from interest on obligations of the
U.S. Government and certain of its agencies and instrumentalities (but generally
not from capital gains realized upon the disposition of such obligations) may be
exempt from state and local taxes. The Fund intends to advise shareholders of
the extent, if any, to which its distributions consist of such interest.
Residents of certain states may be subject to an intangibles tax or a personal
property tax on all or a portion of the value of their shares. Shareholders are
urged to consult their tax advisers regarding this and other state and local
income tax matters.
7. DETERMINATION OF NET ASSET VALUE AND PERFORMANCE
NET ASSET VALUE -- The net asset value per share of each class of the Fund is
determined each day during which the Exchange is open for trading. (As of the
date of this SAI, the Exchange is open for trading every weekday except for the
following holidays or the days on which they are observed: New Year's Day,
Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day and Christmas Day.) This determination is made once during each
such day as of the close of regular trading on such 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
that class outstanding. If acquired, preferred stocks, common stocks and
warrants will be valued at the last sale price on an exchange on which they are
primarily traded or at the last quoted bid price for unlisted securities. Debt
securities (other than short-term obligations) in the Fund's portfolio are
valued on the basis of valuations furnished by pricing services which utilize
both dealer-supplied valuations and electronic data processing techniques which
take into account 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, because such valuations are
believed to reflect more accurately the fair value of such securities. Use of
the pricing service has been approved by the Board of Trustees. Short-term
obligations with a remaining maturity in excess of 60 days will be valued based
upon dealer supplied valuations. Other short-term obligations are valued at
amortized cost, which constitutes fair value as determined by the Board of
Trustees. Positions in listed options, Futures Contracts and Options on Futures
Contracts will normally be valued at the settlement price on the exchange on
which they are primarily traded. Forward Contracts will be valued using a
pricing model taking into consideration market data from an external pricing
source. Portfolio securities for which there are no such quotations or
valuations are valued at fair value as determined in good faith by or at the
direction of the Board of Trustees.
PERFORMANCE INFORMATION
TOTAL RATE OF RETURN: The Fund will calculate its total rate of return for each
class of shares for certain periods by determining the average annual compounded
rates of return over those periods that would cause an investment of $1,000
(made with all distributions reinvested and reflecting the CDSC or the maximum
public offering price), to reach the value of that investment at the end of the
periods. The Fund may also calculate (i) a total return, which is not reduced by
the CDSC (4% maximum for Class B shares and 1% maximum for Class C shares
purchased after April 1, 1996) and therefore may result in a higher rate of
return, (ii) a total rate of return assuming an initial account value of $1,000,
which will result in a higher rate of return since the value of the initial
account will not be reduced by the current maximum sales charge (currently
2.50%) and/or (iii) total rates of return which represent aggregate performance
over a period or year-by-year performance and which may or may not reflect the
effect of the maximum or other sales charge or CDSC. The Fund's average annual
total rate of return for Class A shares, reflecting the initial investment at
the current maximum public offering price for the one-year period ended April
30, 1996 and for the period from the commencement of investment operations,
February 26, 1992 to the Fund's fiscal year ended April 30, 1996 was 4.84% and
5.36%, respectively. The Fund's average annual total rate of return for Class A
shares, not giving effect to the sales charge on the initial investment, for the
same periods was 7.50% and 6.01%, respectively. The Fund's average annual total
rate of return for Class B shares reflecting the CDSC for the one-year period
ended April 30, 1996 and the period September 7, 1993 through the Fund's fiscal
year ended April 30, 1996 was 2.52% and 2.36%, respectively. The Fund's average
annual total rate of return for Class B shares, not giving effect to the CDSC,
for the one-year period and the period September 7, 1993 through the Fund's
fiscal year ended April 30, 1996 was 6.52% and 3.73%, respectively. The Fund's
average annual total rate of return for Class C shares, reflecting the CDSC, for
the one-year period ended April 30, 1996 and the period July 1, 1994 through the
Fund's fiscal year ended April 30, 1996 was 5.44% and 6.39%, respectively. The
Fund's average annual total rate of return for Class C shares, not giving effect
to the CDSC, for the same periods was 6.44% and 6.39%, respectively. The Fund's
annual total rate of return for Class B Shares would have been lower if an
expense limitation were not in effect.
PERFORMANCE RESULTS: The performance results for Class A shares below, based on
an assumed initial investment of $10,000 in Class A shares, cover the period
from January 1, 1992 to December 31, 1995. It has been assumed that dividends
and capital gain distributions were reinvested in additional shares. These
performance results, including any yield or total rate of return quotations
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 yields and
total rates of return should be considered when comparing the yield and total
rate of return published for other investment companies or other investment
vehicles. Total rate of return reflects the performance of both principal and
income. Current net asset value as well as account balance information may be
obtained by calling 1-800-MFS-TALK (637-8255).
MFS LIMITED MATURITY FUND
-------------------------
VALUE OF
VALUE OF REINVESTED/ VALUE OF
YEAR ENDED INITIAL $10,000 CAPITAL GAIN REINVESTED TOTAL
DECEMBER 31 VALUE INVESTMENT DISTRIBUTIONS DIVIDENDS
----------- --------------- ---------- ------------- ----------
1992 9,826 2 549 10,377
1993 9,826 2 1,213 11,041
1994 9,266 2 1,798 11,066
1995 9,666 2 2,686 12,354
EXPLANATORY NOTES: The results assume that the initial investment was reduced by
the current maximum applicable sales charge of 2.50%. No adjustment has been
made for any income taxes payable by shareholders.
YIELD: Any yield quotation for a class of shares of the Fund is based on the
annualized net investment income per share of that class over a 30-day period.
The yield for a class is calculated by dividing the net investment income per
share of that class earned during the period by the maximum offering price per
share on the last day of that period. The resulting figure is then annualized.
Net investment income per share of a class is determined by dividing (i) the
dividends and interest earned by that class during the period, minus accrued
expenses for the period by (ii) the average number of shares of that 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 for Class A shares assume a maximum sales charge of 2.50%. The
yield calculation for Class B and Class C shares assumes no CDSC is paid. The
yield for Class A shares of the Fund for the 30-day period ended April 30, 1996
was 6.00%. The yield for Class B shares of the Fund for the 30-day period ended
April 30, 1996 was 5.35% with the effect of the expense limitation and 5.33%
without the effect of the expense limitation. The yield for Class C Shares of
the Fund for the 30-day period ended April 30, 1996 was 5.31%.
CURRENT DISTRIBUTION RATE: Yield, which is calculated according to a formula
prescribed by the SEC, is not indicative of the amounts which were or will be
paid to the Fund's shareholders. Amounts paid to shareholders of each class are
reflected in the quoted "current distribution rate" for that class. The current
distribution rate for a class is computed by dividing the total amount of
dividends per share paid by the Fund to shareholders of that class during the
past 12 months by the maximum public offering price of that class at the end of
such period. Under certain circumstances, such as when there has been a change
in the amount of dividend payout, or a fundamental change in investment
policies, it might be appropriate to annualize the dividends paid over the
period such policies were in effect, rather than using the dividends during the
past 12 months. The current distribution rate differs from the yield computation
because it may include distributions to shareholders from sources other than
dividends and interest, such as premium income from option writing, short-term
capital gains and return of invested capital, and is calculated over a different
period of time. The Fund's current distribution rate calculation for Class A
shares assumes a maximum sales charge of 2.50%. The Fund's current distribution
rate calculation for Class B and Class C shares assumes no CDSC is paid. The
current distribution rate for Class A shares of the Fund for the 12-month period
ended on April 30, 1996 was 6.73%. The current distribution rate for Class B
shares of the Fund for the 12-month period ended April 30, 1996 was 6.12%. The
current distribution rate for Class C Shares of the Fund for the 12-month period
ended April 30, 1996 was 6.04%.
From time to time the Fund may, as appropriate, quote Fund rankings or reprint
all or a portion of evaluations of fund performance and operations appearing in
various independent publications, including, but not limited to, the following:
Money, Fortune, U.S. News and World Report, Kiplinger's Personal Finance, The
Wall Street Journal, Barron's, Investors Business Daily, Newsweek, Financial
World, Financial Planning, Investment Advisor, USA Today, Pensions and
Investments, SmartMoney, Forbes, Global Finance, Registered Representative,
Institutional Investor, the Investment Company Institute, Johnson's Charts,
Morningstar, Lipper Analytical Services, Inc., CDA Wiesenberger, Shearson Lehman
and Salomon Bros. Indices, Ibbotson, Business Week, Lowry Associates, Media
General, Investment Company Data, The New York Times, Your Money, Strangers
Investment Advisor, Financial Planning on Wall Street, Standard and Poor's,
Individual Investor, The 100 Best Mutual Funds You Can Buy, by Gordon K.
Williamson, Consumer Price Index, and Sanford C. Bernstein & Co. Fund
performance may also be compared to the performance of other mutual funds
tracked by financial or business publications or periodicals. The Fund may also
quote evaluations mentioned in independent radio or television broadcasts and
may use charts and graphs to illustrate the past performance of various indices
such as those mentioned above and illustrations using hypothetical rates of
return to illustrate the effects of compounding and tax-deferral. 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 quote evaluations mentioned in independent radio or television
broadcasts.
From time to time the Fund may use charts and graphs to illustrate the past
performance of various indices such as those mentioned above and illustrations
using hypothetical rates of return to illustrate the effects of compounding and
tax-deferral.
From time to time the Fund may also discuss or quote the views of its
distributor, its investment adviser and other financial planning, legal, tax,
accounting, insurance, estate planning and other professionals, or from surveys,
regarding individual and family financial planning. Such views may include
information regarding: retirement planning; tax management strategies; estate
planning; general investment techniques (e.g., asset allocation and disciplined
saving and investing); business succession; ideas and information provided
through the MFS Heritage Planningsm program, an inter-generational financial
planning assistance program; issues with respect to insurance (e.g., disability
and life insurance and Medicare supplemental insurance); issues regarding
financial and health care management for elderly family members; and other
similar or related matters.
The Fund may advertise examples of the effects of periodic investment plans,
including the principle of dollar cost averaging. In such a program, an investor
invests a fixed dollar amount in a fund at periodic intervals, thereby
purchasing fewer shares when prices are high and more shares when prices are
low. While such a strategy does not assure a profit or guard against a loss in a
declining market, the investor's average cost per share can be lower than if
fixed numbers of shares are purchased at the same intervals.
MFS FIRSTS: MFS has a long history of innovations.
-- 1924 -- Massachusetts Investors Trust is established
as the first open-end mutual fund in America.
-- 1924 -- Massachusetts Investors Trust is the first mutual fund
to make full public disclosure of its operations in shareholder
reports.
-- 1932 -- One of the first internal research departments is
established to provide in-house analytical capability for an
investment management firm.
-- 1933 -- Massachusetts Investors Trust is the first mutual fund
to register under the Securities Act of 1933 ("Truth in
Securities Act" or "Full Disclosure
Act").
-- 1936 -- Massachusetts Investors Trust is the first mutual fund
to allow shareholders to take capital gain distributions either
in additional shares or cash.
-- 1976 -- MFS(R) Municipal Bond Fund is among the first municipal
bond funds established.
-- 1979 -- Spectrum becomes the first combination fixed/ variable
annuity with no initial sales charge.
-- 1981 -- MFS(R) World Governments Fund is established as
America's first globally diversified fixed-income mutual fund.
-- 1984 -- MFS(R) Municipal High Income Fund is the first open-end
mutual fund to seek high tax-free income from lower-rated
municipal securities.
-- 1986 -- MFS(R) Managed Sectors Fund becomes the first mutual
fund to target and shift investments among industry sectors for
shareholders.
-- 1986 -- MFS(R) Municipal Income Trust is the first closed-end,
high-yield municipal bond fund traded on the New York Stock
Exchange.
-- 1987 -- MFS(R) Multimarket Income Trust is the first
closed-end, multimarket high income fund listed on the New York
Stock Exchange.
-- 1989 -- MFS(R) Regatta becomes America's first non-qualified
market-value-adjusted fixed/variable annuity.
-- 1990 -- MFS(R) World Total Return Fund is the first
global balanced fund.
-- 1993 -- MFS(R) World Growth Fund is the first global emerging
markets fund to offer the expertise of two sub-advisers.
-- 1993 -- MFS becomes money manager or MFS(R) Union Standard
Trust, the first Trust to invest in companies deemed to be
union-friendly by an Advisory Board of senior labor officials,
senior managers of companies with significant labor contracts,
academics and other national labor leaders or experts.
8. DISTRIBUTION PLANS
The Trustees have adopted a Distribution Plan for each of Class A, Class B and
Class C shares (the "Distribution Plans") pursuant to Section 12(b) of the 1940
Act and Rule 12b-1 thereunder (the "Rule") after having concluded that there is
a reasonable likelihood that each Distribution Plan would benefit the Fund and
the respective class of shareholders. The Distribution Plans are designed to
promote sales, thereby increasing the net assets of the Fund. Such an increase
may reduce the expense ratio to the extent the Fund's fixed costs are spread
over a larger net asset base. Also, an increase in net assets may lessen the
adverse effects that could result were the Fund required to liquidate portfolio
securities to meet redemptions. There is, however, no assurance that the net
assets of the Fund will increase or that the other benefits referred to above
will be realized.
The Distribution Plans are described in the Prospectus under the caption
"Distribution Plans," which is incorporated herein by reference. The following
information supplements this Prospectus discussion.
SERVICE FEES:
With respect to the Class A Distribution Plan, no service fees will be paid: (i)
to any dealer who is the holder or dealer of record for investors who own Class
A shares having an aggregate net asset value less than $750,000, or such other
amount as may be determined from time to time by MFD (MFD, however, may waive
this minimum amount requirement from time to time); or (ii) to any insurance
company which has entered into an agreement with the Fund and MFD that permits
such insurance company to purchase Class A shares from the Fund at their net
asset value in connection with annuity agreements issued in connection with the
insurance company's separate accounts. Dealers may from time to time be required
to meet certain other criteria in order to receive service fees.
With respect to the Class B Distribution Plan, except in the case of the first
year service fee, no service fees will be paid to any securities dealer who is
the holder or dealer of record for investors who own Class B shares having an
aggregate net asset value of less than $750,000 or such other amount as may be
determined by MFD from time to time. MFD, however, may waive this minimum amount
requirement from time to time. Dealers may from time to time be required to meet
certain other criteria in order to receive service fees.
MFD or its affiliates shall be entitled to receive any service fee payable under
any Distribution Plan for which there is no dealer of record or for which
qualification standards have not been met as partial consideration for personal
services and/or account maintenance services performed by MFD or its affiliates
for shareholder accounts.
DISTRIBUTION FEES:
The purpose of distribution payments to MFD under the Distribution Plans is to
compensate MFD for its distribution services to the Fund. MFD pays commissions
to dealers as well as expenses of printing prospectuses and reports used for
sales purposes, expenses with respect to the preparation and printing of sales
literature and other distribution related expenses, including, without
limitation, the cost necessary to provide distribution-related services, or
personnel, travel, office expenses and equipment.
DISTRIBUTION AND SERVICE FEES PAID DURING THE FUND'S LAST FISCAL YEAR: During
the fiscal year ended April 30, 1996, the Fund paid the following Distribution
Plan expenses:
AMOUNT OF AMOUNT OF AMOUNT OF
DISTRIBUTION DISTRIBUTION DISTRIBUTION
AND SERVICE AND SERVICE AND SERVICE
FEES PAID FEES RETAINED FEES RECEIVED
DISTRIBUTION PLANS BY FUND BY MFD BY DEALERS
- - ------------------ ------- ------------- -------------
Class A Distribution Plan $138,086 $ 15,962 $122,124
Class B Distribution Plan $205,519 $164,608 $ 40,911
Class C Distribution Plan $ 83,445 $ 1,477 $ 81,968
GENERAL: Each of the Distribution Plans will remain in effect until August 1,
1997, and will continue in effect thereafter only if such continuance is
specifically approved at least annually by vote of both the Trustees and a
majority of the Trustees who are not "interested persons" or financially
interested parties to such Plan ("Distribution Plan Qualified Trustees"). Each
of the Distribution Plans also requires that the Fund and MFD each shall provide
to the Trustees, and the Trustees shall review, at least quarterly, a written
report of the amounts expended (and purposes therefor) under such Plan. Each of
the Distribution Plans may be terminated at any time by vote of a majority of
the Distribution Plan Qualified Trustees or by vote of the holders of a majority
of the respective class of the Fund's shares (as defined in "Investment
Restrictions"). All agreements relating to any of the Distribution Plans entered
into between the Fund or MFD and other organizations must be approved by the
Board of Trustees, including a majority of the Distribution Plan Qualified
Trustees. Agreements under any of the Distribution Plans must be in writing,
will be terminated automatically if assigned, and may be terminated at any time
without payment of any penalty, by vote of a majority of the Distribution Plan
Qualified Trustees or by vote of the holders of a majority of the respective
class of the Fund's shares. None of the Distribution Plans may be amended to
increase materially the amount of permitted distribution expenses without the
approval of a majority of the respective class of the Fund's shares (as defined
in "Investment Restrictions") or may be materially amended in any case without a
vote of the Trustees and a majority of the Distribution Plan Qualified Trustees.
The selection and nomination of Distribution Plan Qualified Trustees shall be
committed to the discretion of the non-interested Trustees then in office. No
Trustee who is not an "interested person" has any financial interest in any of
the Distribution Plans or in any related agreement.
9. DESCRIPTION OF SHARES, VOTING RIGHTS AND LIABILITIES
The Trust's Declaration of Trust permits the Trustees to issue an unlimited
number of full and fractional Shares of Beneficial Interest (without par value)
of one or more separate series and to divide or combine the shares into a
greater or lesser number of shares without thereby changing the proportionate
beneficial interests in that series. The Trustees have currently authorized
shares of the Fund and two other series. The Declaration of Trust further
authorizes the Trustees to classify or reclassify the shares of the Fund into
one or more classes. Pursuant thereto, the Trustees have authorized the issuance
of three classes of shares of the Trust's three series, Class A shares, Class B
shares and Class C shares. Each share of a class of the Fund represents an equal
proportionate interest in the assets of the Fund allocable to that class. Upon
liquidation of the Fund, the shareholders of each class of the Fund are entitled
to share pro rata in the net assets of the Fund allocable to such class
available for distribution to shareholders. The Trust reserves the right to
create and issue additional series or classes of shares, in which case the
shares of each class would participate equally in the earnings, dividends and
assets allocable to that class of the particular series.
Shareholders are entitled to one vote for each share held and may vote in the
election of Trustees and on other matters submitted to meetings of shareholders.
Although Trustees are not elected annually by the shareholders, shareholders
have under certain circumstances the right to remove one or more Trustees in
accordance with the provisions of Section 16(c) of the 1940 Act. No material
amendment may be made to the Declaration of Trust without the affirmative vote
of the holders of a majority of the Trust's shares. Shares have no pre-emptive
or conversion rights (except as described in "Purchases -- Conversion of Class B
Shares" in the Prospectus). Shares are fully paid and non-assessable. The Trust
may enter into a merger or consolidation, or sell or substantially all of its
assets (or all or substantially all of the assets belonging to any series of the
Trust), if approved by the vote of the holders of two-thirds of the Trust's
outstanding shares voting as a single class, or of the affected series of the
Trust, as the case may be, except that if the Trustees of the Trust recommend
such merger, consolidation or sale, the approval by vote of the holders of a
majority of the Trust's or the affected series' outstanding shares (as defined
in "Investment Restrictions") will be sufficient. The Trust or any series of the
Trust may also be terminated (i) upon liquidation and distribution of its
assets, if approved by the vote of the holders of two-thirds of its outstanding
shares, or (ii) by the Trustees by written notice to the shareholders of the
Trust or the affected series. If not so terminated, the Trust will continue
indefinitely.
The Trust is an entity of the type commonly known as a "Massachusetts business
trust". Under Massachusetts law, shareholders of such a trust may, under certain
circumstances, be held personally liable as partners for its obligations.
However, the Declaration of Trust contains an express disclaimer of shareholder
liability for acts or obligations of the Trust and provides for indemnification
and reimbursement of expenses out of the Trust property for any shareholder held
personally liable for the obligations of the Trust. The Declaration of Trust
also provides that it shall maintain appropriate insurance (for example,
fidelity bonding and errors and omissions insurance) for the protection of the
Trust, its shareholders, Trustees, officers, employees and agents covering
possible tort and other liabilities. Thus, the risk of a shareholder incurring
financial loss on account of shareholder liability is limited to circumstances
in which both inadequate insurance existed and the Trust itself was unable to
meet its obligations.
The Declaration of Trust further provides that obligations of the Trust are not
binding upon the Trustees individually but only upon the property of the Trust
and that the Trustees will not be liable for any action or failure to act, but
nothing in the Declaration of Trust protects a Trustee against any liability to
which he would otherwise be subject by reason of willful misfeasance, bad faith,
gross negligence, or reckless disregard of the duties involved in the conduct of
his office.
10. INDEPENDENT AUDITORS AND FINANCIAL STATEMENTS
Deloitte & Touche LLP are the Trust's independent auditors providing audit
services, tax preparation, and assistance and consultation with respect to the
preparation of filings with the SEC.
The Portfolio of Investments at April 30, 1996, the Statement of Assets and
Liabilities at April 30, 1996, the Statement of Operations for the year ended
April 30, 1996, the Statement of Changes in Net Assets for the two years ended
April 30, 1996, the Notes to Financial Statements and the Independent Auditors'
Report, each of which is included in the Annual Report to shareholders of the
Fund, are incorporated by reference into this SAI and have been so incorporated
in reliance upon the report of Deloitte & Touche LLP, independent auditors, as
experts in accounting and auditing. A copy of the Annual Report accompanies this
SAI.
<PAGE>
APPENDIX A
<TABLE>
<CAPTION>
TRUSTEE COMPENSATION TABLE
RETIREMENT BENEFIT ESTIMATED TOTAL TRUSTEE FEES
TRUSTEE FEES ACCRUED AS PART OF CREDITED YEARS FROM FUND AND
TRUSTEE FROM FUND(1) FUND'S EXPENSE(1) OF SERVICE(2) FUND COMPLEX(3)
- - ---------------------------- ---------------- --------------------------- --------------------- ----------------------
<S> <C> <C> <C> <C>
Richard B. Bailey .......... $1,945 $324 8 $263,815
A. Keith Brodkin ........... --0-- --0-- N/A --0--
Peter G. Harwood ........... 2,240 221 5 111,366
J. Atwood Ives ............. 2,075 337 17 101,356
Lawrence T. Perera ......... 2,140 333 16 102,546
William Poorvu ............. 2,240 354 16 111,366
Charles W. Schmidt ......... 2,140 337 9 105,411
Arnold D. Scott ............ --0-- --0-- N/A --0--
Jeffrey L. Shames .......... --0-- --0-- N/A --0--
Elaine R. Smith ............ 2,140 253 26 105,411
David B. Stone ............. 2,340 356 9 115,521
- - ------------
(1) For fiscal year ended April 30, 1996.
(2) Based on normal retirement age of 73.
(3) For calendar year 1995. All Trustees receiving compensation served as Trustees of 23 funds within the MFS Fund complex
(having aggregate net assets at December 31, 1995, of approximately $17.6 billion) except Mr. Bailey, who served as Trustee
of 73 funds within the MFS Fund complex (having aggregate net assets at December 31, 1995, of approximately $31.7 billion).
<CAPTION>
ESTIMATED ANNUAL BENEFITS PAYABLE BY FUND UPON RETIREMENT(4)
YEARS OF SERVICE
AVERAGE ------------------------------------------------------
TRUSTEE FEES 3 5 7 10 OR MORE
--------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$1,751 $263 $438 $613 $ 875
1,915 287 479 670 958
2,080 312 520 728 1,040
2,245 337 561 786 1,122
2,409 361 602 843 1,205
2,574 386 644 901 1,287
(4) Other funds in the MFS Fund complex provide similar retirement benefits to the Trustees.
</TABLE>
<PAGE>
INVESTMENT ADVISER
Massachusetts Financial Services Company
500 Boylston Street, Boston, MA 02116
(617) 954-5000
DISTRIBUTOR
MFS Fund Distributors, Inc.
500 Boylston Street, Boston, MA 02116
(617) 954-5000
CUSTODIAN
Investors Bank & Trust Company
89 South Street, Boston, MA 02111
DIVIDEND DISBURSING AGENT
State Street Bank and Trust Company
225 Franklin Street, Boston, MA 02110
SHAREHOLDER SERVICING AGENT
MFS Service Center, Inc.
500 Boylston Street, Boston, MA 02116
Toll free: (800) 225-2606
Mailing Address:
P.O. Box 2281, Boston, MA 02107-9906
INDEPENDENT AUDITORS
Deloitte & Touche LLP
125 Summer Street, Boston, MA 02110
MFS(R)
LIMITED
MATURITY FUND
500 BOYLSTON STREET
BOSTON, MA 02116
[LOGO]
THE FIRST NAME IN MUTUAL FUNDS
MLM-13-9/96/500 36/236/336
<PAGE>
<PAGE>
[MFS logo]
Annual Report for
Year Ended
April 30, 1996
MFS(R) LIMITED MATURITY FUND
[A picture of a columned building.]
<PAGE>
<TABLE>
<CAPTION>
MFS(R) LIMITED MATURITY FUND
<S> <C>
TRUSTEES CUSTODIAN
Investors Bank & Trust Company
A. Keith Brodkin* - Chairman and President
Richard B. Bailey* - Private Investor; AUDITORS
Former Chairman and Director (until 1991), Deloitte & Touche LLP
Massachusetts Financial Services Company; Director,
Cambridge Bancorp; Director, INVESTOR INFORMATION
Cambridge Trust Company For MFS stock and bond market outlooks,
Peter G. Harwood - Private Investor call toll free: 1-800-637-4458 anytime from
J. Atwood Ives - Chairman and Chief Executive a touch-tone telephone.
Officer, Eastern Enterprises For information on MFS mutual funds,
Lawrence T. Perera - Partner, call your financial adviser or, for an
Hemenway & Barnes information kit, call toll free:
William J. Poorvu - Adjunct Professor, 1-800-637-2929 any business day from
Harvard University Graduate School of 9 a.m. to 5 p.m. Eastern time (or leave
Business Administration a message anytime).
Charles W. Schmidt - Private Investor
Arnold D. Scott* - Senior Executive Vice INVESTOR SERVICE
President, Director and Secretary, MFS Service Center, Inc.
Massachusetts Financial Services Company P.O. Box 2281
Jeffrey L. Shames* - President and Director, Boston, MA 02107-9906
Massachusetts Financial Services Company For general information, call toll free:
Elaine R. Smith - Independent Consultant 1-800-225-2606 any business day from
David B. Stone - Chairman, North American 8 a.m. to 8 p.m. Eastern time.
Management Corp. (investment advisers) For service to speech- or hearing-impaired,
call toll free: 1-800-637-6576 any business
INVESTMENT ADVISER day from 9 a.m. to 5 p.m. Eastern time.
Massachusetts Financial Services Company (To use this service, your phone must be
500 Boylston Street equipped with a Telecommunications Device for
Boston, MA 02116-3741 the Deaf.)
For share prices, account balances and
DISTRIBUTOR exchanges, call toll free: 1-800-MFS-TALK
MFS Fund Distributors, Inc. (1-800-637-8255) anytime from a touch-tone
500 Boylston Street telephone.
Boston, MA 02116-3741
DALBAR TOP-RATED SERVICE
PORTFOLIO MANAGER MFS #1 MFS For the second year in a
Geoffrey L. Kurinsky* DALBAR row, MFS earned a #1
ranking in DALBAR,
TREASURER Inc.'s Broker/Dealer
W. Thomas London* Survey, Main Office
Operations Service Quality
ASSISTANT TREASURER category. The firm achieved
James O. Yost* a 3.49 overall score - on a scale of 1 to 4 - in the
1995 survey. A total of 71 firms responded, offering
SECRETARY input on the quality of service they receive from 36
Stephen E. Cavan* mutual fund companies nationwide. The survey
contained questions about service quality in 17
ASSISTANT SECRETARY categories, including "knowledge of phone service
James R. Bordewick, Jr.* contacts," "accuracy of transaction processing," and
"overall ease of doing business with the firm."
*Affiliated with the Investment Adviser
</TABLE>
<PAGE>
LETTER TO SHAREHOLDERS
Dear Shareholders:
Despite the rise in interest rates during the last three months of the Fund's
fiscal year, the past 12 months have been positive for the fixed-income markets,
as short-term interest rates have generally moved lower. While rates on two-year
Treasury notes returned to around 6% at the end of April after moving below 5%,
this was still lower than the 6 5/8% level prevailing at the beginning of the
Fund's fiscal year on May 1, 1995. This decline in rates allowed for some
capital appreciation in addition to the traditional coupon income that
fixed-income securities provide. A discussion of the Fund's performance may be
found in the Portfolio Performance and Strategy section of this letter. Complete
performance data can be found on pages four and five of this report.
During the year ended April 30, 1996, Class A shares of the Fund provided a
total return of 7.50%, Class B shares 6.52%, and Class C shares 6.44%. These
returns assume the reinvestment of distributions but exclude the effects of any
sales charges. The Fund's Class A shares outperformed the 7.43% return of the
Merrill Lynch One- to Five-Year Government/Corporate Bond Index (a total return
index comprised of coupon-bearing Treasury issues and debt of agencies of the
U.S. government, and corporate debt rated Baa or higher by Moody's Investors
Services). They also outperformed the 6.47% average return provided by other
funds with similar investment objectives and policies as reported by Lipper
Analytical Services, an independent firm which reports mutual fund performance.
Class A shares of the Fund ranked eighth, Class B shares 37th, and Class C
shares 45th out of the 89 funds in this short-term investment-grade debt
category for the year ended April 30, 1996. These rankings reflect no sales
charges, and past performance is no guarantee of future results.
Economic Environment
We believe the U.S. economy will continue to show moderate growth in 1996,
although this growth may be somewhat uneven as we move from quarter to quarter.
Thus, while one quarter may experience an annualized rate of growth in gross
domestic product of less than 1%, another quarter may see annualized growth in
excess of 3% - but, for the year, we believe growth could stay within our
expected range of 2% to 2 1/2%. While some increase in consumer spending took
place in the early months of this year, consumers, who represent two-thirds of
the economy, remain in a somewhat weakened position, due in part to an increase
in consumer installment debt in excess of 30% over the past two years.
Meanwhile, growth is also being constrained by ongoing economic doldrums in
Europe and Japan, important markets for U.S. exports. Here again, we are seeing
a few tentative signs, particularly in Japan, of modest recoveries that could
lead to improved prospects for U.S. exporters. Also, the "lag effect" of
increases in short-term interest rates by the Federal Reserve Board in 1994 and
into 1995 is helping to keep growth in check. This lag effect can last up to two
years, and although the Fed did reduce short-term rates late last year and
earlier this year, we expect it to continue its diligent anti-inflationary
policies. Finally, it appears that inflation is likely to remain under control
this year, due in part to a continued moderation in wage pressures and the
subdued level of economic growth. At the same time, we believe the current
upward pressure on energy prices bears close scrutiny, as energy is an important
component of the inflation outlook.
Bond Markets
Persistent signs of economic weakness led to decreases in short-term interest
rates by the Federal Reserve in late 1995 and early 1996. However, should signs
of economic growth and, particularly, of higher inflation continue, we would
expect the Fed to maintain its anti-inflationary stance. This would likely mean
no further reductions in short-term interest rates, and could lead to some
modest increases. In the beginning of the year, bond markets were trading in a
narrow range, as investors shifted between concern about the lack of a budget
resolution in Washington and hopes that sluggish economic reports and low
inflation might lead to lower interest rates. Later, fixed-income markets began
reacting to conflicting signals regarding the strength of the economy with
more-volatile trading patterns marked by an upward bias in interest rates.
Interest rates may move even higher over the coming months, but we believe the
current rise in bond yields is reaching a point where fixed-income markets are
becoming attractively valued.
Portfolio Performance and Strategy
The Fund's performance over the past year was mainly the result of the decline
in short-term interest rates during the period. Rates on two-year Treasury
securities declined from 6 5/8% at the beginning of the period to around 6% at
the end of April. The reduction in rates, which was concentrated in the first
half of the year, was triggered by the slowing pace of economic growth, which
led the Federal Reserve to lower interest rates on three separate occasions
beginning on July 6, 1995. The Fund's performance was also aided by its
significant exposure to investment-grade corporate securities. Corporate
securities, which made up as much as 80% of the portfolio during the period,
outperformed Treasury securities in the one- to five-year range by approximately
85 basis points (0.85%) (although principal value and interest on Treasury
securities are guaranteed by the U.S. government if held to maturity). As the
U.S. economy entered its fifth year of growth in the current economic cycle, the
past year's strong performance was consistent with the general rule that
corporate securities outperform Treasury securities during periods of positive
economic activity. Profits and corporate cash flow are generally strongest
during periods of economic growth and weakest during periods of recession.
The Fund also benefited from owning positions in both the media and cable
industries and in the Yankee bond sectors, which were among the best-performing
sectors of the corporate bond market. Media/cable companies in which the Fund
had positions, including Time Warner and News America Holdings, have benefited
from their ability to reduce debt and from public perceptions of them as solid
investment-grade credits. At the same time, the fortunes of Yankee bond issuers
Colombia and Greece improved as the market became comfortable with their
abilities to remain economically resilient despite local political developments.
Conservative investors should be pleased with the portfolio's low volatility
as of April 30, 1996, which is one of the Fund's objectives. Despite the
175-basis point (1.75%) range in two-year Treasury rates, the Fund's net asset
value remained in a narrow 2.7% range of $7.10 to $7.30 based on Class A shares.
Toward the end of the period, we began to reduce the duration (a measure of
interest rate sensitivity) of the Fund based on concerns that recent signs of
economic growth in the first quarter could continue through the second quarter.
After being as high as 2 1/2 years for much of the year, the duration has been
reduced to 1 1/2 years, which is 25% shorter than what we consider a normal
duration of 2 years. Based on our view that the economy will continue to grow,
we are maintaining roughly two-thirds of the portfolio in investment-grade
corporate securities.
We appreciate your support and welcome any questions or comments you may
have.
Respectfully,
[A photo of A. Keith Brodkin, [A photo of Geoffrey L. Kurinsky,
Chairman and President] Portfolio Manager]
/s/ A. Keith Brodkin /s/ Geoffrey L. Kurinsky
Chairman and President Portfolio Manager
May 10, 1996
<PAGE>
PORTFOLIO MANAGER PROFILE
Geoffrey Kurinsky began his career at MFS in 1987 in the Fixed Income
Department. A graduate of the University of Massachusetts and Boston
University's Graduate School of Management, he was named Assistant Vice
President in 1988, Vice President in 1989, and Senior Vice President in 1993. In
1992, he became Portfolio Manager of MFS Limited Maturity Fund.
OBJECTIVE AND POLICIES
The Fund's primary investment objective is to provide as high a level of current
income as is believed to be consistent with prudent investment risk. The Fund's
secondary objective is to protect shareholders' capital.
The Fund, under normal market conditions, invests substantially all of its
assets in debt securities rated within the four highest grades as determined by
Standard & Poor's Ratings Group (AAA, AA, A or BBB), Fitch Investors Services,
Inc. or Moody's Investors Services, Inc. and comparable unrated securities,
securities which are issued or guaranteed by the U.S. government or its agencies
or instrumentalities, commercial paper, repurchase agreements and cash or cash
equivalents. Under normal market conditions, substantially all of the securities
in the Fund's portfolio will have remaining maturities of five years or less.
TAX FORM SUMMARY
In January 1996, shareholders were mailed a Tax Form Summary reporting the
federal tax status of all distributions paid during the calendar year 1995.
PERFORMANCE
The information on the following page illustrates the historical performance of
MFS Limited Maturity Fund Class A shares in comparison to various market
indicators. Fund results in the graph reflect the deduction of the 2.50% maximum
sales charge; benchmark comparisons are unmanaged and do not reflect any fees or
expenses. You cannot invest in an index. All results reflect the reinvestment of
all dividends and capital gains.
Class B shares were offered effective September 7, 1993. Information on Class B
share performance appears on the next page.
Please note that effective July 1, 1994, Class C shares were offered.
Information on Class C share performance appears on the next page.
Please note that the performance of other classes will be greater than or less
than the line shown, based on the differences in loads and fees paid by
shareholders investing in the different classes.
GROWTH OF A HYPOTHETICAL $10,000 INVESTMENT
(For the Period from March 1, 1992 to April 30, 1996)
$10,000 3/1/92 - 4/30/96
Merrill Lynch
MFS 1-5 Yr. Gov't./Corp.
Days Limited Maturity Fund-A Bond Index CPI
---- ----------------------- -------------------- ---
3/1/92 0 9,750 10,000 10,000
4/30/92 60 9,830 10,080 10,065
4/30/93 425 10,731 11,130 10,390
4/30/94 790 10,904 11,279 10,635
4/30/95 1,155 11,568 11,969 10,960
4/30/96 1,521 12,436 12,859 11,277
<PAGE>
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS
Life of Class
through
1 Year 3 Years 4/30/96
- - --------------------------------------------------------------------------------------
<S> <C> <C> <C>
MFS Limited Maturity Fund (Class A)
including 2.50% sales charge +4.84% +4.16% +5.36%<F1>
- - --------------------------------------------------------------------------------------
MFS Limited Maturity Fund (Class A) at net
asset value +7.50% +5.04% +6.01%<F1>
- - --------------------------------------------------------------------------------------
MFS Limited Maturity Fund (Class B) with CDSC<F2> +2.52% -- +2.71%<F4>
- - --------------------------------------------------------------------------------------
MFS Limited Maturity Fund (Class B) without CDSC +6.52% -- +3.73%<F4>
- - --------------------------------------------------------------------------------------
MFS Limited Maturity Fund (Class C) with CDSC<F5> +5.44% -- +6.39%<F6>
- - --------------------------------------------------------------------------------------
MFS Limited Maturity Fund (Class C) without CDSC +6.44% -- +6.39%<F6>
- - --------------------------------------------------------------------------------------
Average short-term investment-grade debt fund<F3> +6.47% +4.42% +5.30%<F8>
- - --------------------------------------------------------------------------------------
Merrill Lynch One- to Five-Year Government/
Corporate Bond Index<F7> +7.43% +4.93% +6.17%<F8>
- - --------------------------------------------------------------------------------------
Consumer Price Index<F3><F9> +2.90% +2.77% +2.93%<F8>
- - --------------------------------------------------------------------------------------
<FN>
<F1>For the period from the commencement of offering of Class A shares,
February 26, 1992 to April 30, 1996.
<F2>These returns reflect the current Class B contingent deferred sales
charge (CDSC) of 4% for the 1-year period and 3% for the period
commencing September 7, 1993.
<F3>Source: Lipper Analytical Services.
<F4>For the period from the commencement of offering of Class B shares,
September 7, 1993 to April 30, 1996.
<F5>Class C shares have no initial sales charge but, along with Class B
shares, have higher annual fees and expenses than Class A shares.
Class C share purchases made on or after April 1, 1996, will be
subject to a 1% CDSC if redeemed within 12 months of purchase.
<F6>For the period from the commencement of offering of Class C shares,
July 1, 1994 to April 30, 1996.
<F7>Source: Asset Investment Management (AIM) software.
<F8>Benchmark comparisons begin on March 1, 1992.
<F9>The Consumer Price Index is a popular measure of change in prices.
</FN>
</TABLE>
All results are historical and are not an indication of future results. The
investment return and principal value of an investment in a mutual fund will
vary with changes in market conditions, and shares, when redeemed, may be worth
more or less than their original cost.
<PAGE>
PORTFOLIO OF INVESTMENTS - April 30, 1996
Bonds - 96.8%
- - -----------------------------------------------------------------------------
S&P
Bond Rating Principal Amount
(Unaudited) Issuer (000 Omitted) Value
- - -----------------------------------------------------------------------------
Banks and Credit Companies - 3.6%
BBB- Advanta Corp., 7.07s, 1997 $ 5,000 $ 5,038,400
- - -----------------------------------------------------------------------------
Commercial Services - 2.9%
BB+ Loewen Group, Inc., 7.5s,
2001+ $ 4,000 $ 3,960,000
- - -----------------------------------------------------------------------------
Corporate Asset Backed - 9.3%
A First Chicago Master Trust,
8.23s, 1996 $ 1,000 $ 1,013,040
NR Merrill Lynch Mortgage
Investors, Inc., 9.7s, 2010 1,183 1,211,101
NR Merrill Lynch Mortgage
Investors, Inc., 9.75s,
2010 400 409,882
NR Merrill Lynch Mortgage
Investors, Inc., 8.3s, 2011 45 45,604
NR Merrill Lynch Mortgage
Investors, Inc., 10s, 2011 41 43,125
NR Merrill Lynch Mortgage
Investors, Inc., 8.19s,
2021 4,409 4,509,849
NR Residential Accredit Loans,
7.05s, 2019 5,600 5,579,000
------------
$ 12,811,601
- - -----------------------------------------------------------------------------
Entertainment - 5.7%
BB+ Paramount Communications,
5.875s, 2000 $ 4,000 $ 3,806,520
BBB- Time Warner, Inc., 7.95s,
2000 4,000 4,099,800
------------
$ 7,906,320
- - -----------------------------------------------------------------------------
Financial Institutions - 7.7%
A Countrywide Funding Corp.,
6.57s, 1997 $ 500 $ 502,295
A Lehman Brothers Holdings,
Inc., 7.375s, 2007 5,000 5,088,550
BBB- United Cos., Financial Corp.,
7s, 1998 5,000 5,001,900
------------
$ 10,592,745
- - -----------------------------------------------------------------------------
Food and Beverage Products - 4.7%
BBB- Borden, Inc., 9.875s, 1997 $ 1,290 $ 1,340,749
BBB- RJR Nabisco, Inc., 8s, 2001 5,250 5,151,615
------------
$ 6,492,364
- - -----------------------------------------------------------------------------
Foreign - U.S. Dollars - 4.6%
BBB- Empresa Electrica Guacolda
S.A., 7.6s, 2001+ $ 3,305 $ 3,292,772
BBB- Republic of Colombia, 8.75s, 1999 3,000 3,097,500
------------
$ 6,390,272
- - -----------------------------------------------------------------------------
Machinery - 0.4%
BBB Joy Technologies, 10.25s, 2003 $ 540 $ 594,000
- - -----------------------------------------------------------------------------
Oils - 2.2%
BBB- Mitchell Energy &
Development, 8s, 1999 $ 3,000 $ 3,029,160
- - -----------------------------------------------------------------------------
<PAGE>
Real Estate Investment Trusts - 1.7%
BBB- Sun Communities, Inc., 7.375s, 2001 $ 2,400 $ 2,391,000
- - -----------------------------------------------------------------------------
Stores - 3.5%
BBB- Woolworth Corp., 7s, 2000 $ 5,000 $ 4,900,150
- - -----------------------------------------------------------------------------
Telecommunications - 2.9%
BBB- Telecommunications, Inc.,
7.375s, 2000 $ 4,000 $ 4,002,840
- - -----------------------------------------------------------------------------
U.S. Government and Agency
Obligations - 26.2%
GOV Federal National Mortgage
Assn., 6.5s, 2017 $ 5,925 $ 5,842,429
GOV Federal National Mortgage
Assn., 7s, 2006 - 2011 13,396 13,249,621
GOV Federal National Mortgage
Assn., 7.5s, 2010 - 2011 5,735 5,771,095
GOV Federal National Mortgage
Assn., 8.5s, 2007 118 122,876
GOV Federal National Mortgage
Assn., 8.5s, 2025 69 70,426
GOV Government National Mortgage
Assn., 7.5s, 2009 10,000 10,131,200
GOV Government National Mortgage
Assn., 12.5s, 2011 538 626,646
GOV U.S. Treasury Notes, 6.25s, 2001 500 496,875
------------
$ 36,311,168
- - -----------------------------------------------------------------------------
Utilities - Electric - 21.4%
BBB- Arizona Public Services,
6.49s, 2001 $ 5,073 $ 5,034,547
BB Central Maine Power, 7.5s, 1997 4,500 4,532,985
BBB- Gulf States Utilities Co.,
8.21s, 2002 6,000 6,143,220
BBB- Long Island Lighting Co.,
7.625s, 1998 7,500 7,509,375
BBB- Louisiana Power & Light Co.,
10.67s, 2017 2,500 2,688,425
BBB- System Energy Resources, 7.38s, 2000 3,895 3,797,625
------------
$ 29,706,177
- - -----------------------------------------------------------------------------
Total Bonds (Identified Cost, $135,235,132) $134,126,197
- - -----------------------------------------------------------------------------
Repurchase Agreement - 0.8%
- - -----------------------------------------------------------------------------
Goldman Sachs Group L.P., dated 4/30/96,
due 5/01/96, total to be received $1,202,869
(secured by $254,153 par, FNMA at 7.58s, due
4/19/06, market value $254,057; $153,368 par,
FNMA at 6.17s, due 12/30/03, market value
$145,198; $113,378 par, FNMA at 5.3s, due
12/10/98, market value $110,401; $549,880 par,
FHLMC at 0s, due 5/ 23/96, market value $547,970;
and $98,693 par, FHLB at 7.65s, due 3/25/97, market
value $100,414), at Amortized Cost $ 1,142 $ 1,142,000
- - -----------------------------------------------------------------------------
Total Investments (Identified Cost, $136,377,132) $135,268,197
Other Assets, Less Liabilities - 2.4% 3,259,026
- - -----------------------------------------------------------------------------
Net Assets - 100.0% $138,527,223
- - -----------------------------------------------------------------------------
+Restricted security.
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS
Statement of Assets and Liabilities
- - ------------------------------------------------------------------------------
April 30, 1996
- - ------------------------------------------------------------------------------
Assets:
Investments, at value (identified cost, $136,377,132) $ 135,268,197
Cash 206
Receivable for daily variation margin on open futures
contracts 103,000
Receivable for Fund shares sold 654,247
Receivable for investments sold 11,155,389
Interest receivable 1,820,298
Deferred organization expenses 3,753
Other assets 1,549
--------------
Total assets $ 149,006,639
--------------
Liabilities:
Distributions payable $ 190,019
Payable for Fund shares reacquired 102,444
Payable for investments purchased 10,156,250
Payable to affiliates -
Management fee 4,510
Distribution fee 19,862
Accrued expenses and other liabilities 6,331
--------------
Total liabilities $ 10,479,416
--------------
Net assets $ 138,527,223
==============
Net assets consist of:
Paid-in capital $ 143,786,274
Unrealized depreciation on investments (361,492)
Accumulated net realized loss on investments (4,366,910)
Accumulated distributions in excess of net investment
income (530,649)
--------------
Total $ 138,527,223
==============
Shares of beneficial interest outstanding 19,454,679
==============
Class A shares:
Net asset value and redemption price per share
(net assets of $98,582,037 / 13,842,465 shares of
beneficial interest outstanding) $7.12
=====
Offering price per share (100/97.5) $7.30
=====
Class B shares:
Net asset value and offering price per share
(net assets of $26,463,529 / 3,720,318 shares of
beneficial interest outstanding) $7.11
=====
Class C shares:
Net asset value, offering price and redemption price per
share
(net assets of $13,481,657 / 1,891,896 shares of
beneficial interest outstanding) $7.13
=====
On sales of $50,000 or more, the offering price of Class A shares is reduced. A
contingent deferred sales charge may be imposed on redemptions of Class A, Class
B and Class C shares.
