<PAGE>
As filed with the Securities and Exchange Commission on August 27, 1997
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. 34
AND
REGISTRATION STATEMENT
UNDER
THE INVESTMENT COMPANY ACT OF 1940
AMENDMENT NO. 27
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, 1997 pursuant to paragraph (b)
|_| 60 days after filing pursuant to paragraph (a)(i)
|_| on [date] pursuant to paragraph (a)(i)
|_| 75 days after filing pursuant to paragraph (a)(ii)
|_| on [date] pursuant to paragraph (a)(ii) of rule 485.
If appropriate, check the following box:
|_| this post-effective amendment designates a new effective date for a
previously filed post-effective amendment
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, 1997 on June 27, 1997.
- - -------------------------------------------------------------------------------
<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)
<TABLE>
<CAPTION>
STATEMENT OF
ITEM NUMBER ADDITIONAL
FORM N-1A, PART A PROSPECTUS CAPTION INFORMATION CAPTION
- - ----------------- ------------------ -------------------
<S> <C> <C> <C>
1 (a), (b) Front Cover Page *
2 (a) Expense Summary *
(b), (c) * *
3 (a) Condensed Financial Information *
(b) * *
(c) Information Concerning Shares *
of the Fund - Performance
Information
(d) Condensed Financial Information *
4 (a) The Fund; Investment Objective *
and Policies
(b), (c) Investment Objective and Policies *
5 (a) The Fund; Management of the *
Fund - Investment Adviser
(b) Front Cover Page; Management *
of the Fund - Investment Adviser;
Back Cover Page
(c) Management of the Fund - *
Investment Adviser
(d) Management of the Fund - *
Investment Adviser;
Administrator - 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
(h) * *
5A (a), (b), (c) ** **
6 (a) Information Concerning Shares *
of the Fund - Description of
Shares, Voting Rights and
Liabilities; Information
Concerning Shares of the Fund -
Redemptions and Repurchases;
Information Concerning Shares
of the Fund - Purchases; Information
Concerning Shares of the Fund -
Exchanges
(b), (c), (d) * *
(e) Shareholder Services *
(f) Information Concerning Shares *
of the Fund - Distributions;
Shareholder Services -
Distribution Options
(g) Information Concerning Shares *
of the Fund - Tax Status;
Information Concerning Shares
of the Fund - Distributions
(h) * *
7 (a) Front Cover Page; Management *
of the Fund - Distributor; Back
Cover Page
(b) Information Concerning Shares *
of the Fund - Purchases;
Information Concerning Shares
of the Fund - Net Asset Value
(c) Information Concerning Shares *
of the Fund - Purchases;
Information Concerning Shares
of the Fund - Exchanges;
Shareholder Services
(d) Front Cover Page; Information *
Concerning Shares of the Fund -
Purchases; Shareholder Services
(e) Information Concerning Shares *
of the Fund - Distribution Plan;
Information Concerning Shares
of the Fund - Purchases; Expense
Summary
(f) Information Concerning Shares *
of the Fund - Distribution Plan
(g) Expense Summary; Information *
Concerning Shares of the Fund -
Purchases, Exchanges, Redemptions
and Repurchases, Distribution Plan,
Distributions, Performance
Information; Shareholder Services
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 * *
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
STATEMENT OF
ITEM NUMBER ADDITIONAL
FORM N-1A, PART B PROSPECTUS CAPTION INFORMATION CAPTION
- - ----------------- ------------------ --------------------
<C> <S> <C>
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;
Trustee Compensation
Table
15 (a) * *
(b), (c) * Management of the Fund -
Trustees and Officers
16 (a) Management of the Fund - Management of the Fund -
Investment Adviser Investment Adviser;
Management of the Fund -
Trustees and Officers
(b) Management of the Fund - Management of the Fund -
Investment Adviser Investment Adviser
(c) * *
(d) * Management of the Fund -
Investment Adviser;
Administrator
(e) * Portfolio Transactions and
Brokerage Commissions
(f) Information Concerning Shares Distribution Plan
of the Fund - Distribution
Plan
(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 Voting
of the Fund - Description of Rights and Liabilities
Shares, Voting Rights and
Liabilities
(b) * *
19 (a) Information Concerning Shares Shareholder Services
of the Fund - Purchases;
Shareholder Services
(b) Information Concerning Shares Management of the Fund -
of the Fund - Net Asset Value; Distributor; Determination
Information Concerning Shares of Net Asset Value and
of the Fund - Purchases Performance - Net Asset
Value
(c) * *
20 * Tax Status
21 (a), (b) * Management of the Fund -
Distributor; Distribution
Plan
(c) * *
22 (a) * *
(b) * Determination of Net Asset
Value and Performance;
Performance Information
23 * Independent Auditors
and Financial
Statements
- - --------------------------
* Not Applicable
** Contained in Annual Report
</TABLE>
<PAGE>
MFS BOND FUND
SUPPLEMENT TO THE SEPTEMBER 1, 1997
PROSPECTUS AND STATEMENT OF ADDITIONAL INFORMATION
THE FOLLOWING INFORMATION SHOULD BE READ IN CONJUNCTION WITH THE FUND'S
PROSPECTUS AND STATEMENT OF ADDITIONAL INFORMATION ("SAI"), DATED SEPTEMBER 1,
1997, AND CONTAINS A DESCRIPTION OF CLASS I SHARES.
CLASS I SHARES ARE AVAILABLE FOR PURCHASE ONLY BY CERTAIN INVESTORS AS
DESCRIBED UNDER THE CAPTION "ELIGIBLE PURCHASERS" BELOW.
EXPENSE SUMMARY
<TABLE>
<CAPTION>
SHAREHOLDER TRANSACTION EXPENSES: CLASS I
-------
<S> <C>
Maximum Initial Sales Charge Imposed on Purchases of Fund
Shares (as a percentage of offering price)........................................... None
Maximum Contingent Deferred Sales Charge (as a percentage
of original purchase price or redemption proceeds, as applicable).................... None
ANNUAL OPERATING EXPENSES OF THE FUND (AS A PERCENTAGE OF AVERAGE NET ASSETS):
Management Fees........................................................................ 0.40%
Rule 12b-1 Fees........................................................................ None
Other Expenses(1)(2)................................................................... 0.34%
-----
Total Operating Expenses............................................................... 0.74%
- - ------------------
(1) "Other Expenses" is based on Class A expenses incurred during the fiscal year ended April 30,
1997.
(2) The Fund has an expense offset arrangement which reduces the Fund's custodian fee based upon the
amount of cash maintained by the Fund with its custodian and dividend disbursing agent, and may
enter into other such arrangements and directed brokerage arrangements (which would also have
the effect of reducing the Fund's expenses). Any such fee reductions are not reflected under
"Other Expenses."
</TABLE>
EXAMPLE OF EXPENSES
-------------------
An investor would pay the following dollar amounts of expenses on a $1,000
investment in Class I shares of the Fund, assuming (a) a 5% annual return and
(b) redemption at the end of each of the time periods indicated:
PERIOD CLASS I
-------
1 year........................................ $ 8
3 years....................................... 24
The purpose of the expense table above is to assist investors in
understanding the various costs and expenses that a shareholder of the Fund will
bear directly or indirectly. A more complete description of the Fund's
management fee is set forth under the caption "Management of the Fund" in the
Prospectus.
THE "EXAMPLE" SET FORTH ABOVE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST
OR FUTURE EXPENSES OF THE FUND; ACTUAL EXPENSES MAY BE GREATER OR LESS THAN
THOSE SHOWN.
CONDENSED FINANCIAL INFORMATION
The following information has been audited 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 independent auditors are
Deloitte & Touche LLP.
<PAGE>
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS - CLASS I SHARES
YEAR ENDED
APRIL 30,1997***
----------------
Per share data (for a share outstanding throughout the period):
<S> <C>
Net asset value - beginning of period $ 13.15
-------
Income from investment operations# -
Net investment income $ 0.31
Net realized and unrealized loss on investments and foreign
currency transactions (0.09)
-------
Total from investment operations $ 0.22
-------
Less distributions declared to shareholders from net investment income $ (0.32)
-------
Net asset value - end of period $ 13.05
-------
Total return 1.70%++
Ratios (to average net assets)/Supplemental data:
Expenses## 0.69%+
Net investment income 7.19%+
Portfolio turnover 446%
Net assets, end of period (000 omitted) $9,593
- - --------------------------
*** For the period from the commencement of offering of Class I shares, January 2, 1997 to April 30, 1997.
+ Annualized
++ Not annualized
# Per share data are based on average shares outstanding.
## For fiscal years ending after September 1, 1995, the Fund's expenses are calculated without reduction for fees paid indirectly.
</TABLE>
ELIGIBLE PURCHASERS
Class I shares are available for purchase only by the following purchasers
("Eligible Purchasers"):
(i) certain retirement plans established for the benefit of employees of
Massachusetts Financial Services Company ("MFS"), the Fund's investment
adviser, and employees of MFS' affiliates;
(ii) any fund distributed by MFS Fund Distributors, Inc. ("MFD"), the Fund's
distributor, if the fund seeks to achieve its investment objective by
investing primarily in shares of the Fund and other funds distributed by
MFD;
(iii) any retirement plan, endowment or foundation which (a) purchases shares
directly through MFD (rather than through a third party broker or dealer
or other financial intermediary); (b) has, at the time of purchase of
Class I shares, aggregate assets of at least $100 million; and (c)
invests at least $10 million in Class I shares of the Fund either alone
or in combination with investments in Class I shares of other MFS funds
distributed by MFD (additional investments may be made in any amount);
provided that MFD may accept purchases from smaller plans, endowments or
foundations or in smaller amounts if it believes, in its sole discretion,
that such entity's aggregate assets will equal or exceed $100 million, or
that such entity will make additional investments which will cause its
total investment to equal or exceed $10 million, within a reasonable
period of time; and
(iv) bank trust departments which initially invest, on behalf of their trust
clients, at least $100,000 in Class I shares of the Fund (additional
investments may be made in any amount); provided that MFD may accept
smaller initial purchases if it believes, in its sole discretion, that
the bank trust department will make additional investments, on behalf of
its trust clients, which will cause its total investment to equal or
exceed $100,000 within a reasonable period of time.
In no event will the Fund, MFS, MFD or any of their affiliates pay any sales
commissions or compensation to any third party in connection with the sale of
Class I shares; the payment of any such sales commission or compensation would,
under the Fund's policies, disqualify the purchaser as an eligible investor of
Class I shares.
SHARE CLASSES OFFERED BY THE FUND
Four classes of shares of the Fund currently are offered for sale, Class A
shares, Class B shares, Class C shares and Class I shares. Class I shares are
available for purchase only by Eligible Purchasers, as defined above, and are
described in this Supplement. Class A shares, Class B shares and Class C shares
are described in the Fund's Prospectus and are available for purchase by the
general public.
Class A shares are offered at net asset value plus an initial sales charge
up to a maximum of 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 convert
to Class A shares approximately eight years after purchase. Class C shares are
offered at net asset value without an initial sales charge but are subject to a
CDSC upon redemption of 1.00% during the first year and an annual distribution
fee and service fee up to a maximum of 1.00% per annum. Class I shares are
offered at net asset value without an initial sales charge or CDSC and are not
subject to a distribution or service fee. Class C and Class I shares do not
convert to any other class of shares of the Fund.
OTHER INFORMATION
Eligible Purchasers may purchase Class I shares only directly through MFD.
Eligible Purchasers may exchange Class I shares of the Fund for Class I shares
of any other MFS Fund available for purchase by such Eligible Purchasers at
their net asset value (if available for sale), and may exchange Class I shares
of the Fund for shares of the MFS Money Market Fund (if available for sale), and
may redeem Class I shares of the Fund at net asset value. Distributions paid by
the Fund with respect to Class I shares generally will be greater than those
paid with respect to Class A shares, Class B shares and Class C shares because
expenses attributable to Class A shares, Class B shares and Class C shares
generally will be higher.
THE DATE OF THIS SUPPLEMENT IS SEPTEMBER 1, 1997
<PAGE>
PROSPECTUS
September 1, 1997
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. Condensed Financial Information ................................. 4
3. The Fund ........................................................ 6
4. Investment Objectives and Policies .............................. 7
5. Investment Techniques ........................................... 7
6. Additional Risk Factors ......................................... 13
7. Management of the Fund .......................................... 16
8. Information Concerning Shares of the Fund ....................... 17
Purchases ................................................... 17
Exchanges ................................................... 22
Redemptions and Repurchases ................................. 23
Distribution Plan ........................................... 26
Distributions ............................................... 27
Tax Status .................................................. 27
Net Asset Value ............................................. 28
Description of Shares, Voting Rights and Liabilities ........ 28
Performance Information ..................................... 29
9. Shareholder Services ............................................ 29
Appendix A -- Waivers of Sales Charges .......................... A-1
Appendix B -- Description of Bond Ratings ....................... B-1
Appendix C -- Portfolio Composition Chart ....................... 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 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, 1997, 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 31 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 at
http://www.sec.gov that contains the SAI, materials that are incorporated by
reference into this Prospectus and the SAI, and other information regarding the
Fund. This Prospectus is available on the Adviser's Internet World Wide Web site
at http://www.mfs.com.
INVESTORS SHOULD READ THIS PROSPECTUS AND RETAIN IT FOR FUTURE REFERENCE.
<PAGE>
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 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) ............................. 0.34% 0.34% 0.34%
----- ----------- -----------
Total Operating Expenses ...................... 1.04% 1.74% 1.74%
- - ----------
(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 shares in accordance with
Rule 12b-1 under the Investment Company Act of 1940, as amended (the "1940
Act") (the "Distribution Plan"), which provides that it will pay
distribution/service fees aggregating up to (but not necessarily all of)
0.35% per annum of the average daily net assets attributable to Class A
shares. 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. (See
"Information Concerning Shares of the Fund -- Distribution Plan" below).
(3) The Fund's Distribution Plan provides that it will pay distribution/ service
fees aggregating up to (but not necessarily all of) 1.00% per annum of the
average daily net assets attributable to the Class B shares and Class C
shares, respectively. Distribution expenses paid under Distribution Plan
with respect to Class B or Class C shares, together with any CDSC with
respect to Class B and Class C shares, may cause long-term shareholders to
pay more than the maximum sales charge that would have been permissible if
imposed entirely as an initial sales charge. (See "Information Concerning
Shares of the Fund -- Distribution Plan" below).
(4) The Fund has an expense offset arrangement which reduces the Fund's
custodian fee based upon the amount of cash maintained by the Fund with its
custodian and dividend disbursing agent, and may enter into other such
arrangements and directed brokerage arrangements (which would also have the
effect of reducing the Fund's expenses). Any such fee reductions are not
reflected under "Other Expenses."
</TABLE>
<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):
<TABLE>
<CAPTION>
PERIOD CLASS A CLASS B CLASS C
- - ------ ------- -------------------- --------------------
<S> <C> <C> <C> <C> <C>
(1) (1)
1 year ............................................. $ 58 $ 58 $ 18 $ 28 $ 18
3 years ............................................. 79 85 55 55 55
5 years ............................................. 102 114 94 94 94
10 years ............................................. 169 186(2) 186(2) 205 205
- - ----------
(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 -- "Investment Adviser"; and (iv) Rule 12b-1
(i.e., distribution plan) fees -- "Distribution Plan."
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.
<PAGE>
2. CONDENSED FINANCIAL INFORMATION
The following information has been audited for at least the latest five fiscal
years of the Fund and should be read in conjunction with the financial
statements included in the Fund's Annual Report to shareholders which are
incorporated by reference into the SAI in reliance upon the report of the Fund's
independent auditors, given upon their authority as experts in accounting and
auditing. The Fund's current independent auditors are Deloitte & Touche LLP.
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
YEAR ENDED APRIL 30,
----------------------------------------------------------------------
CLASS A
----------------------------------------------------------------------
1997 1996 1995 1994 1993
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
PER SHARE DATA (FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD):
Net asset value -- beginning of period . $12.85 $12.71 $12.75 $14.39 $13.70
------ ------ ------ ------ ------
Income from investment operations# --
Net investment income(S) ............. $ 0.94 $ 0.95 $ 0.98 $ 1.02 $ 1.04
Net realized and unrealized gain
(loss) on investments and foreign
currency transactions ............... 0.18 0.15 (0.05) (0.63) 0.74
------ ------ ------ ------ ------
Total from investment operations ... $ 1.12 $ 1.10 $ 0.93 $ 0.39 $ 1.78
------ ------ ------ ------ ------
Less distributions declared to
shareholders --
From net investment income ........... $(0.93) $(0.94) $(0.89) $(1.06) $(1.04)
From net realized gain on investments
and foreign currency transactions .. -- -- -- (0.80) (0.05)
In excess of net investment income ... -- -- -- (0.02) --
In excess of net realized gain on
investments and foreign currency
transactions ....................... -- -- -- (0.01) --
From paid-in capital ................. -- (0.02) (0.08) (0.14) --
------ ------ ------ ------ ------
Total distributions declared to
shareholders ..................... $(0.93) $(0.96) $(0.97) $(2.03) $(1.09)
------ ------ ------ ------ ------
Net asset value -- end of period ....... $13.04 $12.85 $12.71 $12.75 $14.39
====== ====== ====== ====== ======
Total return(+) ........................ 8.99% 8.67% 7.78% 2.12% 13.42%
RATIOS (TO AVERAGE NET ASSETS)/SUPPLEMENTAL DATA(S):
Expenses## ........................... 1.02% 1.00% 1.00% 0.96% 0.88%
Net investment income ................ 7.12% 7.10% 7.91% 7.17% 7.82%
PORTFOLIO TURNOVER ..................... 446% 377% 306% 410% 330%
NET ASSETS AT END OF PERIOD (000
OMITTED) ............................... $541,710 $514,892 $477,056 $459,311 $490,417
- - ----------
#Per share data for the periods subsequent to April 30, 1993, are based on
average shares outstanding.
##For fiscal years ending after September 1, 1995, the Fund's expenses
are calculated without reduction for fees paid indirectly.
(+)Total returns for Class A shares do not include the applicable sales
charge. If the charge had been included, the results would have been
lower.
(S)The distributor did not impose a portion of its distribution fee for
certain of 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 --
Ratio (to average net assets):
Expenses## ......................... -- -- 1.10% 1.02% --
Net investment income .............. -- -- 7.81% 7.10% --
</TABLE>
<PAGE>
FINANCIAL HIGHLIGHTS -- CONTINUED
<TABLE>
<CAPTION>
YEAR ENDED APRIL 30,
-----------------------------------------------------------------------
CLASS A
-----------------------------------------------------------------------
1992 1991 1990 1989 1988
------ ------ ------ ------ ------
PER SHARE DATA (FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD):
<S> <C> <C> <C> <C> <C>
Net asset value -- beginning of period . $13.25 $12.69 $12.80 $13.20 $14.04
------ ------ ------ ------ ------
Income from investment operations --
Net investment income ................ $ 1.13 $ 1.14 $ 1.20 $ 1.15 $ 1.16
Net realized and unrealized gain
(loss) on investments and foreign
currency transactions .............. 0.45 0.59 (0.14) (0.38) (0.42)
------ ------ ------ ------ ------
Total from investment operations ... $ 1.58 $ 1.73 $ 1.06 $ 0.77 $ 0.74
------ ------ ------ ------ ------
Less distributions declared to
shareholders --
From net investment income ........... $(1.13) $(1.17) $(1.17) $(1.17) $(1.15)
From net realized gain on investments
and foreign currency transactions .. -- -- -- -- (0.43)
------ ------ ------ ------ ------
Total distributions declared to
shareholders ..................... $(1.13) $(1.17) $(1.17) $(1.17) $(1.58)
------ ------ ------ ------ ------
Net asset value -- end of period ....... $13.70 $13.25 $12.69 $12.80 $13.20
====== ====== ====== ====== ======
Total return(+)......................... 12.39% 13.65% 7.69% 5.49% 5.18%
RATIOS (TO AVERAGE NET ASSETS)/SUPPLEMENTAL DATA:
Expenses ............................. 0.91% 0.79% 0.75% 0.83% 0.76%
Net investment income ................ 8.39% 8.82% 9.10% 8.93% 8.85%
PORTFOLIO TURNOVER ..................... 243% 189% 186% 160% 287%
NET ASSETS AT END OF PERIOD
(000 OMITTED) ......................... $448,261 $315,722 $293,242 $299,485 $310,403
</TABLE>
- - ----------
(+)Total returns for Class A shares do not include the applicable sales charge
(except for reinvested dividends prior to March 1, 1991). If the charge had
been included, the results would have been lower.
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED APRIL 30,
--------------------------------------------------------------
CLASS B
-------------------------------------------------------------
1997 1996 1995 1994*
------ ------ ------ ------
PER SHARE DATA (FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD):
<S> <C> <C> <C> <C>
Net asset value -- beginning of period ........ $12.79 $12.69 $12.73 $14.99
------ ------ ------ ------
Income from investment operations# --
Net investment income ....................... $ 0.83 $ 0.85 $ 0.88 $ 0.56
Net realized and unrealized gain (loss) on
investments and foreign currrency
transactions .............................. 0.19 0.13 (0.05) (1.30)
------ ------ ------ ------
Total from investment operations .......... $ 1.02 $ 0.98 $ 0.83 $(0.74)
------ ------ ------ ------
Less distributions declared to shareholders --
From net investment income .................. $(0.82) $(0.85) $(0.80) $(0.59)
From net realized gain on investments and
foreign currency transactions ............. -- -- -- (0.80)
In excess of net investment income .......... -- (0.01) -- (0.02)
In excess of net realized gain on investments
and foreign currency transactions ......... -- -- -- (0.01)
From paid-in capital ........................ -- (0.02) (0.07) (0.10)
------ ------ ------ ------
Total distributions declared to
shareholders ............................ $(0.82) $(0.88) $(0.87) $(1.52)
------ ------ ------ ------
Net asset value -- end of period .............. $12.99 $12.79 $12.69 $12.73
====== ====== ====== ======
Total return .................................. 8.16% 7.90% 6.90% (5.42)%++
RATIOS (TO AVERAGE NET ASSETS)/SUPPLEMENTAL DATA:
Expenses## .................................. 1.76% 1.81% 1.84% 1.83%+
Net investment income ....................... 6.39% 6.29% 7.17% 6.39%+
PORTFOLIO TURNOVER ............................ 446% 377% 306% 410%
NET ASSETS AT END OF PERIOD (000 OMITTED) ..... $123,000 $102,914 $75,451 $33,413
- - ----------
*For the period from the commencement of offering of Class B shares, September 7, 1993 to April 30, 1994.
+Annualized.
++Not annualized.
#Per share data are based on average shares outstanding.
##For fiscal years ending after September 1, 1995, the Fund's expenses are
calculated without reduction for fees paid indirectly.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED APRIL 30,
--------------------------------------------------------------
CLASS C
-------------------------------------------------------------
1997 1996 1995 1994*
------ ------ ------ ------
<S> <C> <C> <C> <C>
PER SHARE DATA (FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD):
Net asset value -- beginning of period ........ $12.79 $12.68 $12.72 $13.57
------ ------ ------ ------
Income from investment operations# --
Net investment income ....................... $ 0.83 $ 0.85 $ 0.88 $ 0.29
Net realized and unrealized gain (loss) on
investments and foreign currrency transactions 0.20 0.15 (0.05) (0.90)
------ ------ ------ ------
Total from investment operations .......... $ 1.03 $ 1.00 $ 0.83 $(0.61)
------ ------ ------ ------
Less distributions declared to shareholders --
From net investment income .................. $(0.84) $(0.85) $(0.80) $(0.22)
In excess of net investment income .......... -- (0.02) -- --
From paid-in capital ........................ -- (0.02) (0.07) (0.02)
------ ------ ------ ------
Total distributions declared to
shareholders ............................ $(0.84) $(0.89) $(0.87) $(0.24)
------ ------ ------ ------
Net asset value -- end of period .............. $12.98 $12.79 $12.68 $12.72
====== ====== ====== ======
Total return .................................. 8.27% 7.90% 7.00% 4.57%++
RATIOS (TO AVERAGE NET ASSETS)/SUPPLEMENTAL DATA:
Expenses## .................................. 1.74% 1.74% 1.75% 1.80%+
Net investment income ....................... 6.44% 6.35% 7.17% 6.57%+
PORTFOLIO TURNOVER ............................ 446% 377% 306% 410%
NET ASSETS AT END OF PERIOD (000 OMITTED) ..... $20,003 $17,330 $8,171 $7,627
- - ----------
*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 are based on average shares outstanding.
##For fiscal years ending after September 1, 1995, the Fund's expenses are
calculated without reduction for fees paid indirectly.
</TABLE>
3. 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. In addition, the Fund offers an additional
class of shares, Class I shares, exclusively to certain institutional investors.
Class I shares are made available by means of a separate Prospectus Supplement
provided to institutional investors eligible to purchase Class I shares and are
offered at net asset value without an initial sales charge or CDSC upon
redemption and without an annual distribution and service fee.
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.
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 convertible and
non-convertible 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, 1997, 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 notional
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 could be used 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, or no
investment of cash. 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, Croatia, Dominican Republic, Ecuador, Jordan, Mexico, Morocco,
Nigeria, Panama, Peru, the Philippines, Poland, Slovenia, Uruguay and Venezuela.
Brady Bonds have been issued only recently, and for that reason do not have a
long payment history. Brady Bonds may be collateralized or uncollateralized, are
issued in various currencies (but primarily the U.S. dollar) and are actively
traded in over-the-counter secondary markets. U.S. dollar-denominated,
collateralized Brady Bonds, which may be fixed rate bonds or floating-rate
bonds, are generally collateralized in full as to principal by U.S. Treasury
zero coupon bonds having the same maturity as the bonds. Brady Bonds are often
viewed as having three or four valuation components: the collateralized
repayment of principal at final maturity; the collateralized interest payments;
the uncollateralized interest payments; and any uncollateralized repayment of
principal at maturity (these uncollateralized amounts constituting the "residual
risk"). In light of the residual risk of Brady Bonds and the history of defaults
of countries issuing Brady Bonds with respect to commercial bank loans by public
and private entities, investments in Brady Bonds may be viewed as speculative.
"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 segregate liquid assets
sufficient to cover its commitments.
INDEXED SECURITIES: The Fund may invest in indexed securities whose value is
linked to foreign currencies, interest rates, commodities, indices, or other
financial indicators. Most indexed securities are short to intermediate term
fixed-income securities whose values at maturity (i.e., principal value) or
interest rates rise or fall according to changes in the value of one or more
specified underlying instruments. Indexed securities may be positively or
negatively indexed (i.e., their principal value or interest rates may increase
or decrease if the underlying instrument appreciates), and may have return
characteristics similar to direct investments in the underlying instrument or to
one or more options on the underlying instrument. Indexed securities may be more
volatile than the underlying instrument itself and could involve the loss of all
or a portion of the principal amount of the instrument.
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"). A determination is made, based upon a continuing review of the
trading markets for a specific Rule 144A security, whether such security is
liquid and thus not subject to the Fund's 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, retains oversight,
focusing on factors, such as valuation, liquidity and availability of
information. Investing in Rule 144A securities could have the effect of
decreasing the level of liquidity in the Fund to the extent that qualified
institutional buyers become for a time uninterested in purchasing 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 liquid assets 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 convertible and non-convertible securities
rated Ba or lower by Moody's or BB or lower by S&P, Fitch, or Duff & Phelps and
comparable unrated securities (commonly known as "junk bonds"). 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, Fitch or Duff & Phelps 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, 1997, the Fund had a portfolio turnover rate of over 100%. Transaction costs
incurred by the Fund and the realized capital gains and losses of the Fund may
be greater than that of a fund with a lesser portfolio turnover rate. 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 Conduct Rules of the National Association of Securities
Dealers, Inc. (the "NASD") and such other policies as the Trustees may
determine, the Adviser may consider sales of shares of the Fund and of the
other investment company clients of MFD, the Fund's distributor, as a factor
in the selection of broker-dealers to execute the Fund's portfolio
transactions. From time to time, the Adviser may direct certain portfolio
transactions to broker-dealer firms which, in turn, have agreed to pay a
portion of the Fund's operating expenses (e.g., fees charged by the custodian of
the Fund's assets).
------------------------
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). Except with respect to the Fund's policy on borrowing and investing
in illiquid securities, 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"). Under the Advisory Agreement, the Adviser provides the Fund with
overall investment advisory services. 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:
<TABLE>
<CAPTION>
ANNUAL RATE OF MANAGEMENT FEE BASED ON AVERAGE DAILY NET ASSETS ANNUAL RATE OF MANAGEMENT FEE BASED ON GROSS INCOME
- - --------------------------------------------------------------- ---------------------------------------------------
<S> <C>
.225% of the first $200 million 2.75% of the first $20 million
.191% of average daily net assets in excess of $200 million 2.34% of gross income in excess of $20 million
</TABLE>
For the Fund's fiscal year ended April 30, 1997, MFS received management fees
under the Advisory Agreement of $2,708,535 (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 and seven variable accounts, each of which is a
registered investment company established by Sun Life Assurance Company of
Canada (U.S.) ("Sun Life of Canada (U.S.)") in connection with the sale of
various fixed/variable annuity contracts. MFS and its wholly owned subsidiary,
MFS Institutional Advisors, Inc., provide investment advice to substantial
private clients.
MFS is America's oldest mutual fund organization. MFS and its predecessor
organizations have a history of money management dating from 1924 and the
founding of the first mutual fund in the United States, Massachusetts Investors
Trust. Net assets under the management of the MFS organization were
approximately $64.3 billion on behalf of approximately 2.6 million investor
accounts as of July 31, 1997. As of such date, the MFS organization managed
approximately $40.6 billion of net assets in fixed income funds and fixed income
portfolios of MFS Institutional Advisors, Inc. Approximately $4.1 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.), a subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.,
which in turn is a wholly owned subsidiary of Sun Life Assurance Company of
Canada ("Sun Life"). The Directors of MFS are A. Keith Brodkin, Jeffrey L.
Shames, Arnold D. Scott, Donald A. Stewart 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 Stewart are the
Chairman and the President, respectively, of Sun Life. Sun Life, a mutual life
insurance company, is one of the largest international life insurance companies
and has been operating in the U.S. since 1895, establishing a headquarters
office here in 1973. The executive officers of MFS report 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, Ellen M. Moynihan, Mark E. Bradley,
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, 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.
ADMINISTRATOR -- MFS provides the Fund with certain financial, legal,
compliance, shareholder communications and other administrative services
pursuant to a Master Administrative Services Agreement dated March 1, 1997.
Under this Agreement, the Fund pays MFS an administrative fee up to 0.015% per
annum of the Fund's average daily net assets. This fee reimburses MFS for a
portion of the costs it incurs to provide such services.
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
Class A, B and C shares of the Fund may be purchased at the public offering
price through any dealer. As used in the Prospectus and any appendices thereto
the term "dealer" includes any broker, dealer, bank (including bank trust
departments), registered investment adviser, financial planner and any other
financial institutions having a selling agreement or other similar agreement
with MFD. Dealers may also charge their customers fees relating to investments
in the Fund.
This Prospectus offers Class A, B and C shares to the general public 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>
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.
</TABLE>
MFD allows discounts to dealers (which are alike for all dealers) from the
applicable public offering price, as shown in the above table. In the case of
the maximum sales charge, the dealer retains 4% and MFD retains approximately
3/4 of 1% of the public offering price. The sales charge may vary depending on
the number of shares of the Fund as well as certain other MFS Funds owned or
being purchased, the existence of an agreement to purchase additional shares
during a 13-month period (or 36-month period for purchases of $1 million or
more) or other special purchase programs. A description of the Right of
Accumulation, Letter of Intent and Group Purchase privileges by which the sales
charge may be reduced is set forth in the SAI.