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS - continued
Statement of Operations
- - ------------------------------------------------------------------------------
Year Ended April 30, 1996
- - ------------------------------------------------------------------------------
Net investment income:
Interest income $ 9,360,289
-----------
Expenses -
Management fee $ 489,030
Trustees' compensation 21,406
Shareholder servicing agent fee (Class A) 138,086
Shareholder servicing agent fee (Class B) 47,466
Shareholder servicing agent fee (Class C) 12,571
Distribution and service fee (Class A) 138,086
Distribution and service fee (Class B) 205,519
Distribution and service fee (Class C) 83,445
Custodian fee 44,687
Auditing fees 33,200
Printing 27,225
Postage 19,831
Amortization of organization expenses 4,586
Legal fees 2,891
Miscellaneous 104,523
-----------
Total expenses $ 1,372,552
Fees paid indirectly (8,646)
Refund of expenses pursuant to reimbursement agreement 42,149
-----------
Net expenses $ 1,406,055
-----------
Net investment income $ 7,954,234
-----------
Realized and unrealized gain (loss) on investments:
Realized gain (loss) (identified cost basis) -
Investment transactions $ 2,703,610
Futures contracts (1,393,012)
-----------
Net realized gain on investments $ 1,310,598
-----------
Change in unrealized appreciation (depreciation) -
Investments $(1,976,863)
Futures contracts 699,209
-----------
Net unrealized loss on investments $(1,277,654)
-----------
Net realized and unrealized gain on investments $ 32,944
-----------
Increase in net assets from operations $ 7,987,178
===========
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS - continued
<TABLE>
<CAPTION>
Statement of Changes in Net Assets
- - -----------------------------------------------------------------------------------------------
Year Ended April 30, 1996 1995
- - -----------------------------------------------------------------------------------------------
Increase (decrease) in net assets:
From operations -
<S> <C> <C>
Net investment income $ 7,954,234 $ 7,248,470
Net realized gain (loss) on investments 1,310,598 (3,398,821)
Net unrealized gain (loss) on investments (1,277,654) 2,524,452
------------ ------------
Increase in net assets from operations $ 7,987,178 $ 6,374,101
------------ ------------
Distributions declared to shareholders -
From net investment income (Class A) $ (6,197,868) $ (6,069,321)
From net investment income (Class B) (1,273,328) (875,473)
From net investment income (Class C) (483,038) (212,068)
In excess of net investment income (Class A) (105,605) --
In excess of net investment income (Class B) (37,487) --
In excess of net investment income (Class C) (27,955) --
------------ ------------
Total distributions declared to shareholders $ (8,125,281) $ (7,156,862)
------------ ------------
Fund share (principal) transactions -
Net proceeds from sale of shares $ 78,771,957 $ 56,036,281
Net asset value of shares issued to shareholders in
reinvestment of distributions 5,979,726 5,481,250
Cost of shares reacquired (53,643,464) (65,546,283)
------------ ------------
Increase (decrease) in net assets from Fund share
transactions $ 31,108,219 $ (4,028,752)
------------ ------------
Total increase (decrease) in net assets $ 30,970,116 $ (4,811,513)
Net assets:
At beginning of period 107,557,107 112,368,620
------------ ------------
At end of period (including accumulated distributions
in excess of net investment income of $530,649 and
$239,443, respectively) $138,527,223 $107,557,107
============ ============
</TABLE>
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS - continued
<TABLE>
<CAPTION>
Financial Highlights
- - --------------------------------------------------------------------------------------------
Year Ended April 30, 1996 1995 1994 1993 1992<F1>
- - --------------------------------------------------------------------------------------------
Class A
- - --------------------------------------------------------------------------------------------
Per share data (for a share outstanding throughout each period):
<S> <C> <C> <C> <C> <C>
Net asset value - beginning of period $ 7.10 $ 7.14 $ 7.46 $ 7.29 $ 7.31
------ ------ ------ ------ ------
Income from investment operations<F3> -
Net investment income $ 0.48 $ 0.46 $ 0.44 $ 0.48 $ 0.08
Net realized and unrealized gain
(loss) on investments 0.03 (0.04) (0.32) 0.17<F5> (0.02)<F5>
------ ------ ------ ------ ------
Total from investment operations $ 0.51 $ 0.42 $ 0.12 $ 0.65 $ 0.06
------ ------ ------ ------ ------
Less distributions declared to shareholders<F7>
From net investment income $(0.48) $(0.46) $(0.42) $(0.48) $(0.08)
In excess of net investment income (0.01) -- (0.02) -- --
------ ------ ------ ------ ------
Total distributions declared to
shareholders $(0.49) $(0.46) $(0.44) $(0.48) $(0.08)
------ ------ ------ ------ ------
Net asset value - end of period $ 7.12 $ 7.10 $ 7.14 $ 7.46 $ 7.29
====== ====== ====== ====== ======
Total return<F6> 7.50% 6.09% 1.61% 9.17% 4.98%<F2>
Ratios (to average net assets)/
Supplemental data<F8>:
Expenses<F4> 0.95% 0.95% 0.85% 0.60% 0.55%<F2>
Net investment income 6.73% 6.54% 5.99% 6.40% 6.22%<F2>
Portfolio turnover 385% 498% 861% 472% 72%
Net assets at end of period (000 omitted) $98,582 $85,773 $100,297 $67,470 $4,924
<FN>
<F1>For the period from the commencement of investment operations, February 26, 1992 to April 30, 1992.
<F2>Annualized.
<F3>Per share data for the periods subsequent to April 30, 1994 is based on average shares outstanding.
<F4>For periods ending after September 1, 1995, the Fund's expenses are calculated without reduction for fees paid indirectly.
<F5>The per share amount is not in accord with the net realized and unrealized gain (loss) for the period because of the timing
of sales of Fund shares and the amount of per share realized and unrealized gains and losses at such time.
<F6>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.
<F7>For the year ended April 30, 1993, the per share distribution from net realized gain on investments was $0.0021.
<F8>The investment adviser did not impose a portion of its managment fee and assumed some of the operating expenses of the Fund
for certain of the periods indicated. If these fees and expenses had been incurred by the Fund and if the expense reimbursement
agreement had not been in effect, the net investment income per share and the ratios would have been:
Net investment income $ 0.48 $ 0.46 $ 0.42 $ 0.43 $ 0.07
Ratios (to average net assets):
Expenses 0.91% 0.97% 1.07% 1.29% 1.44%<F2>
Net investment income 6.77% 6.52% 5.77% 5.70% 5.33%<F2>
See notes to financial statements
</TABLE>
<PAGE>
FINANCIAL STATEMENTS - continued
<TABLE>
<CAPTION>
Financial Highlights - continued
- - --------------------------------------------------------------------------------------------
Year Ended April 30, 1996 1995 1994<F1> 1996 1995<F2>
- - --------------------------------------------------------------------------------------------
Class B Class C
- - --------------------------------------------------------------------------------------------
Per share data (for a share outstanding throughout each period):
<S> <C> <C> <C> <C> <C>
Net asset value - beginning of period $ 7.10 $ 7.14 $ 7.50 $ 7.11 $ 7.08
------ ------ ------ ------ ------
Income from investment operations<F5> -
Net investment income $ 0.42 $ 0.41 $ 0.21 $ 0.41 $ 0.37
Net realized and unrealized gain
(loss) on investments 0.03 (0.05) (0.33) 0.04 (0.01)
------ ------ ------ ------ ------
Total from investment operations $ 0.45 $ 0.36 $(0.12) $ 0.45 $ 0.36
------ ------ ------ ------ ------
Less distributions declared to
shareholders -
From net investment income $(0.42) $(0.40) $(0.23) $(0.41) $(0.33)
In excess of net investment income (0.02) -- (0.01) (0.02) --
------ ------ ------ ------ ------
Total distributions declared to
shareholders $(0.44) $(0.40) $(0.24) $(0.43) $(0.33)
------ ------ ------ ------ ------
Net asset value - end of period $ 7.11 $ 7.10 $ 7.14 $ 7.13 $ 7.11
====== ====== ====== ====== ======
Total return 6.52% 5.20% (1.69)%<F4> 6.44% 5.25%<F4>
Ratios (to average net assets)/Supplemental data<F7>:
Expenses<F6> 1.75% 1.81% 1.74%<F3> 1.80% 1.85%<F3>
Net investment income 5.90% 5.73% 4.90%<F3> 5.76% 6.01%<F3>
Portfolio turnover 385% 498% 861% 385% 498%
Net assets at end of period (000 omitted) $26,464 $17,334 $12,072 $13,482 $4,450
<FN>
<F1>For the period from the commencement of offering of Class B shares, September 7, 1993 to April 30, 1994.
<F2>For the period from the commencement of offering of Class C shares, July 1, 1994 to April 30, 1995.
<F3>Annualized.
<F4>Not annualized.
<F5>Per share data for the periods subsequent to April 30, 1994 is based on average shares outstanding.
<F6>For periods ending after September 1, 1995, the Fund's expenses are calculated without reduction for fees paid indirectly.
<F7>The investment adviser did not impose a portion of its managment fee and assumed some of the operating expenses of the Fund
for certain of the periods indicated. If these fees and expenses had been incurred by the Fund and if the expense reimbursement
agreement had not been in effect, the net investment income per share and the ratios would have been:
Net investment income $ 0.42 $ 0.41 $ 0.20 $ 0.41 $ 0.37
Ratios (to average net assets):
Expenses 1.77% 1.82% 1.96%<F3> 1.75% 1.88%<F3>
Net investment income 5.88% 5.72% 4.68%<F3> 5.81% 5.98%<F3>
See notes to financial statements
</TABLE>
<PAGE>
NOTES TO FINANCIAL STATEMENTS
(1) Business and Organization
MFS Limited Maturity Fund (the Fund) is a diversified series of MFS Series Trust
IX (the Trust). The Trust is organized as a Massachusetts business trust and is
registered under the Investment Company Act of 1940, as amended, as an open-end
management investment company.
(2) Significant Accounting Policies
General - The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Investment Valuations - Debt securities (other than short-term obligations which
mature in 60 days or less), including listed issues, are valued on the basis of
valuations furnished by dealers or by a pricing service with consideration to
factors such as institutional-size trading in similar groups of securities,
yield, quality, coupon rate, maturity, type of issue, trading characteristics
and other market data, without exclusive reliance upon exchange or
over-the-counter prices. Short-term obligations, which mature in 60 days or
less, are valued at amortized cost, which approximates market value. Futures
contracts, options and options on futures contracts listed on commodities
exchanges are valued at closing settlement prices. Over-the-counter options are
valued by brokers through the use of a pricing model which takes into account
closing bond valuations, implied volatility and short-term repurchase rates.
Securities for which there are no such quotations or valuations are valued at
fair value as determined in good faith by or at the direction of the Trustees.
Repurchase Agreements - The Fund may enter into repurchase agreements with
institutions that the Fund's investment adviser has determined are creditworthy.
Each repurchase agreement is recorded at cost. The Fund requires that the
securities purchased in a repurchase transaction be transferred to the custodian
in a manner sufficient to enable the Fund to obtain those securities in the
event of a default under the repurchase agreement. The Fund monitors, on a daily
basis, the value of the securities transferred to ensure that the value,
including accrued interest, of the securities under each repurchase agreement is
greater than amounts owed to the Fund under each such repurchase agreement.
Deferred Organization Expenses - Costs incurred by the Fund in connection with
its organization have been deferred and are being amortized on a straight-line
basis over a five-year period beginning on the date of commencement of
operations of the Fund.
Futures Contracts - The Fund may enter into futures contracts for the delayed
delivery of securities or contracts based on financial indices at a fixed price
on a future date. In entering such contracts, the Fund is required to deposit
either in cash or securities an amount equal to a certain percentage of the
contract amount. Subsequent payments are made or received by the Fund each day,
depending on the daily fluctuations in the value of the underlying security, and
are recorded for financial statement purposes as unrealized gains or losses by
the Fund. The Fund's investment in futures contracts is designed to hedge
against anticipated future changes in interest rates or securities prices.
Investments in interest rate futures for purposes other than hedging may be made
to modify the duration of the portfolio without incurring the additional
transaction costs involved in buying and selling the underlying securities.
Should interest rates or securities prices move unexpectedly, the Fund may not
achieve the anticipated benefits of the futures contracts and may realize a
loss.
Investment Transactions and Income - Investment transactions are recorded on the
trade date. Interest income is recorded on the accrual basis. All premium and
original issue discount are amortized or accreted for both financial statement
and tax reporting purposes as required by federal income tax regulations.
Interest payments received in additional securities are recorded on the
ex-interest date in an amount equal to the value of the security on such date.
Fees Paid Indirectly - The Fund's custodian bank calculates its fee based on the
Fund's average daily net assets. This fee is reduced according to an expense
offset arrangement with State Street Bank, the dividend disbursing agent, which
provides for partial reimbursement of custody fees based on a formula developed
to measure the value of cash deposited by the Fund with the custodian and with
the dividend disbursing agent. This amount is shown as a reduction of expenses
on the Statement of Operations.
Tax Matters and Distributions - The Fund's policy is to comply with the
provisions of the Internal Revenue Code (the Code) applicable to regulated
investment companies and to distribute to shareholders all of its taxable
income, including any net realized gain on investments. Accordingly, no
provision for federal income or excise tax is provided.
The Fund files a tax return annually using tax accounting methods required under
provisions of the Code which may differ from generally accepted accounting
principles, the basis on which these financial statements are prepared.
Accordingly, the amount of net investment income and net realized gain reported
on these financial statements may differ from that reported on the Fund's tax
return and, consequently, the character of distributions to shareholders
reported in the financial highlights may differ from that reported to
shareholders on Form 1099-DIV. Distributions to shareholders are recorded on the
ex-dividend date.
The Fund distinguishes between distributions on a tax basis and a financial
reporting basis and requires that only distributions in excess of tax basis
earnings and profits are reported in the financial statements as a tax return of
capital. Differences in the recognition or classification of income between the
financial statements and tax earnings and profits which result in temporary
over-distributions for financial statement purposes, are classified as
distributions in excess of net investment income or accumulated net realized
gains. During the year ended April 30, 1996, $120,159 was reclassified from
accumulated undistributed net realized loss on investments to accumulated
distributions in excess of net investment income, due to differences between
book and tax accounting for mortgage-backed securities. This change had no
effect on the net assets or net asset value per share.
At April 30, 1996, the Fund, for federal income tax purposes, had a capital loss
carryforward of $3,619,464 which may be applied against any net taxable realized
gains of each succeeding year until the earlier of its utilization or expiration
on April 30, 2003.
Multiple Classes of Shares of Beneficial Interest - The Fund offers Class A,
Class B and Class C shares. The three classes of shares differ in their
respective shareholder servicing agent, distribution and service fees. All
shareholders bear the common expenses of the Fund pro rata based on the average
daily net assets of each class, without distinction between share classes.
Dividends are declared separately for each class. No class has preferential
dividend rights; differences in per share dividend rates are generally due to
differences in separate class expenses.
(3) Transactions with Affiliates
Investment Adviser - The Fund has an investment advisory agreement with
Massachusetts Financial Services Company (MFS) to provide overall investment
advisory and administrative services, and general office facilities. The
management fee is computed daily and paid monthly at an annual rate of 0.40% of
average daily net assets.
Under a temporary expense reimbursement agreement with MFS, MFS has voluntarily
agreed to pay all of the Fund's operating expenses, exclusive of management,
distribution and service fees. The Fund will in turn pay MFS an expense
reimbursement fee not greater than 0.40% of average daily net assets. To the
extent that the expense reimbursement fee exceeds the Fund's actual expenses,
the excess will be applied to amounts paid by MFS in prior years. At April 30,
1996, the aggregate unreimbursed expenses owed to MFS by the Fund amounted to
$106,359 after $42,149 net reimbursement in the current year.
The Fund pays no compensation directly to its Trustees who are officers of the
investment adviser, or to officers of the Fund, all of whom receive remuneration
for their services to the Fund from MFS. Certain of the officers and Trustees of
the Fund are officers or directors of MFS, MFS Fund Distributors, Inc. (MFD) and
MFS Service Center, Inc. (MFSC). The Fund has an unfunded defined benefit plan
for all of its independent Trustees and Mr. Bailey. Included in Trustees'
compensation is a net periodic pension expense of $4,146 for the year ended
April 30, 1996.
Distributor - MFD, a wholly owned subsidiary of MFS, as distributor, received
$40,392 for the year ended April 30, 1996, as its portion of the sales charge on
sales of Class A shares of the Fund.
The Trustees have adopted separate distribution plans for Class A, Class B and
Class C shares pursuant to Rule 12b-1 of the Investment Company Act of 1940 as
follows:
The Class A distribution plan provides that the Fund will pay MFD up to 0.35%
per annum of its average daily net assets attributable to Class A shares in
order that MFD may pay expenses on behalf of the Fund related to the
distribution and servicing of its shares. These expenses include a service fee
to each securities dealer that enters into a sales agreement with MFD of up to
0.25% per annum (reduced to a maximum of 0.15% per annum for an indefinite
period) of the Fund's average daily net assets attributable to Class A shares
which are attributable to that securities dealer, a distribution fee to MFD of
up to 0.10% per annum of the Fund's average daily net assets attributable to
Class A shares, commissions to dealers and payments to MFD wholesalers for sales
at or above a certain dollar level, and other such distribution-related expenses
that are approved by the Fund. MFD retains the service fee for accounts not
attributable to a securities dealer, which amounted to $15,962 for the year
ended April 30, 1996. MFD is not imposing the 0.10% distribution fee for an
indefinite period. Fees incurred under the distribution plan during the year
ended April 30, 1996 were 0.15% of average daily net assets attributable to
Class A shares on an annualized basis.
The Class B and Class C distribution plans provide that the Fund will pay MFD a
distribution fee of 0.75% per annum, and a service fee of up to 0.25% per annum,
of the Fund's average daily net assets attributable to Class B and Class C
shares. The service fee is currently being reduced to 0.15% on Class B shares
held over one year. MFD will pay to securities dealers that enter into a sales
agreement with MFD all or a portion of the service fee attributable to Class B
and Class C shares, and will pay to such securities dealers all of the
distribution fee attributable to Class C shares. The service fee is intended to
be additional consideration for services rendered by the dealer with respect to
Class B and Class C shares. MFD retains the service fee for accounts not
attributable to a securities dealer, which amounted to $2,263 and $1,477 for
Class B and Class C shares, respectively, for the year ended April 30, 1996.
Fees incurred under the distribution plans during the year ended April 30, 1996
were 0.95% and 1.00%, respectively, of average daily net assets attributable to
Class B and Class C shares on an annualized basis.
Purchases over $1 million of Class A shares and certain purchases into
retirement plans are subject to a contingent deferred sales charge in the event
of a shareholder redemption within twelve months following such purchase. A
contingent deferred sales charge is imposed on shareholder redemptions of Class
B shares in the event of a shareholder redemption within six years of purchase.
A contingent deferred sales charge is imposed on shareholder redemptions of
Class C shares in the event of a shareholder redemption within twelve months of
purchases made on or after April 1, 1996. MFD receives all contingent deferred
sales charges. Contingent deferred sales charges imposed during the year ended
April 30, 1996 were $412, $43,291 and $0 for Class A, Class B and Class C
shares, respectively.
Shareholder Servicing Agent - MFSC, a wholly owned subsidiary of MFS, earns a
fee for its services as shareholder servicing agent. The fee is calculated as a
percentage of the average daily net assets of each class of shares at an
effective annual rate of up to 0.15%, up to 0.22%, and up to 0.15% attributable
to Class A, Class B, and Class C shares, respectively.
(4) Portfolio Securities
Purchases and sales of investments, other than purchased option transactions and
short-term obligations, were as follows:
Purchases Sales
- - ------------------------------------------------------------------------------
U.S. government securities $207,577,666 $223,315,803
============ ============
Investments (non-U.S. government securities) $290,937,681 $233,932,017
============ ============
The cost and unrealized appreciation or depreciation in value of the investments
owned by the Fund, as computed on a federal income tax basis, are as follows:
Aggregate cost $136,377,132
============
Gross unrealized depreciation $ (1,432,162)
Gross unrealized appreciation 323,227
------------
Net unrealized depreciation $ (1,108,935)
============
(5) Shares of Beneficial Interest
The Fund's Declaration of Trust permits the Trustees to issue an unlimited
number of full and fractional shares of beneficial interest (without par value).
Transactions in Fund shares were as follows:
<TABLE>
<CAPTION>
Class A Shares
Year Ended April 30, 1996 1995
-------------------------- --------------------------
Shares Amount Shares Amount
- - ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Shares sold 5,978,674 $ 43,102,663 3,921,821 $ 27,684,487
Shares issued to shareholders
in reinvestment of distributions 638,556 4,600,038 655,143 4,624,574
Shares reacquired (4,851,688) (34,933,425) (6,542,877) (46,091,355)
--------- ------------ --------- ------------
Net increase (decrease) 1,765,542 $ 12,769,276 (1,965,913) $(13,782,294)
========= ============ ========= ============
Class B Shares
Year Ended April 30, 1996 1995
-------------------------- --------------------------
Shares Amount Shares Amount
- - ------------------------------------------------------------------------------------------------
Shares sold 2,854,814 $ 20,545,660 2,497,691 $ 17,640,259
Shares issued to shareholders
in reinvestment of distributions 135,072 971,974 99,556 701,588
Shares reacquired (1,712,548) (12,331,259) (1,845,637) (13,014,943)
--------- ------------ --------- ------------
Net increase 1,277,338 $ 9,186,375 751,610 $ 5,326,904
========= ============ ========= ============
Class C Shares
Year Ended April 30, 1996 1995<F1>
-------------------------- --------------------------
Shares Amount Shares Amount
- - ------------------------------------------------------------------------------------------------
Shares sold 2,095,271 $ 15,123,634 1,524,637 $ 10,711,535
Shares issued to shareholders
in reinvestment of distributions 56,575 407,714 22,123 155,088
Shares reacquired (886,139) (6,378,780) (920,571) (6,439,985)
--------- ------------ --------- ------------
Net increase 1,265,707 $ 9,152,568 626,189 $ 4,426,638
========= ============ ========= ============
<FN>
<F1>For the period from commencement of offering of Class C shares, July 31,
1994 to April 30, 1995.
</TABLE>
(6) Line of Credit
The Fund entered into an agreement which enables it to participate with other
funds managed by MFS in an unsecured line of credit with a bank which permits
borrowings up to $350 million, collectively. Borrowings may be made to
temporarily finance the repurchase of Fund shares. Interest is charged to each
fund, based on its borrowings, at a rate equal to the bank's base rate. In
addition, a commitment fee, based on the average daily unused portion of the
line of credit, is allocated among the participating funds at the end of each
quarter. The commitment fee allocated to the Fund for the year ended April 30,
1996 was $1,482
(7) Financial Instruments
The Fund trades financial instruments with off-balance sheet risk in the normal
course of its investing activities in order to manage exposure to market risks
such as interest rates and foreign currency exchange rates. These financial
instruments include written options, forward foreign currency exchange contracts
and futures contracts. The notional or contractual amounts of these instruments
represent the investment the Fund has in particular classes of financial
instruments and does not necessarily represent the amounts potentially subject
to risk. The measurement of the risks associated with these instruments is
meaningful only when all related and offsetting transactions are considered. A
summary of obligations under these financial instruments at April 30, 1996, is
as follows:
Futures Contracts
Unrealized
Description Expiration Contracts Position Appreciation
- - ------------------------------------------------------------------------------
U.S. Treasury Notes June 1996 412 Short $747,443
========
At April 30, 1996, the Fund had sufficient cash and/or securities to cover
margin requirements on open futures contracts.
(8) Restricted Securities
The Fund may invest not more than 15% of its net assets in securities which are
subject to legal or contractual restrictions on resale. At April 30, 1996, the
Fund owned the following restricted securities (constituting 5.24% of net
assets) which may not be publicly sold without registration under the Securities
Act of 1933. The Fund does not have the right to demand that such securities be
registered. The value of these securities is determined by valuations supplied
by a pricing service or brokers or, if not available, in good faith by or at the
direction of the Trustees.
<TABLE>
<CAPTION>
Par Amount
Description Date of Acquisition (000 Omitted) Cost Value
- - ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Empresa Electrica Guacolda S.A., 7.6s, 2001 4/22/96 $3,305 $3,305,000 $3,292,772
Loewen Group, Inc., 7.5s, 2001 3/13/96 4,000 3,988,040 3,960,000
----------
$7,252,772
==========
</TABLE>
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Trustees of MFS Series Trust IX and Shareholders of MFS Limited Maturity
Fund:
We have audited the accompanying statement of assets and liabilities, including
the portfolio of investments, of MFS Limited Maturity Fund, a series of MFS
Series Trust IX, as of April 30, 1996, the related statement of operations for
the year then ended, the statement of changes in net assets for the years ended
April 30, 1996 and 1995, and the financial highlights for each of the years in
the five-year period ended April 30, 1996. These financial statements and
financial highlights are the responsibility of the Fund's management. Our
responsibility is to express an opinion on these financial statements and
financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of the securities owned at
April 30, 1996 by correspondence with the custodian and brokers; where replies
were not received from brokers, we performed other auditing procedures. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of MFS Limited Maturity
Fund at April 30, 1996, the results of its operations, the changes in its net
assets, and its financial highlights for the respective stated periods in
conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Boston, Massachusetts
June 7, 1996
---------------------------------------------
This report is prepared for the general information of shareholders. It is
authorized for distribution to prospective investors only when preceded or
accompanied by a current prospectus.
<PAGE>
MFS(R)
LIMITED MATURITY FUND DALBAR
MFS #1 MFS
500 Boylston Street DALBAR
Boston, MA 02116
[LOGO] MFS
THE FIRST NAME IN MUTUAL FUNDS
BULK RATE
U.S. POSTAGE
P A I D
PERMIT #55638
BOSTON, MA
MLM-2 6/96 11.5M 36/236/336
<PAGE>
PROSPECTUS
September 1, 1996
MFS(R) MUNICIPAL Class A Shares of Beneficial Interest
LIMITED MATURITY FUND Class B Shares of Beneficial Interest
(A Member of the MFS Family of Funds(R)) Class C Shares of Beneficial Interest
- - --------------------------------------------------------------------------------
Page
----
1. Expense Summary ................................................. 2
2. The Fund ........................................................ 3
3. Condensed Financial Information ................................. 4
4. Investment Objective and Policies ............................... 6
5. Investment Techniques ........................................... 6
6. Additional Risk Factors ......................................... 8
7. Management of the Fund .......................................... 9
8. Information Concerning Shares of the Fund ....................... 11
Purchases .................................................... 11
Exchanges .................................................... 15
Redemptions and Repurchases .................................. 16
Distribution Plans ........................................... 19
Distributions ................................................ 21
Tax Status ................................................... 21
Net Asset Value .............................................. 22
Description of Shares, Voting Rights and Liabilities ......... 22
Performance Information ...................................... 22
Expenses ..................................................... 23
9. Shareholder Services ............................................ 23
Appendix A ...................................................... A-1
Appendix B ...................................................... B-1
Appendix C ...................................................... C-1
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
MFS MUNICIPAL LIMITED MATURITY FUND
500 Boylston Street, Boston, Massachusetts 02116 (617) 954-5000
MFS Municipal Limited Maturity Fund (the "Fund") is a diversified series of
MFS(R) Series Trust IX (the "Trust"), an open-end investment company presently
consisting of three series. The investment objective of the Fund is to provide
as high a level of current income exempt from federal income taxes as is
considered consistent with prudent investing while seeking protection of
shareholders' capital. See "Investment Objective and Policies" below. The
minimum initial investment generally is $1,000 per account (see "Information
Concerning Shares of the Fund -- Purchases" below).
The Fund's investment adviser and distributor are Massachusetts Financial
Services Company ("MFS" or the "Adviser") and MFS Fund Distributors, Inc.
("MFD"), respectively, both of which are located at 500 Boylston Street,
Boston, Massachusetts 02116.
INVESTMENT PRODUCTS ARE NOT INSURED BY THE FDIC OR ANY OTHER GOVERNMENT
AGENCY, AND ARE NOT DEPOSITS OR OTHER OBLIGATIONS OF, OR GUARANTEED BY, ANY
FINANCIAL INSTITUTION. SHARES OF MUTUAL FUNDS ARE SUBJECT TO INVESTMENT RISK,
INCLUDING POSSIBLE LOSS OF THE PRINCIPAL AMOUNT INVESTED, AND WILL FLUCTUATE
IN VALUE. YOU MAY RECEIVE MORE OR LESS THAN YOU PAID WHEN YOU REDEEM YOUR
SHARES.
This Prospectus sets forth concisely the information concerning the Trust and
the Fund that a prospective investor ought to know before investing. The
Trust, on behalf of the Fund, has filed with the Securities and Exchange
Commission (the "SEC") a Statement of Additional Information, dated September
1, 1996, as amended or supplemented from time to time (the "SAI"), which
contains more detailed information about the Trust and the Fund and is
incorporated into this Prospectus by reference. See page 25 for a further
description of the information set forth in the SAI. A copy of the SAI may be
obtained without charge by contacting the Shareholder Servicing Agent (see
back cover for address and phone number). The SEC maintains an Internet World
Wide Web site that contains the SAI, materials that are incorporated by
reference into this Prospectus and the SAI, and other information regarding
the Fund. This Prospectus is available on the Adviser's Internet World Wide
Web site at http://www.mfs.com.
INVESTORS SHOULD READ THIS PROSPECTUS AND RETAIN IT FOR FUTURE REFERENCE.
1. EXPENSE SUMMARY
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
------- ------- -------
<S> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES:
Maximum Initial Sales Charge Imposed on Purchases of Shares
(as a percentage of offering price) ...................... 2.50% 0.00% 0.00%
Maximum Contingent Deferred Sales Charge (as a percentage of
original purchase price or redemption proceeds, as
applicable) .............................................. See Below(1) 4.00% 1.00%
ANNUAL OPERATING EXPENSES (AS A PERCENTAGE OF AVERAGE NET ASSETS):
Management Fees ............................................ 0.40% 0.40% 0.40%
Rule 12b-1 Fees ............................................ 0.15%(2) 0.90%(3) 1.00%(3)
Other Expenses(6) .......................................... 0.40%(4) 0.40%(4) 0.40%(4)
----- ----- -----
Total Operating Expenses(5) ................................ 0.95% 1.70% 1.80%
----- ----- -----
</TABLE>
- - ----------
(1) Purchases of $1 million or more and certain retirement plans are not
subject to an initial sales charge; however, a contingent deferred sales
charge ("CDSC") of 1% will be imposed on such purchases made in the event
of certain redemption transactions within 12 months following such
purchases (see "Information Concerning Shares of the Fund -- Purchases"
below).
(2) The Fund has adopted a Distribution Plan for its Class A shares in
accordance with Rule 12b-1 under the Investment Company Act of 1940, as
amended (the "1940 Act"), which provides that it will pay distribution/
service fees aggregating up to (but not necessarily all of) 0.35% per
annum of the average daily net assets attributable to Class A shares (see
"Information Concerning Shares of the Fund -- Distribution Plans" below).
Payment of the 0.10% per annum Class A distribution fee will commence on
such date as the Trustees of the Trust may determine. A portion of the
Class A service fee, equal to 0.15% of the average daily net assets of the
Fund attributable to Class A shares, is currently being paid by the Fund;
payment of the remaining portion of the Class A service fee, equal to
0.10% per annum, will become payable on such date as the Trustees of the
Trust may determine. Distribution expenses paid under this Plan, together
with the initial sales charge, may cause long-term shareholders to pay
more than the maximum sales charge that would have been permissible if
imposed entirely as an initial sales charge.
(3) The Fund has adopted separate Distribution Plans for its Class B and its
Class C shares in accordance with Rule 12b-1 under the 1940 Act, which
provide that it will pay distribution/service fees aggregating up to (but
not necessarily all of) 1.00% per annum of the average daily net assets
attributable to the Class B shares under the Class B Distribution Plan and
the Class C shares under the Class C Distribution Plan (see "Information
Concerning Shares of the Fund -- Distribution Plans" below). 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, the Class B service fee is currently set at 0.15%
per annum and may be increased to a maximum of 0.25% per annum on such
date as the Trustees of the Trust may determine. Distribution expenses
paid under these Plans, together with the CDSC payable upon redemption of
Class B shares, may cause long-term shareholders to pay more than the
maximum sales charge that would have been permissible if imposed entirely
as an initial sales charge.
(4) MFS has voluntarily agreed to pay the Fund's operating expenses, exclusive
of distribution and management fees, such that aggregate operating
expenses of the Fund's Class A, Class B and Class C shares do not exceed
0.40% per annum of its average daily net assets. Absent this expense
arrangement, "Other Expenses" would have been 0.44%, 0.51% and 0.44% for
Class A shares, Class B shares and Class C shares, respectively.
(5) Absent a reduction in the Fund's expense reimbursement arrangements as
described above, "Total Operating Expenses" for Class A shares, Class B
shares and Class C shares would have been 0.99%, 1.81% and 1.84%,
respectively.
(6) The Fund has an expense offset arrangement which reduces the Fund's
custodian fee based upon the amount of cash maintained by the Fund with
its custodian and dividend disbursing agent, and may enter into other such
arrangements and directed brokerage arrangements (which would also have
the effect of reducing the Fund's expenses). Any such fee reductions are
not reflected under "Other Expenses."
EXAMPLE OF EXPENSES
-------------------
An investor would pay the following dollar amounts of expenses on a $1,000
investment in the Fund, assuming (a) 5% annual return and (b) redemption at
the end of each of the time periods indicated (unless otherwise noted):
<TABLE>
<CAPTION>
PERIOD CLASS A CLASS B CLASS C
------ ------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
(1) (1)
1 year ................................... $ 34 $ 57 $ 17 $ 18 $ 18
3 years .................................. 55 84 54 57 57
5 years .................................. 76 112 92 97 97
10 years .................................. 139 181(2) 181(2) 212 212
- - ----------
(1) Assumes no redemption
(2) Class B shares convert to Class A shares approximately eight years after
purchase; therefore, years nine and ten reflect Class A expenses.
</TABLE>
The purpose of the expense table above is to assist investors in understanding
the various costs and expenses that a shareholder of the Fund will bear
directly or indirectly. More complete descriptions of the following expenses
are set forth in the following sections of the Prospectus: (i) varying sales
charges on share purchases -- "Purchases"; (ii) varying CDSCs -- "Purchases";
(iii) management fees -- "Management of the Fund", and (iv) Rule 12b-1 (i.e.,
distribution plan) fees -- "Distribution Plans."
THE "EXAMPLE" SET FORTH ABOVE SHOULD NOT BE CONSIDERED A REPRESENTATION OF
PAST OR FUTURE EXPENSES OF THE FUND; ACTUAL EXPENSES MAY BE GREATER OR LESS
THAN THOSE SHOWN.
2. THE FUND
The Fund is a diversified series of the Trust, an open-end management
investment company which was organized as a business trust under the laws of
The Commonwealth of Massachusetts in 1985. The Trust presently consists of
three series, each of which represents a portfolio with separate investment
policies. Shares of the Fund are continuously sold to the public and the Fund
uses the proceeds to buy securities for its portfolio. Three classes of shares
of the Fund currently are offered for sale to the general public. Class A
shares are offered at net asset value plus an initial sales charge up to a
maximum of 2.50% of the offering price (or a CDSC upon redemption of 1.00%
during the first year in the case of purchases of $1 million or more and
certain purchases by retirement plans) and subject to an annual distribution
and service fee up to a maximum of 0.35% per annum. Class B shares are offered
at net asset value without an initial sales charge but subject to a CDSC upon
redemption (declining from 4.00% during the first year to 0% after six years)
and an annual distribution and service fee up to a maximum of 1.00% per annum;
Class B shares will convert to Class A shares approximately eight years after
purchase. Class C shares are offered at net asset value without an initial
sales charge but subject to an annual distribution fee and service fee up to a
maximum of 1.00% per annum. Class C shares do not convert to any other class
of shares of the Fund.
The Trust's Board of Trustees provides broad supervision over the affairs of
the Trust and the Fund. A majority of the Trustees of the Trust are not
affiliated with the Adviser. The Adviser is responsible for the management of
the Fund's assets and the officers of the Trust are responsible for the Fund's
operations. The Adviser manages the portfolio from day to day in accordance
with the Fund's investment objective and policies. The selection of
investments and the way they are managed depend on the conditions and trends
in the economy and the financial marketplaces. The Fund also offers to buy
back (redeem) its shares from its shareholders at any time at net asset value,
less any applicable CDSC.
3. CONDENSED FINANCIAL INFORMATION
The following information has been audited since inception of the Fund and
should be read in conjunction with the financial statements included in the
Fund's Annual Report to Shareholders, which are incorporated by reference into
the SAI in reliance upon the report of the Fund's independent auditors, given
upon their authority, as experts in accounting and auditing. The Fund's
current independent auditors are Deloitte & Touche LLP.
<PAGE>
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS
EIGHT MONTHS
YEAR ENDED MONTHS YEAR ENDED
APRIL 30, ENDED AUGUST 31,
-------------------- APRIL 30, --------------------
1996 1995 1994 1993 1992*
---------------------------------------------------
CLASS A
---------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE DATA (FOR A SHARE OUTSTANDING
THROUGHOUT EACH PERIOD):
Net asset value -- beginning of period ............. $ 7.45 $ 7.47 $ 7.72 $ 7.43 $ 7.31
------ ------ ------ ------ ------
Income from investment operations++ --
Net investment income(S) ......................... $ 0.30 $ 0.28 $ 0.19 $ 0.31 $ 0.15
Net realized and unrealized gain
(loss) on investments ........................... 0.08 (0.02) (0.22) 0.30 0.12
------ ------ ------ ------ ------
Total from investment operations ............... $ 0.38 $ 0.26 $(0.03) $ 0.61 $ 0.27
------ ------ ------ ------ ------
Less distributions declared to shareholders --
From net investment income ........................ $(0.30) $(0.28) $(0.19)++ $(0.31) $(0.15)++
In excess of net investment income ................ -- -- +++ -- -- --
From net realized gain on investments ............. -- -- -- (0.01) --
In excess of net realized gain on investments ..... -- -- (0.03) -- --
$----- $----- $----- $----- $-----
Total distributions declared to shareholders .... $(0.30) $(0.28) $(0.22) $(0.32) $(0.15)
Net asset value -- end of period .................... $ 7.53 $ 7.45 $ 7.47 $ 7.72 $ 7.43
====== ====== ====== ====== ======
Total return# ....................................... 5.11% 3.55% (0.59)%+ 8.47% (8.26)%+
RATIOS (TO AVERAGE NET ASSETS)/SUPPLEMENTAL DATA:(S)
Expenses## ........................................ 0.95% 0.95% 0.89%+ 0.68% 0.55%+
Net investment income ............................. 4.00% 3.74% 3.72%+ 4.04% 4.25%+
PORTFOLIO TURNOVER 43% 50% 48% 69% 8%
NET ASSETS AT END OF PERIOD (000 OMITTED) ........... $50,387 $64,329 $83,367 $87,192 $21,312
<FN>
- - ----------
*For the period from the commencement of investment operations, March 17, 1992 to August 31, 1992.
+Annualized.
++Per share data for the periods subsequent to April 30, 1994 is based on average shares outstanding.
#Total returns for Class A shares do not include the applicable sales charge. If the charge had been included, the
results would have been lower.
##For fiscal years ending after September 1, 1995, the Fund's expenses are calculated without reduction for fees paid
indirectly.
+++Includes a per share distribution from paid-in-capital of $0.0007.
++++Includes a per share distribution in excess of net investment income of $0.002.
+++++Includes a per share distribution in excess of net investment income of $0.002.
(S)The investment adviser did not impose all or a portion of its management fee and/or assumed some of the operating
expenses of the Fund for certain of the periods indicated. If these fees had been incurred by the Fund, the net
investment income per share and the ratios would have been:
</FN>
Net investment income $ 0.30 $ 0.28 $ 0.18 $ 0.28 $ 0.13
Ratios (to average net assets):
Expenses 0.99% 0.95% 1.12%+ 1.16% 1.16%+
Net investment income ......................... 3.96% 3.74% 3.49%+ 3.57% 3.64%+
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS - continued
YEAR ENDED APRIL 30,
-------------------------------------------------
1996 1995 1994 1996 1995**
-------------------------------------------------
CLASS B CLASS C
-------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE DATA (FOR A SHARE OUTSTANDING
THROUGHOUT EACH PERIOD):
Net asset value -- beginning of period ............. $ 7.44 $ 7.46 $ 7.75 $ 7.45 $ 7.45
------ ------ ------ ------ ------
Income from investment operations++ --
Net investment income(S) ......................... $ 0.25 $ 0.21 $ 0.14 $ 0.23 $ 0.21
Net realized and unrealized gain (loss) on
investments .................................... 0.07 (0.02) (0.26) 0.08 (0.02)
------ ------ ------ ------ ------
Total from investment operations ............... $ 0.32 $ 0.19 $(0.12) $ 0.31 $ 0.19
------ ------ ------ ------ ------
Less distributions declared to shareholders --
From net investment income ....................... $(0.24) $(0.21) $(0.13) $(0.23) $(0.19)
In excess of net investment income ............... -- -- +++ (0.01) -- -- +++
In excess of net realized gain on investments .... -- -- (0.03) -- --
------ ------ ------ ------ ------
Total distributions declared to
shareholders .................................. $(0.24) $(0.21) $(0.17) $(0.23) $(0.19)
------ ------ ------ ------ ------
Net asset value -- end of period ................... $ 7.52 $ 7.44 $ 7.46 $ 7.53 $ 7.45
====== ====== ====== ====== ======
Total return ....................................... 4.34% 2.67% (2.37)%+ 4.23% 2.53%
RATIOS (TO AVERAGE NET ASSETS)/SUPPLEMENTAL DATA(S):
Expenses## 1.70% 1.80% 1.74%+ 1.80% 1.79%+
Net investment income ............................ 3.25% 2.88% 2.79%+ 3.16% 2.77%+
PORTFOLIO TURNOVER ................................. 43% 50% 48% 43% 50%
NET ASSETS AT END OF
PERIOD (000 OMITTED) .............................. $7,749 $7,792 $7,415 $3,013 $1,934
- - ----------
**For the period from the commencement of offering of Class B shares, September 7, 1993 to April 30, 1994.
***For the period from the commencement of offering of Class C shares, July 1, 1994 to April 30, 1995.
##For fiscal years ending after September 1, 1995, the Fund's expenses are calculated without reduction for fees paid
indirectly.
+Annualized.
++Per share data for the periods subsequent to April 30, 1994, is based on average shares outstanding.
++++++Includes a per share distribution in excess of net investment income of $0.001.
(S)The investment adviser did not impose all or a portion of its management fee and/or assumed some of the operating
expenses of the Fund for certain of the periods indicated. If these fees had been incurred by the Fund, the net
investment income per share and the ratios would have been:
Net investment income .......................... $ 0.25 $ 0.21 $ 0.12 $ 0.23 $ 0.21
Ratios (to average net assets):
Expenses ..................................... 1.74% 1.80% 2.05%+ 1.84% 1.79%+
Net investment income ........................ 3.21% 2.88% 2.48%+ 3.12% 2.77%+
</TABLE>
<PAGE>
4. INVESTMENT OBJECTIVE AND POLICIES
INVESTMENT OBJECTIVE -- The Fund's investment objective is to provide as high
a level of current income exempt from federal income taxes as is considered
consistent with prudent investing and protection of shareholders' capital. Any
investment involves risk and there can be no assurance that the Fund will
achieve its investment objective. The Fund's investment objective and policies
are not fundamental and may be changed without shareholder approval. A change
in the Fund's investment objective may result in the Fund having an investment
objective different from the objective which the shareholder considered
appropriate at the time of investment in the Fund.
INVESTMENT POLICIES -- The Fund's policy, under normal conditions, is to
invest substantially all (i.e., at least 80%) of its assets in debt securities
issued by or on behalf of states, territories and possessions of the United
States and the District of Columbia and their political subdivisions, agencies
or instrumentalities, the interest on which is exempt from federal income tax
("Municipal Bonds" or "tax-exempt securities"). The interest income on certain
of these obligations may be subject to an alternative minimum tax, which is
considered to be tax-exempt for purposes of the 80% test described above. As a
defensive measure during times of adverse market conditions, up to 50% of the
Fund's assets may be temporarily invested in short-term investments described
in items 3 and 4 below.
Substantially all of the Fund's total assets will be invested in:
(1) Tax-exempt securities which are rated AAA, AA, A or BBB by
Standard & Poor's Ratings Services ("S&P") or by Fitch Investors
Service, Inc. ("Fitch") or are rated Aaa, Aa, A or Baa by Moody's
Investors Service, Inc. ("Moody's") (and comparable unrated securities);
(2) Notes of issuers having an issue of outstanding Municipal Bonds
rated AAA, AA, A or BBB by S&P or Aaa, Aa, A or Baa by Moody's (or
issues of comparable quality) or which are guaranteed by the U.S.
Government;
(3) Obligations issued or guaranteed by the U.S. Government or its
agencies, authorities or instrumentalities; and
(4) Commercial paper, obligations of banks (including certificates
of deposit and bankers' acceptances) with $1 billion or more of assets,
and cash.
Under normal market conditions, the dollar weighted average maturity of the
Fund's portfolio will not exceed 5 years and substantially all of the
securities held by the Fund will have remaining maturities of 10 years or
less.
Interest income from the short-term investments described in items 3 and 4
above will be taxable to shareholders as ordinary income. For a comparison of
yields on Municipal Bonds and taxable securities, see the Taxable Equivalent
Yield Table in Appendix B to this Prospectus. For a general discussion of
Municipal Bonds and descriptions of short-term investments permitted as
investments and the ratings of S&P, Fitch and Moody's for Municipal Bonds, see
Appendix C to this Prospectus and Appendix A to the SAI, respectively.
From time to time, proposals have been introduced before Congress for the
purpose of restricting or eliminating the federal income tax exemption for
interest on Municipal Bonds. For the effect of current federal tax law on this
exemption, see the "Tax Status" section of this Prospectus.
5. INVESTMENT TECHNIQUES
Consistent with the Fund's investment objective and policies, the Fund may
engage in the following investment techniques, many of which are described
more fully in the SAI. See "Investment Objective, Policies and Restrictions"
in the SAI.
"WHEN-ISSUED" OR "FORWARD DELIVERY" SECURITIES: Some tax-exempt securities may
be purchased on a "when-issued" or on a "forward delivery" basis, which means
that the securities will be delivered to the Fund at a future date, often
beyond customary settlement time. The commitment to purchase a security for
which payment will be made on a future date may be deemed a separate security.
The Fund does not pay for the securities until received and does not start
earning interest on them until the contractual settlement date. In order to
invest its assets immediately, while awaiting delivery of securities purchased
on such bases, the Fund will normally invest in cash, short-term money market
instruments or high quality liquid debt securities. Although the Fund does not
intend to make such purchases for speculative purposes, purchases of
securities on such bases may involve more risk than other types of purchases.
ZERO COUPON BONDS: Municipal Bonds in which the Fund may invest also include
zero coupon bonds. Zero coupon bonds are debt obligations which are issued at
a significant discount from face value and do not require the periodic payment
of interest. The discount approximates the total amount of interest the bonds
will accrue and compound over the period until maturity or the first interest
payment date at a rate of interest reflecting the market rate of the security
at the time of issuance. Zero coupon bonds benefit the issuer by mitigating
its need for cash to meet debt service, but also require a higher rate of
return to attract investors who are willing to defer receipt of such cash.
Such investments may experience greater volatility in market value than debt
obligations which make regular payments of interest. The Fund will accrue
income on such investments for tax and accounting purposes, as required, which
is distributable to shareholders and which, because no cash is received at the
time of accrual, may require the liquidation of other portfolio securities to
satisfy the Fund's distribution obligations.
RESTRICTED SECURITIES: The Fund may also purchase securities that are not
registered under the Securities Act of 1933 ("1933 Act") ("restricted
securities"), including those that can be offered and sold to "qualified
institutional buyers" under Rule 144A under the 1933 Act ("Rule 144A
securities"). The Trust's Board of Trustees determines, based upon a
continuing review of the trading markets for a specific Rule 144A security,
whether such security is liquid and thus not subject to the Fund's limitation
on investing not more than 15% of its net assets in illiquid investments. The
Board of Trustees has adopted guidelines and delegated to MFS the daily
function of determining and monitoring the liquidity of Rule 144A securities.
The Board, however, will retain sufficient oversight and be ultimately
responsible for the determinations. The Board will carefully monitor the
Fund's investments in Rule 144A securities, focusing on such important
factors, among others, as valuation, liquidity and availability of
information. Investing in restricted securities could have the effect of
decreasing the level of liquidity in the Fund to the extent that qualified
institutional buyers become for a time uninterested in purchasing Rule 144A
securities held in the Fund's portfolio. Subject to the Fund's 15% limitation
on investments in illiquid investments, the Fund may also invest in restricted
securities that may not be sold under Rule 144A, which presents certain risks.
As a result, the Fund might not be able to sell these securities when the
Adviser wishes to do so, or might have to sell them at less than fair value.
In addition, market quotations are less readily available. Therefore, judgment
may at times play a greater role in valuing these securities than in the case
of unrestricted securities.
OPTIONS: The Fund may write (sell) "covered" put and call options on fixed
income securities. Call options written by the Fund give the holder the right
to buy the underlying securities from the Fund at a fixed exercise price up to
a stated expiration date or, in the case of certain options, on such date. Put
options written by the Fund give the holder the right to sell the underlying
securities to the Fund during the term of the option at a fixed exercise price
up to a stated expiration date or, in the case of certain options, on such
date. Call options are "covered" by the Fund, for example, when it owns the
underlying securities, and put options are "covered" by the Fund, for example,
when it has established a segregated account of cash, short-term money market
instruments or high quality debt securities which can be liquidated promptly
to satisfy any obligation of the Fund to purchase the underlying securities.