PURCHASES SUBJECT TO A CDSC (but not an initial sales charge). In the
following five circumstances, Class A shares are offered at net asset value
without an initial sales charge, but subject to a CDSC equal to 1% of the lesser
of the value of the shares redeemed (exclusive of reinvested dividend and
capital gain distributions) or the total cost of such shares, in the event of a
share redemption within 12 months following the purchase:
(i) on investments of $1 million or more in Class A shares;
(ii) on investments in Class A shares by certain retirement plans subject
to the Employee Retirement Income Security Act of 1974, as amended
("ERISA"), if prior to July 1, 1996: (a) the plan had established an
account with the Shareholder Servicing Agent and (b) the sponsoring
organization had demonstrated to the satisfaction of MFD that either
(i) the employer has at least 25 employees or (ii) the aggregate
purchases by the retirement plan of Class A shares of Funds in the
MFS Funds would be in an aggregate amount of at least $250,000
within a reasonable period of time, as determined by MFD in its sole
discretion;
(iii) on investments in Class A shares by certain retirement plans subject
to ERISA, if: (a) the retirement plan and/or sponsoring organization
subscribes to the MFS FUNDamental 401(k) Program or any similar
recordkeeping system made available by the Shareholder Servicing Agent
(the "MFS Participant Recordkeeping System"); (b) the plan establishes
an account with the Shareholder Servicing Agent on or after July 1,
1996; and (c) the aggregate purchases by the retirement plan of Class
A shares of the MFS Funds will be in an aggregate amount of at least
$500,000 within a reasonable period of time, as determined by MFD in
its sole discretion;
(iv) on investments in Class A shares by certain retirement plans subject to
ERISA, if: (a) the plan establishes an account with the Shareholder
Servicing Agent on or after July 1, 1996 and (b) the plan has, at the
time of purchase, a market value of $500,000 or more invested in shares
of any class or classes of the MFS Funds. THE RETIREMENT PLAN WILL
QUALIFY UNDER THIS CATEGORY ONLY IF THE PLAN OR ITS SPONSORING
ORGANIZATION INFORMS THE SHAREHOLDER SERVICING AGENT PRIOR TO THE
PURCHASE THAT THE PLAN HAS A MARKET VALUE OF $500,000 OR MORE INVESTED
IN SHARES OF ANY CLASS OR CLASSES OF THE MFS FUNDS. THE SHAREHOLDER
SERVICING AGENT HAS NO OBLIGATION INDEPENDENTLY TO DETERMINE WHETHER
SUCH A PLAN QUALIFIES UNDER THIS CATEGORY; AND
(v) on investments in Class A shares by certain retirement plans subject
to ERISA, if: (a) the plan establishes an account with the
Shareholder Servicing Agent on or after July 1, 1997; (b) such plan's
records are maintained on a pooled basis by the Shareholder Servicing
Agent; and (c) the sponsoring organization demonstrates to the
satisfaction of MFD that, at the time of purchase, the employer has
at least 200 eligible employees and the plan has aggregate assets of
at least $2,000,000.
In the case of all such purchases, MFD will pay commissions to dealers on new
investments in Class A shares made through such dealers as follows:
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
Distribution Plan (see "Distribution Plan" below) at a rate equal to 0.25% of
the purchase price of such shares. Therefore, the total amount paid to a dealer
upon the sale of Class B shares is 4% of the purchase price of the shares
(commission rate of 3.75% plus a service fee equal to 0.25% of the purchase
price).
Class B shares purchased by a retirement plan whose sponsoring organization
subscribes to the MFS Participant Recordkeeping System and which has established
its account with the Shareholder Servicing Agent on or after July 1, 1996, will
be subject to the CDSC described above, only under limited circumstances, as
explained below under "Waivers of CDSC." With respect to such purchases, MFD
pays an amount to dealers equal to 3.00% of the amount purchased through such
dealers (rather than the 4.00% payment described above), which is comprised of a
commission of 2.75% plus the advancement of the first year service fee equal to
0.25% of the purchase price payable under the Fund's Distribution Plan. As
discussed above, such retirement plans are eligible to purchase Class A shares
of the Fund at net asset value without an initial sales charge but subject to a
1% CDSC if the plan has, at the time of purchase, a market value of $500,000 or
more invested in shares of any class or classes of the MFS Funds. IN THIS EVENT,
THE PLAN OR ITS SPONSORING ORGANIZATION SHOULD INFORM THE SHAREHOLDER SERVICING
AGENT THAT THE PLAN IS ELIGIBLE TO PURCHASE CLASS A SHARES UNDER THIS CATEGORY;
THE SHAREHOLDER SERVICING AGENT HAS NO OBLIGATION INDEPENDENTLY TO DETERMINE
WHETHER SUCH A PLAN QUALIFIES UNDER THIS CATEGORY FOR THE PURCHASE OF CLASS A
SHARES.
See "Redemptions and Repurchases -- Contingent Deferred Sales Charge" for
further discussion of the CDSC.
WAIVERS OF CDSC. In certain circumstances, the CDSC imposed upon redemption
of Class B shares is waived. These circumstances are described in Appendix A to
this Prospectus. In addition to these circumstances, the CDSC imposed upon the
redemption of Class B shares is waived with respect to shares held by a
retirement plan whose sponsoring organization subscribes to the MFS Participant
Recordkeeping System and which has established an account with the Shareholder
Servicing Agent on or after July 1, 1996; provided, however, that the CDSC will
not be waived (i.e., it will be imposed) in the event that there is a change in
law or regulations which results in a material adverse change to the tax
advantaged nature of the plan, or in the event that the plan and/or sponsoring
organization: (i) becomes insolvent or bankrupt; (ii) is terminated or partially
terminated under ERISA or is liquidated or dissolved; or (iii) is acquired by,
merged into, or consolidated with, any other entity.
CONVERSION OF CLASS B SHARES. Class B shares of the Fund that remain
outstanding for approximately eight years will convert to Class A shares of the
same Fund. Shares purchased through the reinvestment of distributions paid in
respect of Class B shares will be treated as Class B shares for purposes of the
payment of the distribution and service fees under the Fund's Distribution Plan.
See "Information Concerning Shares of the Fund -- Distribution Plan" below.
However, for purposes of conversion to Class A shares, all shares in a
shareholder's account that were purchased through the reinvestment of dividends
and distributions paid in respect of Class B shares (and which have not
converted to Class A shares as provided in the following sentence) will be held
in a separate sub-account. Each time any Class B shares in the shareholder's
account (other than those in the sub-account) convert to Class A shares, a
portion of the Class B shares then in the sub-account will also convert to Class
A shares. The portion will be determined by the ratio that the shareholder's
Class B shares not acquired through reinvestment of dividends and distributions
that are converting to Class A shares bear to the shareholder's total Class B
shares not acquired through reinvestment. The conversion of Class B shares to
Class A shares is subject to the continuing availability of a ruling from the
Internal Revenue Service or an opinion of counsel that such conversion will not
constitute a taxable event for federal tax purposes. There can be no assurance
that such ruling or opinion will be available, and the conversion of Class B
shares to Class A shares will not occur if such ruling or opinion is not
available. In such event, Class B shares would continue to be subject to higher
expenses than Class A shares for an indefinite period.
CLASS C SHARES: Class C shares are offered at net asset value without an initial
sales charge but are subject to a CDSC upon redemption of 1.00% during the first
year. Class C shares do not convert to any other class of 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 Fund's Distribution Plan to
MFD for the first year after purchase (see "Distribution Plan" below).
Class C shares are not currently available for purchase by any retirement plan
qualified under Sections 401(a) or 403(b) of the 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.
SUBSEQUENT INVESTMENT BY TELEPHONE: Each shareholder may purchase additional
shares of any MFS Fund by telephoning the Shareholder Servicing Agent toll-free
at (800) 225-2606. The minimum purchase amount is $50 and the maximum purchase
amount is $100,000. Shareholders wishing to avail themselves of this telephone
purchase privilege must so elect on their Account Application and designate
thereon a bank and account number from which purchases will be made. If a
telephone purchase request is received by the Shareholder Servicing Agent on any
business day prior to the close of regular trading on the Exchange (generally,
4:00 p.m., Eastern time), the purchase will occur at the closing net asset value
of the shares purchased on that day. The Shareholder Servicing Agent may be
liable for any losses resulting from unauthorized telephone transactions if it
does not follow reasonable procedures designed to verify the identity of the
caller. The Shareholder Servicing Agent will request personal or other
information from the caller, and will normally also record calls. Shareholders
should verify the accuracy of confirmation statements immediately after their
receipt.
RIGHT TO REJECT PURCHASE ORDERS/MARKET TIMING. Purchases and exchanges
should be made for investment purposes only. The Fund and MFD each reserves the
right to reject or restrict any specific purchase or exchange request. In the
event that the Fund or MFD rejects an exchange request, neither the redemption
nor the purchase side of the exchange will be processed.
The Fund is not designed for professional market timing organizations or other
entities using programmed or frequent exchanges. The Fund defines a "market
timer" as an individual, or organization acting on behalf of one or more
individudals, if (i) the individual or organization makes three or more exchange
requests out of the Fund per calender year and (ii) any one of such exchange
requests represents shares equal in value to 1/2 of 1% or more of the Fund's net
assets at the time of the request. Accounts under common ownership or control,
including accounts administered by market timers, will be aggregated for
purposes of this definition.
As noted above, the Fund and MFD each reserves the right to reject or restrict
any specific purchase and exchange request and, in addition, may impose specific
limitations with respect to market timers, including delaying for up to seven
days the purchase side of an exchange request by market timers or specifically
rejecting or otherwise restricting purchase or exchange requests by market
timers. Other funds in the MFS Family of Funds may have different and/or more
restrictive policies with respect to market timers than the Fund. These policies
are disclosed in the prospectuses of these other MFS Funds.
DEALER CONCESSIONS. Dealers may receive different compensation with respect
to sales of Class A, Class B and Class C shares. In addition, from time to time,
MFD may pay dealers 100% of the applicable sales charge on sales of Class A
shares of certain specified MFS Funds sold by such dealer during a specified
sales period. In addition, MFD or its affiliates may, from time to time, pay
dealers an additional commission equal to 0.50% of the net asset value of all of
the Class B and/or Class C shares of certain specified MFS Funds sold by such
dealer during a specified sales period. In addition, from time to time, MFD, at
its expense, may provide additional commissions, compensation or promotional
incentives ("concessions") to dealers which sell 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 into
which an exchange is made and consider the differences in objectives, policies
and restrictions before making any exchange. Exchanges will be made only after
instructions in writing or by telephone (an "Exchange Request") are received for
an established account by the Shareholder Servicing Agent in proper form (i.e.,
if in writing -- signed by the record owner(s) exactly as the shares are
registered; if by telephone -- proper account identification is given by the
dealer or shareholder of record) and each exchange must involve either shares
having an aggregate value of at least $1,000 ($50 in 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.
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.
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 or exchanges, except in the case
of accounts being established for monthly automatic investments and certain
payroll savings programs, Automatic Exchange Plan accounts and tax-deferred
retirement plans, for which there is a lower minimum investment requirement. See
"Purchases -- General -- Minimum Investment." Shareholders will be notified that
the value of their account is less than the minimum investment requirement and
allowed 60 days to make an additional investment before the redemption is
processed.
DISTRIBUTION PLAN
The Trustees have adopted a Distribution Plan for Class A, Class B and Class C
shares pursuant to Section 12(b) of the 1940 Act and Rule 12b-1 thereunder (the
"Distribution Plan"), after having concluded that there is a reasonable
likelihood that the Distribution Plan 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 CLASS OF SHARES: There are certain features of the
Distribution Plan that are common to each class of shares, as described below.
SERVICE FEES. The Distribution Plan provides that the Fund may pay MFD a
service fee of up to 0.25% of the average daily net assets attributable to the
class of shares to which the Distribution Plan relates (i.e., Class A, Class B
or Class C shares, as appropriate) (the "Designated Class") annually in order
that MFD may pay expenses on behalf of the Fund relating to the servicing of
shares of the Designated Class. The service fee is used by MFD to compensate
dealers which enter into a sales agreement with MFD in consideration for all
personal services and/or account maintenance services rendered by the dealer
with respect to shares of the Designated Class owned by investors for whom such
dealer is the dealer or holder of record. MFD may from time to time reduce the
amount of the service fees paid for shares sold prior to a certain date. Service
fees may be reduced for a dealer that is the holder or dealer of record for an
investor who owns shares of the Fund having an aggregate net asset value at or
above a certain dollar level. Dealers may from time to time be required to meet
certain criteria in order to receive service fees. MFD or its affiliates are
entitled to retain all service fees payable under the Distribution Plan for
which there is no dealer of record or for which qualification standards have not
been met as partial consideration for personal services and/or account
maintenance services performed by MFD or its affiliates to shareholder accounts.
DISTRIBUTION FEES. The Distribution Plan provides that the Fund may pay MFD
a distribution fee based on the average daily net assets attributable to the
Designated Class as partial consideration for distribution services performed
and expenses incurred in the performance of MFD's obligations under its
distribution agreement with the Fund. See "Management of the Fund --
Distributor" in the SAI. The amount of the distribution fee paid by the Fund
with respect to each class differs under the Distribution Plan, as does the use
by MFD of such distribution fees. Such amounts and uses are described below in
the discussion of the provisions of the Distribution Plan relating to each class
of shares.
OTHER COMMON FEATURES. Fees payable under the Distribution Plan are charged
to, and therefore reduce, income allocated to shares of the Designated Class.
The provisions of the Distribution Plan relating to operating policies as well
as initial approval, renewal, amendment and termination are substantially
identical as they relate to each class of shares covered by the Distribution
Plan.
FEATURES UNIQUE TO EACH CLASS OF SHARES: There are certain features of the
Distribution Plan that are unique to each class of shares, as described below.
CLASS A SHARES. Class A shares are generally offered pursuant to an initial
sales charge, a substantial portion of which is paid to or retained by the
dealer making the sale (the remainder of which is paid to MFD). See "Purchases
- - -- Class A Shares" above. In addition to the initial sales charge, the dealer
also generally receives the ongoing 0.25% per annum service fee, as discussed
above.
The distribution fee paid to MFD under the Distribution Plan is equal, on an
annual basis, to 0.10% of the Fund's average daily net assets attributable to
Class A shares. As noted above, MFD may use the distribution fee to cover
distribution-related expenses incurred by it under its distribution agreement
with the Fund, including commissions to dealers and payments to wholesalers
employed by MFD (e.g., MFD pays commission to dealers with respect to purchases
of $1 million or more and purchases by certain retirement plans of Class A
shares which are sold at net asset value but which are subject to a 1% CDSC for
one year after purchase). See "Purchases -- Class A Shares" above. In addition,
to the extent that the aggregate service and distribution fees paid under the
Distribution Plan do not exceed 0.35% per annum of the average daily net assets
of the Fund attributable to Class A shares, the Fund is permitted to pay such
distribution-related expenses or other distribution- related expenses.
CLASS B SHARES. Class B shares are offered at net asset value without an
initial sales charge but subject to a CDSC. See "Purchases -- Class B Shares"
above. MFD will advance to dealers the first year service fee described above at
a rate equal to 0.25% of the purchase price of such shares and, as compensation
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 Distribution Plan, the Fund pays MFD a distribution fee equal, on an
annual basis, to 0.75% of the Fund's average daily net assets attributable to
Class B shares. As noted above, this distribution fee may be used by MFD to
cover its distribution-related expenses under its distribution agreement with
the Fund (including the 3.75% commission it pays to dealers upon purchase of
Class B shares, as described under "Purchases -- Class B Shares" above).
CLASS C SHARES. Class C shares are offered at net asset value without an
initial sales charge but subject to a CDSC. See "Purchases -- Class C shares"
above. MFD will pay a commission to dealers of 1.00% of the purchase price of
Class C shares purchased through dealers at the time of purchase. In
compensation for this 1.00% commission paid by MFD to dealers, MFD will retain
the 1.00% per annum Class C distribution and service fees paid by the Fund with
respect to such shares for the first year after purchase, and dealers will
become eligible to receive from MFD the ongoing 1.00% per annum distribution and
service fees paid by the Fund to MFD with respect to such shares commencing in
the thirteenth month following purchase.
This ongoing 1.00% fee is comprised of the 0.25% per annum service fee paid to
MFD under the Distribution Plan (which MFD in turn pays to dealers), as
discussed above, and a distribution fee paid to MFD (which MFD also in turn pays
to dealers) under the Distribution Plan equal, on an annual basis, to 0.75% of
the Fund's average daily net assets attributable to Class C shares.
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. Because the Fund
intends to distribute all of its net investment income and net realized capital
gains to its shareholders in accordance with the timing requirements imposed by
the Code, it is not expected that the Fund will be required to pay any federal
income or excise taxes, although the Fund's foreign-source income may be subject
to foreign withholding taxes.
Shareholders of the Fund normally will have to pay federal income taxes, and any
state or local taxes, on the dividends and capital gain distributions they
receive from the Fund, whether the distribution is 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 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, taxable as long-term capital gain, the portion, if any,
representing a return of capital (which is free of current taxes but results in
a basis reduction), the portion representing interest on U.S. Government
obligations, and the amount, if any, of federal income tax withheld.
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 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 which it
offers to the general public, entitled Class A, Class B and Class C Shares of
Beneficial Interest (without par value). The fund also has a class of shares
which it offers exclusively to certain institutional investors, entitled Class I
Shares. The Trust has reserved the right to create and issue additional 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 the Distribution Plan or
on any other matter that affects solely that class of shares, but will otherwise
vote together with all other classes of shares of the series on all other
matters. The Trust does not intend to hold annual shareholder meetings. The
Declaration of Trust provides that a Trustee may be removed from office in
certain instances (see "Description of Shares, Voting Rights and Liabilities" in
the SAI).
Each share of a class of the Fund represents an equal proportionate interest in
the Fund with each other class, 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
Securities Corporation 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. The Fund offers multiple classes of
shares which were initially offered for sale to the public on different dates.
The calculation of total rate of return for a class of shares which initially
was offered for sale to the public subsequent to another class of shares of the
Fund is based both on (i) the performance of the Fund's newer class from the
date it initially was offered for sale to the public and (ii) the performance of
the Fund's oldest class from the date it initially was offered for sale to the
public up to the date that the newer class initially was offered for sale to the
public. See the SAI for further information on the calculation of total rate of
return for share classes initially offered for sale to the public on different
dates. 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, 1997, please
see the Fund's Annual Report. A copy of the Annual Report may be obtained
without charge by contacting the Shareholder Servicing Agent (see back cover for
address and phone number). In addition to information provided in shareholder
reports, the Fund may, in its discretion, from time to time, make a list of all
or a portion of its holdings available to investors upon request.
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 Class A, B and C shares
of that shareholder in the MFS Funds or MFS Fixed Fund (a bank collective 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 on any day of the month. If the
Shareholder does not specify a date, the investment will automatically occur on
the first day of the month. Required forms are available from the Shareholder
Servicing Agent or investment dealers.
AUTOMATIC EXCHANGE PLAN: Shareholders having account balances of at least
$5,000 in any MFS Fund may exchange their shares for the same class of shares of
other MFS Funds (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 six different funds. A shareholder should consider the differences
in objectives and policies of a fund and review its prospectus before electing
to exchange money into such fund through the Automatic Exchange Plan. No
transaction fee is imposed in connection with exchange transactions under the
Automatic Exchange Plan. However, exchanges 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, 1997, 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 Distribution Plan 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). As used in this
Appendix, the term "dealer" includes any broker, dealer, bank (including bank
trust departments), registered investment adviser, financial planner and any
other financial institutions having a selling agreement or other similar
agreement with MFS Fund Distributors, Inc. ("MFD").
I. WAIVERS OF ALL APPLICABLE SALES CHARGES
In the following circumstances, the initial sales charge imposed on
purchases of Class A shares and the CDSC imposed on certain redemptions of
Class A shares and on redemptions of Class B and Class C shares, as
applicable, are waived:
1. DIVIDEND REINVESTMENT
o Shares acquired through dividend or capital gain reinvestment; and
o Shares acquired by automatic reinvestment of distributions of
dividends and capital gains of any MFS Fund in the MFS Family of Funds
("MFS Funds") pursuant to the Distribution Investment Program.
2. CERTAIN ACQUISITIONS/LIQUIDATIONS
o 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:
o 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;
o Trustees and retired trustees of any investment company for which MFD
serves as distributor;
o Employees, directors, partners, officers and trustees of any sub-
adviser to any MFS Fund;
o Employees or registered representatives of dealers and other financial
institution ("dealers") which have a sales agreement with MFD;
o 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
o Clients of MFS or MFS Institutional Advisors, Inc. ("MFSI").
4. INVOLUNTARY REDEMPTIONS (CDSC WAIVER ONLY)
o Shares redeemed at an MFS Fund's direction due to the small size of a
shareholder's account. See "Redemptions and Repurchases -- General --
Involuntary Redemptions/ Small Accounts" in the Prospectus.
5. RETIREMENT PLANS (CDSC WAIVER ONLY). Shares redeemed on account of
distributions made under the following circumstances:
INDIVIDUAL RETIREMENT ACCOUNTS ("IRA'S")
o Death or disability of the IRA owner.
SECTION 401(a) PLANS ("401(a) PLANS") AND SECTION 403(b) EMPLOYER
SPONSORED PLANS ("ESP PLANS")
o Death, disability or retirement of 401(a) or ESP Plan participant;
o Loan from 401(a) or ESP Plan (repayment of loans, however, will
constitute new sales for purposes of assessing sales charges);
o Financial hardship (as defined in Treasury Regulation Section
1.401(k)-1(d)(2), as amended from time to time);
o Termination of employment of 401(a) or ESP Plan participant
(excluding, however, a partial or other termination of the Plan);
o Tax-free return of excess 401(a) or ESP Plan contributions;
o 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
o 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")
o Death or disability of SRO Plan participant.
6. CERTAIN TRANSFERS OF REGISTRATION (CDSC WAIVER ONLY). Shares
transferred:
o To an IRA rollover account where any sales charges with respect to the
shares being reregistered would have been waived had they been
redeemed; and
o From a single account maintained for a 401(a) Plan to multiple
accounts maintained by the Shareholder Servicing Agent on behalf of
individual participants of such Plan, provided that the Plan sponsor
subscribes to the MFS FUNDamental 401(k) Plan or another similar
recordkeeping system made available by the Shareholder Servicing
Agent.
7. LOAN REPAYMENTS
o Shares acquired pursuant to repayments by retirement plan participants
of loans from 401(a) or ESP Plans with respect to which such Plan or
its sponsoring organization subscribes to the MFS FUNDamental 401(k)
Program or the MFS Recordkeeper Plus Program (but not the MFS
Recordkeeper Program).
II. WAIVERS OF CLASS A SALES CHARGES
In addition to the waivers set forth in Section I above, in the following
circumstances the initial sales charge imposed on purchases of Class A
shares and the CDSC imposed on certain redemption of Class A shares are
waived:
1. WRAP ACCOUNT AND FUND "SUPERMARKET" INVESTMENTS
o Shares acquired by investments through certain dealers (including
registered investment advisers and financial planners) which have
established certain operational arrangements with MFD which include a
requirement that such shares be sold for the sole benefit of clients
participating in a "wrap" account, mutual fund marketplace account or
a similar program under which such clients pay a fee to such dealer.
2. INVESTMENT BY INSURANCE COMPANY SEPARATE ACCOUNTS
o Shares acquired by insurance company separate accounts.
3. RETIREMENT PLANS
ADMINISTRATIVE SERVICES ARRANGEMENTS
o Shares acquired by retirement plans or trust accounts whose third
party administrators or dealers have entered into an administrative
services agreement with MFD or one of its affiliates to perform
certain administrative services, subject to certain operational and
minimum size requirements specified from time to time by MFD or one or
more of its affiliates.
REINVESTMENT OF DISTRIBUTIONS FROM QUALIFIED RETIREMENT PLANS
o 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
o Distributions made on or after the IRA owner has attained the age of
59 1/2 years old; and
o Tax-free returns of excess IRA contributions.
401(a) PLANS
o Distributions made on or after the 401(a) Plan participant has
attained the age of 59 1/2 years old; and
o Certain involuntary redemptions and redemptions in connection with
certain automatic withdrawals from a 401(a) Plan.
ESP PLANS AND SRO PLANS
o 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
o Systematic Withdrawal Plan redemptions with respect to up to 10% per
year (or 15% per year, in the case of accounts registered as IRAs
where the redemption is made pursuant to Section 72(t) of the Internal
Revenue Code of 1986, as amended) of the account value at the time of
establishment.
2. DEATH OF OWNER
o 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
o Shares redeemed on account of the disability of the account owner if
shares are held either solely or jointly in the disabled individual's
name or in a living trust for the benefit of the disabled individual
(in which case a disability certification form is required to be
submitted to 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
o 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")
o 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;
o 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 THE FISCAL YEAR ENDED APRIL 30, 1997
The table below shows the percentages of the Fund's assets at April 30, 1997
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 highest of S&P, Moody's,
Fitch or Duff & Phelps is used.
UNRATED
SECURITIES OF
COMPILED COMPARABLE
RATING RATINGS QUALITY TOTAL
- - ------ -------- -------------- --------
AAA/Aaa ................ 21.61% -- 21.61%
AA/Aa .................. 5.78% -- 5.78%
A/A .................... 13.51% -- 13.51%
BBB/Baa ................ 40.06% -- 40.06%
BB/Ba .................. 16.99% -- 16.99%
B/B .................... 1.28% -- 1.28%
CCC/Caa ................ -- -- --
CC/Ca .................. -- -- --
C/C .................... -- -- --
Default ................ -- -- --
------ ------
TOTAL .............. 99.23% 99.23%
The chart does not necessarily indicate what the composition of 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>
[graphic omitted]
INVESTMENT MANAGEMENT
WE INVENTED THE MUTUAL FUND(TM)
MFS(R) BOND FUND
Prospectus
September 1, 1997
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
[graphic omitted]
INVESTMENT MANAGEMENT
WE INVENTED THE MUTUAL FUND(TM)
MFS(R) BOND FUND
500 Boylston Street
Boston, MA 02116
MFB-1-9/97/400M 11/211/311
<PAGE>
[GRAPHIC OMITTED]
MFS(R) BOND FUND STATEMENT OF
ADDITIONAL INFORMATION
(A Member of the MFS Family of Funds(R)) September 1, 1997
- - -------------------------------------------------------------------------------
Page
1. Definitions ............................................ 2
2. Investment Objectives, Policies and Restrictions ....... 2
3. Management of the Fund ................................. 11
Trustees ............................................ 11
Officers ............................................ 12
Trustee Compensation Table .......................... 12
Investment Adviser .................................. 13
Administrator ....................................... 13
Custodian ........................................... 13
Shareholder Servicing Agent ......................... 14
Distributor ......................................... 14
4. Portfolio Transactions and Brokerage Commissions ....... 15
5. Shareholder Services ................................... 15
Investment and Withdrawal Programs .................. 15
Exchange Privilege .................................. 17
Tax-Deferred Retirement Plans ....................... 18
6. Tax Status ............................................. 18
7. Determination of Net Asset Value and Performance ....... 19
8. Distribution Plan ...................................... 21
9. Description of Shares, Voting Rights and Liabilities ... 22
10. Independent Auditors and Financial Statements .......... 23
Appendix A -- Performance Information .................. 24
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, 1997. This SAI should be read in conjunction with the
Prospectus, a copy of which may be obtained without charge by contacting the
Shareholder Servicing Agent (see last page for address and phone number).
THIS SAI IS NOT A PROSPECTUS AND IS AUTHORIZED FOR DISTRIBUTION TO PROSPECTIVE
INVESTORS ONLY IF PRECEDED OR ACCOMPANIED BY A CURRENT PROSPECTUS.
<PAGE>
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.
"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, 1997, 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. The Fund records these transactions as sale and purchase transactions,
rather than as borrowing transactions. During the roll period, the Fund
foregoes principal and interest paid on the mortgage-backed securities. The
Fund is compensated for the lost interest by the difference between the
current sales price and the lower price for the future purchase (often
referred to as the "drop") as well as by the interest earned on the cash
proceeds of the initial sale. The Fund may also be compensated by receipt of a
commitment fee.
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 liquid assets 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 liquid assets in a
segregated account with its custodian. A put option written by the Fund is
"covered" if the Fund maintains liquid assets with a value equal to the
exercise price in a segregated account with its custodian, or else holds a put
on the same security and in the same principal amount as the put written where
the exercise price of the put held (a) is equal to or greater than the
exercise price of the put written or (b) is less than the exercise price of
the put written if the difference is maintained by the Fund in liquid assets
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 liquid
assets. Such transactions permit the Fund to generate additional premium
income, which will partially offset declines in the value of portfolio
securities or increases in the cost of securities to be acquired. Also,
effecting a closing transaction will permit the cash or proceeds from the
concurrent sale of any securities subject to the option to be used for other
Fund investments. If the Fund desires to sell a particular security from its
portfolio on which it has written a call option, it will effect a closing
transaction prior to or concurrent with the sale of the security.
The Fund will realize a profit from a closing transaction if the price of the
transaction is less than the premium received from writing the option or is
more than the premium paid to purchase the option; the Fund will realize a
loss from a closing transaction if the price of the transaction is more than
the premium received from writing the option or is less than the premium paid
to purchase the option. Because increases in the market price of a call option
will generally reflect increases in the market price of the underlying
security, any loss resulting from the closing out of a call option is likely
to be offset in whole or in part by appreciation of the underlying security
owned by the Fund.
An option position may be closed out only where there exists a secondary
market for an option of the same series. If a secondary market does not exist,
it might not be possible to effect closing transactions in particular options
with the result that the 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 liquid
assets 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 liquid assets from its portfolio in an amount equal to the
difference between the fluctuating market value of such Futures Contracts and
the aggregate value of the initial and variation margin payments made by the
Fund with respect to such Futures Contracts.
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 liquid assets 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 liquid assets 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 liquid
assets 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, liquid assets, 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 liquid assets 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 liquid assets 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 liquid assets in a
segregated account with its custodian. A put option written on foreign
currencies by the Fund is "covered" if the Fund maintains liquid assets with a
value equal to the exercise price in a segregated account with its custodian,
or else holds a put on the same 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 liquid assets 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, Fitch or Duff & Phelps 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, Fitch or Duff & Phelps (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.
Except with respect to the Fund's policy on borrowing and investing in
illiquid securities, 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.