The Fund may also write straddles (combinations of puts and calls on the same
underlying security). The writing of straddles generates additional premium
income but may present greater risk.
The Fund will receive a premium from writing a put or call option, which
increases the Fund's gross income in the event the option expires unexercised
or is closed out at a profit. The amount of the premium will reflect, among
other things, the relationship of the exercise price to the market price and
volatility of the underlying security, the remaining term of the option,
supply and demand and interest rates. By writing a call option, the Fund
limits its opportunity to profit from any increase in the market value of the
underlying security above the exercise price of the option. By writing a put
option, the Fund assumes the risk that it may be required to purchase the
underlying security for an exercise price higher than its then-current market
value, resulting in a potential capital loss unless the security subsequently
appreciates in value.
The Fund may terminate an option that it has written prior to its expiration
by entering into a closing purchase transaction in which it purchases an
option having the same terms as the option written. It is possible, however,
that illiquidity in the options markets may make it difficult from time to
time for the Fund to close out its written option positions.
The Fund may also purchase put or call options in anticipation of changes in
interest rates which may adversely affect the value of its portfolio or the
prices of securities that the Fund wants to purchase at a later date. The
premium paid for a put or call option plus any transaction costs will reduce
the benefit, if any, realized by the Fund upon exercise of the option, and,
unless the price of the underlying security changes sufficiently to result in
exercise, the option may expire without value to the Fund.
In addition, the Fund may purchase warrants on fixed income securities. A
warrant on a fixed income security is a long-dated (i.e., long term) call
option conveying to the holder of the warrant the right, but not the
obligation, to purchase a fixed income security of a specific description
(from the issuer) on a certain date or dates (the exercise date) at a fixed
exercise price.
The Fund intends to write and purchase options on securities primarily for
hedging purposes and also in an effort to increase current income. Options on
securities, including warrants, that are written or purchased by the Fund will
be traded on U.S. securities exchanges and in the over-the-counter market.
INDEXED SECURITIES: The Fund may invest in indexed securities whose value is
linked to foreign currencies, interest rates, commodities, indices or other
financial indicators. Most indexed securities are short to intermediate term
fixed-income securities whose values at maturity (i.e., principal value) or
interest rates rise or fall according to the change in one or more specified
underlying instruments. Indexed securities may be positively or negatively
indexed (i.e., their principal value or interest rates may increase or
decrease if the underlying instrument appreciates), and may have return
characteristics similar to direct investments in the underlying instrument or
to one or more options on the underlying instrument. Indexed securities may be
more volatile than the underlying instrument itself.
FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS: The Fund may purchase and
sell futures contracts on fixed income securities or indices of such
securities, including Municipal Bond indices and any other indices of fixed
income securities which may become available for trading ("Futures
Contracts"). The Fund may also purchase and write options on such Futures
Contracts ("Options on Futures Contracts"). These instruments will be used to
hedge against anticipated future changes in interest rates which otherwise
might either adversely affect the value of the Fund's portfolio securities or
adversely affect the prices of securities which the Fund intends to purchase
at a later date. Should interest rates move in an unexpected manner, the Fund
may not achieve the anticipated benefits of the hedging transactions and may
realize a loss. Such investments may also be used for non-hedging purposes, to
the extent permitted by applicable law.
ADDITIONAL POLICIES ON THE USE OF OPTIONS AND FUTURES: In order to assure that
the Fund will not be deemed to be a "commodity pool" for purposes of the
Commodity Exchange Act, regulations of the CFTC require that the Fund enter
into transactions in Futures Contracts and Options on Futures Contracts only
(i) for bona fide hedging purposes (as defined in CFTC regulations), or (ii)
for non-hedging purposes, provided that the aggregate initial margin and
premiums on such non-hedging positions does not exceed 5% of the liquidation
value of the Fund's assets. In addition, the Fund must comply with the
requirements of various state securities laws in connection with such
transactions.
The Fund has adopted the additional restriction that it will not enter into a
Futures Contract if, immediately thereafter, the value of securities and other
obligations underlying all such Futures Contracts would exceed 50% of the
value of the Fund's total assets. Moreover, the Fund will not purchase put and
call options on securities or on Futures Contracts, if as a result, more than
5% of its total assets would be invested in such options.
Futures Contracts and Options on Futures Contracts that are entered into by
the Fund will be traded on U.S. commodities exchanges.
6. ADDITIONAL RISK FACTORS
The following discussion of additional risk factors supplements the risk
factors described above. Additional information concerning risk factors can be
found under the caption "Investment Objectives, Policies and Restrictions" in
the SAI.
FIXED INCOME SECURITIES: The net asset value of the shares of an open-end
investment company such as the Fund, which invests primarily in fixed income
tax-exempt securities, changes as the general levels of interest rates
fluctuate. When interest rates decline, the market value of the portfolio can
be expected to rise. Conversely, when interest rates rise, the market value of
the portfolio can be expected to decline.
SECURITIES RATED BBB/BAA: As noted above, the Fund may invest in tax-exempt
securities rated Baa by Moody's or BBB by S&P or Fitch (and comparable unrated
securities). These securities, while normally exhibiting adequate protection
parameters, have speculative characteristics and changes in economic
conditions or other circumstances are more likely to lead to a weakened
capacity to make principal and interest payments than in the case of higher
grade tax-exempt securities. If a security purchased by the Fund is
subsequently downgraded to below BBB by S&P or Fitch or Baa by Moody's or
comparable standards for unrated securities, the security will be sold only if
the Adviser believes it is advantageous to do so.
FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS: Although the Fund will
enter into certain transactions in Futures Contracts and Options on Futures
Contracts for hedging purposes, such transactions nevertheless involve risks.
For example, a lack of correlation between the instrument underlying an option
or Futures Contract and the assets being hedged, or unexpected adverse price
movements, could render the Fund's hedging strategy unsuccessful and could
result in losses. The Fund also may enter into transactions in such
investments for other than hedging purposes, which involves greater risk. In
particular, such transactions may result in losses for the Fund which are not
offset by gains on other portfolio positions, thereby reducing gross income.
In addition, there can be no assurance that a liquid secondary market will
exist for any contract purchased or sold, and the Fund may be required to
maintain a position until exercise or expiration, which could result in
losses.
Transactions in options may be entered into on U.S. exchanges regulated by the
SEC and in the over-the-counter market, while Futures Contracts and Options on
Futures Contracts may be entered into on U.S. commodities exchanges regulated
by the CFTC. Over-the-counter transactions involve certain risks which may not
be present in exchange-traded transactions.
Gains recognized from options and futures transactions engaged in by the Fund
are taxable income to shareholders upon distributions.
PORTFOLIO TRADING: The Fund intends to engage in buying and selling
securities, as well as holding securities to maturity. In buying and selling
portfolio securities, the Fund seeks to take advantage of market developments,
yield disparities and variations in the creditworthiness of issuers. For a
description of the strategies which may be used by the Fund in buying and
selling portfolio securities, see the SAI.
The primary consideration in placing portfolio security transactions with
broker-dealers is to obtain, and maintain the availability of, execution at
the most favorable prices. Consistent with the foregoing primary
consideration, the Rules of Fair Practice of the National Association of
Securities Dealers, Inc. (the "NASD") and such other policies as the Trustees
may determine, the Adviser may consider sales of shares of the Fund and of the
other investment company clients of MFD as a factor in the selection of
broker-dealers to execute the portfolio transactions. From time to time, the
Adviser may direct certain portfolio transactions to broker-dealer firms
which, in turn, have agreed to pay a portion of the Fund's operating expenses
(e.g., fees charged by the custodian of the Fund's assets).
--------------------
The SAI includes a discussion of other investment policies and a listing of
specific investment restrictions which govern the Fund's investment policies.
The specific investment restrictions listed in the SAI may be changed without
shareholder approval unless otherwise indicated (see "Investment Restrictions"
in the SAI). The Fund's investment limitations, policies and rating standards
are adhered to at the time of purchase or utilization of assets; a subsequent
change in circumstances will not be considered to result in a violation of
policy.
7. MANAGEMENT OF THE FUND
INVESTMENT ADVISER -- The Adviser manages the Fund pursuant to an Investment
Advisory Agreement dated September 1, 1993 (the "Advisory Agreement"). The
Adviser provides the Fund with overall investment advisory and administrative
services, as well as general office facilities. Robert A. Dennis has been the
Fund's portfolio manager since 1992. Mr. Dennis has been employed as a
portfolio manager by the Adviser since 1980 and has been a Senior Vice
President since 1986. Subject to such policies as the Trustees may determine,
the Adviser makes investment decisions for the Fund. For these services and
facilities, the Adviser receives a management fee computed and paid monthly at
the rate of 0.40% per annum of the Fund's average daily net assets. For the
fiscal year ended April 30, 1996, MFS received management fees under the
Advisory Agreement of $267,876, equivalent to 0.40% of the Fund's average
daily net assets.
MFS also serves as investment adviser to each of the other funds in the MFS
Family of Funds (the "MFS Funds"), to MFS Municipal Income Trust, MFS
Government Markets Income Trust, MFS Multimarket Income Trust, MFS
Intermediate Income Trust, MFS Charter Income Trust, MFS Special Value Trust,
MFS Institutional Trust, MFS Union Standard Trust, MFS Variable Insurance
Trust, Sun Growth Variable Annuity Fund, Inc., MFS/Sun Life Series Trust and
seven variable accounts, each of which is a registered investment company
established by Sun Life Assurance Company of Canada (U.S.) ("Sun Life of
Canada (U.S.)") in connection with the sale of various fixed/variable annuity
contracts. MFS and its wholly owned subsidiary, MFS Asset Management, Inc.,
provide investment advice to substantial private clients.
MFS is America's oldest mutual fund organization. MFS and its predecessor
organizations have a history of money management dating from 1924 and the
founding of the first mutual fund in the United States, Massachusetts
Investors Trust. Net assets under the management of the MFS organization were
approximately $45.9 billion on behalf of approximately 2.1 million accounts as
of July 31, 1996. As of such date, the MFS organization managed approximately
$22.1 billion of assets in equity portfolios and approximately $19.5 billion
of assets invested in fixed income portfolios. MFS is a subsidiary of Sun Life
of Canada (U.S.) which in turn is a wholly owned subsidiary of Sun Life
Assurance Company of Canada ("Sun Life"). The Directors of MFS are A. Keith
Brodkin, Jeffrey L. Shames, Arnold D. Scott, John D. McNeil and John R.
Gardner. Mr. Brodkin is the Chairman, Mr. Shames is the President and Mr.
Scott is the Secretary and a Senior Executive Vice President of MFS. Messrs.
McNeil and Gardner are the Chairman and the President, respectively, of Sun
Life. Sun Life, a mutual life insurance company, is one of the largest
international life insurance companies and has been operating in the United
States since 1895, establishing a headquarters office here in 1973. The
executive officers of MFS report to the Chairman of Sun Life.
A. Keith Brodkin, the Chairman and a Director of MFS, is also the Chairman,
President and a Trustee of the Trust. Robert A. Dennis, Geoffrey L. Kurinsky,
Stephen E. Cavan, W. Thomas London, James R. Bordewick, Jr. and James O. Yost,
all of whom are officers of MFS, are officers of the Trust.
MFS has established a strategic alliance with Foreign & Colonial Management
Ltd. ("Foreign & Colonial"). Foreign & Colonial is a subsidiary of two of the
world's oldest financial services institutions, the London-based Foreign &
Colonial Investment Trust PLC, which pioneered the idea of investment
management in 1868, and HYPO-BANK (Bayerische Hypotheken-und Wechsel-Bank AG),
the oldest publicly listed bank in Germany, founded in 1835. As part of this
alliance, the portfolio managers and investment analysts of MFS and Foreign &
Colonial share their views on a variety of investment related issues, such as
the economy, securities markets, portfolio securities and their issuers,
investment recommendations, strategies and techniques, risk analysis, trading
strategies and other portfolio management matters. MFS has access to the
extensive international equity investment expertise of Foreign & Colonial, and
Foreign & Colonial has access to the extensive U.S. equity investment
expertise of MFS. MFS and Foreign & Colonial each have investment personnel
working in each other's offices in Boston and London, respectively.
In certain instances there may be securities which are suitable for the Fund's
portfolio as well as for portfolios of other clients of MFS or clients of
Foreign & Colonial. Some simultaneous transactions are inevitable when several
clients receive investment advice from MFS and Foreign & Colonial,
particularly when the same security is suitable for more than one client.
While in some cases this arrangement could have a detrimental effect on the
price or availability of the security as far as the Fund is concerned, in
other cases, however, it may produce increased investment opportunities for
the Fund.
DISTRIBUTOR -- MFD, a wholly owned subsidiary of MFS, is the distributor of
shares of the Fund and also serves as distributor for each of the other MFS
Funds.
SHAREHOLDER SERVICING AGENT -- MFS Service Center, Inc. (the "Shareholder
Servicing Agent"), a wholly owned subsidiary of MFS, performs transfer agency
and certain other services for the Fund.
8. INFORMATION CONCERNING SHARES OF THE FUND
PURCHASES
Shares of the Fund may be purchased at the public offering price through any
dealer or other financial institution ("dealers") having a selling agreement
with MFD. Dealers may also charge their customers fees relating to investments
in the Fund.
The Fund offers three classes of shares (Class A, B and C shares) which bear
sales charges and distribution fees in different forms and amounts, as
described below:
CLASS A SHARES: Class A shares are generally offered at net asset value plus
an initial sales charge, but in certain cases are offered at net asset value
without an initial sales charge but subject to a CDSC.
PURCHASES SUBJECT TO INITIAL SALES CHARGE. Class A shares are offered at
net asset value plus an initial sales charge as follows:
<TABLE>
<CAPTION>
SALES CHARGE* AS
PERCENTAGE OF:
-------------------------------- DEALER ALLOWANCE
NET AMOUNT AS A PERCENTAGE
AMOUNT OF PURCHASE OFFERING PRICE INVESTED OF OFFERING PRICE
<S> <C> <C> <C> <C>
Less than $50,000 .......................................................... 2.50% 2.56% 2.25%
$50,000 but less than $100,000 ............................................. 2.25 2.30 2.00
$100,000 but less than $250,000 ............................................ 2.00 2.04 1.75
$250,000 but less than $500,000 ............................................ 1.75 1.78 1.50
$500,000 but less than $1,000,000 .......................................... 1.50 1.52 1.25
$1,000,000 or more ......................................................... None** None** See Below**
- - --------------
*Because of rounding in the calculation of offering price, actual sales charges may be more or less than those calculated using
the percentages above.
**A CDSC will apply to such purchases, as discussed below.
</TABLE>
MFD allows discounts to dealers (which are alike for all dealers) from the
applicable public offering price, as shown in the above table. In the case of
the maximum sales charge, the dealer retains 2.25% and MFD retains
approximately 1/4 of 1% of the public offering price. The sales charge may
vary depending on the number of shares of the Fund as well as certain other
MFS Funds owned or being purchased, the existence of an agreement to purchase
additional shares during a 13-month period (or 36-month period for purchases
of $1 million or more) or other special purchase programs. A description of
the Right of Accumulation, Letter of Intent and Group Purchase privileges by
which the sales charge may be reduced is set forth in the SAI.
PURCHASES SUBJECT TO A CDSC (but not an initial sales charge). In the
following four circumstances, Class A shares are offered at net asset value
without an initial sales charge, but subject to a CDSC equal to 1% of the
lesser of the value of the shares redeemed (exclusive of reinvested dividend
and capital gain distributions) or the total cost of such shares, in the event
of a share redemption within 12 months following the purchase:
(i) on investments of $1 million or more in Class A shares;
(ii) on investments in Class A shares by certain retirement plans subject
to the Employee Retirement Income Security Act of 1974, as amended
("ERISA"), if: (a) the plan had established an account with the
Shareholder Servicing Agent prior to July 1, 1996 and (b) the
sponsoring organization has demonstrated to the satisfaction of MFD
that either (i) the employer has at least 25 employees or (ii) the
aggregate purchases by the retirement plan of Class A shares of
Funds in the MFS Funds will be in an aggregate amount of at least
$250,000 within a reasonable period of time, as determined by MFD in
its sole discretion;
(iii) on investments in Class A shares by certain retirement plans subject
to ERISA, if: (a) the retirement plan and/or sponsoring organization
subscribes to the MFS FUNDamental 401(k) Program or any similar
recordkeeping system made available by the Shareholder Servicing
Agent (the "MFS Participant Recordkeeping System"); (b) the plan
establishes an account with the Shareholder Servicing Agent on or
after July 1, 1996; and (c) the aggregate purchases by the
retirement plan of Class A shares of the MFS Funds will be in an
aggregate amount of at least $500,000 within a reasonable period of
time, as determined by MFD in its sole discretion; and
(iv) on investments in Class A shares by certain retirement plans subject
to ERISA, if: (a) the plan establishes an account with the
Shareholder Servicing Agent on or after July 1, 1996 and (b) the plan
has, at the time of purchase, a market value of $500,000 or more
invested in shares of any class or classes of the MFS Funds. THE
RETIREMENT PLAN WILL QUALIFY UNDER THIS CATEGORY ONLY IF THE PLAN OR
ITS SPONSORING ORGANIZATION INFORMS THE SHAREHOLDER SERVICING AGENT
PRIOR TO THE PURCHASES THAT THE PLAN HAS A MARKET VALUE OF $500,000
OR MORE INVESTED IN SHARES OF ANY CLASS OR CLASSES OF THE MFS FUNDS.
THE SHAREHOLDER SERVICING AGENT HAS NO OBLIGATION INDEPENDENTLY TO
DETERMINE WHETHER SUCH A PLAN QUALIFIES UNDER THIS CATEGORY.
In the case of all such purchases, MFD will pay commissions to dealers on new
investments in Class A shares made through such dealers as follows:
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
For purposes of determining the level of commissions to be paid to dealers
with respect to a shareholder's new investment in Class A shares made on or
after April 1, 1996, purchases for each shareholder account (and certain other
accounts for which the shareholder is a record or beneficial holder) will be
aggregated over a 12-month period (commencing from the date of the first such
purchases).
See "Redemptions and Repurchases -- Contingent Deferred Sales Charge" in the
Prospectus for further discussion of the CDSC.
WAIVERS OF INITIAL SALES CHARGE AND CDSC. In certain circumstances, the
initial sales charge imposed upon purchases of Class A shares and the CDSC
imposed upon redemption of Class A shares is waived. These circumstances are
described in Appendix A to this Prospectus. In addition to these
circumstances, the CDSC imposed upon the redemption of Class A shares is
waived with respect to shares held by certain retirement plans qualified under
Section 401(a) or 403(b) of the Internal Revenue Code of 1986, as amended (the
"Code"), and subject to ERISA, where:
(i) the retirement plan and/or sponsoring organization does not subscribe to
the MFS Participant Recordkeeping System; and
(ii) the retirement plan and/or sponsoring organization demonstrates to the
satisfaction of, and certifies to the Shareholder Servicing Agent that
the retirement plan has, at the time of certification or will have
pursuant to a purchase order placed with the certification, a market
value of $500,000 or more invested in shares of any class or classes of
the MFS Funds and aggregate assets of at least $10 million;
provided, however, that the CDSC will not be waived (i.e., it will be imposed)
in the event that there is a change in law or regulations which results in a
material adverse change to the tax advantaged nature of the plan, or in the
event that the plan and/or sponsoring organization: (i) becomes insolvent or
bankrupt; (ii) is terminated or partially terminated under ERISA or is
liquidated or dissolved; or (iii) is acquired by, merged into, or consolidated
with, any other entity.
CLASS B SHARES: Class B shares are offered at net asset value without an
initial sales charge but subject to a CDSC upon redemption as follows:
YEAR OF CONTINGENT
REDEMPTION DEFERRED SALES
AFTER PURCHASE CHARGE
-------------- --------------
First .......................................... 4%
Second ......................................... 4%
Third .......................................... 3%
Fourth ......................................... 3%
Fifth .......................................... 2%
Sixth .......................................... 1%
Seventh and following .......................... 0%
The CDSC imposed is assessed against the lesser of the value of the shares
redeemed (exclusive of reinvested dividends and capital gain distributions) or
the total cost of such shares. No CDSC is assessed against shares acquired
through the automatic reinvestment of dividends or capital gain distributions.
Except as described below, MFD will pay commissions to dealers of 3.75% of the
purchase price of Class B shares purchased through dealers. MFD will also
advance to dealers the first year service fee payable under the Fund's Class B
Distribution Plan (see "Distribution Plans" below) at a rate equal to 0.25% of
the purchase price of such shares. Therefore, the total amount paid to a
dealer upon the sale of Class B shares is 4% of the purchase price of the
shares (commission rate of 3.75% plus a service fee equal to 0.25% of the
purchase price).
Class B shares purchased by a retirement plan whose sponsoring organization
subscribes to the MFS Participant Recordkeeping System and which has
established its account with the Shareholder Servicing Agent on or after July
1, 1996, will be subject to the CDSC described above, only under limited
circumstances, as explained below under "Waivers of CDSC." With respect to
such purchases, MFD pays an amount to dealers equal to 3.00% of the amount
purchased through such dealers (rather than the 4.00% payment described
above), which is comprised of a commission of 2.75% plus the advancement of
the first year service fee equal to 0.25% of the purchase price payable under
the Class B Distribution Plan. As discussed above, such retirement plans are
eligible to purchase Class A shares of the Fund at net asset value without an
initial sales charge but subject to a 1% CDSC if the plan has, at the time of
purchase, a market value of $500,000 or more invested in shares of any class
or classes of the MFS Funds. IN THIS EVENT, THE PLAN OR ITS SPONSORING
ORGANIZATION SHOULD INFORM THE SHAREHOLDER SERVICING AGENT THAT THE PLAN IS
ELIGIBLE TO PURCHASE CLASS A SHARES UNDER THIS CATEGORY; THE SHAREHOLDER
SERVICING AGENT HAS NO OBLIGATION INDEPENDENTLY TO DETERMINE WHETHER SUCH A
PLAN QUALIFIES UNDER THIS CATEGORY FOR THE PURCHASE OF CLASS A SHARES.
See "Redemptions and Repurchases -- Contingent Deferred Sales Charge" for
further discussion of the CDSC.
WAIVERS OF CDSC. In certain circumstances, the CDSC imposed upon
redemption of Class B shares is waived. These circumstances are described in
Appendix A to this Prospectus. In addition to these circumstances, the CDSC
imposed upon the redemption of Class B shares is waived with respect to shares
held by a retirement plan whose sponsoring organization subscribes to the MFS
Participant Recordkeeping System and which has established an account with the
Shareholder Servicing Agent on or after July 1, 1996; provided, however, that
the CDSC will not be waived (i.e., it will be imposed) in the event that there
is a change in law or regulations which results in a material adverse change
to the tax advantaged nature of the plan, or in the event that the plan and/or
sponsoring organization: (i) becomes insolvent or bankrupt; (ii) is terminated
or partially terminated under ERISA or is liquidated or dissolved; or (iii) is
acquired by, merged into, or consolidated with, any other entity.
CONVERSION OF CLASS B SHARES. Class B shares of the Fund that remain
outstanding for approximately eight years will convert to Class A shares of
the same Fund. Shares purchased through the reinvestment of distributions paid
in respect of Class B shares will be treated as Class B shares for purposes of
the payment of the distribution and service fees under the Distribution Plan
applicable to Class B shares. See "Distribution Plans" below. However, for
purposes of conversion to Class A shares, all shares in a shareholder's
account that were purchased through the reinvestment of dividends and
distributions paid in respect of Class B shares (and which have not converted
to Class A shares as provided in the following sentence) will be held in a
separate sub-account. Each time any Class B shares in the shareholder's
account (other than those in the sub-account) convert to Class A shares, a
portion of the Class B shares then in the sub-account will also convert to
Class A shares. The portion will be determined by the ratio that the
shareholder's Class B shares not acquired through reinvestment of dividends
and distributions that are converting to Class A shares bear to the
shareholder's total Class B shares not acquired through reinvestment. The
conversion of Class B shares to Class A shares is subject to the continuing
availability of a ruling from the Internal Revenue Service or an opinion of
counsel that such conversion will not constitute a taxable event for federal
tax purposes. There can be no assurance that such ruling or opinion will be
available, and the conversion of Class B shares to Class A shares will not
occur if such ruling or opinion is not available. In such event, Class B
shares would continue to be subject to higher expenses than Class A shares for
an indefinite period.
CLASS C SHARES: Class C shares are offered at net asset value without an
initial sales charge but are subject to a CDSC upon redemption of 1.00% during
the first year. Class C shares do not convert to any other class of shares of
the Fund. The maximum investment in Class C shares that may be made is up to
$1,000,000 per transaction.
The CDSC imposed is assessed against the lesser of the value of the shares
redeemed (exclusive of reinvested dividend and capital gain distributions) or
the total cost of such shares. No CDSC is assessed against shares acquired
through the automatic reinvestment of dividend or capital gain distributions.
See "Redemptions and Repurchases -- Contingent Deferred Sales Charge" below
for further discussion of the CDSC.
MFD will pay dealers 1.00% of the purchase price of Class C shares purchased
through dealers and, as compensation therefor, MFD will retain the 1.00% per
annum distribution and service fee paid under the Class C Distribution Plan by
the Fund to MFD for the first year after purchase (see "Distribution Plans"
below).
Class C shares are not currently available for purchase by any retirement plan
qualified under Sections 401(a) or 403(b) of the Internal Revenue Code of
1986, as amended (the "Code") if the retirement plan and/or the sponsoring
organization subscribe to the MFS FUNDamental 401(k) Plan or another similar
recordkeeping program made available by the Shareholder Servicing Agent.
WAIVERS OF CDSC. In certain circumstances, the CDSC imposed upon redemption of
Class C shares is waived. These circumstances are described in Appendix A to
this Prospectus.
GENERAL: The following information applies to purchases of all classes of the
Fund's shares.
MINIMUM INVESTMENT. Except as described below, the minimum initial
investment is $1,000 per account and the minimum additional investment is $50
per account. Accounts being established for monthly automatic investments and
under payroll savings programs and tax-deferred retirement programs (other
than IRAs) involving the submission of investments by means of group remittal
statements are subject to a $50 minimum on initial and additional investments
per account. The minimum initial investment for IRAs is $250 per account and
the minimum additional investment is $50 per account. Accounts being
established for participation in the Automatic Exchange Plan are subject to a
$50 minimum on initial and additional investments per account. There are also
other limited exceptions to these minimums for certain tax-deferred retirement
programs. Any minimums may be changed at any time at the discretion of MFD.
The Fund reserves the right to cease offering its shares at any time.
RIGHT TO REJECT PURCHASE ORDERS/MARKET TIMING. Purchases and exchanges
should be made for investment purposes only. The Fund and MFD each reserve the
right to reject any specific purchase order or to restrict purchases by a
particular purchaser (or group of related purchasers). The Fund or MFD may
reject or restrict any purchases by a particular purchaser or group, for
example, when such purchase is contrary to the best interests of the Fund's
other shareholders or otherwise would disrupt the management of the Fund.
MFD may enter into an agreement with shareholders who intend to make exchanges
among certain classes of shares of certain MFS Funds (as determined by MFD)
which follow a timing pattern, and with individuals or entities acting on such
shareholders' behalf (collectively, "market timers"), setting forth the terms,
procedures and restrictions with respect to such exchanges. In the absence of
such an agreement, it is the policy of the Fund and MFD to reject or restrict
purchases by market timers if (i) more than two exchange purchases are
effected in a timed account in the same calendar quarter or (ii) a purchase
would result in shares being held in timed accounts by market timers
representing more than (x) one percent of the Fund's net assets or (y)
specified dollar amounts in the case of certain MFS Funds which may include
the Fund and which may change from time to time. The Fund and MFD each reserve
the right to request market timers to redeem their shares at net asset value,
less any applicable CDSC, if either of these restrictions is violated.
DEALER CONCESSIONS. Dealers may receive different compensation with
respect to sales of Class A, Class B and Class C shares. In addition, from
time to time, MFD may pay dealers 100% of the applicable sales charge on sales
of Class A shares of certain specified MFS Funds sold by such dealer during a
specified sales period. In addition, MFD or its affiliates may, from time to
time, pay dealers an additional commission equal to 0.50% of the net asset
value of all of the Class B and/or Class C shares of certain specified MFS
Funds sold by such dealer during a specified sales period. In addition, from
time to time, MFD, at its expense, may provide additional commissions,
compensation or promotional incentives ("concessions") to dealers which sell
shares of the Fund. Such concessions provided by MFD may include financial
assistance to dealers in connection with preapproved conferences or seminars,
sales or training programs for invited registered representatives, payment for
travel expenses, including lodging, incurred by registered representatives for
such seminars or training programs, seminars for the public, advertising and
sales campaigns regarding one or more MFS Funds, and/or other dealer-sponsored
events. From time to time, MFD may make expense reimbursements for special
training of a dealer's registered representatives in group meetings or to help
pay the expenses of sales contests. Other concessions may be offered to the
extent not prohibited by state laws or any self-regulatory agency, such as the
NASD.
SPECIAL INVESTMENT PROGRAMS. For shareholders who elect to participate in
certain investment programs (e.g., the Automatic Investment Plan) or other
shareholder services, MFD or its affiliates may either (i) give a gift of
nominal value, such as a hand-held calculator, or (ii) make a nominal
charitable contribution on their behalf.
RESTRICTIONS ON ACTIVITIES OF NATIONAL BANKS. The Glass-Steagall Act
prohibits national banks from engaging in the business of underwriting,
selling or distributing securities. Although the scope of the prohibition has
not been clearly defined, MFD believes that such Act should not preclude banks
from entering into agency agreements with MFD. If, however, a bank were
prohibited from so acting, the Trustees would consider what actions, if any,
would be necessary to continue to provide efficient and effective shareholder
services in respect of shareholders who invested in the Fund through a
national bank. It is not expected that shareholders would suffer any adverse
financial consequence as a result of these occurrences. In addition, state
securities laws on this issue may differ from the interpretation of federal
law expressed herein and banks and financial institutions may be required to
register as broker-dealers pursuant to state law.
------------------------
A shareholder whose shares are held in the name of, or controlled by, a dealer
might not receive many of the privileges and services from the Fund (such as
Right of Accumulation, Letter of Intent and certain recordkeeping services)
that the Fund ordinarily provides.
EXCHANGES
Subject to the requirements set forth below, some or all of the shares in an
account with the Fund for which payment has been received by the Fund (i.e.,
an established account) may be exchanged for shares of the same class of any
of the other MFS Funds in the MFS Family of Funds (the "MFS Funds") at net
asset value (if available for sale). Shares of one class may not be exchanged
for shares of any other class.
EXCHANGES AMONG MFS FUNDS (EXCLUDING MFS MONEY MARKET FUNDS): No initial sales
charges or CDSC will be imposed in connection with an exchange from shares of
an MFS Fund to shares of any other MFS Fund, except with respect to exchanges
from an MFS money market fund to another MFS Fund which is not an MFS money
market fund (discussed below). With respect to an exchange involving shares
subject to a CDSC, the CDSC will be unaffected by the exchange and the holding
period for purposes of calculating the CDSC will carry over to the acquired
shares.
EXCHANGES FROM AN MFS MONEY MARKET FUND: Special rules apply with respect to
the imposition of an initial sales charge or a CDSC for exchanges from an MFS
money market fund to another MFS Fund which is not an MFS money market fund.
These rules are described under the caption "Exchanges" in the Prospectuses of
those MFS money market funds.
EXCHANGES INVOLVING THE MFS FIXED FUND: Class A shares of any MFS Fund held by
certain qualified retirement plans may be exchanged for units of participation
of the MFS Fixed Fund (a bank collective investment fund) (the "Units"), and
Units may be exchanged for Class A shares of any MFS Fund. With respect to
exchanges between Class A shares subject to a CDSC and Units, the CDSC will
carry over to the acquired shares or Units and will be deducted from the
redemption proceeds when such shares or Units are subsequently redeemed,
assuming the CDSC is then payable (the period during which the Class A shares
and the Units were held will be aggregated for purposes of calculating the
applicable CDSC). In the event that a shareholder initially purchases Units
and then exchanges into Class A shares subject to an initial sales charge of
an MFS Fund, the initial sales charge shall be due upon such exchange, but
will not be imposed with respect to any subsequent exchanges between such
Class A shares and Units with respect to shares on which the initial sales
charge has already been paid. In the event that a shareholder initially
purchases Units and then exchanges into Class A shares subject to a CDSC of an
MFS Fund, the CDSC period will commence upon such exchange, and the
applicability of the CDSC with respect to subsequent exchanges shall be
governed by the rules set forth in this paragraph above.
GENERAL: A shareholder should read the prospectus of the other MFS Fund and
consider the differences in objectives, policies and restrictions before
making any exchange. Exchanges will be made only after instructions in writing
or by telephone (an "Exchange Request") are received for an established
account by the Shareholder Servicing Agent in proper form (i.e., if in writing
- - -- signed by the record owner(s) exactly as the shares are registered; if by
telephone -- proper account identification is given by the dealer or
shareholder of record) and each exchange must involve either shares having an
aggregate value of at least $1,000 ($50 in the case of retirement plan
participants whose sponsoring organizations subscribe to the MFS FUNDamental
401(k) Plan or another similar 401(k) recordkeeping system made available by
the Shareholder Servicing Agent) or all the shares in the account. If an
Exchange Request is received by the Shareholder Servicing Agent on any
business day prior to the close of regular trading on the New York Stock
Exchange (generally, 4:00 p.m., Eastern time) (the "Exchange"), the exchange
will occur on that day if all the requirements set forth above have been
complied with at that time and subject to the Fund's right to reject purchase
orders. No more than five exchanges may be made in any one Exchange Request by
telephone. Additional information concerning this exchange privilege and
prospectuses for any of the other MFS Funds may be obtained from dealers or
the Shareholder Servicing Agent. For federal and (generally) state income tax
purposes, an exchange is treated as a sale of the shares exchanged and,
therefore, an exchange could result in a gain or loss to the shareholder
making the exchange. Exchanges by telephone are automatically available to
most non-retirement plan accounts and certain retirement plan accounts. For
further information regarding exchanges by telephone, see "Redemptions by
Telephone." The exchange privilege (or any aspect of it) may be changed or
discontinued and is subject to certain limitations, including certain
restrictions on purchases by market timers. Special procedures, privileges and
restrictions with respect to exchanges may apply to market timers who enter
into an agreement with MFD, as set forth in such agreement. See "Purchases --
General -- Right to Reject Purchase Orders/Market Timing."
REDEMPTIONS AND REPURCHASES
A shareholder may withdraw all or any portion of the value of his account on
any date on which the Fund is open for business by redeeming shares at their
net asset value (a redemption) or by selling such shares to the Fund through a
dealer (a repurchase). Certain redemptions and repurchases are, however,
subject to a CDSC. See "Contingent Deferred Sales Charge" below. Because the
net asset value of shares of the account fluctuates, redemptions or
repurchases, which are taxable transactions, are likely to result in gains or
losses to the shareholder. When a shareholder withdraws an amount from his
account, the shareholder is deemed to have tendered for redemption a
sufficient number of full and fractional shares in his account to cover the
amount withdrawn. The proceeds of a redemption or repurchase will normally be
available within seven days, except for shares purchased or received in
exchange for shares purchased by check (including certified checks or
cashier's checks). Payment of redemption proceeds may be delayed for up to 15
days from the purchase date in an effort to assure that such check has
cleared. See "Tax Status" below.
REDEMPTION BY MAIL: Each shareholder may redeem all or any portion of the
shares in his account by mailing or delivering to the Shareholder Servicing
Agent (see back cover for address) a stock power with a written request for
redemption or letter of instruction, together with his share certificates (if
any were issued), all in "good order" for transfer. "Good order" generally
means that the stock power, written request for redemption, letter of
instruction or certificate must be endorsed by the record owner(s) exactly as
the shares are registered and the signature(s) must be guaranteed in the
manner set forth below under the caption "Signature Guarantee." In addition,
in some cases "good order" will require the furnishing of additional
documents. The Shareholder Servicing Agent may make certain de minimis
exceptions to the above requirements for redemption. Within seven days after
receipt of a redemption request in "good order" by the Shareholder Servicing
Agent, the Fund will make payment in cash of the net asset value of the shares
next determined after such redemption request was received, reduced by the
amount of any applicable CDSC described above and the amount of any income tax
required to be withheld, except during any period in which the right of
redemption is suspended or date of payment is postponed because the Exchange
is closed or trading on such Exchange is restricted or to the extent otherwise
permitted by the 1940 Act if an emergency exists.
REDEMPTION BY TELEPHONE: Each shareholder may redeem an amount from his
account by telephoning the Shareholder Servicing Agent toll-free at (800) 225-
2606. Shareholders wishing to avail themselves of this telephone redemption
privilege must so elect on their Account Application, designate thereon a bank
and account number to receive the proceeds of such redemption, and sign the
Account Application Form with the signature(s) guaranteed in the manner set
forth below under the caption "Signature Guarantee." The proceeds of such a
redemption, reduced by the amount of any applicable CDSC and the amount of any
income tax required to be withheld, are mailed by check to the designated
account, without charge, if the redemption proceeds do not exceed $1,000, and
are wired in federal funds to the designated account if the redemption
proceeds exceed $1,000. If a telephone redemption request is received by the
Shareholder Servicing Agent by the close of regular trading on the Exchange on
any business day, shares will be redeemed at the closing net asset value of
the Fund on that day. Subject to the conditions described in this section,
proceeds of a redemption are normally mailed or wired on the next business day
following the date of receipt of the order for redemption. The Shareholder
Servicing Agent will not be responsible for any losses resulting from
unauthorized telephone transactions if it follows reasonable procedures
designed to verify the identity of the caller. The Shareholder Servicing Agent
will request personal or other information from the caller, and will normally
also record calls. Shareholders should verify the accuracy of confirmation
statements immediately after their receipt.
REPURCHASE THROUGH A DEALER: If a shareholder desires to sell his shares
through his dealer (a repurchase), the shareholder can place a repurchase
order with his dealer, who may charge the shareholder a fee. IF THE DEALER
RECEIVES THE SHAREHOLDER'S ORDER PRIOR TO THE CLOSE OF REGULAR TRADING ON THE
EXCHANGE AND COMMUNICATES IT TO MFD BEFORE THE CLOSE OF BUSINESS ON THE SAME
DAY, THE SHAREHOLDER WILL RECEIVE THE NET ASSET VALUE CALCULATED ON THAT DAY,
REDUCED BY THE AMOUNT OF ANY APPLICABLE CDSC AND THE AMOUNT OF ANY INCOME TAX
REQUIRED TO BE WITHHELD.
REDEMPTION BY CHECK: Only Class A and Class C shares may be redeemed by check.
A shareholder owning Class A or Class C shares of the Fund may elect to have a
special account with State Street Bank and Trust Company (the "Bank") for the
purpose of redeeming Class A or Class C shares from his or her account by
check. The Bank will provide each Class A or Class C shareholder, upon
request, with forms of checks drawn on the Bank. Only shareholders having
accounts in which no share certificates have been issued will be permitted to
redeem shares by check. Checks may be made payable in any amount not less than
$500. Shareholders wishing to avail themselves of this redemption by check
privilege should so request on their Account Application, must execute
signature cards (for additional information, see the Account Application) with
signature guaranteed in the manner set forth under the caption "Signature
Guarantee" below, and must return any Class A or Class C share certificates
issued to them. Additional documentation will be required from corporations,
partnerships, fiduciaries or other such institutional investors. All checks
must be signed by the shareholder(s) of record exactly as the account is
registered before the Bank will honor them. The shareholders of joint accounts
may authorize each shareholder to redeem by check. The check may not draw on
monthly dividends which have been declared but not distributed. SHAREHOLDERS
WHO PURCHASE CLASS A AND CLASS C SHARES BY CHECK (INCLUDING CERTIFIED CHECKS
OR CASHIER'S CHECKS) MAY WRITE CHECKS AGAINST THOSE SHARES ONLY AFTER THEY
HAVE BEEN ON THE FUND'S BOOKS FOR 15 DAYS. WHEN SUCH A CHECK IS PRESENTED TO
THE BANK FOR PAYMENT, A SUFFICIENT NUMBER OF FULL AND FRACTIONAL SHARES WILL
BE REDEEMED TO COVER THE AMOUNT OF THE CHECK, ANY APPLICABLE CDSC AND THE
AMOUNT OF ANY INCOME TAX REQUIRED TO BE WITHHELD. IF THE AMOUNT OF THE CHECK,
PLUS ANY APPLICABLE CDSC AND THE AMOUNT OF ANY INCOME TAX REQUIRED TO BE
WITHHELD IS GREATER THAN THE VALUE OF CLASS A OR CLASS C SHARES HELD IN THE
SHAREHOLDER'S ACCOUNT, THE CHECK WILL BE RETURNED UNPAID, AND THE SHAREHOLDER
MAY BE SUBJECT TO EXTRA CHARGES. TO AVOID DISHONOR OF CHECKS DUE TO
FLUCTUATIONS IN ACCOUNT VALUE, SHAREHOLDERS ARE ADVISED AGAINST REDEEMING ALL
OR MOST OF THEIR ACCOUNT BY CHECK. CHECKS SHOULD NOT BE USED TO CLOSE A FUND
ACCOUNT BECAUSE WHEN THE CHECK IS WRITTEN, THE SHAREHOLDER WILL NOT KNOW THE
EXACT TOTAL VALUE OF THE ACCOUNT ON THE DAY THE CHECK CLEARS. There is
presently no charge to the shareholder for the maintenance of this special
account or for the clearance of any checks, but the Fund and the Bank reserve
the right to impose such charges or to modify or terminate the redemption by
check privilege at any time.
CONTINGENT DEFERRED SALES CHARGE: Investments in Class A, Class B or Class C
shares ("Direct Purchases") will be subject to a CDSC for a period of (i) with
respect to Class A and Class C shares, 12 months (however, the CDSC on Class A
shares is only imposed with respect to purchases of $1 million or more of
Class A shares or purchases by certain retirement plans of Class A shares) or
(ii) with respect to Class B shares, six years. Purchases of Class A shares
made during a calendar month, regardless of when during the month the
investment occurred, will age one month on the last day of the month and each
subsequent month. Class C shares and Class B shares purchased on or after
January 1, 1993 will be aggregated on a calendar month basis -- all
transactions made during a calendar month, regardless of when during the month
they have occurred, will age one year at the close of business on the last day
of such month in the following calendar year and each subsequent year. For
Class B shares of the Fund purchased prior to January 1, 1993, transactions
will be aggregated on a calendar year basis -- all transactions made during a
calendar year, regardless of when during the year they have occurred, will age
one year at the close of business on December 31 of that year and each
subsequent year. Prior to April 1, 1996, Class C shares of the MFS Funds were
not subject to a CDSC upon redemption. In no event will Class C shares of the
MFS Funds purchased prior to this date be subject to a CDSC. For the purpose
of calculating the CDSC upon redemption of shares acquired in an exchange on
or after April 1, 1996, the purchase of shares acquired in one or more
exchanges is deemed to have occured at the time of the original purchase of
the exchanged shares (if such original purchase occurred prior to April 1,
1996, then no CDSC would be imposed upon such a redemption).
At the time of a redemption, the amount by which the value of a shareholder's
account for a particular class of shares represented by Direct Purchases
exceeds the sum of the six calendar year aggregations (12 months in the case
of purchases of Class C shares and of purchases of $1 million or more of Class
A shares or purchases by certain retirement plans of Class A shares) of Direct
Purchases may be redeemed without charge ("Free Amount"). Moreover, no CDSC is
ever assessed on additional shares acquired through the automatic reinvestment
of dividends or capital gain distributions ("Reinvested Shares"). Therefore,
at the time of redemption of a particular class, (i) any Free Amount is not
subject to the CDSC and (ii) the amount of the redemption equal to the then-
current value of Reinvested Shares is not subject to the CDSC, but (iii) any
amount of the redemption in excess of the aggregate of the then-current value
of Reinvested Shares and the Free Amount is subject to a CDSC. The CDSC will
first be applied against the amount of Direct Purchases which will result in
any such charge being imposed at the lowest possible rate. The CDSC to be
imposed upon redemptions of shares will be calculated as set forth in
"Purchases" above.
The applicability of a CDSC will be unaffected by exchanges or transfers of
registration, except as described in Appendix A hereto.
GENERAL: The following information applies to redemptions and repurchases of
all classes of the Fund's shares.
SIGNATURE GUARANTEE. In order to protect shareholders against fraud, the
Fund requires, in certain instances as indicated above, that the shareholder's
signature be guaranteed. In these cases the shareholder's signature must be
guaranteed by an eligible bank, broker, dealer, credit union, national
securities exchange, registered securities association, clearing agency or
savings association. Signature guarantees shall be accepted in accordance with
policies established by the Shareholder Servicing Agent.
REINSTATEMENT PRIVILEGE. Shareholders of the Fund who have redeemed their
shares have a one-time right to reinvest the redemption proceeds in the same
class of shares of any of the MFS Funds (if shares of such Fund are available
for sale) at net asset value (with a credit for any CDSC paid) within 90 days
of the redemption pursuant to the Reinstatement Privilege. If the shares
credited for any CDSC paid are then redeemed within six years of the initial
purchase in the case of Class B shares or within 12 months of the initial
purchase for Class C shares and certain Class A share purchases, a CDSC will
be imposed upon redemption. Such purchases under the Reinstatement Privilege
are subject to all limitations in the SAI regarding this privilege.
IN-KIND DISTRIBUTIONS. The Trust agrees to redeem shares of the Fund
solely in cash up to the lesser of $250,000 or 1% of the net asset value of
the Fund during any 90-day period for any one shareholder. The Fund has
reserved the right to pay other redemptions, either totally or partially, by
a distribution in-kind of securities (instead of cash) from the Fund's
portfolio. The securities distributed in such a distribution would be valued
at the same amount as that assigned to them in calculating the net asset value
for the shares being sold. If a shareholder received a distribution in-kind,
the shareholder could incur brokerage or transaction charges when converting
the securities to cash.
INVOLUNTARY REDEMPTIONS/SMALL ACCOUNTS. Due to the relatively high cost of
maintaining small accounts, the Fund reserves the right to redeem shares in
any account for their then-current value if at any time the total investment
in such account drops below $500 because of redemptions, except in the case of
accounts being established for monthly automatic investments and certain
payroll savings programs, Automatic Exchange Plan accounts and tax-deferred
retirement plans, for which there is a lower minimum investment requirement.
See "Purchases -- General -- Minimum Investment." Shareholders will be
notified that the value of their account is less than the minimum investment
requirement and allowed 60 days to make an additional investment before the
redemption is processed.
DISTRIBUTION PLANS
The Trustees have adopted separate Distribution Plans for Class A, Class B and
Class C shares pursuant to Section 12(b) of the 1940 Act and Rule 12b-1
thereunder (the "Distribution Plans"), after having concluded that there is a
reasonable likelihood that the Distribution Plans would benefit the Fund and
its shareholders.
In certain circumstances, the fees described below may not be imposed or are
being waived. These circumstances, if any, are described below under the
heading "Current Level of Distribution and Service Fees."
FEATURES COMMON TO EACH DISTRIBUTION PLAN: The Distribution Plans have certain
common features, as described below.
SERVICE FEES. Each Distribution Plan provides that the Fund may pay MFD a
service fee of up to 0.25% of the average daily net assets attributable to the
class of shares to which the Distribution Plan relates (i.e., Class A, 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 each
Distribution Plan for which there is no dealer of record or for which
qualification standards have not been met as partial consideration for
personal services and/or account maintenance services performed by MFD or its
affiliates to shareholder accounts.
DISTRIBUTION FEES. Each Distribution Plan provides that the Fund may pay
MFD a distribution fee based on the average daily net assets attributable to
the Designated Class as partial consideration for distribution services
performed and expenses incurred in the performance of MFD's obligations under
its distribution agreement with the Fund. See "Management of the Fund --
Distributor" in the SAI. The amount of the distribution fee paid by the Fund
with respect to each class differs under the Distribution Plans, as does the
use by MFD of such distribution fees. Such amounts and uses are described
below in the discussion of the separate Distribution Plans.
OTHER COMMON FEATURES. Fees payable under each Distribution Plan are
charged to, and therefore reduce, income allocated to shares of the Designated
Class. The Distribution Plans have substantially identical provisions with
respect to their operating policies and their initial approval, renewal,
amendment and termination.
FEATURES UNIQUE TO EACH DISTRIBUTION PLAN: The Distribution Plans have certain
features that are unique to each class of shares, as described below.