Except with respect to Investment Restrictions (1) and (15), 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 (born 8/4/35)
Massachusetts Financial Services Company, Chairman and Director
RICHARD B. BAILEY* (born 9/14/26)
Private Investor; Massachusetts Financial Services Company, former Chairman
(prior to September 30, 1991); Cambridge Bancorp, Director; Cambridge Trust
Company, Director
PETER G. HARWOOD (born 4/3/26)
Private Investor
Address: 211 Lindsay Pond Road, Concord, Massachusetts
J. ATWOOD IVES (born 5/1/36)
Eastern Enterprises (diversified services company), Chairman and Chief
Executive Officer
Address: 9 Riverside Road, Weston, Massachusetts
LAWRENCE T. PERERA (born 6/23/35)
Hemenway & Barnes (attorneys), Partner
Address: 60 State Street, Boston, Massachusetts
WILLIAM J. POORVU (born 4/10/35)
Harvard University Graduate School of Business Administration, Adjunct
Professor; CBL & Associates Properties, Inc. (a real estate investment
trust), Director; The Baupost Fund (a registered investment company), Vice
Chairman (since November 1993), Chairman and Trustee (prior to November
1993)
Address: Harvard Business School, Soldiers Field Road, Cambridge,
Massachusetts
CHARLES W. SCHMIDT (born 3/18/28)
Private Investor; OHM Corporation, Director; Mohawk Paper Company, Director
Address: 30 Colpitts Road, Weston, Massachusetts
ARNOLD D. SCOTT* (born 12/16/42)
Massachusetts Financial Services Company, Senior Executive Vice President,
Secretary and Director
JEFFREY L. SHAMES* (born 6/2/55)
Massachusetts Financial Services Company, President and Director
ELAINE R. SMITH (born 4/25/46
Independent Consultant; Brigham and Women's Hospital, Executive Vice President
and Chief Operating Officer (prior to September 1992)
Address: Weston, Massachusetts
DAVID B. STONE (born 9/2/27)
North American Management Corp. (investment adviser), Chairman and Director;
Eastern Enterprises, Director
Address: 10 Post Office Square, Suite 300, Boston, Massachusetts
OFFICERS
W. THOMAS LONDON,* Treasurer (born 3/1/44)
Massachusetts Financial Services Company, Senior Vice President
JAMES O. YOST,* Assistant Treasurer (born 6/12/60)
Massachusetts Financial Services Company, Vice President
ELLEN M. MOYNIHAN,* Assistant Treasurer (born 11/13/57)
Massachusetts Financial Services Company, Vice President (since September,
1996); Deloitte & Touche LLP, Senior Manager (until September 1996)
MARK E. BRADLEY,* Assistant Treasurer (born 11/23/59)
Massachusetts Financial Services Company, Vice President (since March, 1997);
Putnam Investments, Vice President (from September 1994 until March 1997);
Ernst & Young, Senior Tax Manager (until September 1994)
STEPHEN E. CAVAN,* Secretary and Clerk (born 11/6/53)
Massachusetts Financial Services Company, Senior Vice President, General
Counsel and Assistant Secretary
JAMES R. BORDEWICK, JR.,* Assistant Secretary (born 3/6/59)
Massachusetts Financial Services Company, Senior Vice President and Associate
General Counsel
GEOFFREY L. KURINSKY,* Vice President (born 7/7/53)
Massachusetts Financial Services Company, Senior Vice President
ROBERT A. DENNIS,* Vice President (born 12/12/48)
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 below is certain information concerning the cash compensation paid
to the Trustees and benefits accrued, and estimated benefits payable, under
the retirement plan.
TRUSTEE COMPENSATION TABLE
<TABLE>
<CAPTION>
TOTAL TRUSTEES
FEES FROM
RETIREMENT BENEFIT ESTIMATED FUND AND
TRUSTEES FEE ACCRUED AS PART OF CREDITED YEARS FUND
TRUSTEE FROM FUND(1) FUND'S EXPENSES(1) OF SERVICE(2) COMPLEX(3)
- - ------------------------------ ---------------- ---------------------- ------------------ ------------------
<S> <C> <C> <C> <C>
Richard B. Bailey .......... $4,185 $ 951 8 $247,168
A. Keith Brodkin ........... 0 0 N/A 0
Peter G. Harwood ........... 4,585 631 5 105,995
J. Atwood Ives ............. 4,385 994 17 98,750
Lawrence T. Perera 4,650 1,954 26 93,310
William Poorvu ............. 4,450 2,082 25 102,840
Charles W. Schmidt 4,585 2,036 20 105,995
Arnold D. Scott ............ --0-- --0-- N/A --0--
Jeffrey L. Shames .......... --0-- --0-- N/A --0--
Elaine R. Smith ............ 4,950 1,018 27 105,995
David B. Stone ............. 4,685 2,138 14 108,710
</TABLE>
(1) For fiscal year ended April 30, 1997.
(2) Based on normal retirement age of 73.
(3) For calendar year 1996. All Trustees receiving compensation served as
Trustee of 23 funds within the MFS fund complex (having aggregate net
assets at December 31, 1996, of approximately $21.2 billion) except Mr.
Bailey, who served as Trustee of 81 funds within the MFS fund complex
(having aggregate net assets at December 31, 1996, of approximately $38.5
billion).
ESTIMATED ANNUAL BENEFITS PAYABLE BY THE FUND UPON RETIREMENT(4)
YEARS OF SERVICE
AVERAGE ----------------------------------------------------------
TRUSTEE FEES 3 5 7 10 OR MORE
- - ------------------------------------------------------------------------------
$3,767 $565 $ 942 $1,318 $1,883
4,102 615 1,026 1,436 2,051
4,438 666 1,109 1,553 2,219
4,774 716 1,193 1,671 2,387
5,109 766 1,277 1,788 2,555
5,445 817 1,361 1,906 2,723
- - ------------
(4) Other funds in the MFS fund complex provide similar retirement benefits to
the Trustees.
As of July 31, 1997, all Trustees and officers as a group owned less than 1%
of the outstanding shares of the Fund not including 647,044.3860 of Class I
shares (which represent 1.16% of the outstanding shares of the Fund) owned by
employee benefit plans of MFS for which Messrs. Brodkin, Scott and Shames are
Trustees.
As of July 31, 1997, Nationwide Life Insurance Co., MFS Variable Account,
Department 1748, Columbus, Ohio 43271, was the owner of approximately 5.06% of
the outstanding Class A shares of the Fund. As of July 31, 1997, Merrill
Lynch, Pierce, Fenner & Smith, FBO its Customers, Attention: Fund
Administration, 4800 Deer Lake Drive East, 3rd Floor, Jacksonville, Florida
32246-6484 was the owner of approximately 5.54%, 6.76% and 13.13% of Class A,
B, and C Shares of the Fund, respectively. As of July 31, 1997, MFS Defined
Contribution Plan, MFS 401(K) Plan, and the MFS Pension Plan c/o Mark Leary,
Massachusetts Financial Services, 500 Boylston Street, Boston, MA 02116-3740,
owned 37.52%, 6.38%, and 56.10%, respectively, of the outstanding Class I
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 an indirect 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"). Under the
Advisory Agreement, the Adviser provides the Fund with overall investment
advisory services. Subject to such policies as the Trustees may determine, the
Adviser makes investment decisions for the Fund. For these services and
facilities, the Adviser receives a management fee computed and paid monthly on
the basis of a formula based upon a percentage of the Fund's average daily net
assets plus a percentage of its gross income (i.e., income other than gains
from the sale of securities, 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
excess of $200 million of $20 million
For the fiscal years ended 1995, 1996 and 1997, MFS received fees under the
Advisory Agreement of $2,179,512, $2,531,652, and $2,708,535 respectively.
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, 1998, and will
continue in effect thereafter only if such continuance is specifically
approved at least annually by the Board of Trustees or by vote of a majority
of the Fund's 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.
ADMINISTRATOR
MFS provides the Fund with certain financial, legal, compliance, shareholder
communications and other administrative services pursuant to a Master
Administrative Services Agreement dated March 1, 1997. Under this Agreement,
the Fund pays MFS an administrative fee up to 0.015% per annum of the Fund's
average daily net assets. This fee reimburses MFS for a portion of the costs
it incurs to provide such services. For the period ended April 30, 1997, MFS
received $17,658 under the Agreement, equivalent to 0.0026% of the Fund's
average daily net assets.
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, as amended (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 of the Fund at an
effective annual rate of 0.13%. In addition, the Shareholder Servicing Agent
will be reimbursed by the Fund for certain expenses incurred by the
Shareholder Servicing Agent on behalf of the Fund. 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, CLASS C AND CLASS I SHARES: MFD acts as agent in selling Class B,
Class C and Class I shares of the Fund. The public offering price of Class B,
Class C and Class I shares is their net asset value next computed after the
sale (see "Purchases" in the Prospectus and the Prospectus Supplement Pursuant
to which Class I shares are offered).
GENERAL: Neither MFD nor dealers are permitted to delay 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, 1997, MFD and dealers and
certain other financial institutions received sales charges of $134,341 and
$966,450, respectively, (as their concession on gross sales charges of
$1,100,791), for selling Class A shares of the Fund. The Fund received
$138,111,056 representing the aggregate net asset value of such 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 $1,341,258) 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 years ended April 30, 1995, 1996 and 1997, the
contingent deferred sales charge ("CDSC") imposed on redemption of Class A
shares was $3,369, $4,707 and $38,472, respectively. During the Fund's fiscal
years ended April 30, 1995, 1996 and 1997, the CDSC imposed on redemption of
Class B shares was $145,665, $217,113 and $245,479, respectively. During the
Fund's fiscal years ended April 30, 1996 and 1997, the CDSC imposed on
redemption of Class C shares was $7 and $5,977, respectively.
The Distribution Agreement will remain in effect until August 1, 1998, and
will continue in effect thereafter only if such continuance is specifically
approved at least annually by the Board of Trustees or by vote of a majority
of the 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 Conduct Rules of the
NASD and such other policies as the Trustees may determine, the Adviser may
consider sales of shares of the Fund and of the other investment company
clients of MFD as a factor in the selection of broker-dealers to execute the
Fund's portfolio transactions.
In certain instances there may be securities which are suitable for the Fund's
portfolio as well as for that of one or more of the other clients of the
Adviser or any subsidiary of the Adviser. Investment decisions for the Fund
and for such other clients are made with a view to achieving their respective
investment objectives. It may develop that a particular security is bought or
sold for only one client even though it might be held by, or bought or sold
for, other clients. Likewise, a particular security may be bought for one or
more clients when one or more other clients are selling that same security.
Some simultaneous transactions are inevitable when several clients receive
investment advice from the same investment adviser, particularly when the same
security is suitable for the investment objectives of more than one client.
When two or more clients are simultaneously engaged in the purchase or sale of
the same security, the securities are allocated among clients in a manner
believed by the Adviser to be equitable to each. It is recognized that in some
cases this system could have a detrimental effect on the price or volume of
the security as far as the Fund is concerned. In other cases, however, the
Fund believes that its ability to participate in volume transactions will
produce better executions for the Fund.
5. SHAREHOLDER SERVICES
INVESTMENT AND WITHDRAWAL PROGRAMS -- The Fund makes available the following
programs designed to enable shareholders to add to their investment or
withdraw from it with a minimum of paper work. These are described below and,
in certain cases, in the Prospectus. The programs involve no extra charge to
shareholders (other than a sales charge in the case of certain Class A share
purchases) and may be changed or discontinued at any time by a shareholder or
the Fund.
LETTER OF INTENT: If a shareholder (other than a group purchaser described
below) anticipates purchasing $100,000 or more of Class A shares of the Fund
alone or in combination with shares of 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 Class A, B and C
shares of that shareholder in the MFS Funds or MFS Fixed Fund reaches a
discount level. See "Purchases" in the Prospectus for the sales charges on
quantity 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.
SUBSEQUENT INVESTMENT BY TELEPHONE: Each shareholder may purchase additional
shares of any MFS Fund by telephoning the Shareholder Servicing Agent toll-
free at (800) 225-2606. The minimum purchase amount is $50 and the maximum
purchase amount is $100,000. Shareholders wishing to avail themselves of this
telephone purchase privilege must so elect on their Account Application and
designate thereon a bank and account number from which purchases will be made.
If a telephone purchase request is received by the Shareholder Servicing Agent
on any business day prior to the close of regular trading on the Exchange
(generally, 4:00 p.m., Eastern time), the purchase will occur at the closing
net asset value of the shares purchased on that day. The Shareholder Servicing
Agent may be liable for any losses resulting from unauthorized telephone
transactions if it does not follow reasonable procedures designed to verify
the identity of the caller. The Shareholder Servicing Agent will request
personal or other information from the caller, and will normally also record
calls. Shareholders should verify the accuracy of confirmation statements
immediately after their receipt.
DISTRIBUTION INVESTMENT PROGRAM: Distributions of dividends and capital
gains made by the Fund with respect to a particular class of shares may be
automatically invested in shares of the same class of one of the other MFS
Funds, if shares of 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 six different funds effective on the seventh day of each
month or of every third month, depending on whether monthly or quarterly
exchanges are elected by the shareholder. If the seventh day of the month is
not a business day, the transaction will be processed on the next business
day. Generally, the initial exchange will occur after receipt and processing
by the Shareholder Servicing Agent of an application in good order. Exchanges
will continue to be made from a shareholder's account in 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 and if purchaser
is eligible to purchase the class of shares). 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 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, 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 the shareholders as ordinary
income for federal income tax purposes, whether the distributions are paid in
cash or reinvested in additional shares. Because the Fund expects to earn
primarily interest income, it is expected that no Fund dividends will qualify
for the dividends received deduction for corporations. Distributions of net
capital gains (i.e., the excess of net long-term capital gains over net short-
term capital losses), whether paid in cash or reinvested in additional shares,
are taxable to shareholders as long-term capital gains for federal income tax
purposes without regard to the length of time the shareholders have held their
shares. It is uncertain at this time whether all or any part of such capital
gains will be eligible to be taxed at a maximum rate below 28%. Any Fund
dividend that is declared in October, November, or December of any calendar
year, that is payable to shareholders of record in such a month, and that is
paid the following January will be treated as if received by the shareholders
on December 31 of the year in which the dividend is declared. The Fund will
notify shareholders regarding the federal tax status of its distributions
after the end of each calendar year.
Any Fund distribution will have the effect of reducing the per share net asset
value of shares in the Fund by the amount of the distribution. Shareholders
purchasing shares shortly before the record date of any distribution may thus
pay the full price for the shares and then effectively receive a portion of
the purchase price back as a taxable distribution.
In general, any gain or loss realized upon a taxable disposition of shares of
the Fund by a shareholder that holds such shares as a capital asset will be
treated as a long-term capital gain or loss if the shares have been held for
more than 12 months and otherwise as a short-term capital gain or loss; a
long-term capital gain will be eligible for reduced tax rates if the shares
were held for more than 18 months. However, any loss realized upon a
disposition of shares in the Fund held for six months or less will be treated
as a long-term capital loss to the extent of any distributions of net capital
gain made with respect to those shares. Any loss realized upon a disposition
of shares may also be disallowed under rules relating to wash sales. Gain may
be increased (or loss reduced) upon a redemption of Class A shares of the Fund
within ninety days after their purchase followed by any purchase (including
purchases by exchange or by reinvestment) without payment of an additional
sales charge of Class A shares of the Fund or of another MFS Fund (or of any
other shares of an MFS Fund generally sold subject to a sales charge).
The Fund's current dividend and accounting policies will affect the amount,
timing, and character of distributions to shareholders and may, under certain
circumstances, make an economic return of capital taxable to shareholders. Any
investment in zero coupon bonds, deferred interest bonds, PIK bonds, 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, Forward Contracts, and
swaps and related transactions will be subject to special tax rules that may
affect the amount, timing, and character of Fund income and distributions to
shareholders. For example, certain positions held by the Fund on the last
business day of each taxable year will be marked to market (i.e., treated as
if closed out) on that day, and any gain or loss associated with the positions
will be treated as 60% long-term and 40% short-term capital gain or loss.
Certain positions held by the Fund that substantially diminish its risk of
loss with respect to other positions in its portfolio may constitute
"straddles," and may be subject to special tax rules that would cause deferral
of Fund losses, adjustments in the holding periods of Fund securities, and
conversion of short-term into long-term capital losses. Certain tax elections
exist for straddles that may alter the effects of these rules. The Fund will
limit its activities in options, Futures Contracts, Forward Contracts, 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 any investment, by the Fund in certain "passive foreign
investment companies" may be limited in order to avoid taxes on the Fund. The
Fund may elect to mark to market any investments in "passive foreign
investment companies" on the last day of each taxable year. This election may
cause the Fund to recognize ordinary income prior to the receipt of cash
payments with respect to those investments; in order to distribute this income
and avoid a tax on the Fund, the Fund may be required to liquidate portfolio
securities that it might otherwise have continued to hold.
Investment income received by the Fund from foreign securities may be subject
to foreign income taxes withheld at the source; the Fund does not expect to be
able to pass through to shareholders foreign tax credits or deductions with
respect to such foreign taxes. The United States has entered into tax treaties
with many foreign countries that may entitle the Fund to a reduced rate of tax
or an exemption from tax on such income; the Fund intends to qualify for
treaty reduced rates where available. It is not possible, however, to
determine the effective rate of foreign tax in advance since the amount of the
Fund's assets to be invested within various countries is not known.
Dividends and certain other payments to persons who are not citizens or
residents of the United States or U.S. entities ("Non-U.S. Persons") are
generally subject to U.S. tax withholding at a rate of 30%. The Fund intends
to withhold U.S. federal income tax at the rate of 30% on taxable dividends
and other payments 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
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. 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, Martin Luther King 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) 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 offers multiple classes of shares which were initially offered for
sale to the public on different dates. The calculation of total rate of return
for a class of shares which initially was offered for sale to the public
subsequent to another class of shares of the Fund is based both on (i) the
performance of the Fund's newer class from the date it initially was offered
for sale to the public and (ii) the performance of the Fund's oldest class
from the date it initially was offered for sale to the public up to the date
that the newer class initially was offered for sale to the public.
As discussed in the Prospectus, the sales charges, expenses and expense
ratios, and therefore the performance, of the Fund's classes of shares differ.
In calculating total rate of return for a newer class of shares in accordance
with certain formulas required by the SEC, the performance will be adjusted to
take into account the fact that the newer class is subject to a different
sales charge than the oldest class (e.g., if the newer class is Class A
shares, the total rate of return quoted will reflect the deduction of the
initial sales charge applicable to Class A shares; if the newer class is Class
B shares, the total rate of return quoted will reflect the deduction of the
CDSC applicable to Class B shares). However, the performance will not be
adjusted to take into account the fact that the newer class of shares bears
different class specific expenses than the oldest shares (e.g., Rule 12b-1
fees). Therefore, the total rate of return quoted for a newer class of shares
will differ from the return that would be quoted had the newer class of shares
been outstanding for the entire period over which the calculation is based
(i.e., the total rate of return quoted for the newer class will be higher than
the return that would have been quoted had the newer class of shares been
outstanding for the entire period over which the calculation is based if the
class specific expenses for the newer class are higher than the class specific
expenses of the oldest class, and the total rate of return quoted for the
newer class will be lower than the return that would be quoted had the newer
class of shares been outstanding for this entire period if the class specific
expenses for the newer class are lower than the class specific expenses of the
oldest class).
Total rate of return quotations for each class are presented in Appendix A
attached hereto under the heading "Performance Quotations."
PERFORMANCE RESULTS: The performance results for Class A shares presented in
Appendix A attached hereto under the heading "Performance Results" assume an
initial investment of $10,000 in Class A shares, and cover the period from
January 1, 1987 to December 31, 1996. 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).
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.
Yield quotations for each class of shares are presented in Appendix A attached
under the heading "Performance Quotations".
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%.
Current distribution rate quotations for Class B and Class C shares assume no
CDSC is paid. Current distribution rate quotations for each class of shares
are presented in Appendix A attached hereto under the heading "Performance
Quotations".
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 Securities Corporation, CDA
Wiesenberger, Shearson Lehman and Salomon Bros. Indices, Ibbotson, Business
Week, Lowry Associates, Media General, Investment Company Data, The New York
Times, Your Money, Strangers Investment Advisor, Financial Planning on Wall
Street, Standard and Poor's, Individual Investor, The 100 Best Mutual Funds
You Can Buy, by Gordon K. Williamson, Consumer Price Index, and Sanford C.
Bernstein & Co. Fund performance may also be compared to the performance of
other mutual funds tracked by financial or business publications or
periodicals.
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 PLAN
The Trustees have adopted a Distribution Plan for Class A, Class B and Class C
shares (the "Distribution Plan") pursuant to Section 12(b) of the 1940 Act and
Rule 12b-1 thereunder (the "Rule") after having concluded that there is a
reasonable likelihood that the Distribution Plan would benefit the Fund and
each respective class of shareholders. The provisions of the Distribution Plan
are severable with respect to each class of shares offered by the Fund. The
Distribution Plan is designed to promote sales, thereby increasing the net
assets of the Fund. Such an increase may reduce the expense ratio to the
extent the Fund's fixed costs are spread over a larger net asset base. Also,
an increase in net assets may lessen the adverse 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 Plan is described in the Prospectus under the caption
"Distribution Plan," which is incorporated herein by reference. The following
information supplements this Prospectus discussion.
SERVICE FEES: With respect to Class A Shares, no service fees will be paid:
(i) to any dealer who is the holder or dealer of record for investors who own
Class A shares having an aggregate net asset value less than $750,000, or such
other amount as may be determined from time to time by MFD (MFD, however, may
waive this minimum amount requirement from time to time); or (ii) to any
insurance company which has entered into an agreement with the Fund and MFD
that permits such insurance company to purchase Class A shares from the Fund
at their net asset value in connection with annuity agreements issued in
connection with the insurance company's separate accounts. Dealers may from
time to time be required to meet certain other criteria in order to receive
service fees.
With respect to Class B shares, except in the case of the first year service
fee, no service fees will be paid to any securities dealer who is the holder
or dealer of record for investors who own Class B shares having an aggregate
net asset value of less than $750,000 or such other amount as may be
determined by MFD from time to time. MFD, however, may waive this minimum
amount requirement from time to time. Dealers may from time to time be
required to meet certain other criteria in order to receive service fees.
MFD or its affiliates shall be entitled to receive any service fee payable
under the Distribution Plan for which there is no dealer of record or for
which qualification standards have not been met as partial consideration for
personal services and/or account maintenance services performed by MFD or its
affiliates for shareholder accounts.
DISTRIBUTION FEES: The purpose of distribution payments to MFD under the
Distribution Plan is to compensate MFD for its distribution services to the
Fund. MFD pays commissions to dealers as well as expenses of printing
prospectuses and reports used for sales purposes, expenses with respect to the
preparation and printing of sales literature and other distribution related
expenses, including, without limitation, the cost necessary to provide
distribution-related services, or personnel, travel, office expenses and
equipment.
DISTRIBUTION AND SERVICE FEES PAID DURING THE FUND'S LAST FISCAL YEAR:During
the fiscal year ended April 30, 1997, 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
CLASS OF SHARES BY FUND BY MFD BY DEALERS
- - --------------- --------- ------------ -------------
Class A Shares $1,596,084 $550,450 $1,045,634
Class B Shares $1,165,096 $900,891 $ 264,205
Class C Shares $ 178,635 $ 16,107 $ 162,528
GENERAL: The Distribution Plan will remain in effect until August 1, 1998, and
will continue in effect thereafter only if such continuance is specifically
approved at least annually by vote of both the Trustees and a majority of the
Trustees who are not "interested persons" or financially interested parties to
such Plan ("Distribution Plan Qualified Trustees"). The Distribution Plan 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. The Distribution Plan may be
terminated at any time by vote of a majority of the Distribution Plan
Qualified Trustees or by vote of the holders of a majority of the respective
class of the Fund's shares (as defined in "Investment Restrictions"). All
agreements relating to the Distribution Plan entered into between the Fund or
MFD and other organizations must be approved by the Board of Trustees,
including a majority of the Distribution Plan Qualified Trustees. Agreements
under the Distribution Plan must be in writing, will be terminated
automatically if assigned, and may be terminated at any time without payment
of any penalty, by vote of a majority of the Distribution Plan Qualified
Trustees or by vote of the holders of a majority of the respective class of
the Fund's shares. The Distribution Plan may not be amended to increase
materially the amount of permitted distribution expenses without the approval
of a majority of the respective class of the Fund's shares (as defined in
"Investment Restrictions") or may not be materially amended in any case
without a vote of the Trustees and a majority of the Distribution Plan
Qualified Trustees. The selection and nomination of Distribution Plan
Qualified Trustees shall be committed to the discretion of the non-interested
Trustees then in office. No Trustee who is not an "interested person" has any
financial interest in the Distribution Plan or in any related agreement.
9. DESCRIPTION OF SHARES, VOTING RIGHTS AND
LIABILITIES
The 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 as well as Class I shares for this series and one of the
Trust's other series. 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, 1997, the Statement of Assets and
Liabilities at April 30, 1997, the Statement of Operations for the year ended
April 30, 1997, the Statement of Changes in Net Assets for each of the two
years in the period ended April 30, 1997, 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
PERFORMANCE INFORMATION
The performance results and quotations below should not be considered as
representative of the performance of the Fund in the future since the net
asset value and public offering price of shares of the Fund will vary. See
"Determination of Net Asset Value and Performance" in the SAI.
PERFORMANCE RESULTS -- CLASS A SHARES
<TABLE>
<CAPTION>
VALUE OF VALUE OF VALUE OF
INITIAL $10,000 CAPITAL GAIN REINVESTED TOTAL
YEAR ENDED INVESTMENT DISTRIBUTIONS DIVIDENDS VALUE
---------- ---------------- ------------- ---------- -----
<S> <C> <C> <C> <C>
December 31, 1987 $9,470 $ 0 $ 141 $ 9,611
December 31, 1988 9,381 0 1,030 10,411
December 31, 1989 9,742 0 2,076 11,818
December 31, 1990 9,610 0 3,065 12,675
December 31, 1990 10,338 0 4,617 14,955
December 31, 1992 10,154 55 5,688 15,897
December 31, 1993 10,029 1,098 6,973 18,100
December 31, 1994 8,925 977 7,390 17,292
December 31, 1995 10,066 1,102 9,837 21,005
December 31, 1996 9,735 1,065 11,033 21,833
</TABLE>
Explanatory Notes: The results in the table assume that income dividends and
capital gain distributions were invested in additional shares. The results
also assume that the initial investment in Class A shares was reduced by the
current maximum applicable sales charge. No adjustment has been made for
income taxes, if any, payable by shareholders.
PERFORMANCE QUOTATIONS
All performance quotations are as of April 30, 1997.
<TABLE>
<CAPTION>
30-DAY YIELD 30-DAY YIELD
(INCLUDING (WITHOUT CURRENT
AVERAGE ANNUAL TOTAL RETURNS ANY ANY DISTRIBUTION
1 YEAR 5 YEAR 10 YEAR WAIVERS) WAIVERS) RATE
------ ------ ------- -------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Class A Shares with sales charge ........... 3.82% 7.10% 8.23% N/A 6.27% 6.68%
Class A Shares without sales charge ........ 8.99% 8.15% 8.76% N/A N/A N/A
Class B Shares with CDSC ................... 4.16% 7.26%(1) 8.46%(1) N/A N/A N/A
Class B Shares without CDSC ................ 8.16% 7.55%(1) 8.46%(1) N/A 5.86% 6.25%
Class C Shares with CDSC ................... 7.27% 7.62%(2) 8.50%(2) N/A N/A N/A
Class C Shares without CDSC ................ 8.27% 7.62%(2) 8.50%(2) N/A 5.32% 6.35%
Class I Shares ............................. 9.21%(3) 8.19%(3) 8.78%(3) N/A 6.75% 7.36%(3)
</TABLE>
(1) Class B share performance includes the performance of the Fund's Class A
shares for periods prior to the commencement of offering of Class B shares
on September 7, 1993. Sales charges, expenses and expense ratios, and
therefore performance, for Class A and Class B shares differ. Class B
share performance has been adjusted to reflect that Class B shares
generally are subject to a CDSC (unless the performance quotation does not
give effect to the CDSC) whereas Class A shares generally are subject to
an initial sales charge. Class B share performance has not, however, been
adjusted to reflect differences in operating expenses (e.g., Rule 12b-1
fees), which generally are lower for Class A shares.
(2) Class C share performance includes the performance of the Fund's Class A
shares for periods prior to the commencement of offering of Class C shares
on January 3, 1994. Sales charges, expenses and expense ratios, and
therefore performance, for Class A and Class C shares differ. Class C
share performance has been adjusted to reflect that Class C shares
generally are subject to a CDSC (unless the performance quotation does not
give effect to the CDSC) whereas Class A shares generally are subject to
an initial sales charge. Class C share performance has not, however, been
adjusted to reflect differences in operating expenses (e.g., Rule 12b-1
fees), which generally are lower for Class A shares.
(3) Class I share performance includes the performance of the Fund's Class A
shares for the periods prior to the commencement of offering of Class I
shares on January 2, 1997. Sales charges, expenses and expense ratios, and
therefore performance for Class I and A shares differ. Class I share
performance has been adjusted to reflect that Class I shares are not
subject to an initial sales charge, whereas Class A shares generally are
subject to an initial sales charge. Class I share performance has not,
however, been adjusted to reflect differences in operating expenses (e.g.,
Rule 12b-1 fees), which generally are lower for Class I shares. The
current distribution rate for Class I shares is calculated by annualizing
the last dividend.
<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 ACCOUNTANTS
Deloitte & Touche LLP
125 Summer Street, Boston, MA 02110
MFS(R)
BOND FUND
500 BOYLSTON STREET
BOSTON, MA 02116
[LOGO] MFS
INVESTMENT MANAGEMENT
WE INVENTED THE MUTUAL FUND(SM)
MFB-13-9/96/500 11/211/311
<PAGE>
Annual Report
[Logo] for Year Ended
INVESTMENT MANAGEMENT April 30, 1997
MFS(R) BOND FUND
[Graphic Omitted]
LEARNING FINANCIAL BASICS THE EASY WAY (see page 34)
<PAGE>
TABLE OF CONTENTS
Letter from the Chairman ................................................... 1
A Discussion with the Portfolio Manager .................................... 3
Portfolio Manager's Profile ................................................ 6
Fund Facts ................................................................. 7
Performance Summary ........................................................ 7
Portfolio Concentration ....................................................10
Tax Form Summary ...........................................................10
Portfolio of Investments ...................................................11
Financial Statements .......................................................18
Notes to Financial Statements ..............................................25
Independent Auditors' Report ...............................................33
The ABCs of Investing ......................................................34
It's Easy to Contact Us ....................................................35
The MFS Family of Funds(R) .................................................36
Trustees and Officers ......................................................37
- - --------------------------------------------------------------------------------
HIGHLIGHTS
o FOR THE 12 MONTHS ENDED APRIL 30, 1997, CLASS A SHARES OF THE FUND
PROVIDED A TOTAL RETURN AT NET ASSET VALUE OF 8.99%, CLASS B SHARES
8.16%, CLASS C SHARES 8.27%, AND CLASS I SHARES 9.21%.
o THE FUND BENEFITED FROM ITS OVERWEIGHTINGS IN BOTH INVESTMENT-GRADE AND
HIGH-YIELD CORPORATE SECURITIES, WHICH WERE BOTH HELPED BY THE
CONTINUING STRENGTH OF THE U.S. ECONOMY.
o THE FUND HAD SIGNIFICANT OVERWEIGHTINGS IN THE AIRLINE AND UTILITY
SECTORS THAT CONTRIBUTED TO PERFORMANCE, AS RETURNS OF 8.97% FOR
UTILITIES AND 9.65% FOR AIRLINES MADE THEM THE BEST-PERFORMING SECTORS
IN THE INVESTMENT-GRADE CORPORATE MARKET.
o CURRENTLY, WE ARE EXPERIENCING A RELATIVELY STABLE, TRADITIONAL "CLIP-
THE-COUPON" ENVIRONMENT SIMILAR TO THE 1950S AND 1960S, WHEN INTEREST
RATES WERE MUCH LESS VOLATILE. IN SUCH AN ENVIRONMENT, THERE IS LITTLE
VALUE ADDED IN TRYING TO ANTICIPATE INTEREST-RATE MOVEMENTS.