CLASS A DISTRIBUTION PLAN. Class A shares are generally offered pursuant
to an initial sales charge, a substantial portion of which is paid to or
retained by the dealer making the sale (the remainder of which is paid to
MFD). See "Purchases -- Class A Shares" above. In addition to the initial
sales charge, the dealer also generally receives the ongoing 0.25% per annum
service fee, as discussed above.
The distribution fee paid to MFD under the Class A Distribution Plan is equal,
on an annual basis, to 0.10% of the Fund's average daily net assets
attributable to Class A shares. As noted above, MFD may use the distribution
fee to cover distribution-related expenses incurred by it under its
distribution agreement with the Fund, including commissions to dealers and
payments to wholesalers employed by MFD (e.g., MFD pays commission to dealers
with respect to purchases of $1 million or more and purchases by certain
retirement plans of Class A shares which are sold at net asset value but which
are subject to a 1% CDSC for one year after purchase). See "Purchases -- Class
A Shares" above. In addition, to the extent that the aggregate service and
distribution fees paid under the Class A Distribution Plan do not exceed 0.35%
per annum of the average daily net assets of the Fund attributable to Class A
shares, the Fund is permitted to pay such distribution-related expenses or
other distribution-related expenses.
CLASS B DISTRIBUTION PLAN. Class B shares are offered at net asset value
without an initial sales charge but subject to a CDSC. See "Purchases -- Class
B Shares" above. MFD will advance to dealers the first year service fee
described above at a rate equal to 0.25% of the purchase price of such shares
and, as compensation therefore, MFD may retain the service fee paid by the
Fund with respect to such shares for the first year after purchase. Dealers
will become eligible to receive the ongoing 0.25% per annum service fee with
respect to such shares commencing in the thirteenth month following purchase.
Under the Class B Distribution Plan, the Fund pays MFD a distribution fee
equal, on an annual basis, to 0.75% of the Fund's average daily net assets
attributable to Class B shares. As noted above, this distribution fee may be
used by MFD to cover its distribution-related expenses under its distribution
agreement with the Fund (including the 3.75% commission it pays to dealers
upon purchase of Class B shares, as described under "Purchases -- Class B
Shares" above).
CLASS C DISTRIBUTION PLAN. Class C shares are offered at net asset value
without an initial sales charge but subject to a CDSC. See "Purchases -- Class
C Shares" above. MFD will pay a commission to dealers of 1.00% of the purchase
price of Class C shares purchased through dealers at the time of purchase. In
compensation for this 1.00% commission paid by MFD to dealers, MFD will retain
the 1.00% per annum Class C distribution and service fees paid by the Fund
with respect to such shares for the first year after purchase, and dealers
will become eligible to receive from MFD the ongoing 1.00% per annum
distribution and service fees paid by the Fund to MFD with respect to such
shares commencing in the thirteenth month following purchase.
This ongoing 1.00% fee is comprised of the 0.25% per annum service fee paid to
MFD under the Class C Distribution Plan (which MFD in turn pays to dealers),
as discussed above, and a distribution fee paid to MFD (which MFD also in turn
pays to dealers) under the Class C Distribution Plan equal, on an annual
basis, to 0.75% of the Fund's average daily net assets attributable to Class C
shares.
CURRENT LEVEL OF DISTRIBUTION AND SERVICE FEES: The Fund's Class A, Class B
and Class C distribution and service fees for its current fiscal year are
0.15%, 0.90% and 1.00% per annum, respectively. Payment of the 0.10% per annum
Class A distribution fee will commence on such date as the Trustees of the
Trust may determine. A portion of the Class A service fee, equal to 0.15% of
the average daily net assets of the Fund attributable to Class A shares, is
currently being paid by the Fund. Payment of the remaining portion of the
service fee, equal to 0.10% per annum, will become payable on such date as the
Trustees of the Trust may determine. Except in the case of the first year
service fee, the Class B service fee is currently set at 0.15% per annum and
may be increased to a maximum of 0.25% per annum on such date as the Trustees
of the Trust may determine.
DISTRIBUTIONS
The Fund intends to declare dividends daily and pay to its shareholders
substantially all of its net investment income as dividends on a monthly basis
(dividends will only accrue on shares for which payment has been received.)
Dividends generally are distributed on the first business day of the following
month. The Fund will make one or more distributions during the calendar year
to its shareholders from any long-term capital gains, and may also make one or
more distributions during the calendar year to its shareholders from short-
term capital gains. Shareholders may elect to receive dividends and capital
gain distributions in either cash or additional shares of the same class with
respect to which a distribution is made. See "Tax Status" and "Shareholder
Services -- Distribution Options" below. Distributions paid by the Fund with
respect to Class A shares will generally be greater than those paid with
respect to Class B and Class C shares because expenses attributable to Class B
and Class C shares will generally be higher.
TAX STATUS
The Fund is treated as an entity separate from the other series of the Trust
for Federal income tax purposes. In order to minimize the taxes the Fund would
otherwise be required to pay, the Fund intends to qualify each year as a
"regulated investment company" under Subchapter M of the Code and to make
distributions to its shareholders in accordance with the timing requirements
imposed by the Code. It is expected that the Fund will not be required to pay
entity level federal income or excise taxes.
The Fund expects that dividends paid to shareholders from interest on
Municipal Bonds will be exempt from federal income tax because the Fund
intends to satisfy certain requirements of the Code. One such requirement is
that at the close of each quarter of its taxable year, at least 50% of the
value of the Fund's total assets consists of obligations whose interest is
exempt from federal income tax. Distributions of income from capital gains,
from investments in taxable securities and from certain other transactions,
including options and futures transactions, will be taxable to the
shareholders, whether paid in cash or in additional shares. Certain
distributions of exempt-interest dividends may be a tax preference item for
purposes of the federal individual and corporate alternative minimum tax, and
all exempt-interest dividends may affect a corporate shareholder's alternative
minimum tax liability. Fund distributions may be subject to state and local
income taxes, depending on the nature of the distribution and the residence of
the shareholder. Residents of certain states may be subject to an intangibles
tax or a personal property tax on all or a portion of the value of their
shares. Investors should consult their tax advisors in this regard.
Shortly after the end of each calendar year, each shareholder will be sent a
statement setting forth the federal income tax status of all dividends and
distributions for that calendar year, including the portion exempt from
federal income taxes as "exempt-interest dividends," the portion, if any, that
is a tax preference item under the federal alternative minimum tax, the
portion, if any, taxable as ordinary income, the portion, if any, taxable as
long term capital gain, the portion, if any representing a return of capital
(which is free of current taxes but results in a basis reduction), and the
amount, if any, of federal income tax withheld.
Fund distributions will reduce the Fund's net asset value per share.
Shareholders who buy shares shortly before the Fund makes a distribution of
net capital gains or net short-term capital gains may thus pay the full price
for the shares and then effectively receive a portion of the purchase price
back as a taxable distribution.
Interest on indebtedness incurred by shareholders to purchase or carry shares
of the Fund will not be deductible for federal income tax purposes. Exempt-
interest dividends are taken into account in calculating the amount of social
security and railroad retirement benefits that may be subject to federal
income tax. Entities or persons who are "substantial users" (or persons
related to "substantial users") of facilities financed by certain private
activity bonds should consult their tax advisers before purchasing shares of
the Fund.
The Fund intends to withhold U.S. federal income tax at the rate of 30% on
taxable dividends and certain other payments that are subject to such
withholding and that are made to persons who are neither citizens nor
residents of the U.S., regardless of whether a lower rate may be permitted
under an applicable treaty. The Fund is also required in certain circumstances
to apply backup withholding of 31% of taxable dividends and certain redemption
proceeds paid to any shareholder (including a shareholder who is neither a
citizen nor a resident of the U.S.) who does not furnish to the Fund certain
information and certifications or who is otherwise subject to backup
withholding. Backup withholding will not, however, be applied to payments that
have been subject to 30% withholding. Prospective investors should read the
Fund's Account Application for additional information regarding backup
withholding of federal income tax and should consult their own tax advisors as
to the tax consequences to them of an investment in the Fund.
NET ASSET VALUE
The net asset value per share of each class of shares of the Fund is
determined each day during which the Exchange is open for trading. This
determination is made once during each such day as of the close of regular
trading on the Exchange by deducting the amount of the liabilities
attributable to the class from the value of the assets attributable to the
class and dividing the difference by the number of the shares of the class
outstanding. Assets in the Fund's portfolio are valued on the basis of
valuations furnished by a pricing service or at their fair value as determined
by the Board of Trustees, as described in the SAI. The net asset value per
share of each class of shares is effective for orders received by the dealer
prior to its calculation and received in "good order" by MFD prior to the
close of that business day.
DESCRIPTION OF SHARES, VOTING RIGHTS AND LIABILITIES
The Fund, one of three series of the Trust, has three classes of shares,
entitled Class A, Class B and Class C Shares of Beneficial interest (without
par value). The Trust has reserved the right to create and issue additional
series and classes of shares in which case the shares of each class of each
series participate equally in the earnings, dividends and assets attributable
to that class of the particular series. Shareholders are entitled to one vote
for each share held. Shares of each series are entitled to vote separately to
approve investment advisory agreements or changes in investment restrictions,
but shares of all series vote together in the election of Trustees and
ratification of selection of accountants. Additionally, each class of shares
of a series will vote separately on any material increases in the fees under
its Distribution Plan or on any other matter that affects solely that class of
shares, but will otherwise vote together with all other classes of shares of
the series on all other matters. The Trust does not intend to hold annual
shareholder meetings. The Declaration of Trust provides that a Trustee may be
removed from office in certain instances (see "Description of Shares, Voting
Rights and Liabilities" in the SAI.
Each share of a class of the Fund represents an equal proportionate interest
in the Fund with each other class, subject to the liabilities of the
particular class. Shares of the Fund have no pre-emptive or conversion rights
(except as set forth in "Purchase -- Conversion of Class B Shares" above).
Shares of the Fund are fully paid and nonassessable. Should the Fund be
liquidated, shareholders of each class of the Fund would be entitled to share
pro rata in the net assets of the Fund attributable to that class available
for distribution to shareholders. Shares will remain on deposit with the
Shareholder Servicing Agent and certificates will not be issued except in
connection with pledges and assignments and in certain other limited
circumstances.
The Trust is an entity of the type commonly known as a "Massachusetts business
trust." Under Massachusetts law, shareholders of such a trust may, under
certain circumstances, be held personally liable as partners for its
obligations. However, the risk of a shareholder incurring financial loss on
account of shareholder liability is limited to circumstances in which both
inadequate insurance (e.g. fidelity bonding and errors and omissions
insurance) existed and the Trust itself was unable to meet its obligations.
PERFORMANCE INFORMATION
From time to time, the Fund will provide yield, tax-equivalent yield, current
distribution rate and total rate of return quotations for each class and may
also quote fund rankings in the relevant fund category from various sources,
such as the Lipper Analytical Services, Inc. and Wiesenberger Investment
Companies Service. Yield and tax-equivalent yield quotations are based on the
annualized net investment income per share of each class over a 30-day period
stated as a percent of the maximum public offering price of that class on the
last day of that period. Yield calculations for Class B and Class C shares
assume no CDSC is paid. The current distribution rate for each class is
generally based upon the total amount of dividends per share paid by the Fund
to shareholders of that class during the past 12 months and is computed by
dividing the amount of such dividends by the maximum public offering price of
that class at the end of such period. Current distribution rate calculations
for Class B and Class C shares assume no CDSC is paid. The current
distribution rate differs from the yield and tax-equivalent yield calculations
because it may include distributions to shareholders from sources other than
dividends and interest, such as premium income from option writing, short-term
capital gains, and return of invested capital, and is calculated over a
different period of time. Total rate of return quotations reflect the average
annual percentage change over stated periods in the value of an investment in
each class of shares of the Fund made at the maximum public offering price of
the shares of that class with all distributions reinvested and which will give
effect to the imposition of any applicable CDSC assessed upon redemptions of
the Fund's Class B and Class C shares. Such total rate of return quotations
may be accompanied by quotations which do not reflect the reduction in value
of the initial investment due to the sales charge or the deduction of the
CDSC, and which will thus be higher. All performance quotations are based on
historical performance and are not intended to indicate future performance.
Yield and tax-equivalent yield reflect only net portfolio income as of a
stated period of time, and current distribution rate reflects only the rate of
distributions paid by the Fund over a stated period of time, while total rate
of return reflects all components of investment return over a stated period of
time. All performance quotations may from time to time be used in
advertisements, shareholder reports or other communications to shareholders.
For a discussion of the manner in which the Fund will calculate its yield,
tax-equivalent yield, current distribution rate and total rate of return, see
the SAI. For further information about the Fund's performance for the fiscal
year ended April 30, 1996, please see the Fund's Annual Report. A copy of the
Annual Report may be obtained without charge by contacting the Shareholder
Servicing Agent (see back cover for address and phone number). In addition to
information provided in shareholder reports, the Fund may, in its discretion,
from time to time, make a list of all or a portion of its holdings available
to investors upon request.
EXPENSES
The Adviser has agreed to pay the expenses of the Fund (except for the fees
paid under the Advisory Agreement and any Distribution Plan) until February
28, 2002 and to pay the expenses relating to the organization of the Fund, all
subject to reimbursement by the Fund. To accomplish such reimbursement, the
Adviser receives an expense reimbursement fee from the Fund in addition to the
investment advisory and distribution fees, computed and paid monthly at a rate
of 0.40% of the average daily net assets of the Fund on an annualized basis
for its then-current fiscal year. The expense reimbursement agreement
terminates for the Fund on the earlier of either (i) the date on which the
payments made thereunder by the Fund equal the prior payment of such
reimbursable expenses by the Adviser or (ii) February 28, 2002. The Adviser
may also terminate the expense reimbursement agreement at any time by written
notice to the Trust. See "Investment Adviser" in the SAI for further
information.
9. SHAREHOLDER SERVICES
Shareholders with questions concerning the shareholder services described
below or concerning other aspects of the Fund should contact the Shareholder
Servicing Agent (see back cover for address and phone number).
ACCOUNT AND CONFIRMATION STATEMENTS Each shareholder will receive confirmation
statements showing the activity in the account. Cancelled checks, if any,
will be sent to shareholders monthly.
DISTRIBUTION OPTIONS The following options are available to all accounts
(except Systematic Withdrawal Plan accounts) and may be changed as often as
desired by notifying the Shareholder Servicing Agent:
-- Dividends and capital gain distributions reinvested in additional shares.
This option will be assigned if no other option is specified.
-- Dividends in cash; capital gain distributions reinvested in additional
shares.
-- Dividends and capital gain distributions in cash.
Reinvestments (net of any tax withholding) will be made in additional full and
fractional shares of the same class of shares at the net asset value in effect
at the close of business on the last business day of the month. Dividends and
capital gain distributions in amounts less than $10 will automatically be
reinvested in additional shares of the Fund. If a shareholder has elected to
receive dividends and/or capital gain distributions in cash and the postal or
other delivery service is unable to deliver checks to the shareholder's
address of record, or the shareholder does not respond to mailings from the
Shareholder Servicing Agent with regard to uncashed distribution checks, such
shareholder's distribution option will automatically be converted to having
all dividends and other distributions reinvested in additional shares. Any
request to change a distribution option must be received by the Shareholder
Servicing Agent a reasonable time prior to the next business day of the month
for a dividend or distribution in order to be effective for that dividend or
distribution. No interest will accrue on amounts represented by uncashed
distribution or redemption checks.
INVESTMENT AND WITHDRAWAL PROGRAMS -- For the convenience of shareholders, the
Fund makes available the following programs designed to enable shareholders to
add to their investment in an account with the Fund or withdraw from it with a
minimum of paper work. The programs involve no extra charge to shareholders
(other than a sales charge in the case of certain Class A share purchases) and
may be changed or discontinued at any time by a shareholder or the Fund.
LETTER OF INTENT: If a shareholder (other than a group purchaser as
described in the SAI) anticipates purchasing $50,000 or more of Class A shares
of the Fund alone or in combination with any class of other MFS Funds or MFS
Fixed Fund (a bank collective investment Fund) within a 13-month period (or
36-month period for purchases of $1 million or more), the shareholder may
obtain such shares of the Fund at the same reduced sales charge as though the
total quantity were invested in one lump sum, subject to escrow agreements and
the appointment of an attorney for redemptions from the escrow amount if the
intended purchases are not completed, by completing the Letter of Intent
section of the Account Application.
RIGHT OF ACCUMULATION: A shareholder qualifies for cumulative quantity
discounts on the purchase of Class A shares when his new investment, together
with the current offering price value of all holdings of all classes of shares
of that shareholder in the MFS Funds or MFS Fixed Fund reaches a discount
level.
DISTRIBUTION INVESTMENT PROGRAM: Shares of a particular class of the Fund
may be sold at net asset value (and without any applicable CDSC) through the
automatic reinvestment of distributions of dividends and capital gain
distributions from the same class of any other MFS Fund. Furthermore,
distributions made by the Fund may be automatically invested at net asset
value (and without any applicable CDSC) in the same class of shares of another
MFS Fund, if shares of the fund are available for sale.
SYSTEMATIC WITHDRAWAL PLAN: A shareholder may direct the Shareholder
Servicing Agent to send to him (or any one he designates) regular periodic
payments based upon the value of his account. Each payment under a Systematic
Withdrawal Plan (a "SWP") must be at least $100, except in certain limited
circumstances. The aggregate withdrawals of Class B and Class C shares in any
year pursuant to a SWP will not be subject to a CDSC and generally are limited
to 10% of the value of the account at the time of the establishment of the
SWP. The CDSC will not be waived in the case of SWP redemptions of Class A
shares which are subject to a CDSC.
DOLLAR COST AVERAGING PROGRAM
AUTOMATIC INVESTMENT PLAN: Cash investments of $50 or more may be made
through a shareholder's checking account twice monthly, monthly or quarterly.
Required forms are available from the Shareholder Servicing Agent or
investment dealers.
AUTOMATIC EXCHANGE PLAN: Shareholders having account balances of at least
$5,000 in any MFS Fund may exchange their shares for the same class of shares
of other MFS Funds (and, in the case of Class C shares, for shares of MFS
Money Market Fund) under the Automatic Exchange Plan. The Automatic Exchange
Plan provides for automatic monthly or quarterly exchanges of funds from the
shareholder's account in an MFS Fund for investment in the same class of
shares of other MFS Funds selected by the shareholder if such fund is
available for sale. Under the Automatic Exchange Plan, exchanges of at least
$50 each may be made to up to four different funds. A shareholder should
consider the differences in objectives and policies of a fund and review its
prospectus before electing to exchange money into the fund through the
Automatic Exchange Plan. No transaction fee is imposed in connection with
exchange transactions under the Automatic Exchange Plan. However, exchanges of
shares of MFS Money Market Fund, MFS Government Money Market Fund and Class A
shares of MFS Cash Reserve Fund will be subject to any applicable sales
charge. For federal and (generally) state income tax purposes, an exchange is
treated as a sale of the shares exchanged and, therefore, could result in a
capital gain or loss to the shareholder making the exchange. See the SAI for
further information concerning the Automatic Exchange Plan. Investors should
consult their tax adviser for information regarding the potential capital gain
and loss consequences of transactions under the Automatic Exchange Plan.
Because a dollar cost averaging program involves periodic purchases of shares
regardless of fluctuating share offering prices, a shareholder should consider
his financial ability to continue his purchases through periods of low price
levels. Maintaining a dollar cost averaging program concurrently with a
withdrawal program could be disadvantageous because of the sales charges
included in share purchases in the case of Class A shares, and because of the
assessment of the CDSC for certain share redemptions in the case of Class A
shares.
TAX-DEFERRED RETIREMENT PLANS -- Except as noted under "Purchases -- Class C
Shares," shares of the Fund may be purchased by all types of tax-deferred
retirement plans, including IRAs, SEP-IRA plans, 401(k) plans, 403(b) plans
and other corporate pension and profit-sharing plans. Investors should consult
with their tax advisers before establishing any of the tax-deferred retirement
plans described above.
----------------
The Fund's SAI, dated September 1, 1996, as amended or supplemented from time
to time, contains more detailed information about the Fund, including, but not
limited to, information related to (i) the Fund's investment objective,
policies and restrictions, (ii) its Trustees, officers and investment adviser,
(iii) portfolio transactions and brokerage commissions, (iv) the method used
to calculate performance quotations of the Fund, (v) the Fund's Class A, Class
B and Class C Distribution Plans and (vi) various services and privileges
provided by the Fund for the benefit of its shareholders, including additional
information with respect to the exchange privilege.
<PAGE>
APPENDIX A
WAIVERS OF SALES CHARGES
This Appendix sets forth the various circumstances in which all applicable
sales charges are waived (Section I), the initial sales charge and the
contingent deferred sales charge ("CDSC") for Class A shares are waived
(Section II), and the CDSC for Class B and Class C shares is waived (Section
III).
I. WAIVERS OF ALL APPLICABLE SALES CHARGES
In the following circumstances, the initial sales charge imposed on
purchases of Class A shares and the CDSC imposed on certain redemptions of
Class A shares and on redemptions of Class B and Class C shares, as
applicable, are waived:
1. DIVIDEND REINVESTMENT
* Shares acquired through dividend or capital gain reinvestment; and
* Shares acquired by automatic reinvestment of distributions of dividends
and capital gains of any MFS Fund in the MFS Family of Funds ("MFS
Funds") pursuant to the Distribution Investment Program.
2. CERTAIN ACQUISITIONS/LIQUIDATIONS
* Shares acquired on account of the acquisition or liquidation of assets
of other investment companies or personal holding companies.
3. AFFILIATES OF AN MFS FUND/CERTAIN DEALERS. Shares acquired by:
* Officers, eligible directors, employees (including retired employees)
and agents of Massachusetts Financial Services Company ("MFS"), Sun Life
Assurance Company of America ("Sun Life") or any of their subsidiary
companies;
* Trustees and retired trustees of any investment company for which MFS
Fund Distributors, Inc. ("MFD") serves as distributor;
* Employees, directors, partners, officers and trustees of any sub-adviser
to any MFS Fund;
* Employees or registered representatives of dealers and other financial
institution ("dealers") which have a sales agreement with MFD;
* Certain family members of any such individual and their spouses
identified above and certain trusts, pension, profit-sharing or other
retirement plans for the sole benefit of such persons, provided the
shares are not resold except to the MFS Fund which issued the shares;
and
* Institutional Clients of MFS or MFS Asset Management Company, Inc.
("AMI").
4. INVOLUNTARY REDEMPTIONS (CDSC WAIVER ONLY)
* Shares redeemed at an MFS Fund's direction due to the small size of a
shareholder's account. See "Redemptions and Repurchases -- General --
Involuntary Redemptions/Small Accounts" in the Prospectus.
5. RETIREMENT PLANS (CDSC WAIVER ONLY). Shares redeemed on account of
distributions made under the following circumstances:
INDIVIDUAL RETIREMENT ACCOUNTS ("IRA'S")
* Death or disability of the IRA owner.
SECTION 401(A) PLANS ("401(A) PLANS") AND SECTION 403(B) EMPLOYER
SPONSORED PLANS ("ESP PLANS")
* Death, disability or retirement of Plan 401(a) or ESP participant;
* Loan from 401(a) or ESP Plan (repayment of loans, however, will
constitute new sales for purposes of assessing sales charges);
* Financial hardship (as defined in Treasury Regulation Section
1.401(k)-1(d)(2), as amended from time to time);
* Termination of employment of 401(a) or ESP Plan participant (excluding,
however, a partial or other termination of the Plan);
* Tax-free return of excess 401(a) or ESP Plan contributions;
* To the extent that redemption proceeds are used to pay expenses (or
certain participant expenses) of the 401(a) or ESP Plan (e.g.,
participant account fees), provided that the Plan sponsor subscribes to
the MFS FUNDamental 401(k) Plan or another similar recordkeeping system
made available by the Shareholder Servicing Agent; and
* Distributions from a 401(a) or ESP Plan that has invested its assets in
one or more of the MFS Funds for more than 10 years from the later to
occur of: (i) January 1, 1993 or (ii) the date such 401(a) or ESP Plan
first invests its assets in one or more of the MFS Funds. The sales
charges will be waived in the case of a redemption of all of the 401(a)
or ESP Plan's shares in all MFS Funds (i.e., all the assets of the 401
(a) or ESP Plan invested in the MFS Funds are withdrawn), unless
immediately prior to the redemption, the aggregate amount invested by
the 401(a) or ESP Plan in shares of the MFS Funds (excluding the
reinvestment of distributions) during the prior four years equals 50% or
more of the total value of the 401(a) or ESP Plan's assets in the MFS
Funds, in which case the sales charges will not be waived.
SECTION 403(B) SALARY REDUCTION ONLY PLANS ("SRO PLANS")
* Death or disability of SRO Plan participant.
6. CERTAIN TRANSFERS OF REGISTRATION (CDSC WAIVER ONLY). Shares
transferred:
* To an IRA rollover account where any sales charges with respect to the
shares being reregistered would have been waived had they been redeemed;
and
* From a single account maintained for a 401(a) Plan to multiple accounts
maintained by the Shareholder Servicing Agent on behalf of individual
participants of such Plan, provided that the Plan sponsor subscribes to
the MFS FUNDamental 401(k) Plan or another similar recordkeeping system
made available by the Shareholder Servicing Agent.
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 redemption of Class A shares are
waived:
1. INVESTMENT OF REDEMPTION PROCEEDS FROM UNAFFILIATED MUTUAL FUNDS
* Shares acquired through the investment of redemption proceeds from
another open-end management investment company not distributed or
managed by MFD or its affiliates if: (i) the investment is made through
a dealer and appropriate documentation is submitted to MFD; (ii) the
redeemed shares were subject to an initial sales charge or deferred
sales charge (whether or not actually imposed); (iii) the redemption
occurred no more than 90 days prior to the purchase of Class A shares;
and (iv) the MFS Fund, MFD or its affiliates have not agreed with such
company or its affiliates, formally or informally, to waive sales
charges on Class A shares or provide any other incentive with respect to
such redemption and sale.
2. WRAP ACCOUNT INVESTMENTS
* Shares acquired by investments through certain dealers which have
entered into an agreement with MFD which includes a requirement that
such shares be sold for the sole benefit of clients participating in a
"wrap" account or a similar program under which such clients pay a fee
to such dealer.
3. INVESTMENT BY INSURANCE COMPANY SEPARATE ACCOUNTS
* Shares acquired by insurance company separate accounts.
4. RETIREMENT PLANS
ADMINISTRATIVE SERVICES ARRANGEMENTS
* Shares acquired by retirement plans whose third party administrators or
dealers have entered into an administrative services agreement with MFD
or one of its affiliates to perform certain administrative services,
subject to certain operational and minimum size requirements specified
from time to time by MFD or one or more of its affiliates.
REINVESTMENT OF DISTRIBUTIONS FROM QUALIFIED RETIREMENT PLANS.
* Shares acquired through the automatic reinvestment in Class A shares of
Class A or Class B distributions which constitute required withdrawals
from qualified retirement plans.
SHARES REDEEMED ON ACCOUNT OF DISTRIBUTIONS MADE UNDER THE FOLLOWING
CIRCUMSTANCES:
IRA'S
* Distributions made on or after the IRA owner has attained the age of
59 1/2 years old; and
* Tax-free returns of excess IRA contributions.
401(A) PLANS
* Distributions made on or after the 401(a) Plan participant has attained
the age of 59 1/2 years old; and
* Certain involuntary redemptions and redemptions in connection with
certain automatic withdrawals from a 401(a) Plan.
ESP PLANS AND SRO PLANS
* Distributions made on or after the ESP or SRO Plan participant has
attained the age of 59 1/2 years old.
III. WAIVERS OF CLASS B AND CLASS C SALES CHARGES
In addition to the waivers set forth in Section I above, in the following
circumstances the CDSC imposed on redemptions of Class B and Class C
shares is waived:
1. SYSTEMATIC WITHDRAWAL PLAN
* Systematic Withdrawal Plan redemptions with respect to up to 10% per
year of the account value at the time of establishment.
2. DEATH OF OWNER
* Shares redeemed on account of the death of the account owner if the
shares are held solely in the deceased individual's name or in a
living trust for the benefit of the deceased individual.
3. DISABILITY OF OWNER
* Shares redeemed on account of the disability of the account owner if
shares are held either solely or jointly in the disabled individual's
name or in a living trust for the benefit of the disabled individual
(in which case a disability certification form is required to be
submitted to the Shareholder Servicing Agent.).
4. RETIREMENT PLANS. Shares redeemed on account of distributions made
under the following circumstances:
IRA'S, 401(A) PLANS, ESP PLANS AND SRO PLANS
* Distributions made on or after the IRA owner or the 401(a), ESP or
SRO Plan participant, as applicable, has attained the age of 70 1/2
years old, but only with respect to the minimum distribution under
applicable Internal Revenue Code ("Code") rules.
SALARY REDUCTION SIMPLIFIED EMPLOYEE PENSION PLANS ("SAR-SEP PLANS")
* Distributions made on or after the SAR-SEP Plan participant has
attained the age of 70 1/2 years old, but only with respect to the
minimum distribution under applicable Code rules;
* Death or disability of a SAR-SEP Plan participant.
<PAGE>
APPENDIX B
TAXABLE EQUIVALENT YIELD TABLE*
(UNDER FEDERAL INCOME TAX LAW AND RATES FOR 1996)
The table below shows the approximate taxable bond yields which are
equivalent to tax-exempt bond yields from 3.0% to 8.0% under federal income
tax laws that apply to 1996. (Such yields may differ under the laws applicable
to subsequent years.) Separate calculations, showing the applicable taxable
income brackets, are provided for investors who file joint returns and for
those investors who file individual returns.
<TABLE>
<CAPTION>
SINGLE RETURN JOINT RETURN INCOME TAX-EXEMPT YIELD
- - ---------------------------------------------- TAX ------------------------------------------------------------------
(TAXABLE INCOME)* BRACKET** 3% 4% 5% 6% 7% 8%
- - -----------------------------------------------------------------------------------------------------------------------------
1996 1996 EQUIVALENT TAXABLE YIELD
---- ---- ------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$ 0-$ 24,100 $ 0-$ 40,100 0.15% 3.53% 4.71% 5.88% 7.06% 8.24% 9.41%
$ 24,000-$ 58,150 $ 40,100-$ 96,900 0.28 4.17 5.56 6.94 8.33 9.72 11.11
$ 58,150-$121,300 $ 96,900-$147,700 0.31 4.35 5.80 7.25 8.70 10.14 11.59
$121,300-$263,750 $147,700-$263,750 0.36 4.69 6.25 7.81 9.38 10.94 12.50
$263,750 & Over $263,750 & Over 0.396 4.97 6.62 8.28 9.93 11.59 13.25
</TABLE>
*Net amount subject to Federal income tax after deductions and exemptions.
**Effective federal tax bracket.
<PAGE>
APPENDIX C
DESCRIPTION OF MUNICIPAL BONDS
Municipal Bonds include debt obligations issued to obtain funds for various
public purposes, including the construction of a wide range of public
facilities such as bridges, highways, housing, hospitals, mass transportation,
schools, streets and water and sewer works. Other public purposes for which
Municipal Bonds may be issued include refunding outstanding obligations,
obtaining funds for general operating expenses, and obtaining funds to loan to
other public institutions and facilities. In addition, certain types of
industrial development bonds are issued by or on behalf of public authorities
to obtain funds to provide privately-operated housing facilities, sports
facilities, convention or trade show facilities, airport, mass transit, port
or parking facilities, air or water pollution control facilities for water
supply, gas, electricity or sewage or solid waste disposal. Such obligations
are included in the term Municipal Bonds if the interest paid thereon
qualifies as exempt from federal income tax. Other types of industrial
development bonds, the proceeds of which are used for the construction,
equipment, repair or improvement of privately operated industrial or
commercial facilities, may constitute Municipal Bonds, although the current
federal tax laws place substantial limitations on the size of such issues.
Municipal Bonds also include debt obligations secured by student loan
obligations.
The two principal classifications of Municipal Bonds are "general obligation"
and "revenue" bonds. General obligation bonds are secured by the issuer's
pledge of its good faith, credit and taxing power for the payment of principal
and interest. The payment of such bonds may be dependent upon an appropriation
by the issuer's legislative body. The characteristics and enforcement of
general obligation bonds vary according to the law applicable to the
particular issuer. Revenue bonds are payable only from the revenues derived
from a particular facility or class of facilities, or, in some cases, from the
proceeds of a special excise or other specific revenue source. Industrial
development bonds which are Municipal Bonds are in most cases revenue bonds
and do not generally constitute the pledge of the credit of the issuer of such
bonds. Municipal Bonds also include participations in municipal leases. These
are undivided interests in a portion of an obligation in the form of a lease
or installment purchase which is issued by state and local governments to
acquire equipment and facilities. Municipal leases frequently have special
risks not normally associated with general obligation or revenue bonds. Leases
and installment purchase or conditional sale contracts (which normally provide
for title to the leased asset to pass eventually to the governmental issuer)
have evolved as a means for governmental issuers to acquire property and
equipment without meeting the constitutional and statutory requirements for
the issuance of debt. The debt-issuance limitations are deemed to be
inapplicable because of the inclusion in many leases or contracts of "non-
appropriation" clauses that provide that the governmental issuer has no
obligation to make future payments under the lease or contract unless money is
appropriated for such purpose by the appropriate legislative body on a yearly
or other periodic basis. Although the obligations will be secured by the
leased equipment or facilities, the disposition of the property in the event
of non-appropriation or foreclosure might, in some cases, prove difficult. In
light of these concerns, the Trust has adopted and follows procedures for
determining whether municipal lease securities purchased by the Fund are
liquid and for monitoring the liquidity of municipal lease securities held in
the Fund's portfolio. The procedures require that a number of factors be used
in evaluating the liquidity of a municipal lease security, including, the
frequency of trades and quotes for the security, the number of dealers willing
to purchase or sell the security and the number of other potential purchasers,
the willingness of dealers to undertake to make a market in the security, the
nature of the marketplace in which the security trades, the credit quality of
the security, and other factors in which the Adviser may deem relevant. There
are, of course, variations in the security of Municipal Bonds, both within a
particular classification and between classifications, depending on numerous
factors.
The yields on Municipal Bonds are dependent on a variety of factors, including
general money market conditions, supply and demand and general conditions of
the Municipal Bond market, size of a particular offering, the maturity of the
obligation and rating of the issue.
DESCRIPTION OF OTHER INVESTMENTS
U.S. GOVERNMENT OBLIGATIONS -- are issued by the Treasury and include
bills, certificates of indebtedness, notes, and bonds. Agencies and
instrumentalities of the U.S. Government are established under the authority
of an act of Congress and include, but are not limited to, the Government
National Mortgage Association, the Tennessee Valley Authority, the Bank for
Cooperatives, the Farmers Home Administration, Federal Home Loan Banks,
Federal Intermediate Credit Banks, Federal Land Banks, and the Federal
National Mortgage Association.
CERTIFICATES OF DEPOSIT -- are certificates issued against funds deposited
in a commercial bank, are for a definite period of time, earn a specified rate
of return, and are normally negotiable.
BANKERS' ACCEPTANCES -- are short-term credit instruments used to finance
the import, export, transfer or storage of goods. They are termed "accepted"
when a bank guarantees their payment at maturity.
COMMERCIAL PAPER -- refers to promissory notes issued by corporations in
order to finance their short-term credit needs.
<PAGE>
[LOGO] MFS(RM)
THE FIRST NAME IN MUTUAL FUNDS
MFS(RM) MUNICIPAL LIMITED MATURITY FUND
Prospectus
September 1, 1996
Investment Adviser
Massachusetts Financial Services Company
500 Boylston Street
Boston, MA 02116
(617) 954-5000
Distributor
MFS Fund Distributors, Inc.
500 Boylston Street
Boston, MA 02116
(617) 954-5000
Custodian and Dividend Disbursing Agent
State Street Bank and Trust Company
225 Franklin Street
Boston, MA 02110
Shareholder Servicing Agent
MFS Service Center, Inc.
500 Boylston Street
Boston MA 02116
Toll-free: (800) 225-2606
Mailing Address
P.O. Box 2281
Boston, MA 02107-9906
Independent Auditors
Deloitte & Touche LLP
125 Summer Street
Boston, MA 02110
[LOGO] MFS(RM)
THE FIRST NAME IN MUTUAL FUNDS
MFS(RM) MUNICIPAL LIMITED
MATURITY FUND
500 Boylston Street
Boston, MA 02116
MML-1-9/96/30M 37/237/337
<PAGE>
[LOGO]
THE FIRST NAME IN MUTUAL FUNDS
MFS(R) MUNICIPAL STATEMENT OF
LIMITED MATURITY FUND ADDITIONAL INFORMATION
(A Member of the MFS Family of Funds(R)) September 1, 1996
- - -------------------------------------------------------------------------------
Page
----
1. Definitions ...................................................... 2
2. Investment Objective, Policies and Restrictions .................. 2
3. Management of the Fund ........................................... 7
Trustees ....................................................... 7
Officers ....................................................... 7
Investment Adviser ............................................. 8
Custodian ...................................................... 9
Shareholder Servicing Agent .................................... 9
Distributor .................................................... 9
4. Portfolio Transactions and Brokerage Commissions ................. 10
5. Shareholder Services ............................................. 11
Investment and Withdrawal Programs ............................. 11
Exchange Privilege ............................................. 13
6. Tax Status ....................................................... 13
7. Determination of Net Asset Value and Performance ................. 15
8. Distribution Plans ............................................... 17
9. Description of Shares, Voting Rights and Liabilities ............. 18
10. Independent Auditors and Financial Statements .................... 18
Appendix A ....................................................... A-1
Appendix B ....................................................... B-1
MFS MUNICIPAL LIMITED MATURITY FUND
A Series of MFS Series Trust IX
500 Boylston Street, Boston, Massachusetts 02116
(617) 954-5000
This Statement of Additional Information, as amended or supplemented from time
to time (the "SAI"), sets forth information which may be of interest to
investors but which is not necessarily included in the Fund's Prospectus,
dated September 1, 1996. This SAI should be read in conjunction with the
Prospectus, a copy of which may be obtained without charge by contacting the
Shareholder Servicing Agent (see last page for address and phone number).
THIS SAI IS NOT A PROSPECTUS AND IS AUTHORIZED FOR DISTRIBUTION TO PROSPECTIVE
INVESTORS ONLY IF PRECEDED OR ACCOMPANIED BY A CURRENT PROSPECTUS.
1. DEFINITIONS
"Trust" -- MFS Series Trust IX, a Massachusetts business
trust. The Trust was known as MFS Fixed Income
Trust prior to January 18, 1995, and as
Massachusetts Financial Bond Fund until its
name was changed on January 7, 1992.
"Fund" -- MFS Municipal Limited Maturity Fund, a
diversified series of the Trust. The Fund is
the successor to MFS Municipal Limited Maturity
Fund (formerly known as MFS Tax-Free Limited
Maturity Fund until its name was changed on
August 3, 1992) which was reorganized as a
series of the Trust on September 7, 1993.
"MFS" or the "Adviser" -- Massachusetts Financial Services Company, a
Delaware corporation.
"MFD" -- MFS Fund Distributors, Inc., a Delaware
corporation.
"Prospectus" -- The Prospectus of the Fund, dated September 1,
1996, as amended or supplemented from time to
time.
2. INVESTMENT OBJECTIVE, POLICIES AND RESTRICTIONS
INVESTMENT OBJECTIVE.The Fund's investment objective is to provide as high a
level of current income exempt from federal income taxes as is considered
consistent with prudent investing and protection of shareholders' capital. Any
investment involves risk and there can be no assurance that the Fund will
achieve its investment objective.
INVESTMENT POLICIES. The investment policies of the Fund are described in the
Prospectus. In addition, certain of the Fund's investment policies are
described in greater detail below.
"WHEN-ISSUED" OR "FORWARD DELIVERY" SECURITIES: The Fund may purchase
securities on a "when-issued" or on a "forward delivery" basis. When the Fund
commits to purchase a security on a "when-issued" or on a "forward delivery"
basis, it will set up procedures consistent with the General Statement of
Policy of the Securities and Exchange Commission (the "SEC") concerning such
purchases. Since that policy currently recommends that an amount of the Fund's
assets equal to the amount of the purchase be held aside or segregated to be
used to pay for the commitment, the Fund will always have cash, short-term
money market instruments or high quality liquid debt securities sufficient to
cover any commitments or to limit any potential risk. However, although the
Fund does not intend to make such purchases for speculative purposes and
intends to adhere to the provisions of the SEC policy, purchases of securities
on such bases may involve more risk than other types of purchases. For
example, the Fund may have to sell assets which have been set aside in order
to meet redemptions. Also, if the Fund determines it is necessary to sell the
"when-issued" or "forward delivery" securities before delivery, the Fund may
incur a loss because of market fluctuations since the time the commitment to
purchase such securities was made and any gain or loss would not be tax-
exempt.
INDEXED SECURITIES: The Fund may purchase securities whose prices are indexed
to the prices of other securities, securities indices, currencies, precious
metals or other commodities, or other financial indicators. Indexed securities
typically, but not always, are debt securities or deposits whose value at
maturity (i.e., principal value) or coupon rate is determined by reference to
a specific instrument or statistic. Currency-indexed securities typically are
short-term to intermediate-term debt securities whose maturity values or
interest rates are determined by reference to the values of one or more
specified foreign currencies, and may offer higher yields than U.S. dollar-
denominated securities of equivalent issuers. Currency-indexed securities may
be positively or negatively indexed; that is, their maturity value may
increase when the specified currency value increases, resulting in a security
that performs similarly to a foreign-denominated instrument, or their maturity
value may decline when foreign currencies increase, resulting in a security
whose price characteristics are similar to a put on the underlying currency.
Currency-indexed securities may also have prices that depend on the values of
a number of different foreign currencies relative to each other.
The performance of indexed securities depends to a great extent on the
performance of the security, currency, or other instrument to which they are
indexed, and may also be influenced by interest rate changes in the U.S. and
abroad. At the same time, indexed securities are subject to the credit risks
associated with the issuer of the security, and their values may decline
substantially if the issuer's creditworthiness deteriorates. Recent issuers of
indexed securities have included banks, corporations, and certain U.S.
government agencies.
OPTIONS: The Fund intends to write covered put and call options and purchase
put and call options on fixed income securities that are traded on U.S.
securities exchanges and over-the-counter. Call options written by the Fund
give the holder the right to buy the underlying securities from the Fund at a
fixed exercise price; put options written by the Fund give the holder the
right to sell the underlying securities to the Fund at a fixed exercise price.
A call option written by the Fund is "covered" if the Fund owns the underlying
security covered by the call or has an absolute and immediate right to acquire
that security without additional cash consideration (or for additional cash
consideration held in a segregated account by its custodian) upon conversion
or exchange of other securities held in its portfolio. A call option is also
covered if the Fund holds a call on the same security and in the same
principal amount as the call written where the exercise price of the call held
(a) is equal to or less than the exercise price of the call written or (b) is
greater than the exercise price of the call written if the difference is
maintained by the Fund in cash, short-term money market instruments or high
quality debt securities in a segregated account with its custodian. A put
option written by the Fund is "covered" if the Fund maintains cash, short-term
money market instruments or high quality debt securities with a value equal to
the exercise price in a segregated account with its custodian, or else holds a
put on the same security and in the same principal amount as the put written
where the exercise price of the put held is (a) equal to or greater than the
exercise price of the put written or (b) is less than the exercise price of
the put written if the difference is maintained by the Fund in cash, short-
term money market instruments or high quality debt securities in a segregated
account with its custodian. Put and call options written by the Fund may also
be covered in such other manner as may be in accordance with the requirements
of the exchange on which, or the counter party with which, the option is
traded, and applicable laws and regulations. The writer of an option may have
no control over when the underlying securities must be sold, in the case of a
call option, or purchased, in the case of a put option, since with regard to
certain options, the writer may be assigned an exercise notice at any time
prior to the termination of the obligation.
Effecting a closing transaction in the case of a written call option will
permit the Fund to write another call option on the underlying security with
either a different exercise price or expiration date or both, or in the case
of a written put option will permit the Fund to write another put option to
the extent that the exercise price thereof is secured by deposited cash,
short-term money market instruments or high quality debt securities. Such
transactions permit the Fund to generate additional premium income, which will
partially offset declines in the value of portfolio securities or increases in
the cost of securities to be acquired. Also, effecting a closing transaction
will permit the cash or proceeds from the concurrent sale of any securities
subject to the option to be used for other Fund investments. If the Fund
desires to sell a particular security from its portfolio on which it has
written a call option, it will effect a closing transaction prior to or
concurrent with the sale of the security.
The Fund will realize a profit from a closing transaction if the price of the
transaction is less than the premium received from writing the option or is
more than the premium paid to purchase the option; the Fund will realize a
loss from a closing transaction if the price of the transaction is more than
the premium received from writing the option or is less than the premium paid
to purchase the option. Because increases in the market price of a call option
will generally reflect increases in the market price of the underlying
security, any loss resulting from the closing out of a call option is likely
to be offset in whole or in part by appreciation of the underlying security
owned by the Fund.
An option position may be closed out only where there exists a secondary
market for an option of the same series. If a secondary market does not exist,
it might not be possible to effect closing transactions in particular options
with the result that the Fund would have to exercise the options in order to
realize any profit. If the Fund is unable to effect a closing purchase
transaction in a secondary market, it will not be able to sell the underlying
security until the option expires or it delivers the underlying security upon
exercise. Reasons for the absence of a liquid secondary market include the
following: (i) there may be insufficient trading interest in certain options;
(ii) restrictions may be imposed by a national securities exchange on opening
transactions or closing transactions or both; (iii) trading halts, suspensions
or other restrictions may be imposed with respect to particular classes or
series of options or underlying securities; (iv) unusual or unforeseen
circumstances may interrupt normal operations on an exchange; (v) the
facilities of an exchange or the Options Clearing Corporation (the "OCC") may
not at all times be adequate to handle current trading volume; or (vi) one or
more exchanges could, for economic or other reasons, decide or be compelled at
some future date to discontinue the trading of options (or a particular class
or series of options), in which event the secondary market on that exchange
(or in that class or series of options) would cease to exist, although
outstanding options on that exchange that had been issued by the OCC as a
result of trades on that exchange would continue to be exercisable in
accordance with their terms.
The Fund may write options in connection with buy-and-write transactions; that
is, the Fund may purchase a security and then write a call option against that
security. The exercise price of the call the Fund determines to write will
depend upon the expected price movement of the underlying security. The
exercise price of a call option may be below ("in-the-money"), equal to ("at-
the-money") or above ("out-of-the-money") the current value of the underlying
security at the time the option is written. If the call options are exercised
in such transactions, the Fund's maximum gain will be the premium received by
it for writing the option, adjusted upwards or downwards by the difference
between the Fund's purchase price of the security and the exercise price. If
the options are not exercised and the price of the underlying security
declines, the amount of such decline will be offset in part, or entirely, by
the premium received.
The writing of covered put options is similar in terms of risk/return
characteristics to buy-and-write transactions. Put options may be used by the
Fund in the same market environments that call options are used in equivalent
buy-and-write transactions.
The Fund may write combinations of put and call options on the same security,
a practice known as a "straddle." By writing a straddle, the Fund undertakes a
simultaneous obligation to sell and purchase the same security in the event
that one of the options is exercised. If the price of the security
subsequently rises sufficiently above the exercise price to cover the amount
of the premium and transaction costs, the call will likely be exercised and
the Fund will be required to sell the underlying security at a below market
price. This loss may be offset, however, in whole or in part, by the premiums
received on the writing of the two options. Conversely, if the price of the
security declines by a sufficient amount, the put will likely be exercised.
The writing of straddles will likely be effective, therefore, only where the
price of a security remains stable and neither the call nor the put is
exercised. In an instance where one of the options is exercised, the loss on
the purchase or sale of the underlying security may exceed the amount of the
premiums received.
The Fund may purchase put options to hedge against a decline in the value of
its portfolio. By using put options in this way, the Fund will reduce any
profit it might otherwise have realized in the underlying security by the
amount of the premium paid for the put option and by transaction costs.
The Fund may purchase call options to hedge against an increase in the price
of securities that the Fund anticipates purchasing in the future. The premium
paid for the call option plus any transaction costs will reduce the benefit,
if any, realized by the Fund upon exercise of the option, and, unless the
price of the underlying security rises sufficiently, the option may expire
worthless to the Fund.
The Fund may also purchase warrants on fixed income securities. A warrant on a
fixed income security is a long-dated call option that provides the holder
with the right, but not the obligation, to purchase from an issuer a fixed
income security with a specified par value, coupon, and maturity at a fixed
exercise price on a specified date or between specified dates. Typically, the
fixed income securities that are deliverable pursuant to the warrant will be
noncallable securities. Warrants may be issued as entirely separate securities
or they may be attached to, but subsequently detachable from, a fixed income
security of the same issuer.