- - --------------------------------------------------------------------------------
<PAGE>
LETTER FROM THE CHAIRMAN
[Photo of A. Keith Brodkin]
A. Keith Brodkin
Dear Shareholders:
After more than six years of expansion, the U.S. economy is experiencing another
year of growth in 1997, although a few signs point to the possibility of a
modest rise in inflation during the year. On the positive side, the pattern of
moderate growth and inflation set over the past few years now seems fairly well
entrenched in the economy and, short of a major international or domestic
crisis, appears to have enough momentum to remain on track for some time. Also,
gains in such important sectors as housing, automobiles, industrial production,
and exports indicate a fair amount of underlying strength in the economy. Some
of that strength was seen in the first quarter, when the U.S. economy grew at an
annualized rate of 5.6% (based on preliminary estimates), a pace that would be
inflationary in the unlikely event that it were to continue. The ongoing
tightness in the labor market could also add some inflationary pressures to the
economy. At the same time, there is some reason for caution as a result of the
continuing high level of consumer debt and rising personal bankruptcies. Given
these somewhat conflicting indicators, we expect real (inflation-adjusted)
growth to revolve around 2% in 1997, with the strength of the first quarter
moderating as we move through the balance of the year.
In the bond markets, conflicting signals over the strength of the economy have
also created near-term volatility, and the Federal Reserve Board has begun
taking measured steps to control inflation by raising short-term interest rates.
Although we do not expect a repeat of the rapid growth in the first quarter, we
would expect the Fed to raise interest rates at least one more time in reaction
to the economic momentum that was built up during the period. While inflationary
forces largely remained in check in 1996, the continued strength in the labor
market suggests that a pickup in inflation is still possible. At the same time,
the U.S. budget deficit continues to decline and, as a percentage of gross
domestic product, is now approaching 1%, which we consider a positive
development for the bond markets. Although interest rates may remain volatile
over the coming months, we believe that, at current levels, fixed-income markets
remain equitably valued.
We appreciate your support and welcome any questions or comments you may
have.
Respectfully,
/s/ A. Keith Brodkin
A. Keith Brodkin
Chairman and President
May 14, 1997
<PAGE>
A DISCUSSION WITH THE PORTFOLIO MANAGER
[Photo of Geoffrey L. Kurinsky]
Geoffrey L. Kurinsky
Following a sharp rise in interest rates in early 1996, rates remained
relatively stable over the 12 months ended April 30, 1997. Rates on 10-year
U.S. Treasury securities ended the period at 6.75%, just where they began it
on May 1, 1996. Volatility during this period was also low, with the 10-year
issue trading in a range of 6% to 7%. In this environment, Class A shares of
the Fund provided a total return of 8.99% during this period, Class B shares
8.16%, Class C shares 8.27%, and Class I shares 9.21%. These returns assume
the reinvestment of distributions but exclude the effects of any sales
charges. All classes of shares outperformed the Lehman Brothers Government/
Corporate Bond Index (the Lehman Index), which returned 6.72% over the same
period. 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.
The Fund's performance also compared favorably to the 7.42% average return of
other corporate debt "BBB"-rated funds with similar objectives, as tracked by
Lipper Analytical Services, Inc., an independent firm that reports mutual fund
performance.
Q. THE FUND HAS PERFORMED WELL AGAINST ITS BENCHMARK INDICES THIS YEAR. WHAT
DO YOU SEE AS SOME OF THE REASONS FOR THIS PERFORMANCE?
A. The Fund's strong performance resulted from its overweightings in both
investment-grade and high-yield corporate securities, as well as from its 5%
to 10% allocation to nondollar fixed-income securities. The Fund's average 60%
weighting in investment-grade corporates, which is roughly 50% higher than the
average fund in its Lipper peer group, helped the Fund, as this sector's 7.55%
return far outdistanced the 6.37% return of the Lehman Brothers Treasury Index
(an unmanaged index of U.S. Treasury securities). Also, the Fund's average 20%
weighting in high-yield securities, which is about 33% higher than the average
fund in its Lipper peer group, contributed to the strong performance as this
sector recorded a very solid 11.76% total return for the period. The
traditional pattern, in which corporates outperform Treasuries during periods
of strong economic activity, worked again in the past year as the U.S. economy
continues to roll along into its seventh year of economic recovery from the
1990-91 recession. (Principal value and interest on Treasury securities are
guaranteed by the U.S. government if held to maturity.)
Q. SO YOUR WEIGHTINGS IN INVESTMENT-GRADE AND HIGH-YIELD CORPORATES PAID OFF.
WHAT ABOUT SPECIFIC INDUSTRIES?
A. We had significant overweightings in the airline and utility sectors, which
contributed to the strong performance as well. Returns of 8.97% for utilities
and 9.65% for airlines made them the best-performing sectors of the
investment-grade corporate market. The Fund's utility holdings, such as Long
Island Lighting and Commonwealth Edison, are benefiting from prospects for
restructuring that could result in the elimination of much of their
outstanding debt in the next 12 to 18 months. Holdings in the "big three"
airlines -- Delta, American, and United -- benefited from the favorable
pricing environment in the airline business resulting from the strong economy.
These companies were able to generate strong cash flows, which they used to
purchase their outstanding debt securities in the open market, further
improving their credit profiles.
Q. IN GENERAL, HOW WOULD YOU DESCRIBE THE FIXED-INCOME ENVIRONMENT OVER THE
PAST YEAR?
A. It was a traditional "clip-the-coupon" environment like we used to have in
the 1950s and 1960s, when interest rates were much less volatile. With rates
remaining in a relatively tight range, there was little value to add by trying
to anticipate interest-rate movements. Most of the added value came from being
overweighted in the corporate sector and picking the sectors and companies
that we felt would thrive in that environment. We expect a similar environment
to dominate the scene in the coming year as economic activity appears likely
to continue growing and as inflationary pressures remain dormant.
Q. AND HOW IS YOUR VIEW ON THE FIXED-INCOME MARKETS REFLECTED IN THE FUND'S
DURATION, OR INTEREST-RATE SENSITIVITY?
A. The Fund's current duration is six years, roughly equivalent to that of the
average fund in its Lipper peer group. A neutral outlook is consistent with
our view that rates will likely remain in a narrow range through the summer
months.
Q. MORE SPECIFICALLY, WHAT ABOUT THE CORPORATE BOND MARKET? HOW WOULD YOU
DESCRIBE THE ENVIRONMENT THERE?
A. Environments like the current one, that is, ones that feature steady growth
and low inflation, are ideal for the cash flows and credit quality of American
corporations. Despite the fact that the yield premium for corporate securities
is as low today as it has been in 10 years, we believe the corporate asset
class will continue to outperform Treasury and mortgage-backed securities in
the upcoming year.
Q. YOUR BIGGEST WEIGHTING IN THE INVESTMENT-GRADE SECTOR IS A 12% POSITION IN
ELECTRIC UTILITIES. WHAT IS IT THAT YOU LIKE ABOUT THIS SECTOR, AND ARE THERE
ANY UTILITIES YOU PARTICULARLY FAVOR?
A. Under various restructuring plans, many of the utility securities now rated
"BB" by Standard & Poor's will eventually become investment-grade credits.
When securities cross over to investment grade, or move from "BB," the top
high-yield rating, to "BBB," the lowest investment-grade rating, the universe
of buyers expands significantly. There is a limited set of buyers of high-
yield debt, but a vast arena of buyers of investment-grade securities. Our
favorite names within this optimistic scenario include Long Island Lighting,
Niagara Mohawk, and Cleveland Electric.
Q. YOU ALSO HAVE ABOUT 20% OF ASSETS IN HIGH-YIELD CORPORATE BONDS. WHY DO YOU
FEEL COMFORTABLE WITH THIS LEVEL, AND WHAT TYPES OF HIGH-YIELD BONDS ARE IN
THE PORTFOLIO?
A. We like high-yield bonds because the economy is strong and the credit
quality of this sector is improving as well. We focus on the higher end of the
sector, "BB"-rated bonds, and on issues that we believe will cross over to
investment-grade ratings in the next 12 to 18 months. Our largest holdings
include the utilities I mentioned before, as well as Tenet Healthcare, a large
hospital consolidator with an investment-grade credit profile, and Continental
Airlines, which is benefiting from strong pricing trends in the domestic
airline business.
Q. AT THE SAME TIME, YOU'VE CUT THE FUND'S POSITION IN NONDOLLAR MARKETS FROM
APPROXIMATELY 10% OF ASSETS TO 4% IN RECENT MONTHS. WHY?
A. With the tremendous decline in interest rates in Europe throughout 1996, we
feel this sector is less attractive than it was when rates were significantly
higher earlier in 1996. Given all the concern over European monetary
unification, we feel that this sector represents merely fair value.
Q. WE'VE TALKED ABOUT SOME SECTORS AND INDUSTRIES THAT HELPED THE FUND OVER
THE PAST YEAR; NOW, WOULD YOU MIND TALKING ABOUT ANY POSITIONS THAT DID NOT
PERFORM AS WELL AS YOU HOPED?
A. The Fund maintains positions in a couple of companies that have been
adversely affected by the deteriorating pattern in consumer delinquencies.
Advanta Corp., a credit-card company, had a significant pickup in
delinquencies that resulted in an unexpected loss in the first quarter of
1997. At the same time, First Merchants Acceptance Corp. had difficulty with
delinquencies in its auto-loan portfolio. Although we are very concerned about
these trends and talk with the companies frequently, we believe the securities
of both of these institutions represent good value at current prices.
Q. AS YOU LOOK AHEAD, WHAT CHANGES DO YOU SEE IN THE GENERAL ECONOMIC
ENVIRONMENT FOR YOUR MARKET, AND HOW ARE YOU POSITIONING THE FUND FOR THOSE
CHANGES?
A. We are watching the current pace of economic growth and inflation very
closely. While the economy has been growing at a steady pace, we are on the
lookout for signs of an economic slowdown. If we see any of these signs, we
will increase the duration of the portfolio to take advantage of a likely move
to lower interest rates. If we see signs of a protracted slowdown, we will
reduce our exposure to both investment-grade and high-yield corporate
securities. Finally, inflation is the enemy of every bond investor, and it has
failed to show up in the current cycle, despite the strong pace of growth and
resource utilization. If we begin to see signs of inflation, we will reduce
the duration of the portfolio to seek to protect the Fund against the
potential for lower bond prices that could result from higher interest rates.
/s/ Geoffrey L. Kurinsky
Geoffrey L. Kurinsky
Portfolio Manager
- - --------------------------------------------------------------------------------
PORTFOLIO MANAGER'S PROFILE
GEOFFREY L. KURINSKY BEGAN HIS CAREER AT MFS IN 1987 IN THE FIXED INCOME
DEPARTMENT. A GRADUATE OF THE UNIVERSITY OF MASSACHUSETTS AND BOSTON
UNIVERSITY'S GRADUATE SCHOOL OF MANAGEMENT, HE WAS NAMED ASSISTANT VICE
PRESIDENT IN 1988, VICE PRESIDENT IN 1989, AND SENIOR VICE PRESIDENT IN
1993. HE HAS MANAGED MFS(R) BOND FUND SINCE 1989.
- - --------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
FUND FACTS
STRATEGY: THE FUND 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.
COMMENCEMENT OF
INVESTMENT OPERATIONS: CLASS A: MAY 8, 1974
CLASS B: SEPTEMBER 7, 1993
CLASS C: JANUARY 3, 1994
CLASS I: JANUARY 2, 1997
SIZE: $694.3 MILLION NET ASSETS AS OF APRIL 30, 1997
- - --------------------------------------------------------------------------------
PERFORMANCE SUMMARY
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. Class A share performance results reflect the deduction of the
4.75% maximum sales charge; benchmark comparisons are unmanaged and do not
reflect any fees or expenses. The performance of other share classes will be
greater than or less than the line shown, based on differences in loads and
fees paid by shareholders investing in different classes. It is not possible
to invest in an index.
GROWTH OF A HYPOTHETICAL $10,000 INVESTMENT
(For the 5-year period ended April 30, 1997)
MFS CONSUMER LEHMAN BROTHERS
BOND FUND PRICE INDEX GOVERNMENT/CORPORATE
CLASS A U.S. BOND INDEX
--------- ----------- --------------------
4/92 9,527 10,000 10,000
4/93 10,813 10,323 11,450
4/94 11,043 10,566 11,581
4/95 11,902 10,889 12,382
4/96 12,934 11,195 13,453
4/97 14,097 11,508 14,356
<PAGE>
GROWTH OF A HYPOTHETICAL $10,000 INVESTMENT
(For the 10-year period ended April 30, 1997)
MFS CONSUMER LEHMAN BROTHERS
BOND FUND PRICE INDEX GOVERNMENT/CORPORATE
CLASS A U.S. BOND INDEX
--------- ----------- --------------------
4/87 9,525 10,000 10,000
4/89 10,705 10,917 11,503
4/91 13,258 11,990 14,316
4/93 16,914 12,770 18,157
4/95 18,617 13,471 19,653
4/97 22,050 14,237 22,766
<TABLE>
AVERAGE ANNUAL TOTAL RETURNS AS OF APRIL 30, 1997
<CAPTION>
1 Year 3 Years 5 Years 10 Years
- - ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
MFS Bond Fund (Class A)
including 4.75% sales charge (SEC results) +3.82% +6.72% +7.10% +8.23%
- - ----------------------------------------------------------------------------------------------------------------------------------
MFS Bond Fund (Class A) at net asset value +8.99% +8.48% +8.15% +8.76%
- - ----------------------------------------------------------------------------------------------------------------------------------
MFS Bond Fund (Class B) with CDSC (SEC results) +4.16% +6.78% +7.26% +8.46%
- - ----------------------------------------------------------------------------------------------------------------------------------
MFS Bond Fund (Class B) at net asset value +8.16% +7.65% +7.55% +8.46%
- - ----------------------------------------------------------------------------------------------------------------------------------
MFS Bond Fund (Class C) with CDSC (SEC results) +7.27% +7.72% +7.62% +8.50%
- - ----------------------------------------------------------------------------------------------------------------------------------
MFS Bond Fund (Class C) at net asset value +8.27% +7.72% +7.62% +8.50%
- - ----------------------------------------------------------------------------------------------------------------------------------
MFS Bond Fund (Class I) with CDSC (SEC results) +9.21% +8.55% +8.19% +8.78%
- - ----------------------------------------------------------------------------------------------------------------------------------
MFS Bond Fund (Class I) at net asset value +9.21% +8.55% +8.19% +8.78%
- - ----------------------------------------------------------------------------------------------------------------------------------
Average corporate debt BBB-rated fund* +7.42% +7.80% +8.29% +8.53%
- - ----------------------------------------------------------------------------------------------------------------------------------
Lehman Brothers Government/
Corporate Bond Index** +6.72% +7.42% +7.50% +8.57%
- - ----------------------------------------------------------------------------------------------------------------------------------
Consumer Price Index(+) +2.80% +2.89% +2.85% +3.60%
- - ----------------------------------------------------------------------------------------------------------------------------------
* Source: Lipper Analytical Services.
** Source: CDA/Wiesenberger.
(+) The Consumer Price Index is published by the U.S. Bureau of Labor Statistics
and measures the cost of living (inflation).
</TABLE>
All results are historical and assume the reinvestment of dividends and
capital gains. Investment return and principal value will fluctuate, and
shares, when redeemed, may be worth more or less than their original cost.
Past performance is no guarantee of future results.
Class A share SEC results include the maximum 4.75% sales charge. Class B
share SEC results reflect the applicable contingent deferred sales charge
(CDSC), which declines over six years as follows: 4%, 4%, 3%, 3%, 2%, 1%, 0%.
Class 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 are subject to a 1% CDSC if redeemed within 12 months of purchase.