The staff of the SEC has taken the position that purchased over-the-counter
options and assets used to cover written over-the-counter options are illiquid
and, therefore, together with other illiquid securities, cannot exceed a
certain percentage of the Fund's assets (the "SEC illiquidity ceiling").
Although the Adviser disagrees with this position, the Adviser intends to
limit the Fund's writing of over-the-counter options in accordance with the
following procedure. Except as provided below, the Fund intends to write over-
the-counter options only with primary U.S. Government securities dealers
recognized by the Federal Reserve Bank of New York. Also, the contracts which
the Fund has in place with such primary dealers will provide that the Fund has
the absolute right to repurchase an option it writes at any time at a price
which represents the fair market value, as determined in good faith through
negotiation between the parties, but which in no event will exceed a price
determined pursuant to a formula in the contract. Although the specific
formula may vary between contracts with different primary dealers, the formula
will generally be based on a multiple of the premium received by the Fund for
writing the option, plus the amount, if any, of the option's intrinsic value
(i.e., the amount that the option is in-the-money). The formula may also
include a factor to account for the difference between the price of the
security and the strike price of the option if the option is written out-of-
the-money. The Fund will treat all or a portion of the formula price as
illiquid for purposes of the SEC illiquidity ceiling imposed by the SEC staff.
The Fund may also write over-the-counter options with non-primary dealers and
will treat the assets used to cover these options as illiquid for purposes of
such SEC illiquidity ceiling.
FUTURES CONTRACTS: The Fund may enter into contracts for the future delivery
of fixed income securities or contracts based on Municipal Bond or other
financial indices, including any index of fixed income securities, as such
contracts become available for trading ("Futures Contracts"). A "sale" of a
Futures Contract means a contractual obligation to deliver the securities
called for by the contract at a specified price in a fixed delivery month or,
in the case of a Futures Contract on an index of securities, to make or
receive a cash settlement. A "purchase" of a Futures Contract means a
contractual obligation to acquire the securities called for by the contract at
a specified price in a fixed delivery month or, in the case of a Futures
Contract on an index of securities, to make or receive a cash settlement.
Futures Contracts have been designed by exchanges which have been designated
as "contract markets" by the Commodity Futures Trading Commission (the
"CFTC"), and must be executed through a futures commission merchant, or
brokerage firm, which is a member of the relevant contract market. Existing
contract markets include the Chicago Board of Trade and the International
Monetary Market of the Chicago Mercantile Exchange. Futures Contracts are
traded on these markets, and, through their clearing corporations, the
exchanges guarantee performance of the contracts as between the clearing
members of the exchange.
At the same time a Futures Contract is purchased or sold, the Fund must
allocate cash or securities as a deposit payment ("initial deposit"). The
initial deposit varies but may be as low as 5% or less of the value of the
contract. Daily thereafter, the Futures Contract is valued and the payment of
"variation margin" may be required since each day the Fund would provide or
receive cash that reflects any decline or increase in the contract's value.
At the time of delivery of securities pursuant to a Futures Contract based on
fixed income securities, adjustments are made to recognize differences in
value arising from the delivery of securities with a different interest rate
from that specified in the contract. In some (but not many) cases, securities
called for by a Futures Contract may not have been issued when the contract
was written.
A Futures Contract based on an index of securities, such as a Municipal Bond
index Futures Contract, provides for a cash payment, equal to the amount, if
any, by which the value of the index at maturity is above or below the value
of the index at the time the contract was entered into, times a fixed index
"multiplier". The index underlying such a Futures Contract is generally a
broad based index of securities designed to reflect movements in the relevant
market as a whole. The index assigns weighted values to the securities
included in the index, and its composition is changed periodically.
Although Futures Contracts call for the actual delivery or acquisition of
securities or, in the case of Futures Contracts based on an index, the making
or acceptance of a cash settlement at a specified future time, the contractual
obligation is usually fulfilled before such date by buying or selling, as the
case may be, on a commodities exchange, an identical Futures Contract calling
for settlement in the same month, subject to the availability of a liquid
secondary market. The Fund incurs brokerage fees when it purchases and sells
Futures Contracts.
The purpose of the acquisition or sale of a Futures Contract for hedging
purposes, in the case of a portfolio such as that of the Fund, which holds or
intends to acquire long-term fixed income securities, is to attempt to protect
the Fund from fluctuations in interest rates without actually buying or
selling long-term fixed income securities. For example, if the Fund owns long-
term bonds, and interest rates were expected to increase, the Fund might enter
into Futures Contracts for the sale of debt securities. Such a sale would have
much the same effect as selling an equivalent value of the long-term bonds
owned by the Fund. If interest rates did increase, the value of the debt
securities in the portfolio would decline, but the value of the Futures
Contracts would increase at approximately the same rate, thereby keeping the
net asset value of the Fund from declining as much as it otherwise would have.
The Fund could accomplish similar results by selling bonds with long
maturities and investing in bonds with short maturities when interest rates
are expected to increase. However, the use of Futures Contracts as an
investment technique allows the Fund to maintain a hedging position without
having to sell its portfolio securities.
Similarly, when it is expected that interest rates may decline, Futures
Contracts may be purchased to attempt to hedge against anticipated purchases
of long-term bonds at higher prices. Since the fluctuations in the value of
Futures Contracts should be similar to that of long-term bonds, the Fund could
take advantage of the anticipated rise in the value of long-term bonds without
actually buying them until the market had stabilized. At that time, the
Futures Contracts could be liquidated and the Fund could then buy long-term
bonds on the cash market. To the extent the Fund enters into Futures Contracts
for this purpose, the assets in the segregated asset account maintained to
cover the Fund's obligations with respect to such Futures Contracts will
consist of cash, short-term money market instruments or high quality debt
securities from its portfolio in an amount equal to the difference between the
fluctuating market value of such Futures Contracts and the aggregate value of
the initial and variation margin payments made by the Fund with respect to
such Futures Contracts, thereby assuring that the positions are unleveraged.
Such transactions may also be entered into for non-hedging purposes, which
involve greater risk.
The ordinary spreads between prices in the cash and futures markets, due to
differences in the natures of those markets, are subject to distortions.
First, all participants in the futures market are subject to initial deposit
and variation margin requirements. Rather than meeting additional variation
margin requirements, investors may close out Futures Contracts through
offsetting transactions which could distort the normal relationship between
the cash and futures markets. Second, the liquidity of the futures market
depends on participants entering into offsetting transactions rather than
making or taking delivery. To the extent participants decide to make or take
delivery, liquidity in the futures market could be reduced, thus producing
distortion. Third, from the point of view of speculators, the margin deposit
requirements in the futures market are less onerous than margin requirements
in the securities market. Therefore, increased participation by speculators in
the futures market may cause temporary price distortions. Due to the
possibility of distortion, a correct forecast of general interest rate trends
by the Adviser may still not result in a successful transaction.
RISKS: In addition, Futures Contracts entail risks. Although the Fund
believes that use of such contracts will benefit the Fund, if the Adviser's
investment judgment about the general direction of interest rates is
incorrect, the Fund's overall performance would be poorer than if it had not
entered into any such contract. For example, if the Fund has hedged against
the possibility of an increase in interest rates which would adversely affect
the price of bonds held in its portfolio and interest rates decrease instead,
the Fund will lose part or all of the benefit of the increased value of its
bonds which it has hedged because it will have offsetting losses in its
futures positions. In addition, in such situations, if the Fund has
insufficient cash, it may have to sell bonds from its portfolio to meet daily
variation margin requirements. Such sales of bonds may be, but will not
necessarily be, at increased prices which reflect the rising market. The Fund
may have to sell securities at a time when it may be disadvantageous to do so.
Transactions entered into for non-hedging purposes involve greater risk, and
could result in losses which are not offset by gains on other portfolio
assets.
OPTIONS ON FUTURES CONTRACTS: The Fund may purchase and write options on
Futures Contracts ("Options on Futures Contracts") for hedging purposes. An
Option on a Futures Contract provides the holder with the right to enter into
a "long" position in the underlying Futures Contract, in the case of a call
option, or a "short" position in the underlying Futures Contract, in the case
of a put option, at a fixed exercise price up to a stated expiration date or,
in the case of certain options, on such date. Such Options on Futures
Contracts will be traded on contract markets regulated by the CFTC. Depending
on the pricing of the option compared to either the price of the Futures
Contract upon which it is based or the price of the underlying debt
securities, it may or may not be less risky than ownership of the Futures
Contract or underlying debt securities. As with the purchase of Futures
Contracts, when the Fund is not fully invested it may purchase a call Option
on a Futures Contract to hedge against a market advance due to declining
interest rates.
The writing of a call Option on a Futures Contract constitutes a partial hedge
against declining prices of the securities which are deliverable upon exercise
of the Futures Contract. If the future price at expiration of the option is
below the exercise price, the Fund will retain the full amount of the option
premium which provides a partial hedge against any decline that may have
occurred in the Fund's portfolio holdings. The writing of a put Option on a
Futures Contract constitutes a partial hedge against increasing prices of the
securities which are deliverable upon exercise of the Futures Contract. If the
futures price at expiration of the option is higher than the exercise price,
the Fund will retain the full amount of the option premium, less related
transaction costs, which provides a partial hedge against any increase in the
price of securities which the Fund intends to purchase. If a put or call
option the Fund has written is exercised, the Fund will incur a loss which
will be reduced by the amount of the premium it receives, less related
transaction costs. Depending on the degree of correlation between changes in
the value of its portfolio securities and changes in the value of its futures
positions, the Fund's losses from existing Options on Futures Contracts may to
some extent be reduced or increased by changes in the value of portfolio
securities. The writer of an Option on a Futures Contract is subject to the
requirement of initial and variation margin payments.
The Fund may cover the writing of call Options on Futures Contracts (a)
through purchases of the underlying Futures Contract, (b) through ownership of
the security, or securities included in the index, underlying the Futures
Contract, or (c) through the holding of a call on the same Futures Contract
and in the same principal amount as the call written where the exercise price
of the call held (i) is equal to or less than the exercise price of the call
written or (ii) is greater than the exercise price of the call written if the
difference is maintained by the Fund in cash, short-term money market
instruments or high quality debt securities in a segregated account with its
custodian. The Fund may cover the writing of put Options on Futures Contracts
(a) through sales of the underlying Futures Contract, (b) through segregation
of cash, short-term money market instruments or high quality debt securities
in an amount equal to the value of the security or index underlying the
Futures Contract, or (c) through the holding of a put on the same Futures
Contract and in the same principal amount as the put written where the
exercise price of the put held is equal to or greater than the exercise price
of the put written, or is less than the exercise price of the put written if
the difference is maintained by the Fund in cash, short-term money market
instruments or high quality debt securities in a segregated account with its
custodian. Put and call Options on Futures Contracts written by the Fund may
also be covered in such other manner as may be in accordance with the
requirements of the exchange on which they are traded and applicable laws and
regulations.
The purchase of a put Option on a Futures Contract is similar in some respects
to the purchase of protective put options on portfolio securities. The Fund
will purchase a put Option on a Futures Contract to hedge the Fund's portfolio
against the risk of rising interest rates.
The amount of risk the Fund assumes when it purchases an Option on a Futures
Contract is the premium paid for the option plus related transaction costs,
although in order to realize a profit it may be necessary to exercise the
option and close out the underlying Futures Contract. In addition to the
correlation risks discussed above, the purchase of an option also entails the
risk that changes in the value of the underlying Futures Contract will not be
fully reflected in the value of the option purchased.
ADDITIONAL RISKS OF OPTIONS ON SECURITIES, FUTURES CONTRACTS AND OPTIONS ON
FUTURES CONTRACTS: Various additional risks exist with respect to the trading
of options and futures. For example, the Fund's ability effectively to hedge
all or a portion of its portfolio through transactions in such instruments
will depend on the degree to which price movements in the underlying index or
instrument correlate with price movements in the relevant portion of the
Fund's portfolio. The trading of futures and options entails the additional
risk of imperfect correlation between movements in the futures or option price
and the price of the underlying index or obligation, while the trading of
options also entails the risk of imperfect correlation between securities used
to cover options written and the securities underlying such options. The
anticipated spread between the prices may be distorted because of various
factors, which are set forth under "Futures Contracts" above.
The Fund's ability to engage in options and futures strategies will also
depend on the availability of liquid markets in such instruments. "Options"
above sets forth certain reasons why a liquid secondary market may not exist.
Transactions in these instruments are also subject to the risk of brokerage
firm or clearing house insolvencies.
The liquidity of a secondary market in a Futures Contract or option thereon
may be adversely affected by "daily price fluctuation limits", established by
exchanges, which limit the amount of fluctuation in the price of a contract
during a single trading day and prohibit trading beyond such limit. In
addition, the exchanges on which futures and options are traded may impose
limitations governing the maximum number of positions on the same side of the
market and involving the same underlying instrument which may be held by a
single investor, whether acting alone or in concert with others (regardless of
whether such contracts are held on the same or different exchanges or held or
written in one or more accounts or through one or more brokers).
Options on securities may be traded over-the-counter. In an over-the-counter
trading environment, many of the protections afforded to exchange participants
will not be available. For example, there are no clearing house performance
guarantees and the Fund will be subject to the risk of default by a counter
party. In addition, there are no daily price fluctuation limits, and adverse
bmarket 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.
The investment objective and policies described above and the policies with
respect to portfolio trading described below may be changed without
shareholder approval.
PORTFOLIO TRADING: The Fund intends to fully manage its portfolio by buying and
selling securities, as well as holding securities to maturity. In managing its
portfolio the Fund seeks to take advantage of market developments and yield
disparities, which may include use of the following strategies:
(1) shortening the average maturity of its portfolio in anticipation of a
rise in interest rates so as to minimize depreciation of principal;
(2) lengthening the average maturity of its portfolio in anticipation of a
decline in interest rates so as to maximize tax-exempt yield;
(3) selling one type of debt security (e.g., revenue bonds) and buying
another (e.g., general obligation bonds) when disparities arise in the
relative values of each; and
(4) changing from one debt security to an essentially similar debt
security when their respective yields are distorted due to market factors.
The Fund cannot predict its annual portfolio turnover rate but it is
anticipated such rate will not exceed 100%. A high turnover rate necessarily
involves some expenses to the Fund. The Fund engages in portfolio trading if
it believes a transaction net of costs (including custodian charges) will help
in achieving its investment objectives.
INVESTMENT RESTRICTIONS. The Fund has adopted the following investment
restrictions which cannot be changed without the approval of the holders of a
majority of the Fund shares (which, as used in this SAI, means the lesser of
(i) 67% or more of the outstanding shares of the Fund (or the Trust or a
class, as applicable) present at a meeting at which holders of more than 50%
of the outstanding shares of the Fund (or the Trust or a class, as applicable)
are represented in person or by proxy, or (ii) more than 50% of the
outstanding shares of the Fund (or the Trust or a class, as applicable)):
The Fund may not:
(1) borrow money in an amount in excess of 33 1/3% of its gross assets,
and then only as a temporary measure for extraordinary or emergency
purposes, or pledge, mortgage or hypothecate an amount of its assets (taken
at market value) in excess of 33 1/3% of its gross assets, in each case
taken at the lower of cost or market value and subject to a 300% asset
coverage requirement (for the purpose of this restriction, collateral
arrangements with respect to options, Futures Contracts, Options on Futures
Contracts, foreign currency, forward foreign currency contracts and options
on foreign currencies and payments of initial and variation margin in
connection therewith are not considered a pledge of assets);
(2) underwrite securities issued by other persons except insofar as the
Fund may technically be deemed an underwriter under the Securities Act of
1933 in selling a portfolio security;
(3) concentrate its investments in any particular industry, but if it is
deemed appropriate for the achievement of its investment objectives, the
Fund may invest up to 25% of its assets (taken at market value at the time
of each investment) in securities of issuers in any one industry;
(4) purchase or sell real estate (including limited partnership interests
but excluding Municipal Bonds secured by real estate or interests therein),
or mineral leases, commodities or commodity contracts (except options,
Futures Contracts, Options on Futures Contracts, foreign currency, forward
foreign currency contracts and options on foreign currencies) in the
ordinary course of its business. The Fund reserves the freedom of action to
hold and to sell real estate or mineral leases, commodities or commodity
contracts (including options, Futures Contracts, Options on Futures
Contracts, foreign currency, forward foreign currency contracts and options
on foreign currencies) acquired as a result of the ownership of securities;
(5) make loans to other persons except through the lending of the Fund's
portfolio securities in accordance with, and to the extent permitted by, its
investment objectives and policies, and except further that the Fund may
enter into repurchase agreements. For these purposes the purchase of
commercial paper or all or a portion of an issue of debt securities which
are part of an issue to the public shall not be considered the making of a
loan;
(6) purchase any securities or evidences of interest therein on margin,
except to make deposits on margin in connection with options, Futures
Contracts, Options on Futures Contracts, foreign currency, forward foreign
currency contracts and options on foreign currencies, and except that the
Fund may obtain such short-term credit as may be necessary for the clearance
of purchases and sales of securities; or
(7) sell any security which the Fund does not own unless by virtue of its
ownership of other securities the Fund has at the time of sale a right to
obtain securities without payment of further consideration equivalent in
kind and amount to the securities sold and provided that if such right is
conditional the sale is made upon the same conditions.
These investment restrictions are adhered to at the time of purchase or
utilization of assets; a subsequent change in circumstances will not be
considered to result in a violation of policy.
For the purposes of the Fund's investment restrictions (including those listed
below), the issuer of a tax-exempt security is deemed to be the entity (public
or private) ultimately responsible for the payment of the principal of and
interest on the security.
STATE AND FEDERAL RESTRICTIONS: In order to comply with certain federal and
state statutes and regulatory policies, as a matter of operating policy of the
Fund, the Fund will not: (a) invest more than 5% of its total assets at the
time of investment in unsecured obligations of issuers which, including
predecessors, controlling persons, sponsoring entities, general partners and
guarantors, have a record of less than three years' continuous business
operation or relevant business experience; (b) purchase voting securities of
any issuer if such purchase, at the time thereof, would cause more than 10% of
the outstanding voting securities of such issuer to be held by the Fund; (c)
purchase securities issued by any other 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 the Fund
shall not purchase such securities if such purchase at the time thereof would
cause (i) more than 5% of the Fund's total assets (taken at market value) to
be invested in the securities of any one such issuer or (ii) more than 10% of
the Fund's total assets (taken at market value) to be invested in the
securities of such issuers or (iii) more than 3% of the outstanding voting
securities of any such issuer to be held by the Fund; and, provided further,
that the Fund shall not purchase securities issued by any open-end investment
company; (d) 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 an officer or Director of the Adviser,
if after the purchase of the securities of such issuer by the Fund one or more
of such persons owns beneficially more than 1/2 of 1% of the shares or
securities, or both, of such issuer, and such persons owning more than 1/2 of
1% of such shares or securities together own beneficially more than 5% of such
shares or securities, or both; (e) invest for the purpose of exercising
control or management; or (f) purchase or sell any put or call option or any
combination thereof, provided, that this shall not prevent the purchase,
ownership, holding or sale of warrants where the grantor of the warrants is
the issuer of the underlying securities or the writing, purchasing and selling
of puts, calls or combinations thereof with respect to securities,
commodities, Futures Contracts and foreign currencies.
In addition, the Fund will not 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 the Fund's 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 not registered under
the Securities Act of 1933, as amended, and sold in reliance on Rule 144A
thereunder, but are determined to be liquid by the Trust's Board of Trustees
(or its delegee), will not be subject to this 15% limitation.
In addition, purchases of warrants will not exceed 5% of the Fund's net
assets. Included within that amount, but not exceeding 2% of the Fund's net
assets, may be warrants not listed on the New York or American Stock Exchange.
As a "diversified" investment portfolio under the Investment Company Act of
1940, as amended (the "1940 Act"), the Fund will maintain at least 75% of its
assets in (i) cash, (ii) cash items, (iii) U.S. Government securities and (iv)
other securities, limited per issuer to blocks of less than 5% of the Fund's
total assets.
The investment policies described under "State and Federal Restrictions" are
not fundamental and may be changed without shareholder approval.
3. MANAGEMENT OF THE FUND
The Trust's Board of Trustees provides broad supervision over the affairs of
the Trust and the Fund. The Adviser is responsible for the investment
management, and the officers of the Trust are responsible for the operations
of the Fund. The Trustees and officers of the Trust are listed below, together
with their principal occupations during the past five years. (Their titles may
have varied during that period.)
TRUSTEES
A. KEITH BRODKIN,* Chairman
Massachusetts Financial Services Company, Chairman and Director
RICHARD B. BAILEY*
Private investor; Massachusetts Financial Services Company, former Chairman
prior to September 30, 1991)
PETER G. HARWOOD
Private Investor
Address: 211 Lindsay Pond Road, Concord, Massachusetts
J. ATWOOD IVES
Eastern Enterprises (diversified holding company), Chairman and Chief
Executive Officer (since December 1991); General Cinema Corporation, Vice
Chairman and Chief Financial Officer (prior to December 1991); The Neiman
Marcus Group, Inc., Vice Chairman and Chief Financial Officer (prior to
February, 1992);
Address: 9 Riverside Road, Weston, Massachusetts
LAWRENCE T. PERERA
Hemenway & Barnes (attorneys), Partner
Address: 60 State Street, Boston, Massachusetts
WILLIAM J. POORVU
Harvard University Graduate School of Business Administration, Adjunct
Professor; CBL & Associates Properties, Inc. (a real estate investment
trust), Director; The Baupost Fund (a registered investment company), Vice
Chairman (since November 1993). Chairman and Trustee (prior to November
1993)
Address: Harvard Business School, Soldiers Field Road, Cambridge,
Massachusetts
CHARLES W. SCHMIDT
Private investor; OHM Corporation, Director; The Boston Company, Director;
Boston Safe Deposit and Trust Company, Director; Mohawk Paper Company,
Director.
Address: 30 Colpitts Road, Weston, Massachusetts
ARNOLD D. SCOTT*
Massachusetts Financial Services Company, Senior Executive Vice President,
Secretary and Director
JEFFREY L. SHAMES*
Massachusetts Financial Services Company, President and Director
ELAINE R. SMITH
Independent Consultant; Brigham and Women's Hospital, Executive Vice President
and Chief Operating Officer (prior to September 1992)
Address: Weston, Massachusetts
DAVID B. STONE
North American Management Corp. (investment adviser), Chairman and Director;
Eastern Enterprises, Director
Address: 10 Post Office Square, Suite 300, Boston, Massachusetts
OFFICERS
A. KEITH BRODKIN,* President
Massachusetts Financial Services Company, Chairman and Director
ROBERT A. DENNIS,* Vice President
Massachusetts Financial Services Company, Senior Vice President
GEOFFREY L. KURINSKY,* Vice President
Massachusetts Financial Services Company, Senior Vice President
W. THOMAS LONDON,* Treasurer
Massachusetts Financial Services Company, Senior Vice President
JAMES O. YOST,* Assistant Treasurer
Massachusetts Financial Services Company, Vice President
STEPHEN E. CAVAN,* Secretary and Clerk
Massachusetts Financial Services Company, Senior Vice President, General
Counsel and Assistant Secretary
JAMES R. BORDEWICK, JR.,* Assistant Secretary
Massachusetts Financial Services Company, Vice President and Associate General
Counsel
- - ----------
*"Interested persons" (as defined in 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. Brodkin, Shames, Scott and
Cavan are the Chairman, a Director, a Director and the Secretary,
respectively, of MFD and hold similar positions with certain other MFS
affiliates. Mr. Bailey is a Director of Sun Life Assurance Company of Canada
(U.S.) ("Sun Life of Canada (U.S.)"), the corporate parent of MFS.
The Fund pays the compensation of non-interested Trustees and Mr. Bailey (who
currently receive a fee of $500 per year plus $35 per meeting and $30
committee meeting attended, together with such Trustee's out-of-pocket
expenses) and has adopted a retirement plan for non-interested Trustees and
Mr. Bailey. Under this plan, a Trustee will retire upon reaching age 73 and if
the Trustee has completed at least five years of service, he would be entitled
to annual payments during his lifetime of up to 50% of such Trustee's average
annual compensation based on the three years prior to his retirement depending
on his length of service. A Trustee may also retire prior to age 73 and
receive reduced payments if he has completed at least five years of service.
Under the plan, a Trustee (or his beneficiaries) will also receive benefits
for a period of time in the event the Trustee is disabled or dies. These
benefits will also be based on the Trustee's average annual compensation and
length of service. There is no retirement plan provided by the Trust for
Messrs. Brodkin, Scott and Shames. The Fund will accrue its allocable share of
compensation expenses each year to cover current year's service and amortize
past service cost.
Set forth in Appendix B hereto is certain information concerning the cash
compensation paid to the Trustees and benefits accrued, and estimated benefits
payable, under the retirement plan.
As of July 31, 1996, all Trustees and officers as a group owned less than 1%
of the outstanding shares of the Fund. As of July 31, 1996, Merrill Lynch,
Pierce, Fenner and Smith Inc., P.O. Box 45286, Jacksonville, FL 32232-5286,
was the owner of approximately 7.53% of outstanding Class A shares of the
Fund; Painewebber, Incorporated, FBO Granada Insurance Company, 3911 SW 67th
Avenue, Miami, Florida 33155-3710 was the owner of approximately 7.35% of
outstanding Class B shares of the Fund. Also as of July 31, 1996, Merrill
Lynch, Pierce, Fenner & Smith Inc., P.O. Box 45286, Jacksonville, FL 32232-
5286 was the owner of approximately 17.85%, of outstanding Class B shares of
the Fund. As of July 31, 1996, BHC Securities, Inc., FAO 18197639, Attn:
Mutual Funds, One Commerce Square, 2005 Market Street, Suite 1200,
Philadelphia, PA 19103-7042, was the owner of approximately 5.47% of the
outstanding Class C shares of the Fund. As of July 31, 1996, BHC Securities,
Inc. FAO 18229273, Attn: Mutual Funds, One Commerce Square, 2005 Market
Street, Suite 1200, Philadelphia, PA 19103-7042 was the owner of approximately
17.74% of the outstanding shares of the Fund. As of July 31, 1996, NFSC FEBO,
#A1F-517259, The Anne R. Bord Living Trust, Anne R. Bord, Trustee, 4501
Connecticut Avenue, N.W., Apt. #616, Washington DC 20008-3727 was the owner of
approximately 21.23% of the outstanding Class C shares of the Fund. As of July
31, 1996, Abigail S. Flaherty, 102 Covewood Road, Brandon, MS 39042-6316 was
the owner of approximately 7.92% of the outstanding Class C shares of the
Fund.
The Declaration of Trust provides that it will not indemnify its Trustees and
officers against liabilities and expenses incurred in connection with
litigation in which they may be involved because of their offices with the
Trust, unless, as to liabilities to the Trust or its shareholders, it is
finally adjudicated that they engaged in willful misfeasance, bad faith, gross
negligence or reckless disregard of the duties involved in their offices or,
with respect to any matter, unless it is adjudicated that they have not acted
in good faith in the reasonable belief that their actions were in the best
interest of the Trust. In the case of settlement, such indemnification will
not be provided unless it has been determined pursuant to the Declaration of
Trust that such officers and Trustees have not engaged in willful misfeasance,
bad faith, gross negligence or reckless disregard of their duties.
INVESTMENT ADVISER
MFS and its predecessor organizations have a history of money management
dating from 1924. MFS is a subsidiary of Sun Life of Canada (U.S.) which in
turn is a wholly owned subsidiary of Sun Life Assurance Company of Canada
("Sun Life").
The Adviser manages the assets of the Fund pursuant to an Investment Advisory
Agreement dated September 1, 1993 (the "Advisory Agreement"). The Adviser
provides the Fund with overall investment advisory and administrative
services, as well as general office facilities. Subject to such policies as
the Trustees may determine, the Adviser makes investment decisions for the
Fund. For these services and facilities, the Adviser receives a management fee
computed and paid monthly at the rate of 0.40% per annum of the Fund's average
daily net assets. Prior to February 1, 1994, the Adviser was entitled to
receive a management fee computed and paid monthly at the rate of 0.55% per
annum of the Fund's average daily net assets. From September 1, 1992 to
February 1, 1994 the Adviser had voluntarily reduced the management fee to
0.30% per annum of average net assets.
In order to comply with the expense limitations of certain state securities
commissions, the Adviser will reduce its management fee or otherwise reimburse
the Fund for any expenses, exclusive of interest, taxes and brokerage
commissions, incurred by the Fund in any fiscal year to the extent such
expenses exceed the most restrictive of such state expense limitations. The
Adviser will make appropriate adjustments to such reimbursements in response
to any amendment or rescission of the various state requirements.
The Fund pays all of the Fund's expenses (other than those assumed by the
Adviser or MFD); including: governmental fees; interest charges; taxes;
membership dues in the Investment Company Institute allocable to the Fund;
fees and expenses of independent auditors, of legal counsel, and of any
transfer agent, registrar or dividend disbursing agent of the Fund; expenses
of repurchasing and redeeming shares; expenses of preparing, printing and
mailing share certificates, prospectuses, shareholders' reports, notices,
proxy statements and reports to governmental officers and commissions;
brokerage and other expenses connected with the execution of portfolio
security transactions; insurance premiums; fees and expenses of the custodian
for all services to the Fund, including safekeeping of funds and securities,
keeping of books and accounts and calculation of the net asset value of shares
of the Fund; and expenses of shareholders' meetings. Expenses relating to the
issuance, registration and qualification of shares of the Fund and the
preparation, printing and mailing of prospectuses for such purposes are borne
by the Fund except that the Trust's Distribution Agreement with MFD requires
MFD to pay for prospectuses that are to be used for sales purposes. Expenses
of the Trust which are not attributable to a specific series are allocated
among the series in a manner believed by management of the Trust to be fair
and equitable. The Adviser has agreed to pay the foregoing expenses of the
Fund (except for the fees paid under the Advisory Agreement and the
Distribution Plans) until February 28, 2002 and to pay the expenses relating
to the organization of the Fund, all subject to reimbursement by the Trust on
behalf of the Fund. To accomplish such reimbursement, the Adviser receives an
expense reimbursement fee from the Fund in addition to the investment advisory
and distribution fees, computed and paid monthly at a rate of 0.40% per annum
of the average daily net assets of the Fund. The expense reimbursement
agreement terminates for the Fund on the earlier of either (i) the date on
which the payments made thereunder by the Fund equal the prior payment of such
reimbursement expenses by the Adviser or (ii) February 28, 2002. The Adviser
may also terminate the expense reimbursement agreement at any time upon
written notice to the Trust. For a list of expenses, including the
compensation paid to the Trustees who are not officers of the Adviser, for the
fiscal year ended April 30, 1996, see "Financial Statements -- Statement of
Operations" in the Fund's Annual Report to shareholders.
For the period September 1, 1993 to the fiscal year end on April 30, 1994, MFS
received management fees in the amount of $313,896, equivalent on an
annualized basis to 0.50% of average net assets and did not impose management
fees of $100,052 (equivalent on an annualized basis to 0.16% of average daily
net assets). For the same period, MFS paid expenses of the Fund amounting to
$301,086 (equivalent to 0.48% of the Fund's average daily net assets) for
which the Fund reimbursed MFS $252,992 (equivalent to 0.40% of the Fund's
average daily net assets).
For the fiscal year ended April 30, 1995, MFS received fees under the Advisory
Agreement of $343,251, (equivalent on an annualized basis to 0.40% of average
net assets).
For the fiscal year ended April 30, 1996, MFS received management fees in the
amount of $267,876 (equivalent on an annualized basis to 0.40% of average
daily net assets).
MFS pays the compensation of the officers of the Trust and of any Trustee who
is an officer of MFS. The Adviser also furnishes at its own expense all
necessary administrative services, including office space, equipment, clerical
personnel, investment advisory facilities, and all executive and supervisory
personnel necessary for managing the investments, effecting the portfolio
transactions and, in general, administering the affairs of the Fund.
The Advisory Agreement will remain in effect until August 1, 1997, and will
continue in effect thereafter only if such continuance is specifically
approved at least annually by the Board of Trustees or by vote of holders of a
majority of the Fund's shares (as defined in "Investment Restrictions") and,
in either case, by a majority of the Trustees who are not parties to the
Advisory Agreement or interested persons of any such party. The Advisory
Agreement terminates automatically if it is assigned and may be terminated
without penalty by vote of holders of a majority of the Fund's shares or by
either party on not more than 60 days' nor less than 30 days' written notice.
The Advisory Agreement provides that the Adviser may render services to
others. 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.
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 issued by
the Custodian and may deal with the Custodian as principal in securities
transactions. The Custodian also acts as the dividend disbursing agent for the
Fund. The Custodian has contracted with the Adviser for the Adviser to perform
certain accounting functions related to options transactions for which the
Adviser receives remuneration on a cost basis.
SHAREHOLDER SERVICING AGENT
MFS Service Center, Inc. (the "Shareholder Servicing Agent"), a wholly owned
subsidiary of MFS, is the Fund's shareholder servicing agent, pursuant to a
Shareholder Servicing Agent Agreement, effective December 2, 1985 (the "Agency
Agreement"). The Shareholder Servicing Agent's responsibilities under the
Agency Agreement include administering and performing transfer agent functions
and keeping records in connection with the issuance, transfer and redemption
of each class of the shares of the Fund. For these services, the Shareholder
Servicing Agent will receive a fee calculated as a percentage of the average
daily net assets of each class of shares at an effective annual rate of up to
0.15%, up to 0.22% and up to 0.15% attributable to Class A, Class B and Class
C shares, respectively. In addition, the Shareholder Servicing Agent will be
reimbursed by the Fund for certain expenses incurred by the Shareholder
Servicing Agent on behalf of the Fund. The Custodian has contracted with the
Shareholder Servicing Agent to administer and perform certain dividend and
distribution disbursing functions for the Fund.
DISTRIBUTOR
MFD, a wholly owned subsidiary of MFS, serves as distributor for the
continuous offering of shares of the Fund pursuant to a distribution
agreement, dated as of January 1, 1995 (the "Distribution Agreement"). Prior
to January 1, 1995, MFS Financial Services, Inc. ("FSI"), another wholly owned
subsidiary of MFS, was the Fund's distributor. Where this SAI refers to MFD in
relation to the receipt or payment of money with respect to a period or
periods prior to January 1, 1995, such reference shall be deemed to include
FSI, as the predecessor in interest to MFD.
CLASS A SHARES: MFD acts as agent in Class A shares of the Fund to dealers.
The public offering price of Class A shares of the Fund is their net asset
value next computed after the sale plus a sales charge which varies based upon
the quantity purchased. The public offering price of Class A shares of the
Fund is calculated by dividing the net asset value of a Class A share by the
difference (expressed as a decimal) between 100% and the sales charge
percentage of offering price applicable to the purchase (see "Purchases" in
the Prospectus). The sales charge scale set forth in the Prospectus applies to
purchases of Class A shares of the Fund alone or in combination with shares of
all classes of certain other funds in the MFS Family of Funds (the "MFS
Funds") and other Funds (as noted under Right of Accumulation) by any person,
including members of a family unit (e.g., husband, wife and minor children)
and bona fide trustees of trusts for the benefit of such persons, and also
applies to purchases made under the Right of Accumulation or a Letter of
Intent (see "Investment and Withdrawal Programs"). A group might qualify to
obtain quantity sales charge discounts (see "Investment and Withdrawal
Programs").
Class A shares of the Fund may be sold at their net asset value to certain
persons and in certain transactions as described in the Prospectus. Such sales
are made without a sales charge to promote good will with employees and others
with whom MFS, MFD and/or the Fund have business relationships, and because
the sales effort, if any, involved in making such sales is negligible.
MFD allows discounts to dealers (which are alike for all dealers) from the
applicable public offering price of Class A shares. Dealer allowances
expressed as a percentage of offering price for all offering prices are set
forth in the Prospectus (see "Purchases" in the Prospectus). The difference
between the total amount invested and the sum of (a) the net proceeds to the
Fund and (b) the dealer commission is the commission paid to the distributor.
Because of rounding in the computation of offering price, the portion of the
sales charge paid to the distributor may vary and the total sales charge may
be more or less than the sales charge calculated using the sales charge
expressed as a percentage of offering price or as a percentage of the net
amount invested as listed in the Prospectus. In the case of the maximum sales
charge, the dealer retains 2.25% and MFD retains approximately 1/4 of 1% of
the public offering price. In addition, MFD will pay a commission to dealers
who initiate and are responsible for purchases of $1 million or more as
described in the Prospectus.
CLASS B AND CLASS C SHARES:MFD acts as agent in selling Class B and Class C
shares of the Fund to dealers. The public offering price of Class B and Class
C shares is their net asset value next computed after the sale (see
"Purchases" in the Prospectus).
GENERAL: Neither MFD nor dealers are permitted to delay placing orders to
benefit themselves by a price change. On occasion, MFD may obtain brokers
loans from various banks, including the custodian bank 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 shares of the Fund.
During the Fund's fiscal year ended April 30, 1996, MFD received sales charges
of $11,207 and dealers received sales charges of $107,312 (as their concession
on gross sales charges of $118,519) for selling Class A shares of the Fund;
the Fund received $10,247,827 representing the aggregate net asset value of
such shares. During the Fund's fiscal year ended April 30, 1995, MFD received
sales charges of $20,393 and dealers received sales charges of $166,648 (as
their concession on gross sales charges of $187,041) for selling Class A
shares of the Fund; the Fund received $16,439,434 representing the aggregate
net asset value of such shares. During the period from September 1, 1993 to
the Fund's fiscal year ended April 30, 1994, MFD received sales charges of
$32,108 and dealers received sales charges of $225,255 (as their concession on
gross sales charges of $257,363) for selling Class A shares of the Fund; the
Fund received $28,339,909 representing the aggregate net asset value of such
shares.
For the fiscal years ended April 30, 1995 and 1996, the contingent deferred
sales charge ("CDSC") imposed on redemption of Class A shares was $7,604 and
$33,644, respectively. For the year ended April 30, 1995 and 1996 and for the
period September 7, 1993 through April 30, 1994, the CDSC imposed on
redemption of Class B shares was $40,063, $33,644, and $9,137, respectively.
For the fiscal year ended April 30, 1996, the contingent deferred sales charge
("CDSC") imposed on redemption of Class C shares was approximately $10.
The Distribution Agreement will remain in effect until August 1, 1997 and will
continue in effect thereafter only if such continuance is specifically
approved at least annually by the Board of Trustees or by vote of a majority
of the Fund's shares (as defined in "Investment Restrictions") and, in either
case, by a majority of the Trustees who are not parties to the Distribution
Agreement or interested persons of any such party. The Distribution Agreement
terminates automatically if it is assigned and may be terminated without
penalty by either party on not more than 60 days' nor less than 30 days'
notice.
4. PORTFOLIO TRANSACTIONS AND BROKERAGE COMMISSIONS
Specific decisions to purchase or sell securities for the Fund are made by a
portfolio committee, consisting of employees of the Adviser who are appointed
and supervised by its senior officers. Changes in the Fund's investments are
reviewed by the Board of Trustees. Members of the Fund's portfolio committee
may serve other clients of the Adviser or any subsidiary of the Adviser in a
similar capacity.
The primary consideration in placing portfolio security transactions is
execution at the most favorable prices. The Adviser has complete freedom as to
the markets in and broker-dealers through which it seeks this result.
Municipal Bonds and other debt securities are traded principally in the over-
the-counter market on a net basis through dealers acting for their own account
and not as brokers. The cost of securities purchased from underwriters
includes an underwriter's commission or concession, and the prices at which
securities are purchased and sold from and to dealers include a dealer's mark-
up or mark-down. The Adviser attempts to negotiate with underwriters to
decrease the commission or concession for the benefit of the Fund. The Adviser
normally seeks to deal directly with the primary market makers unless, in its
opinion, better prices are available elsewhere. Securities firms or futures
commission merchants may receive brokerage commissions on transactions
involving Futures Contracts and Options on Futures Contracts. Subject to the
requirement of seeking execution at the best available price, securities may,
as authorized by the Advisory Agreement, be bought from or sold to dealers who
have furnished statistical, research and other information or services to the
Adviser. At present no arrangements for the recapture of commission payments
are in effect.
Consistent with the foregoing primary consideration, the Rules of Fair
Practice of the NASD and such other policies as the Trustees may determine,
the Adviser may consider sales of shares of the Fund and of the other
investment company clients of MFD as a factor in the selection of broker-
dealers to execute the Fund's portfolio transactions.
In certain instances there may be securities which are suitable for the Fund's
portfolio as well as for that of one or more of the other clients of the
Adviser or any subsidiary of the Adviser. Investment decisions for the Fund
and for such other clients are made with a view to achieving their respective
investment objectives. It may develop that a particular security is bought or
sold for only one client even though it might be held by, or bought or sold
for, other clients. Likewise, a particular security may be bought for one or
more clients when one or more other clients are selling that same security.
Some simultaneous transactions are inevitable when several clients receive
investment advice from the same investment adviser, particularly when the same
security is suitable for the investment objectives of more than one client.
When two or more clients are simultaneously engaged in the purchase or sale of
the same security, the securities are allocated among clients in a manner
believed by the Adviser to be equitable to each. It is recognized that in some
cases this system could have a detrimental effect on the price or volume of
the security as far as the Fund is concerned. In other cases, however, the
Trust believes that its ability to participate in volume transactions on
behalf of the Fund will produce better executions for the Fund.
5. SHAREHOLDER SERVICES
INVESTMENT AND WITHDRAWAL PROGRAMS -- The Fund makes available several programs
designed to enable shareholders to add to their investment or withdraw from it
with a minimum of paper work. The programs involve no extra charge to
shareholders (other than a sales charge in the case of certain 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 the Shareholder Servicing Agent) within 90
days of the commencement of purchases. Subject to acceptance by MFD and the
conditions mentioned below, each purchase will be made at a public offering
price applicable to a single transaction of the dollar amount specified on the
Letter of Intent application. The shareholder or his dealer must inform MFD
that the Letter of Intent is in effect each time shares are purchased. The
shareholder makes no commitment to purchase additional shares, but if his
purchases within 13 months (or 36 months in the case of purchases of $1
million or more) plus the value of shares credited toward completion of the
Letter of Intent do not total the sum specified, he will pay the increased
amount of the sales charge as described below. Instructions for issuance of
shares in the name of a person other than the person signing the Letter of
Intent application must be accompanied by a written statement from the dealer
stating that the shares were paid for by the person signing such Letter.
Neither income dividends nor capital gain distributions taken in additional
shares will apply toward the completion of the Letter of Intent. Dividends and
distributions of other MFS Funds automatically reinvested in shares of the
Fund pursuant to the Distribution Investment Program will also not apply
toward completion of the Letter of Intent.
Out of the shareholder's initial purchase (or subsequent purchases if
necessary), 5% of the dollar amount specified in the Letter of Intent
application shall be held in escrow by the Shareholder Servicing Agent in the
form of shares registered in the shareholder's name. All income dividends and
capital gain distributions on escrowed shares will be paid to the shareholder
or to his order. When the minimum investment so specified is completed (either
prior to or by the end of the 13-month period or 36-month period, as
applicable), the shareholder will be notified and the escrowed shares will be
released.
If the intended investment is not completed, the Shareholder Servicing Agent
will redeem an appropriate number of the escrowed shares in order to realize
such difference. Shares remaining after any such redemption will be released
by the Shareholder Servicing Agent. By completing and signing the Account
Application or separate Letter of Intent application, the shareholder
irrevocably appoints the Shareholder Servicing Agent his attorney to surrender
for redemption any or all escrowed shares with full power of substitution in
the premises.
RIGHT OF ACCUMULATION: A shareholder qualifies for cumulative quantity
discounts on the purchase of Class A shares when his new investment, together
with the current offering price value of all the holdings of all classes of
shares of that shareholder in the MFS Funds or MFS Fixed Fund reaches a
discount level. See "Purchases" in the Prospectus for the sales charges on
quantity discounts. For example, if a shareholder owns shares valued at
$37,500 and purchases an additional $12,500 of shares of the Fund, the sales
charge for the $12,500 purchase would be at the rate of 2% (the rate
applicable to single transactions of $50,000). A shareholder must provide the
Shareholder Servicing Agent (or his investment dealer must provide MFD) with
information to verify that the quantity sales charge discount is applicable at
the time the investment is made.
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 the same class of shares of one of the other MFS
Funds, if shares of the fund are available for sale. Such investments will be
subject to additional purchase minimums. Distributions will be invested at net
asset value (exclusive of any sales charge) and will not be subject to a CDSC.
Distributions will be invested at the close of business on the payable date
for the distribution. A shareholder considering the Distribution Investment
Program should obtain and read the prospectus of the other fund and consider
the differences in objectives and policies before making any investment.
SYSTEMATIC WITHDRAWAL PLAN: A shareholder may direct the Shareholder
Servicing Agent to send him (or anyone he designates) regular periodic
payments based upon the value of his account. Each payment under a Systematic
Withdrawal Plan ("SWP") must be at least $100, except in certain limited
circumstances. The aggregate withdrawals of Class B shares and Class C shares
in any year pursuant to a SWP generally are limited to 10% of the value of the
account at the time of the establishment of the SWP. SWP payments are drawn
from the proceeds of share redemptions held in the shareholder's account
(which would be a return of principal and, if reflecting a gain, would be
taxable). Redemptions of Class B and Class C shares will be made in the
following order: (i) any "Free Amount"; (ii) to the extent necessary, any
"Reinvested Shares"; (iii) to the extent necessary, the "Direct Purchase"
subject to the lowest CDSC (as such terms are defined in "Contingent Deferred
Sales Charge" in the Prospectus). The CDSC will be waived in the case of
redemptions of Class B and Class C shares pursuant to a SWP, but will not be
waived in the case of SWP redemptions of Class A shares. To the extent that
redemptions for such periodic withdrawals exceed dividend income reinvested in
the account, such redemptions will reduce and may eventually exhaust the
number of shares in the shareholder's account. All dividend and capital gain
distributions for an account with a SWP will be reinvested in additional full
or fractional shares of the Fund at the net asset value in effect at the close
of business on the last business day of the month for such distributions. To
initiate this service, shares of the Fund having an aggregate value of at
least $5,000 either must be held on deposit by, or certificates for such
shares must be deposited with, the Shareholder Servicing Agent with respect to
Class A shares. Maintaining a withdrawal plan concurrently with an investment
program would be disadvantageous because of the sales charges included in
share purchases and the imposition of a CDSC on certain redemptions. The
shareholder may deposit into the account additional shares of the Fund, change
the payee or change the dollar amount of each payment. The Shareholder
Servicing Agent may charge the account for services rendered and expenses
incurred beyond those normally assumed by the Fund with respect to the
liquidation of shares. No charge is currently assessed against the account,
but one could be instituted by the Shareholder Servicing Agent on 60 days'
notice in writing to the shareholder in the event that the Fund ceases to
assume the cost of these services. The Fund may terminate any SWP for an
account if the value of the account falls below $5,000 as a result of share
redemptions (other than as a result of a SWP) or an exchange of shares of the
Fund for shares of another MFS Fund. Any SWP may be terminated at any time by
either the shareholder or the Fund.
INVEST BY MAIL: Additional investments of $50 or more may be made at any time
by mailing a check payable to the Fund directly to the Shareholder Servicing
Agent. The shareholder's account number and the name of his investment dealer
must be included with each investment.
GROUP PURCHASES: A bona fide group and all its members may be treated as a
single purchaser and, under the Right of Accumulation (but not a Letter of
Intent), obtain quantity sales charge discounts on the purchase of Class A
shares if the group (1) gives its endorsement or authorization to the
investment program so it may be used by the investment dealer to facilitate
solicitation of the membership, thus effecting economies of sales effort; (2)
has been in existence for at least six months and has a legitimate purpose
other than to purchase mutual fund shares at a discount; (3) is not a group of
individuals whose sole organizational nexus is as credit cardholders of a
company, policyholders of an insurance company, customers of a bank or broker-
dealer, clients of an investment adviser or other similar groups; and (4)
agrees to provide certification of membership of those members investing money
in the MFS Funds upon the request of MFD.
AUTOMATIC EXCHANGE PLAN: Shareholders having account balances of at least
$5,000 in any MFS Fund (and, in the case of Class C shares, in the MFS Money
Market Fund) may exchange their shares for the same class of shares of other
MFS Funds under the Automatic Exchange Plan, a dollar cost averaging program
(if available for sale). The Automatic Exchange Plan provides for automatic
exchanges of funds from the shareholder's account in an MFS Fund for
investment in the same class of shares of other MFS Funds selected by the
shareholder. Under the Automatic Exchange Plan, exchanges of at least $50 each
may be made to up to four different funds effective on the seventh day of each
month or of every third month, depending whether monthly or quarterly
exchanges are elected by the shareholder. If the seventh day of the month is
not a business day, the transaction will be processed on the next business
day. Generally, the initial exchange will occur after receipt and processing
by the Shareholder Servicing Agent of an application in good order. Exchanges
will continue to be made from a shareholder's account in an MFS Fund as long
as the balance of the account is sufficient to complete the exchanges.
Additional payments made to a shareholder's account in that MFS Fund will
extend the period that exchanges will continue to be made under the Automatic
Exchange Plan. However, if additional payments are added to an account subject
to the Automatic Exchange Plan shortly before an exchange is scheduled, such
funds may not be available for exchanges until the following month; therefore,
care should be used to avoid inadvertently terminating the Automatic Exchange
Plan through exhaustion of the account balance.
No transaction fee for exchanges will be charged in connection with Automatic
Exchange Plan. However, exchanges of shares of MFS Money Market Fund, MFS
Government Money Market Fund and Class A shares of MFS Cash Reserve Fund will
be subject to any applicable sales charge. Changes in amounts to be exchanged
to each fund, the funds to which exchanges are to be made and the timing of
exchanges (monthly or quarterly), or termination of a shareholder's
participation in Automatic Exchange Plan will be made after instructions in
writing or by telephone (an "Exchange Change Request") are received by the
Shareholder Servicing Agent in proper form (i.e., if in writing -- signed by
the record owner(s) exactly as shares of the Fund are registered; if by
telephone -- proper account identification is given by the dealer or
shareholder of record). Each Exchange Change Request (other than termination
of participation in the program) must involve at least $50. Generally, if an
Exchange Change Request is received 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 exhanges 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 Automatic Transfer 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 shares of MFS Money Market Fund, MFS Government Money
Market Fund and holders of Class A shares of MFS Cash Reserve Fund in the case
where such shares are acquired through direct purchase or reinvested
dividends) who have redeemed their shares have a one-time right to reinvest
the redemption proceeds in the same class of shares of any of the MFS Funds
(if shares of the fund are available for sale) at net asset value (without a
sales charge) and, if applicable, with credit for any CDSC paid. In the case
of proceeds invested in shares of MFS Money Market Fund, MFS Government Money
Market Fund and Class A shares of MFS Cash Reserve Fund, the shareholder has
the right to exchange such shares for shares of another MFS Fund at net asset
value pursuant to the exchange privilege described below. Such a reinvestment
must be made within 90 days of the redemption and is limited to the amount of
the redemption proceeds. If the shares credited for any CDSC paid are then
redeemed within six years of their initial purchase in the case of Class B
shares or within 12 months of the initial purchase of Class C shares and
certain Class A shares, such CDSC will be imposed upon redemption. Although
redemptions and repurchases of shares are taxable events, a reinvestment
within a certain period of time in the same fund may be considered a "wash
sale" and may result in the inability to recognize currently all or a portion
of any loss realized on the original redemption for federal income tax
purposes. Please see your tax adviser for further information.
EXCHANGE PRIVILEGE -- Subject to the requirements set forth below, some or all
of the shares for which payment has been received by the Fund (i.e., an
established account) may be exchanged for shares of the same class of other
MFS Funds (if available for sale) at their net asset value. Exchanges will be
made after instructions in writing or by telephone (an "Exchange Request") are
received for an established account by the Shareholder Servicing Agent.
Each Exchange Request must be in proper form (i.e., if in writing -- signed by
the record owner(s) exactly as the shares are registered; if by telephone --
proper account identification is given by the dealer or shareholder of
record), and each exchange must involve either shares having an aggregate
value of at least $1,000 (except that the minimum is $50 for accounts of
retirement plan participants whose sponsoring organizations subscribe to the
MFS FUNDamental 401(k) Plan or another similar 401(k) recordkeeping system
made available by the Shareholder Sevicing Agent) or all the shares in the
account. Each exchange involves the redemption of the shares of the Fund to be
exchanged and the purchase at net asset value (i.e., without a sales charge)
of the same class of shares of the shares of the other MFS Fund. Any gain or
loss on the redemption of the shares exchanged is reportable on the
shareholder's federal income tax return, unless both the shares received and
the shares surrendered in the exchange are held in a tax-deferred retirement
plan or other tax-exempt account. No more than five exchanges may be made in
any one Exchange Request by telephone. If an Exchange Request is received by
the Shareholder Servicing Agent prior to the close of regular trading on the
Exchange, the exchange usually will occur on that day if all of the
requirements set forth above have been complied with at that time. However,
payment of the redemption proceeds by the Fund, and thus 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 the Shareholder
Servicing Agent by facsimile subject to the requirements set forth above.
No CDSC is imposed on exchanges among the MFS Funds, although liability for
the CDSC is carried forward to the exchanged shares. For purposes of
calculating the CDSC upon redemption of shares acquired in an exchange, the
purchase of shares acquired in one or more exchanges is deemed to have
occurred at the time of the original purchase of the exchanged shares. Any
gain or loss on the redemption of the shares exchanged is reportable in the
shareholders federal income tax return, unless such shares were held in a tax-
deferred retirement plan.
Additional information with respect to any of the MFS Funds, including a copy
of its current prospectus, may be obtained from investment dealers, MFD or the
Shareholder Servicing Agent. A shareholder considering an exchange should
obtain and read the prospectus of the other MFS Fund and consider the
differences in objectives and policies before making any exchange.
Shareholders of the other MFS Funds (except shares of MFS Money Market Fund,
MFS Government Money Market Fund and Class A shares of MFS Cash Reserve Fund
for shares acquired through direct purchase or dividends reinvested prior to
June 1, 1992) have the right to exchange their shares for shares of the Fund,
subject to the conditions, if any, set forth in their respective prospectuses.
In addition, unitholders of the MFS Fixed Fund have the right to exchange
their units (except units acquired through direct purchases) for shares of the
Fund, subject to the conditions, if any, imposed upon such unitholders by the
MFS Fixed Fund.
Any state income tax advantages for investment in shares of each state-
specific series of MFS Municipal Series Trust may only benefit residents of
such states. Investors should consult with their own tax advisers to be sure
this is an appropriate investment, based on their residency and each state's
income tax laws.
The exchange privilege (or any aspect of it) may be changed or discontinued
and is subject to certain limitations, including certain restrictions on
purchases by market timer accounts (see "Purchases" in the Prospectus).
TAX-DEFERRED RETIREMENT PLANS -- Except as noted below, shares of the Fund may
be purchased by all types of tax-deferred retirement plans. MFD makes
available through investment dealers plans and/or custody agreements for the
following:
Individual Retirement Accounts (IRAs) (for individuals and their non-
employed spouses who desire to make limited contributions to a tax-deferred
retirement program and, if eligible, to receive a federal income tax
deduction for amounts contributed);
Simplified Employee Pension (SEP-IRA) Plans;
Retirement Plans Qualified under Section 401(k) of the Internal Revenue Code
of 1986, as amended (the "Code");
403(b) Plans (deferred compensation arrangements for employees of public
school systems and certain non-profit organizations); and
Certain other qualified pension and profit-sharing plans.
The plan documents and forms provided by MFD designate a trustee or custodian
(unless another trustee or custodian is designated by the individual or group
establishing the plan) and contain specific information about the plans. Each
plan provides that dividends and distributions will be reinvested
automatically. For further details with respect to any plan, including fees
charged by the trustee, custodian or MFD, tax consequences and redemption
information, see the specific documents for that plan. Plan documents other
than those provided by MFD may be used to establish any of the plans described
above. Third party administrative services, available for some corporate
plans, may limit or delay the processing of transactions.
Investors should consult with their tax advisers 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 401(a) or 403(b) recordkeeping
program made available by the Shareholder Servicing Agent.
6. TAX STATUS
The Fund has elected to be treated and intends to qualify each year as a
"regulated investment company" under Subchapter M of the Code by meeting all
applicable requirements of Subchapter M, including requirements as to the
nature of the Fund's gross income, the amount of Fund distributions (as a
percentage of both the Fund's overall income and its tax-exempt income), and
the composition and holding period of the Fund's portfolio assets. Because the
Fund intends to distribute all of its net investment income and net realized
capital gains to its shareholders in accordance with the timing requirements
imposed by the Code, it is not expected that the Fund will be required to pay
any federal income or excise taxes. If the Fund should fail to qualify as a
"regulated investment company" in any year, the Fund would incur a regular
corporate federal income tax upon its taxable income and Fund distributions
would generally be taxable as ordinary dividend income to the shareholders.
The portion of the Fund's distributions of net investment income that is
attributable to interest from tax-exempt securities will be designated by the
Fund as an "exempt-interest dividend" and will generally be exempt from
federal income tax in the hands of the shareholders so long as at least 50% of
the total value of the Fund's assets consists of tax-exempt securities at the
close of each quarter of the Fund's taxable year. Distributions of tax-exempt
interest earned from certain securities may, however, be treated as an item
of tax preference for shareholders under the Federal alternative minimum tax,
and all exempt-interest dividends may increase a corporate shareholder's
alternative minimum tax. The percentage of income designated as tax-exempt
will be applied uniformly to all distributions of net investment income made
by the Fund during each fiscal year of the Fund and may differ from the
percentage of distributions consisting of tax-exempt interest in any
particular month. Shareholders are required to report exempt-interest
dividends received from the Fund on their federal income tax returns.
The Fund may also recognize some net investment income that is not tax-exempt
from investments in taxable securities and from certain securities (including
Municipal Bonds) purchased at a market discount, as well as capital gains and
losses as a result of the disposition of securities and from certain options
and futures transactions. Shareholders of the Fund will have to pay federal
income taxes, and any state or local income taxes, on the non-exempt interest
dividends and capital gain distributions they receive from the Fund. That
portion of net investment income distributions not designated as an exempt-
interest dividend and any distributions from net short-term capital gains
(whether paid in cash or reinvested in additional shares) is taxable to
shareholders as ordinary income for federal income tax purposes. Because the
Fund expects to earn primarily tax-exempt interest income, it is expected that
no Fund dividends will qualify for the dividends received deduction for
corporations. Distributions of net capital gains (i.e. the excess of net long-
term capital gains over net short-term capital losses), whether paid in cash
or in additional shares, are taxable to shareholders as long-term capital
gains without regard to the length of time the shareholders have held their
shares. Any Fund dividend that is declared in October, November, or December
of any calendar year, that is payable to shareholders or record in such a
month, and that is paid the following January will be treated as if received
by the shareholders on December 31 of the year in which the dividend is
declared. The Fund will notify shareholders regarding the federal tax status
of its distributions after the end of each calendar year.
Any Fund distribution of net capital gains or net short-term capital gains
will have the effect of reducing the per share net asset value of shares in
the Fund by the amount of the distribution. Shareholders purchasing shares
shortly before the record date of any such distribution may thus pay the full
price for the shares and then effectively receive a portion of the purchase
price back as a taxable distribution.
Interest on indebtedness incurred by shareholders to purchase or carry shares
of the Fund will not be deductible for federal income tax purposes. Exempt-
interest dividends are taken into account in calculating the amount of social
security and railroad retirement benefits that may be subject to federal
income tax. Entities or persons who are "substantial users" (or persons
related to "substantial users") of facilities financed by certain private
activity bonds should consult their tax advisors before purchasing shares of
the Fund.
In general, any gain or loss realized upon a taxable disposition of shares of
the Fund by a shareholder that holds such shares as a capital asset will be
treated as long-term capital gain or loss if the shares have been held for
more than twelve months and otherwise as short-term capital gain or loss.
However, any loss realized upon a disposition of shares in the Fund held for
six months or less will be disallowed to the extent of any exempt-interest
dividends received with respect to those shares. If not disallowed, any such
loss will be treated as a long-term capital loss to the extent of any
distributions of net capital gain made with respect to those shares. Any loss
realized upon a disposition of shares may also be disallowed under rules
relating to wash sales. Gain may be increased (or loss reduced) upon a
redemption of Class A shares of the Fund within ninety days after their
purchase followed by any purchase (including purchases by exchange or by
reinvestment) without payment of an additional sales charge of Class A shares
of the Fund or of another MFS Fund (or any other shares of an MFS Fund
generally sold subject to a sales charge).
The Fund's current dividend and accounting policies will affect the amount,
timing, and character of distributions to shareholders. Any investment in zero
coupon bonds and certain securities purchased at a market discount will cause
the Fund to realize income prior to the receipt of cash payments with respect
to those securities. In order to distribute this income and avoid a tax on the
Fund, the Fund may be required to liquidate portfolio securities that it might
otherwise have continued to hold, potentially resulting in additional taxable
gain or loss to the Fund.
The Fund's transactions in options and Futures Contracts will be subject to
special tax rules that may affect the amount, timing, and character of Fund
income and distributions to shareholders. For example, certain positions held
by the Fund on the last business day of each taxable year will be marked to
market (i.e., treated as if closed out) on that day, and any gain or loss
associated with the positions will be treated as 60% long-term and 40% short-
term capital gain or loss. Certain positions held by the Fund that
substantially diminish its risk of loss with respect to other positions in its
portfolio may constitute "straddles," and may be subject to special tax rules
that would cause deferral of Fund losses, adjustments in the holding periods
of Fund securities, and conversion of short-term into long-term capital
losses. Certain tax elections exist for straddles that may alter the effects
of these rules. The Fund will limit its activities in options and Futures
Contracts to the extent necessary to meet the requirements of Subchapter M of
the Code.
Dividends and certain other payments to persons who are not citizens or
residents of the United States or U.S. entities ("Non-U.S. Persons") are
generally subject to U.S. tax withholding at a rate of 30%. The Fund intends
to withhold U.S. federal income tax at the rate of 30% on taxable dividends
and other payments made to Non-U.S. Persons that are subject to such
withholding, regardless of whether a lower rate may be permitted under an
applicable treaty. Any amounts overwithheld may be recovered by such persons
by filing a claim for refund with the U.S. Internal Revenue Service within the
time period appropriate to such claims. Distributions received from the Fund
by non-U.S. Persons may also be subject to tax under the laws of their own
jurisdictions.
The Fund is also required in certain circumstances to apply backup withholding
at a rate of 31% on taxable dividends and redemption proceeds paid to any
shareholder (including a Non-U.S. Person) who does not furnish to the Fund
certain information and certifications or who is otherwise subject to backup
withholding. Backup withholding, will not however, be applied to payments that
have been subject to 30% withholding.
As long as it qualifies as a regulated investment company under the Code, the
Fund will not be required to pay Massachusetts income or excise taxes.
The exemption of exempt-interest dividends for federal income tax purposes
does not necessarily result in exemption under the tax laws of any state or
local taxing authority. Some states do exempt from tax that portion of an
exempt-interest dividend which represents interest received by a regulated
investment company on its holdings of securities of that state and its
political subdivisions and instrumentalities. Therefore, the Fund will report
annually to its shareholders the percentage of interest income earned by the
Fund during the preceding year on Municipal Bonds and will indicate, on a
state-by-state basis only, the source of such income. Residents of certain
states may be subject to an intangibles tax or a personal property tax on all
or a portion of the value of their shares. Shareholders are urged to consult
their tax advisers regarding this and other state and local income tax
matters.
7. DETERMINATION OF NET ASSET VALUE AND PERFORMANCE
NET ASSET VALUE: The net asset value per share of each class of shares of the
Fund is determined each day during which the Exchange is open for trading. (As
of the date of this SAI, the Exchange is open for trading every weekday except
for the following holidays or the days on which they are observed: New Year's
Day, Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day and Christmas Day.) This determination is made once during
each such day as of the close of regular trading on the Exchange by deducting
the amount of the liabilities attributable to the class from the value of the
assets attributable to the class and dividing the difference by the number of
the shares of the class outstanding. Debt securities (other than short-term
obligations) are valued on the basis of valuations furnished by a pricing
service which utilizes both dealer-supplied valuations and electronic data
processing techniques which take into account appropriate factors such as
institution-size trading in similar groups of securities, yield, quality,
coupon rate, maturity, type of issue, trading characteristics and other market
data, without exclusive reliance upon exchange or over-the-counter prices,
since such valuations are believed to reflect more accurately the fair value
of such securities. Use of the pricing service has been approved by the Board
of Trustees. Short-term obligations 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. Other short-term obligations are valued at
amortized cost, which constitutes fair value as determined by the Board of
Trustees. Positions in listed options, Futures Contracts and Options on
Futures Contracts will normally be valued at the settlement price on the
exchange on which they are primarily traded. Positions in over-the-counter
options will be valued using dealer supplied valuations. Portfolio securities
for which there are no such valuations are valued at fair value as determined
in good faith by or at the direction of the Board of Trustees.
TOTAL RATE OF RETURN: The Fund will calculate its total rate of return for each
class of shares for certain periods by determining the average annual
compounded rates of return over those periods that would cause an investment
of $1,000 (made with all dividends and distributions reinvested and reflecting
the CDSC or the maximum public offering price) to reach the value of that
investment at the end of the periods. The Fund may also calculate (i) a total
return, which is not reduced by the CDSC (4% maximum for Class B shares and 1%
maximum for Class C shares purchased after April 1, 1996) and therefore may
result in a higher rate of return (ii) a total rate of return assuming an
initial account value of $1,000, which will result in a higher rate of return
since the value of the initial account will not be reduced by the sales charge
(maximum currently 2.50%) imposed with respect to Class A shares, and/or (iii)
total rates of return which represent aggregate performance over a period or
year-by-year performance, and which may or may not reflect the effect of the
CDSC or other sales charge. The average annual total rate of return for Class
A shares of the Fund reflecting the initial investment at the current maximum
public offering price for the one-year period ended April 30, 1996 and from
March 17, 1992 (commencement of operations) through April 30, 1996 was 2.50%
and 4.30%, respectively. The average annual total rate of return for Class A
shares of the Fund not giving effect to the sales charge for the same one-year
period and for the life of the Fund was 5.11% and 4.95%, respectively. The
Fund's average annual total rate of return for Class B shares reflecting the
CDSC for the one-year period ended April 30, 1996 and for the period September
7, 1993 through the Fund's fiscal year ended April 30, 1995 was 0.34% and
0.61%, respectively. The Fund's average annual total rate of return for Class
B shares, not giving effect to the CDSC, for this period was 4.34% and 2.04%,
respectively. The Fund's average annual total rate of return for Class C
shares, reflecting the CDSC, for the one-year period ended April 30, 1996 and
from July 1, 1994 (commencement of operations) through April 30, 1996 was
3.23% and 3.69%, respectively. The Fund's average annual total rate of return
for Class C shares, not giving effect to the CDSC for the same periods was
4.23% and 3.69%, respectively. The Fund's annual total rate of return for
Class A, Class B and Class C shares would have been lower if an expense
limitation were not in effect.
PERFORMANCE RESULTS: The performance results for Class A shares below, based on
an assumed initial investment of $10,000 in Class A shares, cover the period
from January 1, 1992 to December 31, 1995. It has been assumed that dividends
and capital gain distributions were reinvested in additional shares. These
performance results, including any yield, tax-equivalent yield, current
distribution rate or total rate of return quotation provided by the Fund,
should not be considered as representative of the performance of the Fund in
the future since the net asset value and public offering price of shares of
the Fund will vary based not only on the type, quality and maturities of the
securities held in the Fund's portfolio, but also on changes in the current
value of such securities and on changes in the expenses of the Fund. These
factors and possible differences in the methods used to calculate performance
quotations should be considered when comparing the performance quotations of
the Fund to performance quotations published for other investment companies or
other investment vehicles. Total rate of return reflects the performance of
both principal and income. Current net asset value as well as account balance
information may be obtained by calling 1-800-MFS-TALK (637-8255).
MFS MUNICIPAL LIMITED MATURITY FUND
VALUE OF
VALUE OF REINVESTED/ VALUE OF
YEAR ENDED INITIAL $10,000 CAPITAL GAIN REINVESTED TOTAL
DECEMBER 31 INVESTMENT DISTRIBUTIONS DIVIDENDS VALUE
----------- ------- ------------ ---------- -----
1992 9,973 16 360 10,349
1993 10,306 18 844 11,168
1994 9,799 17 1,210 11,026
1995 10,186 18 1,707 11,911
EXPLANATORY NOTES: The results assume that the initial investment was reduced
by the current maximum applicable sales charge of 2.50%. No adjustment has
been made for any income taxes payable by shareholders.
YIELD: Any yield quotation for a class of shares of the Fund is based on the
annualized net investment income per share of that class over a 30-day period.
The yield for each class of shares of the Fund is calculated by dividing the
net investment income per share 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 that period. The resulting figure is then annualized. Net
investment income per share of a class is determined by dividing (i) the
dividends and interest allocated to that class during the period, minus
accrued expenses 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
yield calculation for Class A and Class C shares assumes a maximum sales
charge of 2.50%. The yield calculations for Class B shares assumes no CDSC is
paid. The yield for Class A, Class B and Class C shares of the Fund for the
30-day period ended April 30, 1996 was 3.62%, 2.92%, and 2.87%, respectively,
with the effect of the expense limitation and 3.58%, 2.81% and 2.83%,
respectively, without the effect of the expense limitation.
TAX-EQUIVALENT YIELD: The Fund's tax-equivalent yield for each class is
calculated by determining the rate of return that would have to be achieved on
a fully taxable investment to produce the after-tax equivalent of the yield
for that class. In calculating tax-equivalent yield, the Fund assumes certain
tax brackets for shareholders. The tax-equivalent yield for Class A, Class B
and Class C shares of the Fund for the 30-day period ended April 30, 1996 was
5.03%, 4.06% and 3.99%, respectively (assuming a tax bracket of 28%), and
5.25%, 4.23% and 4.16%, respectively (assuming a tax bracket of 31%).
CURRENT DISTRIBUTION RATE: Yield, which is calculated according to a formula
prescribed by the SEC, is not indicative of the amounts which were or will be
paid to the Fund's shareholders. Amounts paid to shareholders of each class
are reflected in the quoted "current distribution rate" for that class. The
current distribution rate for a class is computed by dividing the total amount
of dividends per share paid by the Fund to shareholders of that class during
the past 12 months by the maximum public offering price of that class at the
end of such period. Under certain circumstances, such as when there has been a
change in the amount of dividend payout, or a fundamental change in investment
policies, it might be appropriate to annualize the dividends paid over the
period such policies were in effect, rather than using the dividends during
the past 12 months. The current distribution rate differs from the yield
computation because it may include distributions to shareholders from sources
other than dividends and interest, such as premium income from option writing,
short-term capital gains and return of invested capital, and is calculated
over a different period of time. The Fund's current distribution rate
calculation for Class A shares assumes a maximum sales charge of 2.50%. The
Fund's current distribution rate calculation for Class B and Class C shares
assumes no CDSC is paid. The current distribution rate for Class A shares of
the Fund for the 12-month period ended on April 30, 1995 was 3.85%. The
current distribution rate for Class B shares of the Fund for the 12-month
period ended on April 30, 1996 was 3.20%. The current distribution rate for
Class C shares of the Fund for the 12-month period ended April 30, 1996 was
3.09%.
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.
GENERAL: From time to time the Fund may, as appropriate, quote Fund rankings or
reprint all or a portion of evaluations of fund performance and operations
appearing in various independent publications, including but not limited to
the following: Money, Fortune, U.S. News and World Report, Kiplinger's
Personal Finance, The Wall Street Journal, Barron's, Investors Business Daily,
Newsweek, Financial World, Financial Planning, Investment Advisor, USA Today,
Pensions and Investments, SmartMoney, Forbes, Global Finance, Registered
Representative, Institutional Investor, the Investment Company Institute,
Johnson's Charts, Morningstar, Lipper Analytical Services, Inc., CDA
Wiesenberger, Shearson Lehman and Salomon Bros. Indices, Ibbotson, Business
Week, Lowry Associates, Media General, Investment Company Data, The New York
Times, Your Money, Strangers Investment Advisor, Financial Planning on Wall
Street, Standard and Poor's, Individual Investor, The 100 Best Mutual Funds
You Can Buy, by Gordon K. Williamson, Consumer Price Index, and Sanford C.
Bernstein & Co. Fund performance may also be compared to the performance of
other mutual funds tracked by financial or business publications or
periodicals.
From time to time, the Fund may discuss or quote its current portfolio manager
as well as other investment personnel, including such persons' views on: the
economy; securities markets; portfolio securities and their issuers;
investment philosophies, strategies, techniques and criteria used in the
selection of securities to be purchased or sold for the Fund; the Fund's
portfolio holdings; the investment research and analysis process; the
formulation and evaluation of investment recommendations; and the assessment
and evaluation of credit, interest rate, market and economic risks and similar
or related matters.
The Fund may also quote evaluations mentioned in independent radio or
television broadcasts.
From time to time the Fund may use charts and graphs to illustrate the past
performance of various indices such as those mentioned above and illustrations
using hypothetical rates of return to illustrate the effects of compounding
and tax-deferral.
From time to time the Fund may also discuss or quote the views of its
distributor, its investment adviser and other financial planning, legal, tax,
accounting, insurance, estate planning and other professionals, or from
surveys, regarding individual and family financial planning. Such views may
include information regarding: retirement planning; tax management strategies;
estate planning; general investment techniques (e.g., asset allocation and
disciplined saving and investing); business succession; ideas and information
provided through the MFS Heritage Planningsm program, an inter-generational
financial planning assistance program; issues with respect to insurance (e.g.,
disability and life insurance and Medicare supplemental insurance); issues
regarding financial and health care management for elderly family members; and
other similar or related matters.
The Fund may advertise examples of the effects of periodic investment plans,
including the principle of dollar cost averaging. In such a program, an
investor invests a fixed dollar amount in a fund at periodic intervals,
thereby purchasing fewer shares when prices are high and more shares when
prices are low. While such a strategy does not assure a profit or guard
against a loss in a declining market, the investor's average cost per share
can be lower than if fixed numbers of shares are purchased at the same
intervals.
MFS FIRSTS: MFS has a long history of innovations.
-- 1924 -- Massachusetts Investors Trust is established
as the first open-end mutual fund in America.
-- 1924 -- Massachusetts Investors Trust is the first
mutual fund to make full public disclosure of its
operations in shareholder reports.
-- 1932 -- One of the first internal research departments
is established to provide in-house analytical
capability for an investment management firm.
-- 1933 -- Massachusetts Investors Trust is the first
mutual fund to register under the Securities Act of
1933 ("Truth in Securities Act" or "Full Disclosure
Act").
-- 1936 -- Massachusetts Investors Trust is the first
mutual fund to allow shareholders to take capital gain
distributions either in additional shares or cash.
-- 1976 -- MFS(R) Municipal Bond Fund is among the first
municipal bond funds established.
-- 1979 -- Spectrum becomes the first combination fixed/
variable annuity with no initial sales charge.
-- 1981 -- MFS(R) World Governments Fund is established as
America's first globally diversified fixed-income
mutual fund.
-- 1984 -- MFS(R) Municipal High Income Fund is the first
open-end mutual fund to seek high tax-free income from
lower-rated municipal securities.
-- 1986 -- MFS(R) Managed Sectors Fund becomes the first
mutual fund to target and shift investments among
industry sectors for shareholders.
-- 1986 -- MFS(R) Municipal Income Trust is the first
closed-end, high-yield municipal bond fund traded on
the New York Stock Exchange.
-- 1987 -- MFS(R) Multimarket Income Trust is the first
closed-end, multimarket high income fund listed on the
New York Stock Exchange.
-- 1989 -- MFS(R) Regatta becomes America's first non-
qualified market-value-adjusted fixed/variable annuity.
-- 1990 -- MFS(R) World Total Return Fund is the first
global balanced fund.
-- 1993 -- MFS(R) World Growth Fund is the first global
emerging markets fund to offer the expertise of two
sub-advisers.
-- 1993 -- MFS becomes money manager of MFS(R) Union
Standard Trust, the first Trust to invest in companies
deemed to be union-friendly by an Advisory Board of
senior labor officials, senior managers of companies
with significant labor contracts, academics and other
national labor leaders or experts.
8. DISTRIBUTION PLANS
The Trustees have adopted a Distribution Plan for each of Class A, Class B and
Class C shares (the "Distribution Plans") pursuant to Section 12(b) of the
1940 Act and Rule 12b-1 thereunder (the "Rule") after having concluded that
there is a reasonable likelihood that each Distribution Plan would benefit the
Fund and the respective class of shareholders. The Distribution Plans are
designed to promote sales, thereby increasing the net assets of the Fund. Such
an increase may reduce the Fund's expense ratio to the extent the Fund's fixed
costs are spread over a larger net asset base. Also, an increase in net assets
may lessen the adverse effects that could result were the Fund required to
liquidate portfolio securities to meet redemptions. There is, however, no
assurance that the net assets of the Fund will increase or that the other
benefits referred to above will be realized.
The Distribution Plans are described in the Prospectus under the caption
"Distribution Plans," which is incorporated herein by reference. The following
information supplements this Prospectus discussion.
SERVICE FEES: With respect to the Class A Distribution Plan, no service fees
will be paid: (i) to any dealer who is the holder or dealer of record for
investors who own Class A shares having an aggregate net asset value less than
$750,000, or such other amount as may be determined from time to time by MFD
(MFD, however, may waive this minimum amount requirement from time to time);
or (ii) to any insurance company which has entered into an agreement with the
Fund and MFD that permits such insurance company to purchase Class A shares
from the Fund at their net asset value in connection with annuity agreements
issued in connection with the insurance company's separate accounts. Dealers
may from time to time be required to meet certain other criteria in order to
receive service fees.
With respect to the Class B Distribution Plan, except in the case of the first
year service fee, no service fees will be paid to any securities dealer who is
the holder or dealer of record for investors who own Class B shares having an
aggregate net asset value of less than $750,000 or such other amount as may be
determined by MFD from time to time. MFD, however, may waive this minimum
amount requirement from time to time. Dealers may from time to time be
required to meet certain other criteria in order to receive service fees.
MFD or its affiliates shall be entitled to receive any service fee payable
under any Distribution Plan for which there is no dealer of record or for
which qualification standards have not been met as partial consideration for
personal services and/or account maintenance services performed by MFD or its
affiliates for shareholder accounts.
DISTRIBUTION FEES: The purpose of distribution payments to MFD under the
Distribution Plans is to compensate MFD for its distribution services to the
Fund. MFD pays commissions to dealers as well as expenses of printing
prospectuses and reports used for sales purposes, expenses with respect to the
preparation and printing of sales literature and other distribution related
expenses, including, without limitation, the cost necessary to provide
distribution-related services, or personnel, travel, office expenses and
equipment.
DISTRIBUTION AND SERVICE FEES PAID DURING THE FUND'S LAST FISCAL YEAR: During
the fiscal year ended April 30, 1996, the Fund paid the following Distribution
Plan expenses:
AMOUNT OF AMOUNT OF AMOUNT OF
DISTRIBUTION DISTRIBUTION DISTRIBUTION
AND SERVICE AND SERVICE AND SERVICE
FEES PAID FEES RETAINED FEES RECEIVED
DISTRIBUTION PLANS BY FUND BY MFD BY DEALERS
- - ------------------ ------- ------------- -------------
Class A Distribution Plan $85,052 $10,411 $74,641
Class B Distribution Plan $71,907 $60,518 $11,389
Class C Distribution Plan $22,763 $ 36 $22,727
GENERAL: Each of the Distribution Plans will remain in effect until August 1,
1997, and will continue in effect thereafter only if such continuance is
specifically approved at least annually by vote of both the Trustees and a
majority of the Trustees who are not "interested persons" or financially
interested parties to such Plan ("Distribution Plan Qualified Trustees"). Each
of the Distribution Plans also requires that the Fund and MFD each shall
provide to the Trustees, and the Trustees shall review, at least quarterly, a
written report of the amounts expended (and purposes therefor) under such
Plan. Each of the Distribution Plans may be terminated at any time by vote of
a majority of the Distribution Plan Qualified Trustees or by vote of the
holders of a majority of the respective class of the Fund's shares (as defined
in "Investment Restrictions"). All agreements relating to any of the
Distribution Plans entered into between the Fund or MFD and other
organizations must be approved by the Board of Trustees, including a majority
of the Distribution Plan Qualified Trustees. Agreements under any of the
Distribution Plans must be in writing, will be terminated automatically if
assigned, and may be terminated at any time without payment of any penalty, by
vote of a majority of the Distribution Plan Qualified Trustees or by vote of
the holders of a majority of the respective class of the Fund's shares. None
of the Distribution Plans may be amended to increase materially the amount of
permitted distribution expenses without the approval of a majority of the
respective class of the Fund's shares (as defined in "Investment
Restrictions") or may be materially amended in any case without a vote of the
Trustees and a majority of the Distribution Plan Qualified Trustees. The
selection and nomination of Distribution Plan Qualified Trustees shall be
committed to the discretion of the non-interested Trustees then in office. No
Trustee who is not an "interested person" has any financial interest in any of
the Distribution Plans or in any related agreement.
9. DESCRIPTION OF SHARES, VOTING RIGHTS AND LIABILITIES
The Declaration of Trust permits the Trustees to issue an unlimited number of
full and fractional Shares of Beneficial Interest (without par value) of one
or more separate series and to divide or combine the shares into a greater or
lesser number of shares without thereby changing the proportionate beneficial
interests in that series. The Trustees have currently authorized shares of the
Fund and two other series. The Declaration of Trust further authorizes the
Trustees to classify or reclassify the shares of the Fund into one or more
classes. Pursuant thereto, the Trust has authorized the issuance of three
classes of shares of the Fund, Class A, Class B and Class C shares. Each share
of a class of a series represents an equal proportionate interest in the
assets of that series attributable to that class. Upon liquidation of the
Fund, shareholders of each class of the Fund would be entitled to share pro
rata in the net assets of the Fund allocable to that class available for
distribution to shareholders. The Trust reserves the right to create and issue
additional series or classes of shares, in which case the shares of each class
of a series would participate equally in the earnings, dividends and assets
allocable to that class of the particular series.
Shareholders are entitled to one vote for each share held and may vote in the
election of Trustees and on other matters submitted to meetings of
shareholders. Although Trustees are not elected annually by the shareholders,
shareholders have the right under certain circumstances to remove one or more
Trustees. No material amendment may be made to the Declaration of Trust
without the affirmative vote of the holders of a majority of the Trust's
outstanding shares. Shares have no pre-emptive or conversion rights (except as
set forth in "Purchases -- Conversion of Class B Shares" in the Prospectus).
Shares when issued are fully paid and non-assessable. The Trust may enter
into a merger or consolidation, or sell all or substantially all of its assets
(or all or substantially all of the assets belonging to any series of the
Trust), if approved by the vote of the holders of two-thirds of the Trust's
outstanding shares voting as a single class, or of the affected series of the
Trust, as the case may be, except that if the Trustees of the Trust recommend
such merger, consolidation or sale, the approval by vote of the holders of a
majority of the Trust's or the affected series' outstanding shares (as defined
in "Investment Restrictions") will be sufficient. The Trust or any series of
the Trust may also be terminated (i) upon liquidation and distribution of its
assets, if approved by the vote of the holders of two-thirds of its
outstanding shares, or (ii) by the Trustees by written notice to the
shareholders of the Trust or the affected series. If not so terminated, the
Trust will continue indefinitely.
The Trust is an entity of the type commonly known as a "Massachusetts business
trust". Under Massachusetts law, shareholders of such a trust may, under
certain circumstances, be held personally liable as partners for its
obligations. However, the Declaration of Trust contains an express disclaimer
of shareholder liability for acts or obligations of the Trust and provides for
indemnification and reimbursement of expenses out of the Trust property for
any shareholder held personally liable for the obligations of the Trust. The
Declaration of Trust also provides that the Trust shall maintain appropriate
insurance (for example, fidelity bonding and errors and omissions insurance)
for the protection of the Trust, its shareholders, Trustees, officers,
employees and agents covering possible tort and other liabilities. Thus, the
risk of a shareholder incurring financial loss on account of shareholder
liability is limited to circumstances in which both inadequate insurance
existed and the Trust itself was unable to meet its obligations.
The Declaration of Trust further provides that obligations of the Trust are
not binding upon the Trustees individually but only upon the property of the
Trust and that the Trustees will not be liable for any action or failure to
act, but nothing in the Declaration of Trust protects a Trustee against any
liability to which he would otherwise be subject by reason of willful
misfeasance, bad faith, gross negligence, or reckless disregard of the duties
involved in the conduct of his office.
10. INDEPENDENT AUDITORS AND FINANCIAL STATEMENTS
Deloitte & Touche LLP are the Trust's independent auditors providing audit
services, tax preparation, and assistance and consultation with respect to the
preparation of filings with the SEC.
The Portfolio of Investments at April 30, 1996, the Statement of Assets and
Liabilities at April 30, 1996, the Statement of Operations for the year ended
April 30, 1996, the Statement of Changes in Net Assets for the two years ended
April 30, 1996, the Notes to Financial Statements and the Independent
Auditors' Report, each of which is included in the Annual Report to
Shareholders of the Fund, are incorporated by reference into this SAI and have
been so incorporated in reliance upon the report of Deloitte & Touche LLP,
independent auditors, as experts in accounting and auditing. A copy of the
Annual Report accompanies this SAI.
<PAGE>
APPENDIX A
The ratings of Moody's and S&P represent their opinions as to the quality of
various Municipal Bonds. It should be emphasized, however, that ratings are
not absolute standards of quality. Consequently, Municipal Bonds with the same
maturity, coupon and rating may have different yields while Bonds of the same
maturity and coupon with different ratings may have the same yield.
DESCRIPTION OF MUNICIPAL BOND RATINGS
MOODY'S
Aaa: Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt edged". Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized
are most unlikely to impair the fundamentally strong position of such issuers.
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 fluctuations of
protective elements may be of greater amplitude or there may be other elements
present which make the long term risks appear somewhat larger than in Aaa
securities.
A: Bonds which are rated A possess many favorable investment attributes and
are to be considered as upper medium grade obligations. Factors giving
security to principal and interest are considered adequate, but elements may
be present which suggest a susceptibility to impairment sometime in the
future.
Baa: Bonds which are rated Baa are considered as medium grade obligations,
(i.e., they are neither highly protected nor poorly secured). Interest
payments and principal security appear adequate for the present but certain
protective elements may be lacking or may be characteristically unreliable
over any great length of time. Such bonds lack outstanding investment
characteristics and in fact have speculative characteristics as well.
S&P
AAA: Debt rated AAA has the highest rating assigned by S&P. Capacity to pay
interest and repay principal is extremely strong.
AA: Debt rated AA has a very strong capacity to pay interest and repay
principal and differs from the higher rated issues only in small degree.
A: Debt rated a has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher rated categories.
BBB: Debt rated BBB is regarded as having an adequate capacity to pay interest
and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are most
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories.
FITCH INVESTORS SERVICE, INC.
AAA: Bonds considered to be investment grade and of the highest credit
quality. The obligor has an exceptionally strong ability to pay interest and
repay principal, which is unlikely to be affected by reasonably foreseeable
events.
A: Bonds considered to be investment grade and of very high credit quality.
The obligor's ability to pay interest and repay principal is very strong,
although not quite as strong as bonds rated "AAA." Because bonds rated in the
"AAA" and "AA" categories are not significantly vulnerable to foreseeable
future developments, short-term debt of these issuers is generally rated "F-1+"
A: Bonds considered to be investment grade and of high credit quality. The
obligor's ability to pay interest and repay principal is considered to be
strong, but may be more vulnerable to adverse changes in economic conditions
and circumstances than bonds with higher ratings.
BBB: Bonds considered to be investment grade and of satisfactory credit
quality. The obligor's ability to pay interest and repay principal is
considered to be adequate. Adverse changes in economic conditions, however,
are more likely to have adverse impact on these bonds, and therefor impair
timely payment. The likelihood that the ratings of these bonds will fall below
investment grade is higher than for bonds with higher ratings.
<PAGE>
APPENDIX B
<TABLE>
<CAPTION>
TRUSTEE COMPENSATION TABLE
RETIREMENT BENEFIT ESTIMATED TOTAL TRUSTEE FEES
TRUSTEE FEES ACCRUED AS PART OF CREDITED YEARS OF FROM FUND AND
TRUSTEE FROM FUND(1) FUND'S EXPENSES(1) SERVICE(2) FUND COMPLEX(3)
- - ---------------------------- ---------------- ---------------------- --------------------- ----------------------
<S> <C> <C> <C> <C>
Richard B. Bailey .......... $1,015 $200 8 $263,815
A. Keith Brodkin ........... -0- -0- N/A -0-
Peter G. Harwood ........... 1,180 120 5 111,366
J. Atwood Ives ............. 1,085 209 17 101,356
Lawrence T. Perera ......... 1,120 206 16 102,546
William Poorvu ............. 1,180 218 16 111,366
Charles W. Schmidt ......... 1,120 207 9 105,411
Arnold D. Scott ............ -0- -0- N/A -0-
Jeffrey L. Shames .......... -0- -0- N/A -0-
Elaine R. Smith ............ 1,120 207 27 105,411
David B. Stone ............. 1,240 219 9 115,521
</TABLE>
- - ------------
(1) For fiscal year ended April 30, 1996.
(2) Based on normal retirement age of 73.
(3) For calendar year 1995. All Trustees receiving compensation
served as Trustees of 23 funds within the MFS fund complex
(having aggregate net assets at December 31, 1995, of
approximately $17.6 billion) except Mr. Bailey, who served as
Trustee of 73 funds within the MFS fund complex (having
aggregate net assets at December 31, 1995, of approximately
$31.7 billion).
<TABLE>
<CAPTION>
ESTIMATED ANNUAL BENEFITS PAYABLE BY FUND UPON RETIREMENT(4)
YEARS OF SERVICE
------------------------------------------------------------------------
AVERAGE TRUSTEE FEES 3 5 7 10 OR MORE
- - -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
$ 914 $137 $228 $320 $457
1,004 151 251 351 502
1,094 164 273 383 547
1,184 178 296 414 592
1,274 191 318 446 637
1,364 205 341 477 682
</TABLE>
(4) Other funds in the MFS fund complex provide similar retirement
benefits to the Trustees.
<PAGE>
INVESTMENT ADVISER
Massachusetts Financial Services Company
500 Boylston Street, Boston, MA 02116
(617) 954-5000
DISTRIBUTOR
MFS Fund Distributors, Inc.
500 Boylston Street, Boston, MA 02116
(617) 954-5000
CUSTODIAN AND DIVIDEND DISBURSING AGENT
State Street Bank and Trust Company
225 Franklin Street, Boston, MA 02110
SHAREHOLDER SERVICING AGENT
MFS Service Center, Inc.
500 Boylston Street, Boston MA 02116
Toll free: (800) 225-2606
Mailing Address
P.O. Box 2281, Boston, MA 02107-9906
INDEPENDENT AUDITORS
Deloitte & Touche LLP
125 Summer Street, Boston, MA 02110
MFS(R)
MUNICIPAL LIMITED
MATURITY FUND
500 BOYLSTON STREET
BOSTON, MA 02116
[LOGO] MFS
THE FIRST NAME IN MUTUAL FUNDS
MML-13-9/96/500 37/237/500
<PAGE>
<PAGE>
[Logo] Annual Report for
THE FIRST NAME IN MUTUAL FUNDS Year Ended
April 30, 1996
MFS(R) MUNICIPAL LIMITED MATURITY FUND
[Graphic Omitted]
<PAGE>
<TABLE>
MFS(R) MUNICIPAL LIMITED MATURITY FUND
<S> <C>
TRUSTEES ASSISTANT SECRETARY
A. Keith Brodkin* - Chairman and President James R. Bordewick, Jr.*
Richard B. Bailey* - Private Investor;
Former Chairman and Director (until 1991), CUSTODIAN
Massachusetts Financial Services Company; State Street Bank and Trust Company
Director, Cambridge Bancorp;
Director, Cambridge Trust Company AUDITORS
Deloitte & Touche LLP
Peter G. Harwood - Private Investor
INVESTOR INFORMATION
J. Atwood Ives - Chairman and Chief Executive For MFS stock and bond market outlooks,
Officer, Eastern Enterprises call toll free: 1-800-637-4458 anytime from
a touch-tone telephone.
Lawrence T. Perera - Partner, For information on MFS mutual funds,
Hemenway & Barnes call your financial adviser or, for an
information kit, call toll free:
William J. Poorvu - Adjunct Professor, 1-800-637-2929 any business day from
Harvard University Graduate School of 9 a.m. to 5 p.m. Eastern time (or leave
Business Administration a message anytime).
Charles W. Schmidt - Private Investor INVESTOR SERVICE
MFS Service Center, Inc.
Arnold D. Scott* - Senior Executive Vice P.O. Box 2281
President, Director and Secretary, Boston, MA 02107-9906
Massachusetts Financial Services Company For general information, call toll free:
1-800-225-2606 any business day from
Jeffrey L. Shames* - President and Director, 8 a.m. to 8 p.m. Eastern time.
Massachusetts Financial Services Company For service to speech- or hearing-impaired,
call toll free: 1-800-637-6576 any business
Elaine R. Smith - Independent Consultant day from 9 a.m. to 5 p.m. Eastern time.
(To use this service, your phone must be
David B. Stone - Chairman, North American equipped with a Telecommunications Device for
Management Corp. (investment advisers) the Deaf.)
For share prices, account balances and
INVESTMENT ADVISER exchanges, call toll free: 1-800-MFS-TALK
Massachusetts Financial Services Company (1-800-637-8255) anytime from a touch-tone
500 Boylston Street telephone.
Boston, MA 02116-3741
DISTRIBUTOR
MFS Fund Distributors, Inc.
500 Boylston Street
Boston, MA 02116-3741 DALBAR TOP-RATED SERVICE
MFS #1 MFS For the second year in a
PORTFOLIO MANAGER DALBAR row, MFS earned a #1
Robert A. Dennis* ranking in DALBAR,
Inc.'s Broker/Dealer
TREASURER Survey, Main Office
W. Thomas London* Operations Service Quality
category. The firm achieved
ASSISTANT TREASURER a 3.49 overall score - on a scale of 1 to 4 - in the
James O. Yost* 1995 survey. A total of 71 firms responded, offering
input on the quality of service they receive from 36
SECRETARY mutual fund companies nationwide. The survey
Stephen E. Cavan* contained questions about service quality in 17
categories, including "knowledge of phone service
contacts," "accuracy of transaction processing," and
*Affiliated with the Investment Adviser "overall ease of doing business with the firm."
</TABLE>
<PAGE>
LETTER TO SHAREHOLDERS
Dear Shareholders:
Sentiment in the fixed-income markets has turned decidedly negative in recent
months. Strong employment growth indicated that the economy has made a better-
than-expected recovery from the special factors (government shutdowns, severe
weather) that caused it to slow during mid-winter. Sharp rises in commodity and
energy prices added to the sudden realization that the best news regarding
inflation may be behind us. The failure of Congress and the administration to
reach a long-term balanced-budget agreement added to the dismal market
psychology. Nevertheless, compared to other markets such as comparable-maturity
U.S. Treasuries, short- and intermediate-term maturity municipals actually
performed quite well. For the 12-month period ended April 30, 1996, Class A
shares of the Fund provided a total return of 5.11%, while Class B and Class C
shares returned 4.34% and 4.23%, respectively. These returns assume the
reinvestment of distributions but exclude the effects of any sales charges. A
discussion of the Fund's performance may be found in the Portfolio Performance
and Strategy section of this letter.
Yields on three- to five-year high-grade municipals, while still about 40 to
50 basis points (0.40% to 0.50%) lower than those of April 30, 1995, rose about
30 basis points (0.30%) over the six-month period ended April 30, 1996. Yields
were about 60 basis points (0.60%) higher than the lows for the period reached
in mid-February. However, yield increases in this market were significantly less
than those experienced by comparable-maturity U.S. Treasuries. Indicating the
market's favorable relative performance, the ratio of five-year AAA-rated (by
Standard & Poor's) municipal yields to five-year Treasuries, which was as high
as 79% in late January of this year, declined to a low of 71% as of April 30,
1996. By contrast, the comparable yield ratio for long-term maturity municipals
has been about 85%.
This year's rise in interest rates has served to further depress the
issuance of new municipal bonds. While supply has been limited, demand for
short- to intermediate-maturity municipals has been strong from investors
seeking to avoid the risks of the long-term market. Another positive for the
overall municipal market was the diminished sense of fear about radical tax
reform following the sharp attacks against the "flat-tax" concept that were
raised during the presidential primary season.
Economic Environment
We believe the U.S. economy will continue to show moderate growth in 1996,
although this growth may be somewhat uneven as we move from quarter to quarter.
Thus, while one quarter may experience an annualized rate of growth in gross
domestic product of less than 1%, another quarter may see annualized growth in
excess of 3% - but, for the year, we believe growth could stay within our
expected range of 2% to 2 1/2%. While some increase in consumer spending took
place in the early months of this year, consumers, who represent two-thirds of
the economy, remain in a somewhat weakened position, due in part to an increase
in consumer installment debt in excess of 30% over the past two years.
Meanwhile, growth is also being constrained by ongoing economic doldrums in
Europe and Japan, important markets for U.S. exports. Here again, we are seeing
a few tentative signs, particularly in Japan, of modest recoveries that could
lead to improved prospects for U.S. exporters. Also, the "lag effect" of
increases in short-term interest rates by the Federal Reserve Board in 1994 and
into 1995 is helping to keep growth in check. This lag effect can last up to two
years, and although the Fed did reduce short-term rates late last year and
earlier this year, we expect it to continue its diligent anti-inflationary
policies. At the same time, it appears that inflation is likely to remain under
control this year, due in part to a continued moderation in wage pressures and
the subdued level of economic growth. Finally, we believe the current upward
pressure on energy prices bears close scrutiny, as energy is an important
component of the inflation outlook.
Bond Markets
Persistent signs of economic weakness led to decreases in short-term interest
rates by the Federal Reserve in late 1995 and early 1996. However, should signs
of economic growth and, particularly, of higher inflation continue, we could
expect the Fed to maintain its anti-inflationary stance. This could likely mean
no further reductions in short-term interest rates and could lead to some modest
increases. In the beginning of the year, bond markets were trading in a narrow
range, as investors shifted between concern about the lack of a budget
resolution in Washington and hopes that sluggish economic reports and low
inflation might lead to lower interest rates. Later, fixed-income markets began
reacting to conflicting signals regarding the strength of the economy with
more-volatile trading patterns marked by an upward bias in interest rates.
Interest rates may move even higher over the coming months, but we believe the
current rise in bond yields is reaching a point where fixed-income markets are
becoming attractively valued.
Portfolio Performance and Strategy
The Fund's total return at net asset value for Class A shares was in line with
the 5.09% average return for short/intermediate municipal bond funds as compiled
by Lipper Analytical Services, Inc., an independent firm which reports mutual
fund performance, although Class B and Class C shares lagged this average for
the 12-month period. However, returns lagged the 6.26% and 6.86% returns
reported for the Lehman Brothers Municipal Bond Three-Year and Five-Year
indices, respectively. These are unmanaged indices of investment-grade,
fixed-rate municipal bonds.
Since there have been no major changes in yield relationships among major
sectors in the municipal market over the past year, performance has been mainly
determined by maturity structure. Optimal performance could have been obtained
by having maturities as long as possible while rates were stable or declining,
and by shortening maturities substantially prior to this year's rise in rates.
The Fund performed particularly well while interest rates were falling, since
its average maturity was at least four years. Beginning in March, the average
maturity was shortened, reaching 3.4 years by April 30, 1996, but performance
would have been better if the average maturity had been shortened earlier in the
year.
Since the yield differential between high- and low-quality bonds remains
very narrow, the Fund currently maintains a high-quality portfolio. Currently,
76% of the Fund's total net assets is invested in bonds rated AAA or AA by
Standard & Poor's, or in cash reserves of the highest quality. The Fund's
largest sector concentration, which represents about 28% of total assets, is in
tax-supported general obligation bonds, historically the most secure municipal
credits. This sector has benefited not only from the conservative financial
practices generally employed by municipal governments in recent years, but also
from the improved revenues flowing into state and local governments as a result
of better economic conditions.
We appreciate your support and welcome any questions or comments you may
have.
Respectfully,
[A Photo of A. Keith Brodkin, [A photo of Robert A. Dennis,
Chairman and President] Portfolio Manager]
/s/ A. Keith Brodkin /s/ Robert A. Dennis
- - -------------------------- -----------------------------
A. Keith Brodkin Robert A. Dennis
Chairman and President Portfolio Manager
May 10, 1996
<PAGE>
PORTFOLIO MANAGER PROFILE
A graduate of Massachusetts Institute of Technology and its Sloan School of
Management, Robert Dennis began his career at MFS in 1980 and was promoted to
Vice President - Investments in 1983. In 1986, he was named Senior Vice
President. He has been the Portfolio Manager of MFS Municipal Limited Maturity
Fund since 1992. Mr. Dennis is a Chartered Financial Analyst (C.F.A.).
OBJECTIVE AND POLICIES
The Fund's investment objective is to provide as high a level of current income
exempt from federal income taxes as is considered consistent with prudent
investing and protection of shareholders' capital. A small portion of income may
be subject to state, federal, and/or alternative minimum tax. Capital gains, if
any, are subject to capital gains tax.
The Fund, under normal conditions, invests substantially all (at least 80%) of
its assets in debt securities issued by or on behalf of states, territories and
possessions of the United States and the District of Columbia and their
political subdivisions, agencies or instrumentalities, the interest on which is
exempt from federal income tax. As a defensive measure during times of adverse
market conditions, up to 50% of the Fund's assets may be temporarily invested in
short-term investments. Substantially all of the Fund's total assets will be
invested in: tax-exempt securities which are rated AAA, AA, A or BBB by Standard
& Poor's Corporation (S&P) or by Fitch Investors Service, Inc. (Fitch) or are
rated Aaa, Aa, A or Baa by Moody's Investors Service, Inc. (Moody's) (and
comparable unrated securities); notes of issuers having an issue of outstanding
municipal bonds rated AAA, AA, A or BBB by S&P or Fitch or Aaa, Aa, A or Baa by
Moody's (or issuers of comparable quality) or which are guaranteed by the U.S.
government; obligations issued or guaranteed by the U.S. government or its
agencies, authorities or instrumentalities; and commercial paper, obligations of
banks (including certificates of deposit and bankers' acceptances) with $1
billion of assets, and cash. Under normal market conditions, the dollar-weighted
average maturity of the Fund's portfolio will not exceed five years and
substantially all of the securities held by the Fund will have remaining
maturities of 10 years or less.
FEDERAL INCOME TAX INFORMATION ON DISTRIBUTIONS
For federal income tax purposes, 100% of the total dividends paid by the Fund
from net investment income during the year ended April 30, 1996 were designated
as an exempt-interest dividend.
In January 1996, shareholders were mailed a Tax Form Summary reporting the
federal tax status of all distributions paid during the calendar year 1995.
PERFORMANCE
The information on the following page illustrates the historical performance of
MFS Municipal Limited Maturity Fund Class A shares in comparison to various
market indicators. Fund results in the graph reflect the deduction of the 2.50%
maximum sales charge; benchmark comparisons are unmanaged and do not reflect any
fees or expenses. You cannot invest in an index. All results reflect the
reinvestment of all dividends and capital gains.
Class B shares were offered effective September 7, 1993. Information on Class B
share performance appears on the next page.
Please note that effective July 1, 1994, Class C shares were offered.
Information on Class C share performance appears on the next page.
Please note that the performance of other classes will be greater than or less
than the line shown, based on the differences in loads and fees paid by
shareholders investing in the different classes.
In the following table, we have included the average annual total returns of all
short/intermediate municipal debt funds (including the Fund) tracked by Lipper
Analytical Services, Inc. for the applicable time periods.
All results are historical and are not an indication of future results. The
investment return and principal value of an investment in a mutual fund will
vary with changes in market conditions, and shares, when redeemed, may be worth
more or less than their original cost.
<PAGE>
GROWTH OF A HYPOTHETICAL $10,000 INVESTMENT
(For the Period from April 1, 1992 to April 30, 1996)
MFS MUNICIPAL LIMITED MATURITY FUND (CLASS A)
LEHMAN BROTHERS MUNICIPAL BOND FIVE-YEAR INDEX
LEHMAN BROTHERS MUNICIPAL BOND THREE-YEAR INDEX
CPI
$10,000 4/1/92 - 4/30/96
MFS Lehman Brothers Lehman Brothers
Municipal Municipal Municipal
Limited Bond Bond
Maturity Five-Year Three-Year
Days Fund-A Index Index CPI
---- --------- --------------- --------------- ---
4/1/92 0 9,750 10,000 10,000 10,000
4/30/92 29 9,759 10,085 10,076 10,014
4/30/93 394 10,710 11,103 10,896 10,337
4/30/94 759 10,949 11,435 11,194 10,581
4/30/95 1,124 11,338 12,060 11,713 10,905
4/30/96 1,490 11,918 12,887 12,447 11,220
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS
Life of Class
through
1 Year 3 Years 4/30/96
- - ---------------------------------------------------------------------------------------
<S> <C> <C> <C>
MFS Municipal Limited Maturity Fund (Class A)
including 2.50% sales charge +2.50% +2.73% +4.30%<F1>
- - ---------------------------------------------------------------------------------------
MFS Municipal Limited Maturity Fund (Class A)
at net asset value +5.11% +3.63% +4.95%<F1>
- - ---------------------------------------------------------------------------------------
MFS Municipal Limited Maturity Fund (Class B)
with CDSC<F2> +0.34% -- +0.97%
- - ---------------------------------------------------------------------------------------
MFS Municipal Limited Maturity Fund (Class B)
without CDSC +4.34% -- +2.04%
- - ---------------------------------------------------------------------------------------
MFS Municipal Limited Maturity Fund (Class C)
with CDSC<F4> +3.23% -- +3.69%<F5>
- - ---------------------------------------------------------------------------------------
MFS Municipal Limited Maturity Fund (Class C)
without CDSC +4.23% -- +3.69%<F5>
- - -------------------------------------------------------------------------------------
Average short/intermediate municipal debt fund<F6> +5.09% +3.93% +5.28%<F7>
- - ---------------------------------------------------------------------------------------
Lehman Brothers Municipal Bond Three-Year
Index<F6> +6.26% +4.54% +5.51%<F7>
- - ---------------------------------------------------------------------------------------
Lehman Brothers Municipal Bond Five-Year
Index<F6> +6.86% +5.09% +6.41%<F7>
- - ---------------------------------------------------------------------------------------
Consumer Price Index<F8><F6> +2.90% +2.77% +2.86%<F7>
- - ---------------------------------------------------------------------------------------
<FN>
<F1>For the period from the commencement of offering of Class A shares, March 17, 1992 to April 30, 1996.
<F2>These returns reflect the current Class B contingent deferred sales charge (CDSC) of 4% for the 1-year
period and 3% for the period commencing September 7, 1993.
<F3>For the period from the commencement of offering of Class B shares, September 7, 1993 to April 30, 1996.
<F4>Class C shares have no initial sales charge but, along with Class B shares, have higher annual fees and
expenses than Class A shares. Class C share purchases made on or after April 1, 1996, will be
subject to a 1% CDSC if redeemed within 12 months of purchase.
<F5>For the period from the commencement of offering of Class C shares, July 1, 1994 to April 30, 1996.
<F6>Source: Lipper Analytical Services, Inc.
<F7>Benchmark comparisons begin on April 1, 1992.
<F8>The Consumer Price Index is a popular measure of change in prices.
</FN>
</TABLE>
<PAGE>
PORTFOLIO OF INVESTMENTS - April 30, 1996
Municipal Bonds - 85.4%
- - -----------------------------------------------------------------------------
S&P
Bond Rating Principal Amount
(Unaudited) Issuer (000 Omitted) Value
- - -----------------------------------------------------------------------------
General Obligation - 26.6%
AAA Aldine, TX, Independent School
District, PSFG, 7.25s, 1997 $ 600 $ 613,620
AAA Baltimore County, MD,
Consolidated Public
Improvement, 5s, 1997 500 506,535
AAA Baltimore County, MD,
Metropolitan District,
6.5s, 1997 500 514,755
AAA Clark County NV, FGIC, 5.5s, 2002 2,000 2,034,880
A+ Commonwealth of Massachusetts,
7s, 1999 1,000 1,053,530
AAA Cook County, IL, FGIC, 5.1s, 1999 1,000 1,016,760
AAA Cook County, IL, High School
District No. 205 (Thornton
Township), FGIC, 5.4s, 1997 450 456,800
B District of Columbia, 4.3s, 1996 900 892,197
AAA District of Columbia, AMBAC,
7.25s, 1998 500 526,045
NR Indianapolis, IN, Local Public
Improvement Bond Bank,
6.25s, 2001 1,000 1,062,010
AAA Lawrence, MA, AMBAC, 9.7s, 2001 1,000 1,197,720
AA- Milwaukee County, WI, 5.35s, 2001 2,410 2,467,334
AA Milwaukee, WI, Metropolitan
Sewage District, 6.7s, 2001 500 545,890
BBB+ New York City, NY, 5.3s, 2000 1,245 1,245,697
BBB+ New York City, NY, 6.125s, 2001 600 617,448
AA State of Hawaii, 5.4s, 2001 500 514,555
AA- State of Illinois, 5.5s, 2000 500 514,175
AAA State of Louisiana, MBIA,
5.3s, 2001 500 510,250
-----------
$16,290,201
- - -----------------------------------------------------------------------------
Student Loan Revenue - 9.5%
NR Colorado Student Obligation
Bond Authority, Student Loan
Rev., 6.125s, 1998 $ 255 $ 260,238
NR Louisiana Public Facilities
Authority, Student Loan
Rev., 6.5s, 2002 1,000 1,050,240
NR Mississippi Higher Education
Student Loan,
5.4s, 2002 1,000 1,012,930
NR Nebraska Higher Education Loan
Program, Inc. Rev., 5s, 1998 500 496,760
NR Nebraska Higher Education Loan
Program, Inc. Rev., 5.2s, 1999 500 497,455
NR New Mexico Educational
Assistance Foundation,
5.25s, 1998 1,000 1,012,680
NR Virginia Educational Loan
Authority, Guaranteed
Student Loan Program, 5.05s, 2003 1,460 1,464,073
-----------
$ 5,794,376
- - -----------------------------------------------------------------------------
State and Local Appropriation - 11.8%
AAA California Public Works Board
Rev. (Community
College Projects), AMBAC,
5.5s, 2001 850 877,939
AAA California Public Works Board,
Lease Rev. (Secretary of
State), AMBAC, 5.25s, 1998 630 645,202
B- District of Columbia,
Certificates of Participation,
6s, 1997 272 272,024
AA+ Indianapolis, IN, Local Public
Improvement, 5s, 2000 500 506,770
AA- Michigan Building Authority
Rev., 6.2s, 2002 1,000 1,071,070
BBB New York Dormitory Authority
Rev. (City University),
5.25s, 1997 500 505,350
BBB+ New York Medical Care
Facilities Finance Agency
Rev., 5.9s, 2000 995 1,030,452
BBB New York Urban Development
(Correctional Facility),
5.5s, 2001 1,000 1,004,760
AAA State of New Jersey,
Transportation System
Authority Rev., AMBAC, 5.5s, 2000 500 516,370
AA State of Utah, Building
Ownership Authority Lease
Rev., 5.125s, 2000 750 763,005
-----------
$ 7,192,942
- - -----------------------------------------------------------------------------
Refunded and Special Obligation - 6.0%
A+ Commonwealth of Massachusetts,
6.7s, 2002 $1,000 $ 1,064,740
BBB+ Detroit, MI, Distributable
State Aid, 5.375s, 1996 750 750,007
BBB+ Detroit, MI, Distributable
State Aid, 5.625s, 1997 750 762,863
A+ New Jersey Transportation
Trust Fund Authority,
5.6s, 1998 495 508,870
AA State of Texas, 7.125s, 2020 500 553,060
-----------
$ 3,639,540
- - -----------------------------------------------------------------------------
Multi-Family Housing Revenue - 3.3%
AAA Rhode Island Housing &
Mortgage Finance Corp.,
AMBAC, 5.15s, 2001 $1,000 $ 1,017,840
AAA Rhode Island Housing &
Mortgage Finance Corp.,
AMBAC, 5.25s, 2002 1,000 1,021,180
-----------
$ 2,039,020
- - -----------------------------------------------------------------------------
Insured Health Care Revenue - 6.0%
AAA Delaware County, IN, Hospital
Authority (Ball Memorial Hospital),
AMBAC, 6.625s, 2001 $2,520 $ 2,714,292
AAA Medical Center Hospital
Authority, GA, Anticipation
Certificates (Columbus
Regional Healthcare System),
MBIA, 5.9s, 2001 885 930,153
-----------
$ 3,644,445
- - -----------------------------------------------------------------------------
Electric and Gas Utility Revenue - 9.2%
AAA Brownsville, TX, Utility Rev.,
AMBAC, 5s, 2000 $ 400 $ 404,904
AAA Intermountain Power Agency,
Utah Power Supply Rev.,
MBIA, 5.5s, 1999 2,000 2,055,800
BBB Philadelphia, PA, Gas Works
Rev., 5.4s, 1998 1,000 1,007,610
AAA Sacramento, CA, Municipal
Utility District Electric
Rev., FGIC, 6s, 2001 620 656,320
AAA South Carolina Public Service
Authority, AMBAC,
5s, 1999 $ 500 $ 506,420
AA Washington Public Power Supply
System Rev., Nuclear Project
#2, 4.625s, 1998 1,000 997,600
-----------
$ 5,628,654
- - -----------------------------------------------------------------------------
Water and Sewer Utility Revenue - 5.9%
A Massachusetts Water Resources
Authority, 5.25s, 2001 $2,500 $ 2,539,550
AAA San Antonio, TX, Water Rev.,
FGIC, 5.8s, 1999 1,000 1,036,450
-----------
$ 3,576,000
- - -----------------------------------------------------------------------------
Airport and Port Revenue - 3.0%
AAA Indianapolis, IN, Airport
Authority Rev., FGIC,
5s, 1999 $1,000 $ 1,011,580
AAA Metropolitan Nashville Airport
Authority, TN,
Airport Rev., FGIC, 6.125s, 1999 800 831,872
-----------
$ 1,843,452
- - -----------------------------------------------------------------------------
Sales and Excise Tax Revenue - 2.5%
AAA Arizona State Transportation
Board, Excise Tax Rev.
(Maricopa County Regional
Area), MBIA,
6.8s, 1997 $1,000 $ 1,031,270
AAA San Diego County, CA, Regional
Transportation
Commission, Sales Tax Rev.,
FGIC, 5s, 1998 500 506,975
-----------
$ 1,538,245
- - -----------------------------------------------------------------------------
Universities - 0.8%
AAA Union County, PA, Higher
Educational Facilities
Financing Authority
(Bucknell University), MBIA,
5.3s, 1998 $ 500 $ 509,700
- - -----------------------------------------------------------------------------
Miscellaneous Revenue - 0.8%
AAA Pennsylvania Intergovernmental
Coop Authority (City of
Philadelphia Funding $ 500 $ 506,835
- - -----------------------------------------------------------------------------
Total Municipal Bonds (Identified Cost, $51,655,817) $52,203,410
- - -----------------------------------------------------------------------------
Floating Rate Demand Notes - 7.8%
- - -----------------------------------------------------------------------------
NR City of Grand Rapids, MI, due
1/01/20 $ 800 $ 800,000
A1+ Lincoln County, WY, Pollution
Control (Exxon),
due 11/01/14 100 100,000
NR Uinta County, WY, Pollution
Control Rev. (Chevron), due
8/15/20 3,900 3,900,000
-----------
$ 4,800,000
- - -----------------------------------------------------------------------------
Total Investments (Identified Cost, $56,455,817) $57,003,410
Other Assets, Less Liabilities - 6.8% 4,145,918
- - -----------------------------------------------------------------------------
Net Assets - 100.0% $61,149,328
- - -----------------------------------------------------------------------------
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS
Statement of Assets and Liabilities
- - ------------------------------------------------------------------------------
April 30, 1996
- - ------------------------------------------------------------------------------
Assets:
Investments, at value (identified cost, $56,455,817) $57,003,410
Cash 14,080
Receivable for Fund shares sold 7,061
Receivable for investments sold 4,445,422
Interest and dividends receivable 854,066
Deferred organization expenses 3,637
Other assets 1,099
-----------
Total assets $62,328,775
-----------
Liabilities:
Distributions payable $ 59,460
Payable for Fund shares reacquired 79,165
Payable for investments purchased 1,016,313
Payable to affiliates -
Management fee 2,001
Distribution fee 8,748
Accrued expenses and other liabilities 13,760
-----------
Total liabilities $ 1,179,447
-----------
Net assets $61,149,328
===========
Net assets consist of:
Paid-in capital $61,510,601
Unrealized appreciation on investments 547,593
Accumulated net realized loss on investments (930,166)
Accumulated undistributed net investment income 21,300
-----------
Total $61,149,328
===========
Shares of beneficial interest outstanding 8,124,263
===========
Class A shares:
Net asset value and redemption price per share
(net assets of $50,386,771 / 6,693,361 shares of
beneficial interest outstanding) $7.53
=====
Offering price per share (100/97.5) $7.72
=====
Class B shares:
Net asset value and offering price per share
(net assets of $7,749,317 / 1,030,696 shares of
beneficial interest outstanding) $7.52
=====
Class C shares:
Net asset value, offering price and redemption price per
share (net assets of $3,013,240 / 400,206 shares of
beneficial interest outstanding) $7.53
=====
On sales of $50,000 or more, the offering price of Class A shares is reduced. A
contingent deferred sales charge may be imposed on redemptions of Class A, Class
B and Class C shares.
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS - continued
Statement of Operations
- - ------------------------------------------------------------------------------
Year Ended April 30, 1996
- - ------------------------------------------------------------------------------
Net investment income:
Interest income $3,314,103
----------
Expenses -
Management fee $ 267,876
Trustees' compensation 11,404
Shareholder servicing agent fee (Class A) 85,183
Shareholder servicing agent fee (Class B) 17,575
Shareholder servicing agent fee (Class C) 3,400
Distribution and service fee (Class A) 85,052
Distribution and service fee (Class B) 71,907
Distribution and service fee (Class C) 22,763
Printing 39,885
Auditing fees 33,730
Custodian fee 29,260
Postage 7,396
Amortization of organization expenses 4,148
Legal fees 1,480
Miscellaneous 60,891
----------
Total expenses $ 741,950
Reduction of expenses pursuant to reimbursement agreement (25,934)
Fees paid indirectly (2,815)
----------
Net expenses $ 713,201
----------
Net investment income $2,600,902
----------
Realized and unrealized gain (loss) on investments:
Realized loss on investment transactions (identified cost
basis) $ (40,278)
Change in unrealized appreciation on investments 816,807
----------
Net realized and unrealized gain on investments $ 776,529
----------
Increase in net assets from operations $3,377,431
==========
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS - continued
<TABLE>
<CAPTION>
Statement of Changes in Net Assets
- - -----------------------------------------------------------------------------------------------
Year Ended April 30, 1996 1995
- - -----------------------------------------------------------------------------------------------
<S> <C> <C>
Increase in net assets:
From operations -
Net investment income $ 2,600,902 $ 3,098,003
Net realized loss on investments (40,278) (409,013)
Net unrealized gain on investments 816,807 136,714
------------ ------------
Increase in net assets from operations $ 3,377,431 $ 2,825,704
------------ ------------
Distributions declared to shareholders -
From net investment income (Class A) $ (2,223,764) $ (2,806,873)
From net investment income (Class B) (253,938) (234,092)
From net investment income (Class C) (70,381) (57,037)
In excess of net investment income (Class A) -- (16,471)
In excess of net investment income (Class B) -- (1,374)
In excess of net investment income (Class C) -- (335)
------------ ------------
Total distributions declared to shareholders $ (2,548,083) $ (3,116,182)
------------ ------------
Fund share (principal) transactions -
Net proceeds from sale of shares $ 21,822,226 $ 34,025,377
Net asset value of shares issued to shareholders in
reinvestment of distributions 1,783,696 2,114,934
Cost of shares reacquired (37,340,487) (52,576,887)
------------ ------------
Decrease in net assets from Fund share transactions $(13,734,565) $(16,436,576)
------------ ------------
Total decrease in net assets $(12,905,217) $(16,727,054)
Net assets:
At beginning of period 74,054,545 90,781,599
------------ ------------
At end of period $ 61,149,328 $ 74,054,545
============ ============
Accumulated undistributed (distributions in excess of)
net investment income $ 6,189 $ (46,630)
============ ============
</TABLE>
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS - continued
<TABLE>
<CAPTION>
Financial Highlights
- - ---------------------------------------------------------------------------------------
Eight
Year Ended Months Year Ended
April 30, Ended August 31,
---------------- April 30, ------------------
1996 1995 1994 1993 1992<F1>
- - ----------------------------------------------------------------------------------------
Class A
- - ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value -
beginning of period $ 7.45 $ 7.47 $ 7.72 $ 7.43 $ 7.31
------- ------- ------- ------- ------
Income from investment operations<F3> -
Net investment income<F9> $ 0.30 $ 0.28 $ 0.19 $ 0.31 $ 0.15
Net realized and
unrealized gain (loss)
on investments 0.08 (0.02) (0.22) 0.30 0.12
------- ------- ------- ------- ------
Total from investment
operations $ 0.38 $ 0.26 $ (0.03) $ 0.61 $ 0.27
------- ------- ------- ------- ------
Less distributions declared to shareholders -
From net investment
income $ (0.30) $ (0.28) $ (0.19)<F7> $ (0.31) $(0.15)<F6>
In excess of net
investment income -- -- <F8> -- -- --
From net realized gain
on investments -- -- -- (0.01) --
In excess of net
realized gain on
investments -- -- (0.03) -- --
------- ------- ------- ------- ------
Total distributions
declared to
shareholders $ (0.30) $ (0.28) $ (0.22) $ (0.32) $(0.15)
------- ------- ------- ------- ------
Net asset value - end of
period $ 7.53 $ 7.45 $ 7.47 $ 7.72 $ 7.43
======= ======= ======= ======= ======
Total return<F4> 5.11% 3.55% (0.59)%<F2> 8.47% (8.26)%<F2>
Ratios (to average net assets)/Supplemental data<F9>:
Expenses<F5> 0.95% 0.95% 0.89%<F2> 0.68% 0.55%<F2>
Net investment income 4.00% 3.74% 3.72%<F2> 4.04% 4.25%<F2>
Portfolio turnover 43% 50% 48% 69% 8%
Net assets at end of
period (000 omitted) $50,387 $64,329 $83,367 $87,192 $21,312
<FN>
<F1>For the period from the commencement of investment operations, March 17, 1992 to August 31, 1992.
<F2>Annualized.
<F3>Per share data for the periods subsequent to April 30, 1994 is based on average shares outstanding.
<F4>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.
<F5>For fiscal years ending after September 1, 1995, the Fund's expenses are calculated without reduction
for fees paid indirectly.
<F6>Includes a per share distribution from paid-in-capital of $0.0007.
<F7>Includes a per share distribution in excess of net investment income of $0.002.
<F8>Includes a per share distribution in excess of net investment income of $0.002.
<F9>The investment adviser did not impose all or a portion of its advisory, distribution or expense
reimbursement fees for the periods indicated. If these fees had been incurred by the Fund, the net
investment income per share and the ratios would have been:
Net investment income $ 0.30 $ 0.28 $ 0.18 $ 0.28 $ 0.13
Ratios (to average net assets):
Expenses 0.99% 0.95% 1.12%<F2> 1.16% 1.16%<F2>
Net investment income 3.96% 3.74% 3.49%<F2> 3.57% 3.64%<F2>
</TABLE>
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS - continued
<TABLE>
<CAPTION>
Financial Highlights - continued
- - ---------------------------------------------------------------------------------------------
Year Ended April 30,
----------------------------------------------------------
1996 1995 1994<F1> 1996 1995<F2>
- - ---------------------------------------------------------------------------------------------
Class B Class C
- - ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value -
beginning of period $ 7.44 $ 7.46 $ 7.75 $ 7.45 $ 7.45
------ ------ ------ ------ ------
Income from investment operations<F5> -
Net investment income<F7> $ 0.25 $ 0.21 $ 0.14 $ 0.23 $ 0.21
Net realized and unrealized
gain (loss) on investments 0.07 (0.02) (0.26) 0.08 (0.02)
------ ------ ------ ------ ------
Total from investment
operations $ 0.32 $ 0.19 $(0.12) $ 0.31 $ 0.19
------ ------ ------ ------ ------
Less distributions declared to shareholders -
From net investment income $(0.24) $(0.21) $(0.13) $(0.23) $(0.19)
In excess of net investment
income -- -- <F6> (0.01) -- -- <F6>
In excess of net realized
gain on investments -- -- (0.03) -- --
------ ------ ------ ------ ------
Total distributions
declared to
shareholders $(0.24) $(0.21) $(0.17) $(0.23) $(0.19)
------ ------ ------ ------ ------
Net asset value - end of period $ 7.52 $ 7.44 $ 7.46 $ 7.53 $ 7.45
====== ====== ====== ====== ======
Total return 4.34% 2.67% (2.37)%<F4> 4.23% 2.53%
Ratios (to average net assets)/Supplemental data<F7>:
Expenses<F3> 1.70% 1.80% 1.74%<F4> 1.80% 1.79%<F4>
Net investment income 3.25% 2.88% 2.79%<F4> 3.16% 2.77%<F4>
Portfolio turnover 43% 50% 48% 43% 50%
Net assets at end of
period (000 omitted) $7,749 $7,792 $7,415 $3,013 $1,934
<FN>
<F1>For the period from the commencement of offering of Class B shares,
September 7, 1993 to April 30, 1994.
<F2>For the period from the commencement of offering of Class C shares,
July 1, 1994 to April 30, 1995.
<F3>For fiscal years ending after September 1, 1995, the Fund's expenses
are calculated without reduction for fees paid indirectly.
<F4>Annualized.
<F5>Per share data for the periods subsequent to April 30, 1994 is based
on average shares outstanding.
<F6>Includes a per share distribution in excess of net investment income of $0.001.
<F7>The investment adviser did not impose all or a portion of its
advisory, distribution or expense reimbursement fees for the periods
indicated. If these fees had been incurred by the Fund, the net
investment income per share and the ratios would have been:
Net investment income $ 0.25 $ 0.21 $ 0.12 $ 0.23 $ 0.21
Ratios (to average net assets):
Expenses 1.74% 1.80% 2.05%<F4> 1.84% 1.79%<F4>
Net investment income 3.21% 2.88% 2.48%<F4> 3.12% 2.77%<F4>
</TABLE>
See notes to financial statements
<PAGE>
NOTES TO FINANCIAL STATEMENTS
(1) Business and Organization
MFS Municipal Limited Maturity Fund (the Fund) is a diversified series of MFS
Fixed Income Trust (the Trust). The Trust is organized as a Massachusetts
business trust and is registered under the Investment Company Act of 1940, as
amended, as an open-end management investment company.
(2) Significant Accounting Policies
General - The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Investment Valuations - Debt securities (other than short-term obligations which
mature in 60 days or less), including listed issues, are valued on the basis of
valuations furnished by dealers or by a pricing service with consideration to
factors such as institutional-size trading in similar groups of securities,
yield, quality, coupon rate, maturity, type of issue, trading characteristics
and other market data, without exclusive reliance upon exchange or
over-the-counter prices. Short-term obligations, which mature in 60 days or
less, are valued at amortized cost, which approximates market value. Futures
contracts, options and options on futures contracts listed on commodities
exchanges are valued at closing settlement prices. Over-the-counter options are
valued by brokers through the use of a pricing model which takes into account
closing bond valuations, implied volatility and short-term repurchase rates.
Securities for which there are no such quotations or valuations are valued at
fair value as determined in good faith by or at the direction of the Trustees.
Deferred Organization Expenses - Costs incurred by the Fund in connection with
its organization have been deferred and are being amortized on a straight-line
basis over a five-year period beginning on the date of commencement of
operations of the Fund.
Written Options - The Fund may write covered call or put options for which
premiums are received and are recorded as liabilities, and are subsequently
adjusted to the current value of the options written. Premiums received from
writing options which expire are treated as realized gains. Premiums received
from writing options which are exercised or are closed are offset against the
proceeds or amount paid on the transaction to determine the realized gain or
loss. If a put option is exercised, the premium reduces the cost basis of the
security purchased by the Fund. The Fund, as writer of an option, may have no
control over whether the underlying security may be sold (call) or purchased
(put) and, as a result, bears the market risk of an unfavorable change in the
price of the securities underlying the written option. In general, written call
options may serve as a partial hedge against decreases in value in the
underlying securities to the extent of the premium received. Written options may
also be used as a part of an income producing strategy reflecting the view of
the Fund's management on the direction of interest rates.
Futures Contracts - The Fund may enter into futures contracts for the delayed
delivery of securities, or indices of such securities, at a fixed price on a
future date. In entering such contracts, the Fund is required to deposit either
in cash or securities an amount equal to a certain percentage of the contract
amount. Subsequent payments are made or received by the Fund each day, depending
on the daily fluctuations in the value of the underlying security, and are
recorded for financial statement purposes as unrealized gains or losses by the
Fund. The Fund's investment in futures contracts is designed to hedge against
anticipated future changes in interest rates. Investments in interest rate
futures for purposes other than hedging may be made to modify the duration of
the portfolio without incurring the additional transaction costs involved in
buying and selling the underlying securities. Should interest rates move
unexpectedly, the Fund may not achieve the anticipated benefits of the futures
contracts and may realize a loss.
Investment Transactions and Income - Investment transactions are recorded on the
trade date. Interest income is recorded on the accrual basis. All premium and
original issue discount are amortized or accreted for financial statement and
tax reporting purposes as required by federal income tax regulations.
Fees Paid Indirectly - The Fund's custodian bank calculates its fee based on the
Fund's average daily net assets. The fee is reduced according to a fee
arrangement, which provides for custody fees to be reduced based on a formula
developed to measure the value of cash deposited with the custodian by the Fund.
This amount is shown as a reduction of expenses on the Statement of Operations.
Tax Matters and Distributions - The Fund's policy is to comply with the
provisions of the Internal Revenue Code (the Code) applicable to regulated
investment companies and to distribute to shareholders all of its net income,
including any net realized gain on investments. Accordingly, no provision for
federal income or excise tax is provided.
The Fund files a tax return annually using tax accounting methods required under
provisions of the Code which may differ from generally accepted accounting
principles, the basis on which these financial statements are prepared.
Accordingly, the amount of net investment income and net realized gain reported
on these financial statements may differ from that reported on the Fund's tax
return, and consequently, the character of distributions to shareholders
reported in the financial highlights may differ from that reported to
shareholders on Form 1099-DIV.
Distributions paid by the Fund from net interest received on tax-exempt
municipal bonds are not includable by shareholders as gross income for federal
income tax purposes because the Fund intends to meet certain requirements of the
Code applicable to regulated investment companies which will enable the Fund to
pay exempt-interest dividends. The portion of such interest, if any, earned on
private activity bonds issued after August 7, 1986, may be considered a
tax-preference item to shareholders. Distributions to shareholders are recorded
on the ex-dividend date.
The Fund distinguishes between distributions on a tax basis and a financial
reporting basis and requires that only distributions in excess of tax basis
earnings and profits are reported in the financial statements as a tax return of
capital. Differences in the recognition or classification of income between the
financial statements and tax earnings and profits which result in temporary
over-distributions for financial statement purposes, are classified as
distributions in excess of net investment income or accumulated net realized
gains.
Multiple Classes of Shares of Beneficial Interest - The Fund offers Class A,
Class B, and Class C shares. The three classes of shares differ in their
respective shareholder servicing agent, distribution, and service fees. All
shareholders bear the common expenses of the Fund pro rata based on the average
daily net assets of each class, without distinction between share classes.
Dividends are declared separately for each class. No class has preferential
dividend rights; differences in per share dividend rates are generally due to
differences in separate class expenses.
(3) Transactions with Affiliates
Investment Adviser - The Fund has an investment advisory agreement with
Massachusetts Financial Services Company (MFS) to provide overall investment
advisory and administrative services, and general office facilities. The
management fee is computed daily and paid monthly at an effective annual rate of
0.40% of average daily net assets.
Under a temporary expense reimbursement agreement with MFS, MFS has voluntarily
agreed to pay all of the Fund's operating expenses, exclusive of management,
distribution and service fees, until February 28, 2002 or the date upon which
operating expenses attributable to the Fund are repaid. To accomplish such
reimbursement, the Fund pays an expense reimbursement fee to MFS of 0.40% of
average daily net assets. The cumulative unreimbursed amount subject to
reimbursement by the Fund at April 30, 1996 amounted to $154,343. For the year
ended April 30, 1996, MFS paid expenses amounting to $294,246, of which the Fund
reimbursed $268,312. The difference ($25,934) is reflected as a reduction of
expenses on the Statement of Operations.
The Fund pays no compensation directly to its Trustees who are officers of the
investment adviser, or to officers of the Fund, all of whom receive remuneration
for their services to the Fund from MFS. Certain of the officers and Trustees of
the Fund are officers or directors of MFS, MFS Fund Distributors, Inc. (MFD) and
MFS Service Center, Inc. (MFSC). The Fund has an unfunded defined benefit plan
for all of its independent Trustees and Mr. Bailey. Included in Trustees'
compensation is a net periodic pension expense of $2,344 for the year ended
April 30, 1996.
Distributor - MFD, a wholly owned subsidiary of MFS, as distributor, received
$11,207 as its portion of the sales charge on sales of Class A shares of the
Fund. The Trustees have adopted a separate distribution plan for Class A, Class
B, and Class C shares pursuant to Rule 12b-1 of the Investment Company Act of
1940 as follows:
The Class A distribution plan provides that the Fund will pay MFD up to 0.35%
per annum of its average daily net assets attributable to Class A shares in
order that MFD may pay expenses on behalf of the Fund related to the
distribution and servicing of its shares. These expenses include a service fee
to each securities dealer that enters into a sales agreement with MFD of up to
0.25% per annum (reduced to a maximum of 0.15% per annum for an indefinite
period) of the Fund's average daily net assets attributable to Class A shares
which are attributable to that securities dealer, a distribution fee to MFD of
up to 0.10% per annum of the Fund's average daily net assets attributable to
Class A shares, commissions to dealers and payments to MFD wholesalers for sales
at or above a certain dollar level, and other such distribution-related expenses
that are approved by the Fund. MFD retains the service fee for accounts not
attributable to a securities dealer which amounted to $10,411 for the year ended
April 30, 1996. MFD is not imposing the 0.10% distribution fee for an indefinite
period. Fees incurred under the distribution plan during the year ended April
30, 1996, were 0.15% of average daily net assets attributable to Class A shares
on an annualized basis.
The Class B and Class C distribution plans provide that the Fund will pay MFD a
monthly distribution fee of 0.75% per annum, and a quarterly service fee of up
to 0.25% per annum, of the Fund's average daily net assets attributable to Class
B and Class C shares. MFD will pay to securities dealers that enter into a sales
agreement with MFD all or a portion of the service fee attributable to Class B
and Class C shares, and will pay to such securities dealers all of the
distribution fee attributable to Class C shares. The service fee is intended to
be additional consideration for services rendered by the dealer with respect to
Class B and Class C shares. MFD retains the service fee for accounts not
attributable to a securities dealer, which amounted to $580 and $36 for Class B
and Class C shares, respectively, for the year ended April 30, 1996. Fees
incurred under the distribution plans during the year ended April 30, 1996, were
1.00% of average daily net assets attributable to Class B and Class C shares on
an annualized basis.
Purchases over $1 million into Class A shares and certain purchases by
retirement plans are subject to a contingent deferred sales charge in the event
of a shareholder redemption within twelve months following such purchase. A
contingent deferred sales charge is imposed on shareholder redemptions of Class
B shares in the event of a shareholder redemption within six years of purchase.
MFD receives all contingent deferred sales charges. Contingent deferred sales
charges imposed during the year ended April 30, 1996, were $112 and $33,644 for
Class A and Class B shares, respectively.
Shareholder Servicing Agent - MFSC, a wholly owned subsidiary of MFS, earns a
fee for its services as shareholder servicing agent. The fee is calculated as a
percentage of the average daily net assets of each class of shares at an
effective annual rate of up to 0.15%, up to 0.22%, and up to 0.15% attributable
to Class A, Class B, and Class C shares, respectively.
(4) Portfolio Securities
Purchases and sales of investments, other than purchased option transactions and
short-term obligations, aggregated $28,159,825 and $48,571,531, respectively.
The cost and unrealized appreciation or depreciation in value of the investments
owned by the Fund, as computed on a federal income tax basis, are as follows:
Aggregate cost $56,455,817
===========
Gross unrealized appreciation $ 613,681
Gross unrealized depreciation (66,088)
-----------
Net unrealized appreciation $ 547,593
===========
At April 30, 1996, the Fund, for federal income tax purposes, had a capital loss
carryforward of $830,991, which may be applied against any net taxable realized
gains of each succeeding year until the earlier of its utilization or expiration
on April 30, 2004.
(5) Shares of Beneficial Interest
The Fund's Declaration of Trust permits the Trustees to issue an unlimited
number of full and fractional shares of beneficial interest (without par value).
Transactions in Fund shares were as follows:
Class A Shares 1996 1995
Year Ended April --------------------------- ---------------------------
30, Shares Amount Shares Amount
- - -----------------------------------------------------------------------------
Shares sold 1,999,874 $ 15,164,604 3,162,482 $ 23,485,000
Shares issued to
shareholders in
reinvestment of
distributions 206,976 1,568,611 256,666 1,915,510
Shares reacquired (4,146,143) (31,416,230) (5,948,248) (44,193,995)
---------- ------------- ---------- -------------
Net decrease (1,939,293) $ (14,683,015) (2,529,100) $ (18,793,485)
========== ============= ========== =============
Class B Shares
1996 1995
Year Ended April --------------------------- ---------------------------
30, Shares Amount Shares Amount
- - -----------------------------------------------------------------------------
Shares sold 395,418 $ 2,988,803 502,731 $ 3,735,135
Shares issued to
shareholders in
reinvestment of
distributions 19,614 148,492 20,109 149,528
Shares reacquired (431,218) (3,263,193) (469,653) (3,479,709)
------- ----------- ------- -----------
Net increase
(decrease) (16,186) $ (125,898) 53,187 $ 404,954
======= =========== ======= ===========
Class C Shares
1996 1995*
Year Ended April --------------------------- ---------------------------
30, Shares Amount Shares Amount
- - -----------------------------------------------------------------------------
Shares sold 483,511 $ 3,668,819 915,597 $ 6,805,242
Shares issued to
shareholders in
reinvestment of
distributions 8,781 66,593 6,704 49,896
Shares reacquired (351,660) (2,661,064) (662,727) (4,903,183)
-------- ------------ -------- ------------
Net increase 140,632 $ 1,074,348 259,574 $ 1,951,955
======= ============ ======= ============
*For the period from commencement of offering of Class C shares, July 1, 1994 to
April 30, 1995.
(6) Line of Credit
The Fund entered into an agreement which enables it to participate with other
funds managed by MFS in an unsecured line of credit with a bank which permits
borrowings up to $350 million, collectively. Borrowings may be made to
temporarily finance the repurchase of Fund shares. Interest is charged to each
fund, based on its borrowings, at a rate equal to the bank's base rate. In
addition, a commitment fee, based on the average daily unused portion of the
line of credit, is allocated among the participating funds at the end of each
quarter. The commitment fee allocated to the Fund for the year ended April 30,
1996 was $792.
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Trustees of MFS Series Trust
IX and Shareholders of MFS Municipal
Limited Maturity Fund:
We have audited the accompanying statement of assets and liabilities, including
the portfolio of investments, of MFS Municipal Limited Maturity Fund (of the
series constituting MFS Series Trust IX) as of April 30, 1996, the related
statement of operations for the year then ended, the statement of changes in net
assets for the years ended April 30, 1996 and 1995, and the financial highlights
for each of the years in the five-year period ended April 30, 1996. These
financial statements and financial highlights are the responsibility of the
Fund's management. Our responsibility is to express an opinion on these
financial statements and financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of the securities owned at
April 30, 1996 by correspondence with the custodian and brokers; where replies
were not received from brokers, we performed other auditing procedures. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of MFS Municipal
Limited Maturity Fund at April 30, 1996, the results of its operations, the
changes in its net assets, and its financial highlights for the respective
stated periods in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Boston, Massachusetts
June 7, 1996
---------------------------------------------
This report is prepared for the general information of shareholders. It is
authorized for distribution to prospective investors only when preceded or
accompanied by a current prospectus.
<PAGE>
MFS(R) MUNICIPAL -------------
LIMITED MATURITY [DALBAR LOGO] BULK RATE
FUND U.S. POSTAGE
PAID
500 Boylston Street PERMIT #55638
Boston, MA 02116 BOSTON, MA
-------------
[LOGO] MFS(R)
THE FIRST NAME IN MUTUAL FUNDS
MML-2 6/96 7M 37/237/337
<PAGE>
PART C
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS
MFS BOND FUND
(A) FINANCIAL STATEMENTS INCLUDED IN PART A:
For the ten years ended April 30, 1996
Financial Highlights
FINANCIAL STATEMENTS INCLUDED IN PART B:
At April 30, 1996:
Portfolio of Investments*
Statement of Assets and Liabilities*
For the two years ended April 30, 1996:
Statement of Changes in Net Assets*
For the year ended April 30, 1996:
Statement of Operations*
- - ---------------------
* Incorporated herein by reference to the Fund's Annual Report to Shareholders
dated April 30, 1996, filed with the SEC on July 12, 1996.
<PAGE>
MFS LIMITED MATURITY FUND
(A) FINANCIAL STATEMENTS INCLUDED IN PART A:
For the period from the commencement of investment operations on
February 26, 1992 to April 30, 1992 and for the four years ended
April 30, 1996:
Financial Highlights
FINANCIAL STATEMENTS INCLUDED IN PART B:
At April 30, 1996:
Portfolio of Investments*
Statement of Assets and Liabilities*
For the two years ended April 30, 1996:
Statement of Changes in Net Assets*
For the year ended April 30, 1996:
Statement of Operations*
- - ----------------------------
* Incorporated herein by reference to the Fund's Annual Report to Shareholders
dated April 30, 1996, filed with the SEC on July 1, 1996.
MFS MUNICIPAL LIMITED MATURITY FUND
(A) FINANCIAL STATEMENTS INCLUDED IN PART A:
For the period from the commencement of investment operations
on March 17, 1992 to August 31, 1992, for the year ended August
31, 1993, for the eight months ended April 30, 1994 and for the
two years ended April 30, 1996:
Financial Highlights
FINANCIAL STATEMENTS INCLUDED IN PART B:
At April 30, 1996:
Portfolio of Investments*
Statement of Assets and Liabilities*
For the two years ended April 30, 1996:
Statement of Changes in Net Assets*
For the year ended April 30, 1996:
Statement of Operations*
- - -------------------------
* Incorporated herein by reference to the Fund's Annual Report to Shareholders
dated April 30, 1996, filed with the SEC on July 3, 1996.
(B) EXHIBITS
1(a) Amended and Restated Declaration of Trust dated February
17, 1995. (4);
(b) Amendment to the Declaration of Trust Designation of Class
P Shares dated June 20, 1996; filed herewith.
2 Amended and Restated By-Laws, dated December 21, 1994. (4)
3 Not Applicable.
4 Form of Share Certificate for Classes of Shares. (6)
5(a) Investment Advisory Agreement dated December 2, 1985 by and
between MFS Bond Fund and Massachusetts Financial Services
Company. (4)
(b) Investment Advisory Agreement dated January 8, 1992 by and
between MFS Fixed Income Trust on behalf of MFS Limited
Maturity Fund. (4)
(c) Investment Advisory Agreement dated September 1, 1993 by
and between MFS Fixed Income Trust on behalf of MFS
Municipal Limited Maturity Fund. (4)
6(a) Amended and Restated Distribution Agreement for MFS Series
Trust IX dated January 1, 1995. (4)
(b) Dealer Agreement between MFS Fund Distributors, Inc.
("MFD"), and a dealer dated December 28, 1994 and the
Mutual Fund Agreement between MFD and a bank or NASD
affiliate, dated December 28, 1994. (1)
7 Retirement Plan for Non-Interested Trustees, dated
January 1, 1991. (4)
8(a) Custodian Contract between Registrant on behalf of MFS
Municipal Limited Maturity Fund and State Street Bank and
Trust Company dated April 25, 1988. (4)
(b) Amendment to Custodian Contract between Registrant on
behalf of MFS Municipal Limited Maturity Fund and State
Street Bank and Trust Company dated April 25, 1988. (4)
(c) Amendment to Custodian Contract between Registrant on
behalf of MFS Municipal Limited Maturity Fund and State
Street Bank and Trust Company dated September 20,
1989. (4)
(d) Amendment to Custodian Contract between Registrant on
behalf of MFS Municipal Limited Maturity Fund and State
Street Bank and Trust Company dated October 1, 1989. (4)
(e) Custodian Contract between Registrant on behalf of MFS Bond
Fund and MFS Limited Maturity Fund and Investors Bank &
Trust Company dated August 1, 1991. (4)
(f) Amendment to Custodian Contract between Registrant on
behalf of MFS Bond Fund and MFS Limited Maturity Fund and
Investors Bank & Trust Company dated April 21, 1992. (4)
9(a) Shareholder Servicing Agreement between Registrant and
Massachusetts Financial Service Center dated December 2,
1985. (4)
(b) Form of Amendment to Shareholder Servicing Agent Agreement;
filed herewith.
(c) Exchange Privilege Agreement dated September 1, 1995. (5)
(d) Loan Agreement by and among The Banks Named Therein, The
MFS Funds Named Therein, and The First National Bank of
Boston as Agent, dated February 21, 1995. (2)
(e) Dividend Disbursing Agency Agreement among MFS Funds and
State Street Bank and Trust Company, dated February 1,
1986. (3)
10 Consent and Opinion of Counsel previously filed with Rule
24f-2 Notice on June 25, 1996.
11 Consent of Deloitte & Touche LLP; filed herewith.
12 Not Applicable.
13 Investment Representation Letters (MFS Limited Maturity
Fund). (4)
14(a) Forms for Individual Retirement Account Disclosure
Statement as currently in effect. (4)
(b) Forms for MFS 403(b) Custodial Account Agreement as
currently in effect. (4)
(c) Forms for MFS Prototype Paired Defined Contribution Plans
as Trust Agreement as currently in effect. (4).
15 (a) Amended and Restated Distribution Plan for Class A shares
of MFS Bond Fund, dated December 21, 1994. (4)
(b) Distribution Plan for Class B shares of MFS Bond Fund,
dated December 21, 1994. (4)
(c) Distribution Plan for Class C shares of MFS Bond Fund,
dated December 21, 1994. (4)
(d) Amended and Restated Distribution Plan for Class A shares
of MFS Limited Maturity Fund, dated December 21, 1994. (4)
(e) Distribution Plan for Class B shares of MFS Limited
Maturity Fund, dated December 21, 1994. (4)
(f) Distribution Plan for Class C shares of MFS Limited
Maturity Fund, dated December 21, 1994. (4)
(g) Amended and Restated Distribution Plan for Class A
shares of MFS Municipal Limited Maturity Fund, dated
December 21, 1994. (4)
(h) Distribution Plan for Class B shares of MFS Municipal
Limited Maturity Fund, dated December 21, 1994. (4)
(i) Distribution Plan for Class C shares of MFS Municipal
Limited Maturity Fund, dated December 21, 1994. (4)
16 Schedule for Computation of Performance Quotations - Yield,
Tax Equivalent Yield, Distribution Rate, Total Rate of
Return and Aggregate Total Rate of Return for the
Registrant. (1)
17 Financial Data Schedules for each class of each series;
filed herewith.
18 Plan pursuant to Rule 18f-3(d) under the Investment Company
Act of 1940.
Power of Attorney, dated September 21, 1994. (4)
- - -----------------------------
(1) Incorporated by reference to MFS Municipal Series Trust (File Nos. 2-92915
and 811-4096) Post-Effective Amendment No. 26 filed with the SEC via EDGAR
on February 22, 1995.
(2) Incorporated by reference to Amendment No. 8 on Form N-2 for MFS Municipal
Income Trust (File Nos. 33-8850 and 811-4841) filed with the SEC via EDGAR
on February 28, 1995.
(3) Incorporated by reference to MFS Municipal Series Trust (File Nos. 2-92915
and 811-4096) Post-Effective Amendment No. 28 filed with the SEC via EDGAR
on July 28, 1995.
(4) Incorporated by reference to Registrant's Amendment No. 32 filed with the
SEC via EDGAR on August 28, 1995.
(5) Incorporated by reference to MFS Series Trust X (File Nos. 33-1657 and
811-4492) Post-Effective Amendment No. 13 filed with the SEC via EDGAR on
November 28, 1995.
(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 26, 1996.
ITEM 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT
Not applicable.
ITEM 26. NUMBER OF HOLDERS OF SECURITIES
FOR MFS BOND FUND
(1) (2)
TITLE OF CLASS NUMBER OF RECORD HOLDERS
Shares of Beneficial Interest Class A shares - 44,146
(without par value) Class B shares - 9,881
Class C shares - 768
Class P shares - 0
(as of July 31, 1996)
FOR MFS LIMITED MATURITY FUND
(1) (2)
TITLE OF CLASS NUMBER OF RECORD HOLDERS
Shares of Beneficial Interest Class A shares - 3,551
(without par value) Class B shares - 1,482
Class C shares - 544
Class P shares - 0
(as of July 31, 1996)
FOR MFS MUNICIPAL LIMITED MATURITY FUND
(1) (2)
TITLE OF CLASS NUMBER OF RECORD HOLDERS
Shares of Beneficial Interest Class A shares - 1,442
(without par value) Class B shares - 187
Class C shares - 77
(as of July 31, 1996)
ITEM 27. INDEMNIFICATION
The Trustees and officers of the Trust and the personnel of the Trust's
investment adviser and principal underwriter are insured under an errors and
omissions liability insurance policy. The Trust and its officers are also
insured under the fidelity bond required by Rule 17g-1 under the Investment
Company Act of 1940, as amended.
Reference is hereby made to (a) Article V of the Trust's Declaration of
Trust and (b) Section 4 of the Distribution Agreement between the Trust and MFS
Fund Distributors, Inc., each incorporated by reference to the Registrant's
Post-Effective Amendment No. 32 filed with the SEC via EDGAR on August 28, 1995.
The Trustees and officers of the Registrant and the personnel of the
Registrant's investment adviser and principal underwriter are insured under an
errors and omissions liability insurance policy. The Registrant and its officers
are also insured under the fidelity bond required by Rule 17g-1 under the
Investment Company Act of 1940.
ITEM 28. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER
MFS serves as investment adviser to the following open-end Funds
comprising the MFS Family of Funds: Massachusetts Investors Trust, Massachusetts
Investors Growth Stock Fund, MFS Growth Opportunities Fund, MFS Government
Securities Fund, MFS Government Limited Maturity Fund, MFS Series Trust I (which
has eight series: MFS Managed Sectors Fund, MFS Cash Reserve Fund, MFS World
Asset Allocation Fund, MFS Aggressive Growth Fund, MFS Research Growth and
Income Fund, MFS Core Growth Fund, MFS Equity Income Fund and MFS Special
Opportunities Fund), MFS Series Trust II (which has four series: MFS Emerging
Growth Fund, MFS Capital Growth Fund, MFS Intermediate Income Fund and MFS Gold
& Natural Resources Fund), MFS Series Trust III (which has two series: MFS High
Income Fund and MFS Municipal High Income Fund), MFS Series Trust IV (which has
four series: MFS Money Market Fund, MFS Government Money Market Fund, MFS
Municipal Bond Fund and MFS OTC Fund), MFS Series Trust V (which has two series:
MFS Total Return Fund and MFS Research Fund), MFS Series Trust VI (which has
three series: MFS World Total Return Fund, MFS Utilities Fund and MFS World
Equity Fund), MFS Series Trust VII (which has two series: MFS World Governments
Fund and MFS Value Fund), MFS Series Trust VIII (which has two series: MFS
Strategic Income Fund and MFS World Growth Fund), MFS Series Trust IX (which has
three series: MFS Bond Fund, MFS Limited Maturity Fund and MFS Municipal Limited
Maturity Fund), MFS Series Trust X (which has four series: MFS Government
Mortgage Fund, MFS/Foreign & Colonial Emerging Markets Equity Fund, MFS/Foreign
& Colonial International Growth Fund and MFS/Foreign & Colonial International
Growth and Income Fund), and MFS Municipal Series Trust (which has 16 series:
MFS Alabama Municipal Bond Fund, MFS Arkansas Municipal Bond Fund, MFS
California Municipal Bond Fund, MFS Florida Municipal Bond Fund, MFS Georgia
Municipal Bond Fund, MFS Maryland Municipal Bond Fund, MFS Massachusetts
Municipal Bond Fund, MFS Mississippi Municipal Bond Fund, MFS New York Municipal
Bond Fund, MFS North Carolina Municipal Bond Fund, MFS Pennsylvania Municipal
Bond Fund, MFS South Carolina Municipal Bond Fund, MFS Tennessee Municipal Bond
Fund, MFS Virginia Municipal Bond Fund, MFS West Virginia Municipal Bond Fund
and MFS Municipal Income Fund) (the "MFS Funds"). The principal business address
of each of the aforementioned Funds is 500 Boylston Street, Boston,
Massachusetts 02116.
MFS also serves as investment adviser of the following no-load,
open-end Funds: MFS Institutional Trust ("MFSIT") (which has seven series), MFS
Variable Insurance Trust ("MVI") (which has twelve series) and MFS Union
Standard Trust ("UST") (which has two series). The principal business address of
each of the aforementioned Funds is 500 Boylston Street, Boston, Massachusetts
02116.
In addition, MFS serves as investment adviser to the following
closed-end Funds: MFS Municipal Income Trust, MFS Multimarket Income Trust, MFS
Government Markets Income Trust, MFS Intermediate Income Trust, MFS Charter
Income Trust and MFS Special Value Trust (the "MFS Closed-End Funds"). The
principal business address of each of the aforementioned Funds is 500 Boylston
Street, Boston, Massachusetts 02116.
Lastly, MFS serves as investment adviser to MFS/Sun Life Series Trust
("MFS/SL"), Sun Growth Variable Annuity Funds, Inc. ("SGVAF"), Money Market
Variable Account, High Yield Variable Account, Capital Appreciation Variable
Account, Government Securities Variable Account, World Governments Variable
Account, Total Return Variable Account and Managed Sectors Variable Account. The
principal business address of each is One Sun Life Executive Park, Wellesley
Hills, Massachusetts 02181.
MFS International Ltd. ("MIL"), a limited liability company organized
under the laws of the Republic of Ireland and a subsidiary of MFS, whose
principal business address is 41-45 St. Stephen's Green, Dublin 2, Ireland,
serves as investment adviser to and distributor for MFS International Fund
(which has four portfolios: MFS International Funds-U.S. Equity Fund, MFS
International Funds-U.S. Emerging Growth Fund, MFS International Funds-Global
Governments Fund, MFS International Funds - U.S. Dollar Reserve Fund and MFS
International Funds-Charter Income Fund) (the "MIL Funds"). The MIL Funds are
organized in Luxembourg and qualify as an undertaking for collective investments
in transferable securities (UCITS). The principal business address of the MIL
Funds is 47, Boulevard Royal, L-2449 Luxembourg.
MIL also serves as investment adviser to and distributor for MFS
Meridian U.S. Government Bond Fund, MFS Meridian Charter Income Fund, MFS
Meridian Global Government Fund, MFS Meridian U.S. Emerging Growth Fund, MFS
Meridian Global Equity Fund, MFS Meridian Limited Maturity Fund, MFS Meridian
World Growth Fund, MFS Meridian Money Market Fund, MFS Meridian World Total
Return Fund, MFS Meridian U.S. Equity Fund and MFS Meridian Research Fund
(collectively the "MFS Meridian Funds"). Each of the MFS Meridian Funds is
organized as an exempt company under the laws of the Cayman Islands. The
principal business address of each of the MFS Meridian Funds is P.O. Box 309,
Grand Cayman, Cayman Islands, British West Indies.
MFS International (U.K.) Ltd. ("MIL-UK"), a private limited company
registered with the Registrar of Companies for England and Wales whose current
address is 4 John Carpenter Street, London, England ED4Y 0NH, is involved
primarily in marketing and investment research activities with respect to
private clients and the MIL Funds and the MFS Meridian Funds.
MFS Fund Distributors, Inc. ("MFD"), a wholly owned subsidiary of MFS,
serves as distributor for the MFS Funds, MVI, UST and MFSIT.
Clarendon Insurance Agency, Inc. ("CIAI"), a wholly owned subsidiary of
MFS, serves as distributor for certain life insurance and annuity contracts
issued by Sun Life Assurance Company of Canada (U.S.).
MFS Service Center, Inc. ("MFSC"), a wholly owned subsidiary of MFS,
serves as shareholder servicing agent to the MFS Funds, the MFS Closed-End
Funds, MFSIT, MVI and UST.
MFS Asset Management, Inc. ("AMI"), a wholly owned subsidiary of MFS,
provides investment advice to substantial private clients.
MFS Retirement Services, Inc. ("RSI"), a wholly owned subsidiary of
MFS, markets MFS products to retirement plans and provides administrative and
record keeping services for retirement plans.
MFS
The Directors of MFS are A. Keith Brodkin, Jeffrey L. Shames, Arnold D.
Scott, John R. Gardner and John D. McNeil. Mr. Brodkin is the Chairman, Mr.
Shames is the President, Mr. Scott is a Senior Executive Vice President and
Secretary, Bruce C. Avery, William S. Harris, William W. Scott, Jr., and
Patricia A. Zlotin are Executive Vice Presidents, Stephen E. Cavan is a Senior
Vice President, General Counsel and an Assistant Secretary, Joseph W. Dello
Russo is a Senior Vice President, Chief Financial Officer and Treasurer, Robert
T. Burns is a Vice President, Associate General Counsel and an Assistant
Secretary of MFS, and Thomas B. Hastings is a Vice President and Assistant
Treasurer.
MASSACHUSETTS INVESTORS TRUST
MASSACHUSETTS INVESTORS GROWTH STOCK FUND
MFS GROWTH OPPORTUNITIES FUND
MFS GOVERNMENT SECURITIES FUND
MFS SERIES TRUST I
MFS SERIES TRUST V
MFS SERIES TRUST VI
MFS SERIES TRUST X
MFS GOVERNMENT LIMITED MATURITY FUND
A. Keith Brodkin is the Chairman and President, Stephen E. Cavan is the
Secretary, W. Thomas London is the Treasurer, James O. Yost, Vice President of
MFS, is the Assistant Treasurer, James R. Bordewick, Jr., Vice President and
Associate General Counsel of MFS, is the Assistant Secretary.
MFS SERIES TRUST II
A. Keith Brodkin is the Chairman and President, Leslie J. Nanberg,
Senior Vice President of MFS, is a Vice President, Stephen E. Cavan is the
Secretary, W. Thomas London is the Treasurer, James O. Yost is the Assistant
Treasurer, and James R. Bordewick, Jr., is the Assistant Secretary.
MFS GOVERNMENT MARKETS INCOME TRUST
MFS INTERMEDIATE INCOME TRUST
A. Keith Brodkin is the Chairman and President, Patricia A. Zlotin,
Executive Vice President of MFS and Leslie J. Nanberg, Senior Vice President of
MFS, are Vice Presidents, Stephen E. Cavan is the Secretary, W. Thomas London is
the Treasurer, James O. Yost is the Assistant Treasurer, and James R. Bordewick,
Jr., is the Assistant Secretary.
MFS SERIES TRUST III
A. Keith Brodkin is the Chairman and President, James T. Swanson,
Robert J. Manning, Cynthia M. Brown and Joan S. Batchelder, Senior Vice
Presidents of MFS, Bernard Scozzafava, Vice President of MFS, and Matthew
Fontaine, Assistant Vice President of MFS, are Vice Presidents, Sheila
Burns-Magnan and Daniel E. McManus, Assistant Vice Presidents of MFS, are
Assistant Vice Presidents, Stephen E. Cavan is the Secretary, W. Thomas London
is the Treasurer, James O. Yost is the Assistant Treasurer, and James R.
Bordewick, Jr., is the Assistant Secretary.
MFS SERIES TRUST IV
MFS SERIES TRUST IX
A. Keith Brodkin is the Chairman and President, Robert A. Dennis and
Geoffrey L. Kurinsky, Senior Vice Presidents of MFS, are Vice Presidents,
Stephen E. Cavan is the Secretary, W. Thomas London is the Treasurer, James O.
Yost is the Assistant Treasurer and James R. Bordewick, Jr., is the Assistant
Secretary.
MFS SERIES TRUST VII
A. Keith Brodkin is the Chairman and President, Leslie J. Nanberg and
Stephen C. Bryant, Senior Vice Presidents of MFS, are Vice Presidents, Stephen
E. Cavan is the Secretary, W. Thomas London is the Treasurer, James O. Yost is
the Assistant Treasurer and James R. Bordewick, Jr., is the Assistant Secretary.
MFS SERIES TRUST VIII
A. Keith Brodkin is the Chairman and President, Jeffrey L. Shames,
Leslie J. Nanberg, Patricia A. Zlotin, James T. Swanson and John D. Laupheimer,
Jr., Vice President of MFS, are Vice Presidents, Stephen E. Cavan is the
Secretary, W. Thomas London is the Treasurer, James O. Yost is the Assistant
Treasurer and James R. Bordewick, Jr., is the Assistant Secretary.
MFS MUNICIPAL SERIES TRUST
A. Keith Brodkin is the Chairman and President, Cynthia M. Brown and
Robert A. Dennis are Vice Presidents, David B. Smith, Geoffrey L. Schechter and
David R. King, Vice Presidents of MFS, are Vice Presidents, Daniel E. McManus,
Assistant Vice President of MFS, is an Assistant Vice President, Stephen E.
Cavan is the Secretary, W. Thomas London is the Treasurer, James O. Yost is the
Assistant Treasurer and James R. Bordewick, Jr., is the Assistant Secretary.
MFS VARIABLE INSURANCE TRUST
MFS UNION STANDARD TRUST
MFS INSTITUTIONAL TRUST
A. Keith Brodkin is the Chairman and President, Stephen E. Cavan is the
Secretary, W. Thomas London is the Treasurer, James O. Yost is the Assistant
Treasurer and James R. Bordewick, Jr., is the Assistant Secretary.
MFS MUNICIPAL INCOME TRUST
A. Keith Brodkin is the Chairman and President, Cynthia M. Brown and
Robert J. Manning are Vice Presidents, Stephen E. Cavan is the Secretary, W.
Thomas London is the Treasurer, James O. Yost, is the Assistant Treasurer and
James R. Bordewick, Jr., is the Assistant Secretary.
MFS MULTIMARKET INCOME TRUST
MFS CHARTER INCOME TRUST
A. Keith Brodkin is the Chairman and President, Patricia A. Zlotin,
Leslie J. Nanberg and James T. Swanson are Vice Presidents, Stephen E. Cavan is
the Secretary, W. Thomas London is the Treasurer, James O. Yost, Vice President
of MFS, is the Assistant Treasurer and James R. Bordewick, Jr., is the Assistant
Secretary.
MFS SPECIAL VALUE TRUST
A. Keith Brodkin is the Chairman and President, Jeffrey L. Shames,
Patricia A. Zlotin and Robert J. Manning are Vice Presidents, Stephen E. Cavan
is the Secretary, W. Thomas London is the Treasurer, and James O. Yost, is the
Assistant Treasurer and James R. Bordewick, Jr., is the Assistant Secretary.
SGVAF
W. Thomas London is the Treasurer.
MIL
A. Keith Brodkin is a Director and the Chairman, Arnold D. Scott and
Jeffrey L. Shames are Directors, Ziad Malek, Senior Vice President of MFS, is
the President, Thomas J. Cashman, Jr., a Senior Vice President of MFS, is a
Senior Vice President, Stephen E. Cavan is a Director, Senior Vice President and
the Clerk, James R. Bordewick, Jr. is a Director, Vice President and an
Assistant Clerk, Robert T. Burns is an Assistant Clerk, Joseph W. Dello Russo is
the Treasurer and Thomas B. Hastings is the Assistant Treasurer.
MIL-UK
A. Keith Brodkin is a Director and the Chairman, Arnold D. Scott,
Jeffrey L. Shames, and James R. Bordewick, Jr., are Directors, Stephen E. Cavan
is a Director and the Secretary, Ziad Malek is the President, James E. Russell
is the Treasurer, and Robert T. Burns is the Assistant Secretary.
MIL FUNDS
A. Keith Brodkin is the Chairman, President and a Director, Richard B.
Bailey, John A. Brindle, Richard W. S. Baker and William F. Waters are
Directors, Stephen E. Cavan is the Secretary, W. Thomas London is the Treasurer,
James O. Yost is the Assistant Treasurer and James R. Bordewick, Jr., is the
Assistant Secretary, and Ziad Malek is a Senior Vice President.
MFS MERIDIAN FUNDS
A. Keith Brodkin is the Chairman, President and a Director, Richard B.
Bailey, John A. Brindle, Richard W. S. Baker, Arnold D. Scott, Jeffrey L. Shames
and William F. Waters are Directors, Stephen E. Cavan is the Secretary, W.
Thomas London is the Treasurer, James R. Bordewick, Jr., is the Assistant
Secretary, James O. Yost is the Assistant Treasurer, and Ziad Malek is a Senior
Vice President.
MFD
A. Keith Brodkin is the Chairman and a Director, Arnold D. Scott and
Jeffrey L. Shames are Directors, William W. Scott, Jr., an Executive Vice
President of MFS, is the President, Stephen E. Cavan is the Secretary, Robert T.
Burns is the Assistant Secretary, Joseph W. Dello Russo is the Treasurer, and
Thomas B. Hastings is the Assistant Treasurer.
CIAI
A. Keith Brodkin is the Chairman and a Director, Arnold D. Scott and
Jeffrey L. Shames are Directors, Cynthia Orcott is President, Bruce C. Avery is
the Vice President, Joseph W. Dello Russo is the Treasurer, Thomas B. Hastings
is the Assistant Treasurer, Stephen E. Cavan is the Secretary, and Robert T.
Burns is the Assistant Secretary.
MFSC
A. Keith Brodkin is the Chairman and a Director, Arnold D. Scott and
Jeffrey L. Shames are Directors, Joseph A. Recomendes, a Senior Vice President
of MFS, is Vice Chairman and a Director, Janet A. Clifford is the Executive Vice
President, Joseph W. Dello Russo is the Treasurer, Thomas B. Hastings is the
Assistant Treasurer, Stephen E. Cavan is the Secretary, and Robert T. Burns is
the Assistant Secretary.
AMI
A. Keith Brodkin is the Chairman and a Director, Jeffrey L. Shames, and
Arnold D. Scott are Directors, Thomas J. Cashman, Jr., is the President and a
Director, Leslie J. Nanberg is a Senior Vice President, a Managing Director and
a Director, George F. Bennett, Carol A. Corley, John A. Gee, Brianne Grady and
Kevin R. Parke are Senior Vice Presidents and Managing Directors, Joseph W.
Dello Russo is the Treasurer, Thomas B. Hastings is the Assistant Treasurer and
Robert T. Burns is the Secretary.
RSI
William W. Scott, Jr. and Bruce C. Avery are Directors, Arnold D. Scott
is the Chairman and a Director, Joseph W. Dello Russo is the Treasurer, Thomas
B. Hastings is the Assistant Treasurer, Stephen E. Cavan is the Secretary,
Robert T. Burns is the Assistant Secretary and Sharon A. Brovelli and Martin E.
Beaulieu are Senior Vice Presidents.
In addition, the following persons, Directors or officers of MFS, have
the affiliations indicated:
A. Keith Brodkin Director, Sun Life Assurance Company of
Canada (U.S.), One Sun Life Executive Park,
Wellesley Hills, Massachusetts
Director, Sun Life Insurance and Annuity
Company of New York, 67 Broad Street, New
York, New York
John R. Gardner President and a Director, Sun Life Assurance
Company of Canada, Sun Life Centre, 150
King Street West, Toronto, Ontario, Canada
(Mr. Gardner is also an officer and/or
Director of various subsidiaries and
affiliates of Sun Life)
John D. McNeil Chairman, Sun Life Assurance Company of
Canada, Sun Life Centre, 150 King Street
West, Toronto, Ontario, Canada (Mr. McNeil
is also an officer and/or Director of
various subsidiaries and affiliates of Sun
Life)
Joseph W. Dello Russo Director of Mutual Fund Operations, The
Boston Company, Exchange Place, Boston,
Massachusetts (until August, 1994)
ITEM 29. DISTRIBUTORS
(a) Reference is hereby made to Item 28 above.
(b) Reference is hereby made to Item 28 above; the principal business
address of each of these persons is 500 Boylston Street, Boston, Massachusetts
02116.
(c) Not Applicable.
ITEM 30. LOCATION OF ACCOUNTS AND RECORDS
The accounts and records of the Registrant are located, in whole or in
part, at the office of the Registrant and the following locations:
NAME ADDRESS
Massachusetts Financial Services 500 Boylston Street
Company (investment adviser) Boston, MA 02116
MFS Fund Distributors, Inc. 500 Boylston Street
{principal underwriter) Boston, MA 02116
State Street Bank and State Street South
Trust Company (custodian) 5 - West
North Quincy, MA 02171
Investors Bank & Trust 89 South Street
Company (custodian) Boston, MA 02110
MFS Service Center, Inc. 500 Boylston Street
(transfer agent) Boston, MA 02116
ITEM 31. MANAGEMENT SERVICES
Not applicable.
ITEM 32. UNDERTAKINGS
Not applicable.
(a) Not applicable.
(b) Not applicable.
(c) The Registrant undertakes to furnish each person to whom a
prospectus of a series of the Registrant is delivered with a copy of that
series' latest Annual Report to shareholders upon request and without charge.
(d) Insofar as indemnification for liability arising under the
Securities Act of 1933 may be permitted to trustees, officers and controlling
persons of the Registrant pursuant to the provisions set forth in Item 27 of
this Part C, or otherwise, the Registrant has been advised that in the opinion
of the Securities and Exchange Commission such indemnification is against public
policy as expressed in the Act and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the Registrant of expenses incurred or paid by a trustee, officer or
controlling person of the Registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the Securities being registered, the Registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
<PAGE>
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 August, 1996.
MFS SERIES TRUST IX
By: JAMES R. BORDEWICK, JR.
--------------------------------
Name: James R. Bordewick, Jr.
Title: Assistant Secretary
Pursuant to the requirements of the Securities Act of 1933, this
Post-Effective Amendment to its Registration Statement has been signed below by
the following persons in the capacities indicated on August 27, 1996.
SIGNATURE TITLE
A. KEITH BRODKIN* Chairman, President (Principal
- - ------------------------------- Executive Officer) and Trustee
A. Keith Brodkin
W. THOMAS LONDON* Treasurer (Principal Financial
- - ------------------------------- Officer and Principal Accounting Officer)
W. Thomas London
RICHARD B. BAILEY* Trustee
- - -------------------------------
Richard B. Bailey
PETER G. HARWOOD* Trustee
- - -------------------------------
Peter G. Harwood
J. ATWOOD IVES* Trustee
- - -------------------------------
J. Atwood Ives
LAWRENCE T. PERERA* Trustee
- - -------------------------------
Lawrence T. Perera
WILLIAM J. POORVU* Trustee
- - -------------------------------
William J. Poorvu
CHARLES W. SCHMIDT* Trustee
- - -------------------------------
Charles W. Schmidt
ARNOLD D. SCOTT* Trustee
- - -------------------------------
Arnold D. Scott
JEFFREY L. SHAMES* Trustee
- - -------------------------------
Jeffrey L. Shames
ELAINE R. SMITH* Trustee
- - -------------------------------
Elaine R. Smith
<PAGE>
DAVID B. STONE* Trustee
- - -------------------------------
David B. Stone
*By: JAMES R. BORDEWICK, JR.
------------------------------
Name: James R. Bordewick, Jr.
as Attorney-in-fact
Executed by James R. Bordewick, Jr.,
on behalf of those indicated pursuant
to a Power of Attorney dated September
21, 1994, incorporated by reference to
the Registrant's Post-Effective
Amendment No. 32 filed with the SEC
via EDGAR on August 28, 1995.
<PAGE>
INDEX TO EXHIBITS
EXHIBIT NO. DESCRIPTION OF EXHIBIT PAGE NO.
1 (b) Amendment to the Declaration of Trust - Designation
of Class P Shares dated June 20, 1996.
9 (b) Form of Amendment to Shareholder Servicing Agent
Agreement.
11 Consent of Deloitte & Touche LLP.
17 Financial Data Schedules for each class of each series.
18 Plan pursuant to Rule 18f-3(d) under the Investment
Company Act of 1940.
<PAGE>
EXHIBIT NO. 99.1(b)
MFS SERIES TRUST IX
CERTIFICATION OF AMENDMENT
TO THE DECLARATION OF TRUST
ESTABLISHMENT AND DESIGNATION
OF CLASSES
TThe undersigned, being a majority of the Trustees of MFS Series Trust
IX (the "Trust"), a business trust organized under the laws of The Commonwealth
of Massachusetts pursuant to an Amended and Restated Declaration of Trust dated
January 18, 1995, as amended May 17, 1995 (the "Declaration"), acting pursuant
to Section 6.10 of the Declaration, do hereby divide the shares of both MFS Bond
Fund and MFS Limited Maturity Fund (collectively, the "Series"), each a series
of the Trust, to create an additional class of shares, within the meaning of
Section 6.10, as follows:
1. The additional class of shares is designated "Class P Shares";
2. Class P Shares shall be entitled to all the rights and preferences
accorded to shares under the Declaration;
3. The purchase price of Class P Shares, the method of determination
of the net asset value of Class P Shares, the price, terms and
manner of redemption of Class P Shares, and the relative dividend
rights of holders of Class P Shares shall be established by the
Trustees of the Trust in accordance with the Declaration and shall
be set forth in the current prospectus and statement of additional
information of the Trust or any series thereof, as amended from
time to time, contained in the Trust's registration statement under
the Securities Act of 1933, as amended;
4. Class P Shares shall vote together as a single class except that
Shares of a class may vote separately on matters affecting only
that class and Shares of a class not affected by a matter will not
vote on that matter; and
5. A class of Shares of any series of the Trust may be terminated by
the Trustees by written notice to the Shareholders of the class.
IN WITNESS WHEREOF, a majority of the Trustees of the Trust have
executed this amendment, in one or more counterparts, all constituting a single
instrument, as an instrument under seal in The Commonwealth of Massachusetts, as
of this 19th day of June, 1996.
/s/ Keith Brodkin /s/ CHARLES W. SCHMIDT
- - --------------------------------- -----------------------------
A. Keith Brodkin Charles W. Schmidt
76 Farm Road 63 Claypit Hill Road
Sherborn, MA 01770 Wayland, MA 01778
/s/ RICHARD B. BAILEY /s/ ARNOLD D. SCOTT
- - --------------------------------- -----------------------------
Richard B. Bailey Arnold D. Scott
63 Atlantic Avenue 20 Rowes Wharf
Boston, MA 02110 Boston, MA 02110
/s/ PETER G. HARWOOD /s/ JEFFREY L. SHAMES
- - --------------------------------- -----------------------------
Peter G. Harwood Jeffrey L. Shames
211 Lindsay Pond Road 60 Brookside Road
Concord, MA 01742 Needham, MA 02192
J. ATWOOD IVES /s/ ELAINE R. SMITH
- - --------------------------------- -----------------------------
J. Atwood Ives Elaine R. Smith
1 Bennington Road 75 Scotch Pine Road
Lexington, MA 02173 Weston, MA 02193
<PAGE>
/s/ LAWRENCE T. PERERA /s/ DAVID B. STONE
- - --------------------------------- -----------------------------
Lawrence T. Perera David B. Stone
18 Marlborough Street 282 Beacon Street
Boston, MA 02116 Boston, MA 02116
/s/ WILLIAM J. POORVU
- - ---------------------------------
William J. Poorvu
975 Memorial Drive
Cambridge, MA 02138
<PAGE>
EXHIBIT NO. 99.9(b)
MFS SERIES TRUST IX
500 Boylston Street o Boston o Massachusetts 02116
August ___, 1996
MFS Service Center, Inc.
500 Boylston Street
Boston, MA 02116
Dear Sir/Madam:
This will confirm our understanding that Exhibit B to the Shareholder
Servicing Agent Agreement between us, dated December 2, 1985, as amended
December 31, 1992, September 7, 1993 and December 28, 1993, is hereby amended,
effective immediately, to read in its entirety as set forth on Attachment 1
hereto.
Please indicate your acceptance of the foregoing by signing below.
Sincerely,
MFS FIXED INCOME TRUST
By: -----------------
W. Thomas London
Treasurer
Accepted and Agreed:
MFS SERVICE CENTER, INC.
By: --------------------------
Joseph W. Dello Russo
Treasurer
<PAGE>
ATTACHMENT 1
August 30, 1996
EXHIBIT B TO THE SHAREHOLDER
SERVICING AGENT AGREEMENT BETWEEN
MFS SERVICE CENTER, INC. ("MFSC")
AND MFS SERIES TRUST IX (THE "FUND")
1. The fees to be paid by the Fund on behalf of its series with respect to Class
A shares of each series of the Fund to MFSC, for MFSC's services as shareholder
servicing agent, shall be:
0.15% of the first $500 million of the assets of the series attributable
to such class;
0.12% of the second $500 million of the assets of the series attributable
to such class;
0.09% over $1 billion of the assets of the series attributable to such
class.
2. The fees to be paid by the Fund on behalf of its series with respect to Class
B shares of each series of the Fund to MFSC, for MFSC's services as shareholder
servicing agent, shall be:
0.22% of the first $500 million of the assets of the series attributable
to such class;
0.18% of the second $500 million of the assets of the series attributable
to such class; 0.13% over $1 billion of the assets of the series
attributable to such class.
3. The fees to be paid by the Fund on behalf of its series with respect to Class
C shares of each series of the Fund to MFSC, for MFSC's services as shareholder
servicing agent, shall be:
0.15% of the first $500 million of the assets of the series attributable
to such class;
0.12% of the second $500 million of the assets of the series attributable
to such class; 0.09% over $1 billion of the assets of the series
attributable to such class.
4. The fees to be paid by the Fund on behalf of its series with respect to Class
P shares of each series of the Fund to MFSC, for MFSC's services as shareholder
servicing agent, shall be:
0.15% of the first $500 million of the assets of the series attributable
to such class;
0.12% of the second $500 million of the assets of the series attributable
to such class;
0.09% over $1 billion of the assets of the series attributable to such
class.
<PAGE>
EXHIBIT 99.11
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in this Post-Effective
Amendment No. 33 to Registration Statement No. 2-50409 of MFS Series Trust IX of
our reports each dated June 7, 1996 appearing in the annual reports to
shareholders for the year ended April 30, 1996, of MFS Bond Fund, MFS Limited
Maturity Fund and MFS Municipal Limited Maturity Fund and to the references to
us under the headings "Condensed Financial Information" in the Prospectus and
"Independent Auditors and Financial Statements" in the Statement of Additional
Information, both of which are part of such Registration Statement.
DELOITTE & TOUCHE LLP
Boston, Massachusetts
August 23, 1996
<PAGE>
EXHIBIT 99.18
MFS FUNDS
PLAN PURSUANT TO RULE 18F-3(D) UNDER THE
INVESTMENT COMPANY ACT OF 1940
Effective September 6, 1996
This Plan relating to Multiple Classes of Shares (the "Plan") has been
adopted by each of the registered investment companies (the "Trust" or
"Trusts"), identified on behalf of its various series from time to time on
Exhibit A hereto, severally and not jointly, pursuant to Rule 18f-3(d) under the
Investment Company Act of 1940, as amended (the "1940 Act"), and sets forth the
differences in expenses among the classes of shares representing interests in
the same portfolio issued by the Trusts under a multiple distribution
arrangement and the conversion and exchange feature, if any, of each such class
of shares (the "Multiple Distribution System").
A. THE TRUSTS AND FUNDS
Each Trust is an open-end management investment company registered under the
1940 Act, some consisting of multiple investment portfolios or series, each
of which has separate investment objectives and policies and segregated
assets (the "Fund" or "Funds").
Each Trust (if it has no series) and each Trust on behalf of each Fund (if
it has series) has entered into a management agreement with Massachusetts
Financial Services Company ("MFS") pursuant to which MFS, subject to the
general supervision of the Board of Trustees of the Trust, provides
management services. Each Trust has also entered into a distribution
agreement with MFS Fund Distributors, Inc. ("MFD") to provide certain
distribution services for the Fund, pursuant to which MFD acts as each
Fund's distributor. Certain Funds have adopted a distribution plan (a "Rule
12b-1 Plan") in accordance with Rule 12b-1 under the 1940 Act. Transfer
agency and recordkeeping functions are provided to each Fund by MFS Service
Center, Inc. ("MFSC") pursuant to a shareholder servicing agent agreement.
B. THE MULTIPLE DISTRIBUTION SYSTEM
Under the Multiple Distribution System, each Fund may provide investors with
the option of purchasing shares either (1) with a front-end sales load
(except sales of $1 million or more and purchases by certain retirement
plans, which are subject to a contingent deferred sales charge ("CDSC"))
which may vary among Funds and, in some cases, a distribution fee and/or
service fee pursuant to a Rule 12b-1 Plan ("Class A shares") or (2) without
a front-end sales load, but subject to a CDSC as well as a distribution fee
and/or a service fee pursuant to a Rule 12b-1 Plan ("Class B shares") or (3)
without a front-end load, but subject to a CDSC, (which may differ from the
CDSC applicable to Class B shares) as well as a distribution fee and/or
service fee pursuant to a Rule 12b-1 Plan ("Class C shares") or (iv) without
a front-end load or CDSC and without a distribution or service fee pursuant
to a Rule 12b-1 plan ("Class P shares"). Some of the Funds presently offer
only certain of these classes of shares to investors. This Plan shall apply
to the classes of shares of each Fund only to the extent each Trust has
designated particular classes of shares for that Fund. The Funds may from
time to time create one or more additional classes of shares, the terms of
which may differ from the Class A shares, Class B shares, Class C shares and
Class P shares described below.
The Trusts have been offering Multiple Classes of Shares, prior to the
effectiveness of this Plan, pursuant to an exemptive order issued by the
Securities and Exchange Commission. This Plan is intended to permit the
Funds to offer Multiple Classes of Shares pursuant to Rule 18f-3 under the
1940 Act, without any change in the arrangements and expense allocations
that have previously been approved by the Trustees of each Trust under such
order of exemption.
1. Class A Shares
Class A shares are offered to investors at net asset value plus a
front-end sales load (except for certain sales, which are subject to a
CDSC). The sales load is at rates competitive in the industry and is
subject to reduction for larger purchases and under a right of
accumulation or a letter of intention. In accordance with Section 22(d)
of the 1940 Act, the front-end sales load is waived for certain types of
investors or in connection with certain classes of transactions. Class A
shareholders are assessed an ongoing service fee and/or distribution fee
under a Rule 12b-1 Plan based upon a percentage of the average daily net
asset value of the Class A shares. Proceeds from the front-end load,
service fee and distribution fee are used by MFD primarily to pay
initial commissions, ongoing service fees and certain
distribution-related expenses, respectively. Amounts payable under the
Rule 12b-1 Plan are subject to such further limitations as the Trustees
may from time to time determine and as set forth in the registration
statement of each Trust as from time to time in effect.
2. Class B Shares
Class B shares are offered to investors at net asset value without the
imposition of a sales load at the time of purchase. However, an
investor's proceeds from a redemption of Class B shares (on which a
dealer commission has been paid) within a specified period of time after
purchase may be subject to a CDSC. The CDSC is paid to and retained by
MFD. The amount of any applicable CDSC will be based upon the lower of
the net asset value at the time of purchase or at the time of redemption
as required by Rule 6c-10 under the 1940 Act. Class B shares that are
redeemed will not be subject to a CDSC to the extent that the shares
represent (1) reinvestment of dividends or capital gain distributions,
(2) shares redeemed after a defined period of time, or (3) increases in
the value of an account due to capital appreciation. Class B
shareholders are assessed a distribution fee and/or service fee pursuant
to a Rule 12b-1 Plan. Class B shares that are outstanding for a
specified period of time will convert to Class A shares of the Fund. See
"Conversion Features" below. Amounts payable under the Rule 12b-1 Plan
are subject to such further limitations as the Trustees may from time to
time determine and as set forth in the registration statement of each
Trust as from time to time in effect.
<PAGE>
3. Class C Shares
Class C shares are offered to investors at net asset value without the
imposition of a front-end sales load. Class C shareholders are assessed
a distribution fee and/or service fee pursuant to a Rule 12b-1 Plan. In
addition, an investor's proceeds from a redemption of Class C shares (on
which a dealer commission has been paid) within a specified period of
time after purchase may be subject to a CDSC. The CDSC is paid to and
retained by MFD. Class C shares that are redeemed will not be subject to
a CDSC to the extent that the shares represent (i) reinvestment of
dividends or capital gains distributions, (ii) shares redeemed after a
defined period of time, or (iii) increases in the value of an account
due to capital appreciation. Class C shares differ from Class B shares
in that (i) the Class C shares would be subject to a lower CDSC than the
Class B shares (ii) the CDSC would be imposed on the Class C shares for
a shorter period of time than the Class B shares and (iii) Class C
shares do not convert to any other class of shares. Amounts payable
under the Rule 12b-1 Plan are subject to such further limitations as the
Trustees may from time to time determine and as set forth in the
registration statement of each Trust as from time to time in effect.
4. Class P Shares
Class P shares are offered to certain investors at net asset value
without the imposition of a front-end load or a CDSC and without a
distribution fee and/or service fee pursuant to a Rule 12b-1 Plan.
C. EXPENSES
Under the Multiple Distribution System, all expenses incurred by a Fund are
borne proportionately by each class of shares based on the relative net
assets attributable to each such class, except for the (i) different
distribution and service fees (and any other costs relating to implementing
the Rule 12b-1 Plan or an amendment to such Plan including obtaining
shareholder approval of the Rule 12b-1 Plan or an amendment to such Plan);
(ii) printing and postage expenses; and (iii) shareholder servicing fees
attributable to a class, which will be borne directly by each respective
class.
D. CONVERSION FEATURES
1. Conversion of Class B shares
If a shareholder's Class B shares of a Fund remain outstanding for a
specified period of time, they will automatically convert to Class A
shares of that Fund at the relative net asset values of each of the
classes, and will thereafter be subject to the lower fee under the Class
A Rule 12b-1 Plan. Shares purchased through the reinvestment of
distributions paid in respect of Class B shares will be treated as Class
B shares for purposes of the payment of the distribution and service
fees under the Rule 12b-1 Plan applicable to Class B shares. However,
for purposes of conversion to Class A, all shares in a shareholder's
account that were purchased through the reinvestment of distributions
paid in respect of Class B shares (and which have not converted to Class
A shares as provided above) will be held in a separate sub-account. Each
time any Class B shares in the shareholder's account (other than those
in the sub-account) convert to Class A, a portion of the Class B shares
then in the sub-account will also convert to Class A. The portion will
be determined by the ratio that the shareholder's Class B shares not
acquired through distributions that are converting to Class A bears to
the shareholder's total Class B shares not acquired through
distributions.
2. Conversion of Other Classes
Any other class of shares may provide that shares in that class (the
"Purchase Class") will, after a period of time, automatically convert
into another class of shares (the "Target Class") in accordance with the
provisions of Rule 18f-3. Such a conversion feature would be described
in the relevant Fund's prospectus.
3. General
Any conversion of shares of one class to shares of another class would
be subject to the continuing availability of a ruling of the Internal
Revenue Service or an opinion of legal counsel to the effect that the
conversion of these shares does not constitute a taxable event under
federal tax law. Any such conversion may be suspended if such a ruling
or opinion is no longer available. In the event such conversion does not
occur, these shares would continue to be subject for an indefinite
period to the higher distribution fees and, in some cases, higher
shareholder servicing fees of the class.
E. EXCHANGE FEATURES
Each class of shares may have different exchange features applicable to the
shares of that class. Currently, Class A shares of a Fund may be exchanged,
either all or in part, at net asset value for Class A shares of another
Fund. Class A shares of MFS Cash Reserve Fund may be exchanged for Class A
shares of another Fund at net asset value plus that Fund's normal front-end
load (except in certain situations described in MFS Cash Reserve Fund's
prospectus). Class B shares may be exchanged, either all or in part, at net
asset value for Class B shares of another Fund. Class C shares may be
exchanged, either all or in part, at net asset value for Class C shares of
another Fund. 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.
Each exchange is subject to share availability and must involve shares
having an aggregate minimum value as set forth in the Fund's prospectus.
Shares of one class may not be exchanged for shares of any other class.
F. PLAN DURATION
This Plan shall continue in effect indefinitely unless terminated or amended
as provided herein.
G. TERMINATION AND AMENDMENT PROCEDURE
This Plan may be terminated at any time by a vote of a majority of the
Trustees who are not "interested persons" of the Trust ("Disinterested
Trustees") or by a vote of the holders of a "majority of the outstanding
voting securities" of the Trust. No material amendment may be made to this
Plan without the approval of a majority of the Trustees, including a
majority of the Disinterested Trustees, after a finding that the Plan is in
the best interests of each class of shares individually and each Fund as a
whole. This Plan may be amended without Trustee approval to make a change
that is not material which includes, by way of example, to supply any
omission, to cure, correct or supplement any ambiguous, defective or
inconsistent provision hereof.
H. SCOPE OF TRUST'S OBLIGATIONS
A copy of the Declaration of Trust of each Trust is on file with the
Secretary of State of The Commonwealth of Massachusetts. It is acknowledged
that the obligations of or arising out of this Plan are not binding upon any
of the Trust's trustees, officers, employees, agents or shareholders
individually, but are binding solely upon the assets and property of the
Trust in accordance with its proportionate interest hereunder. If this Plan
is adopted by the Trust on behalf of one or more series of the Trust, it is
further acknowledged that the assets and liabilities of each series of the
Trust are separate and distinct and that the obligations of or arising out
of this Plan are binding solely upon the assets or property of the series on
whose behalf the Trust has adopted this Plan. If the Trust has adopted this
Plan on behalf of more than one series of the Trust, it is also acknowledged
that the obligations of each series hereunder shall be several and not
joint, in accordance with its proportionate interest hereunder, and no
series shall be responsible for the obligations of another series.
I. MISCELLANEOUS PROVISIONS
As used in this Plan, the terms "interested person" and "majority of the
outstanding voting securities" are used as defined in the 1940 Act. This
Plan shall be administered and construed in accordance with the laws of The
Commonwealth of Massachusetts and the applicable provisions of the 1940 Act
and the Rules and Regulations promulgated thereunder. If any provision of
this Plan shall be held or made invalid by a court decision, statute, rule
or otherwise, the remainder of the Plan shall not be affected thereby.
<PAGE>
EXHIBIT A
Dated: September 6, 1996
<TABLE>
<CAPTION>
<S> <C>
MFS SERIES TRUST I: MFS SERIES TRUST IX:
MFS Managed Sectors Fund MFS Bond Fund
MFS Cash Reserve Fund MFS Limited Maturity Fund
MFS World Asset Allocation Fund MFS Municipal Limited Maturity Fund
MFS Aggressive Growth Fund
MFS Research Growth and Income Fund MFS SERIES TRUST X:
MFS Core Growth Fund MFS Government Mortgage Fund
MFS Equity Income Fund MFS/Foreign & Colonial Emerging Markets Equity Fund
MFS Special Opportunities Fund MFS/Foreign & Colonial International Growth Fund
MFS/Foreign & Colonial International Growth and Income Fund
MFS SERIES TRUST II:
MFS Emerging Growth Fund MFS MUNICIPAL SERIES TRUST:
MFS Capital Growth Fund MFS Alabama Municipal Bond Fund
MFS Intermediate Income Fund MFS Arkansas Municipal Bond Fund
MFS Gold & Natural Resources Fund MFS California Municipal Bond Fund
MFS Florida Municipal Bond Fund
MFS SERIES TRUST III: MFS Georgia Municipal Bond Fund
MFS High Income Fund MFS Maryland Municipal Bond Fund
MFS Municipal High Income Fund MFS Massachusetts Municipal Bond Fund
MFS Mississippi Municipal Bond Fund
MFS SERIES TRUST IV: MFS New York Municipal Bond Fund
MFS Municipal Bond Fund MFS North Carolina Municipal Bond Fund
MFS OTC Fund MFS Pennsylvania Municipal Bond Fund
MFS South Carolina Municipal Bond Fund
MFS SERIES TRUST V: MFS Tennessee Municipal Bond Fund
MFS Total Return Fund MFS Virginia Municipal Bond Fund
MFS Research Fund MFS West Virginia Municipal Bond Fund
MFS Municipal Income Fund
MFS SERIES TRUST VI:
MFS World Total Return Fund MASSACHUSETTS INVESTORS TRUST
MFS Utilities Fund
MFS World Equity Fund MASSACHUSETTS INVESTORS GROWTH STOCK FUND
MFS SERIES TRUST VII: MFS GROWTH OPPORTUNITIES FUND
MFS World Governments Fund
MFS Value Fund MFS GOVERNMENT SECURITIES FUND
MFS SERIES TRUST VIII: MFS GOVERNMENT LIMITED MATURITY FUND
MFS Strategic Income Fund
MFS World Growth Fund
</TABLE>
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<OVERDISTRIBUTION-GAINS> (4366910)
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<EXPENSES-NET> (1406055)
<NET-INVESTMENT-INCOME> 7954234
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