Class I shares, which became available on January 2, 1997, have no sales
charge or Rule 12b-1 fees and are only available to certain institutional
investors.
Class B and Class C share results include the performance and the operating
expenses (e.g., Rule 12b-1 fees) of the Fund's Class A shares for periods
prior to the commencement of offering of Class B and Class C shares. Because
operating expenses attributable to Class B and Class C shares are higher than
those of Class A shares, Class B and Class C share performance generally would
have been lower than Class A share performance. The Class A share performance
included in the Class B and Class C share SEC performance with CDSC has been
adjusted to reflect the CDSC generally applicable to Class B and Class C
shares rather than the sales charge generally applicable to Class A shares.
Class I share results include the performance and operating expenses (e.g.,
Rule 12b-1 fees) of Class A shares for periods prior to the commencement of
offering of Class I shares. Because operating expenses attributable to Class A
shares are greater than those of Class I shares, Class I share performance
generally would have been higher than Class A share performance. The Class A
share performance included in the Class I share SEC performance has been
adjusted to reflect the fact that Class I shares have no initial sales charge.
These results represent the percentage change in net asset value.
Performance results reflect any applicable expense subsidies and waivers,
without which the results would have been less favorable. Current subsidies
and waivers may be discontinued at any time.
<PAGE>
PORTFOLIO CONCENTRATION AS OF APRIL 30, 1997
LARGEST SECTORS
High-Grade Corporates 46%
High-Yield Corporates 20%
Mortgage Backed 11%
Asset Backed 6%
Emerging Markets 6%
Nondollar 4%
U.S. Treasuries 4%
Miscellaneous 3%
For a more complete breakdown, refer to the Portfolio of Investments.
- - --------------------------------------------------------------------------------
TAX FORM SUMMARY
IN JANUARY 1997, SHAREHOLDERS WERE MAILED A TAX FORM SUMMARY REPORTING
THE FEDERAL TAX STATUS OF ALL DISTRIBUTIONS PAID DURING THE CALENDAR
YEAR 1996.
- - --------------------------------------------------------------------------------
<PAGE>
<TABLE>
PORTFOLIO OF INVESTMENTS - April 30, 1997
Bonds - 97.4%
<CAPTION>
- - ------------------------------------------------------------------------------------------------------------
S&P
Bond
Rating Principal Amount
(Unaudited) Issuer (000 Omitted) Value
- - ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
U.S. Bonds - 93.3%
Aerospace - 0.3%
BBB- Northrup Grumman Corp., 9.375s, 2024 $ 2,200 $ 2,374,922
- - ------------------------------------------------------------------------------------------------------------
Airlines - 7.6%
BB Airplane Pass-Through Trust,
10.875s, 2019 $ 1,500 $ 1,642,500
B Continental Airlines, Inc.,
9.5s, 2001 4,250 4,345,625
BBB Continental Airlines, Inc.,
9.5s, 2013 4,411 4,896,794
BBB Continental Airlines, Inc.,
10.22s, 2014 5,346 6,207,387
NR Continental Airlines, Inc.,
7.461s, 2016 1,000 992,978
BB+ Delta Airlines, Inc.,
8.5s, 2002 3,155 3,304,263
BB+ Delta Airlines, Inc.,
9.75s, 2021 12,330 14,476,283
A Jet Equipment Trust,
8.64s, 2012## 2,040 2,188,904
BB+ Jet Equipment Trust,
11.44s, 2014## 3,500 4,091,885
NR Jet Equipment Trust,
10.69s, 2015## 2,390 2,842,475
BB- Northwest Airlines, Inc.,
8.7s, 2007 1,000 990,820
A- Southwest Airlines Co.,
7.375s, 2027 1,500 1,431,000
BB United Airlines, Inc.,
9.125s, 2012 1,500 1,627,575
BB+ United Airlines, Inc.,
7.27s, 2013 3,978 3,831,488
------------
$ 52,869,977
- - ----------------------------------------------------------------------------------------------------------
Automotive - 1.3%
BB- Lear Corp., 9.5s, 2006 $ 4,500 $ 4,657,500
BB+ Mark IV Industries, Inc.,
7.75s, 2006 4,500 4,263,750
------------
$ 8,921,250
- - ----------------------------------------------------------------------------------------------------------
Bank and Finance - 10.1%
BB+ ADVANTA Corp., 7.07s, 1997 $10,000 $ 10,008,000
BB+ ADVANTA Corp., 6.925s, 2002 2,475 2,374,367
BBB+ AFC Capital Trust, 8.207s, 2027 3,775 3,779,643
A- BankAmerica Capital II, 8s,
2026 4,550 4,491,578
BB+ Bank United Corp., 8.875s, 2007 1,325 1,313,406
A Bear Stearns Cos., Inc., 7s,
2007 1,600 1,536,416
BBB+ BT Institutional Capital Trust,
8.09s, 2026## 3,000 2,858,340
BB+ Capital One Financial Corp.,
7.25s, 2003 2,675 2,586,974
BB Colonial Capital II,
8.92s, 2027 1,640 1,600,115
BB+ Contifinancial Corp., 8.375s,
2003 1,735 1,748,013
A+ Credit Suisse, 7.9s, 2007## 5,759 5,830,124
NR First Chicago, 7.95s, 2026## 1,300 1,243,944
BBB- First Empire Capital Trust,
8.234s, 2027 3,275 3,200,723
NR First Merchants Acceptance
Corp., 9.5s, 2006 1,500 1,200,000
BB- First USA Capital Trust,
9.33s, 2027## 2,400 2,635,032
BB+ Hubco Capital Trust,
8.98s, 2027## 2,000 1,972,500
A Lehman Brothers
Holdings, 7.125s, 2003 3,000 2,960,250
A Lehman Brothers
Holdings, 7.5s, 2003 8,800 8,955,672
BBB Leucadia Capital Trust,
8.65s, 2027 2,000 1,895,000
BBB- MBNA Capital, 8.278s, 2026 2,000 1,901,720
BB- Riggs National Corp.,
8.5s, 2006 1,250 1,262,500
BBB Salomon, Inc., 7.2s, 2004 1,260 1,236,035
A State Street Institutional
Capital,
7.94s, 2026## 2,450 2,361,188
BBB- UCFC, 7.7s, 2004 1,300 1,260,051
-------------
$ 70,211,591
- - ----------------------------------------------------------------------------------------------------------
Building - 1.9%
BB Building Materials Corp.,
8.625s, 2006 $ 1,000 $ 965,000
BBB- Owens Corning Fiberglass Corp., 8.875s,
2002 5,650 6,042,054
NR Owens Corning Fiberglass Corp.,
9.9s, 2015## 1,500 1,561,875
BB+ USG Corp., 9.25s, 2001 4,440 4,650,900
------------
$ 13,219,829
- - ----------------------------------------------------------------------------------------------------------
Business Machines - 0.3%
A IBM Corp., 7.125s, 1997 $ 2,500 $ 2,273,650
- - ----------------------------------------------------------------------------------------------------------
Consumer Goods and Services - 1.1%
BBB- Fingerhut Cos., Inc.,
7.375s, 1999 $ 1,600 $ 1,600,000
A Philip Morris Cos., Inc.,
7.5s, 2004 6,189 6,187,700
------------
$ 7,787,700
- - ----------------------------------------------------------------------------------------------------------
Corporate Asset Backed - 5.8%
BBB BCF LLC, 96-R1, 7.75s, 2026## $ 2,477 $ 2,338,275
AAA Chevy Chase Master Credit Card
Trust, 5.838s, 2005 2,500 2,500,000
AAA MBNA Master Credit Card Trust, 5.798s,
2006 30,000 29,981,100
NR Merrill Lynch Mortgage Investors, Inc.,
9.7s, 2008 12 11,990
NR Merrill Lynch Mortgage Investors, Inc.,
8.3s, 2011 1,427 1,440,697
NR Merrill Lynch Mortgage Investors, Inc.,
9s, 2011 751 765,065
NR Merrill Lynch Mortgage Investors, Inc.,
10s, 2011 1,172 1,228,643
B Merrill Lynch Mortgage Investors, Inc.,
8.10s, 2022+ 2,000 1,699,375
------------
$ 39,965,145
- - ----------------------------------------------------------------------------------------------------------
Entertainment - 9.9%
BBB+ Circus Circus
Enterprises, 6.7s, 2020 $ 3,000 $ 2,870,070
BBB Continental Cablevision, Inc.,
11s, 2007 10,000 11,253,100
BBB News America Holdings, Inc.,
10.125s, 2012 6,825 7,585,100
BBB News America Holdings, Inc.,
9.5s, 2024 2,600 2,860,390
BBB News America Holdings, Inc.,
8.15s, 2036 3,250 3,098,388
BBB- NWCG Holdings Corp., 0s, 1999 5,060 4,364,250
BB+ TCI Communications, Inc.,
9.65s, 2027 4,650 4,580,250
BBB- Tele-Communications, Inc.,
7.38s, 2001 1,375 1,360,108
BBB- Tele-Communications, Inc.,
7.385s, 2001 9,500 9,398,920
BBB- Tele-Communications, Inc.,
9.25s, 2002 2,000 2,119,880
BBB- Time Warner, Inc., 6.1s, 2001## 7,000 6,629,770
BBB- Time Warner, Inc., 9.15s, 2023 10,354 11,060,143
B- World Com, Inc., 7.75s, 2009 1,600 1,600,096
------------
$ 68,780,465
- - ----------------------------------------------------------------------------------------------------------
Food and Beverage Products - 0.4%
BBB- RJR Nabisco, Inc., 8.75s, 2007 $ 3,000 $ 2,890,470
- - ----------------------------------------------------------------------------------------------------------
Foreign - U.S. Dollar Denominated - 8.0%
NR Banco Comercial S.A.,
8.25s, 2007## $ 1,820 $ 1,793,392
BBB Dao Heng Bank Ltd., 7.75s,
2007## 2,500 2,465,450
A- Empresa Nacional, 7.325s, 2037 2,367 2,336,679
A- Enersis S.A., 6.9s, 2006 1,200 1,146,000
BBB- Financiera Energetica Nacional, 9.375s,
2006## 6,150 6,365,250
NR Hidroelectrica Alicura,
8.375s, 1999## 4,325 4,325,000
NR Industrial Finance Corp.,
7.375s, 2007## 3,000 2,936,490
AA- Korea Development Bank,
6.75s, 2005 7,000 6,693,680
AA- Korea Electric Power, 7s, 2027 4,025 3,914,393
NR Montell America Finance Corp.,
7.6s, 2007## 1,250 1,250,000
BB Pepsi-Gemex S.A., 9.75s, 2004## 1,350 1,336,500
BBB- Petroleum Geo
Services, 7.5s, 2007 675 670,781
BB Polysindo Internationale
Finance, 13s, 2001 2,217 2,477,498
BB Republic of Argentina,
9.25s, 2001 1,560 1,612,650
BBB- Republic of Colombia,
8.75s, 1999 110 115,088
BBB- Republic of Colombia,
7.625s, 2007 1,950 1,829,724
BBB- Republic of Colombia,
8.7s, 2016 6,200 6,203,472
BB+ Republic of Panama,
7.875s, 2002## 1,370 1,311,775
BBB- Total Access Communications, 8.375s,
2006## 1,500 1,487,340
BBB- United Mexican States, Floating Rate,
2001## 2,500 2,525,000
BB United Mexican
States, 11.375s, 2016 2,500 2,637,500
------------
$ 55,433,662
- - ----------------------------------------------------------------------------------------------------------
Forest and Paper Products - 3.0%
BBB- Boise Cascade Co., 9.85s, 2002 $ 4,412 $ 4,897,099
BBB- Boise Cascade Co., 7.43s, 2005 5,000 4,964,400
BBB- Georgia Pacific Corp., 9.875s,
2021 7,850 8,600,696
A Westvaco Corp., 7.65s, 2027 2,510 2,497,550
------------
$ 20,959,745
- - ----------------------------------------------------------------------------------------------------------
Insurance - 5.0%
BBB- Conseco Financing Trust III,
8.796s, 2027 $ 1,600 $ 1,612,000
A Equitable Life Assurance,
7.7s, 2015## 4,435 4,289,310
BBB+ Fairfax Financial
Holdings, 8.3s, 2026 2,750 2,803,405
A+ Jackson National Life Insurance Co.,
8.15s, 2027## 3,000 2,994,810
A+ Liberty Mutual Insurance Co.,
8.2s, 2007## 5,375 5,652,350
A+ Nationwide Mutual Insurance Co., 7.5s,
2024## 6,440 5,836,701
AA- New York Life Insurance Co.,
7.5s, 2023## 2,000 1,844,360
NR Providian Capital, 9.525s, 2027 4,100 4,125,625
A Travelers Capital II,
7.75s, 2036 5,875 5,581,250
------------
$ 34,739,811
- - ----------------------------------------------------------------------------------------------------------
Medical and Health Technology and Services - 1.3%
BB Tenet Healthcare Corp.,
8.625s, 2003 $ 2,000 $ 2,030,000
BB Tenet Healthcare Corp.,
8s, 2005 3,950 3,871,000
B+ Tenet Healthcare Corp.,
10.125s, 2005 2,740 2,931,800
------------
$ 8,832,800
- - ----------------------------------------------------------------------------------------------------------
Oil Services - 0.4%
BBB Transcontinental
Gas, 7.25s, 2026 $ 3,015 $ 2,796,413
- - ----------------------------------------------------------------------------------------------------------
Oils - 2.6%
BB Chesapeake Energy Corp.
7.875s, 2004## $ 4,000 $ 3,880,000
NR Enserch Exploration,
7.54s, 2009## 1,625 1,586,715
BBB- Freeport-McMoRan Co.,
7.5s, 2006 850 832,575
BB+ Gulf Canada Resources Ltd.,
8.25s, 2017 2,000 1,965,000
BBB Husky Oil Ltd., 7.125s, 2006 3,000 2,924,550
BB Oryx Energy Co., 10s, 2001 102 110,928
BBB- Tosco Corp., 7.8s, 2027## 3,250 3,201,494
A- Transocean Offshore, Inc.,
8s, 2027 3,285 3,329,183
------------
$ 17,830,445
- - ----------------------------------------------------------------------------------------------------------
Restaurants and Lodging - 1.4%
BBB+ Hilton Hotels Corp.,
7.95s, 2007 $ 9,300 $ 9,376,353
- - ----------------------------------------------------------------------------------------------------------
Steel - 0.4%
BB- AK Steel Corp., 9.125s, 2006 $ 2,500 $ 2,468,750
- - ----------------------------------------------------------------------------------------------------------
Supermarkets - 1.5%
BBB- Great Atlantic & Pacific Tea,
9.125s, 1998 $ 6,480 $ 6,605,194
NR Great Atlantic & Pacific Tea,
7.75s, 2007## 3,850 3,859,625
------------
$ 10,464,819
- - ----------------------------------------------------------------------------------------------------------
Telecommunications - 0.3%
BBB- 360 Communications Corp.,
7.5s, 2006 $ 1,000 $ 984,300
B- 360 Communications Corp.,
7.6s, 2009 1,000 985,340
------------
$ 1,969,640
- - ----------------------------------------------------------------------------------------------------------
Transportation - 0.2%
NR Humpuss Funding Corp., 7.72s, 2009## $ 1,500 $ 1,477,062
- - ----------------------------------------------------------------------------------------------------------
U.S. Government and Agency
Obligations - 15.0%
GOV Federal Home Loan Mortgage
Corp., 9.5s, 2001 $ 7 $ 7,813
GOV Government National Mortgage
Assn., 7.5s, 2007-2011 7,928 8,022,144
GOV Government National Mortgage
Assn., 8s, 2024-2026 41,993 49,582,149
GOV Government National Mortgage
Assn., 8.5s, 2026 - 2027 16,502 20,351,758
GOV Government National Mortgage
Assn., 13.25s, 2023 684 762,620
GOV U.S. Treasury Bonds, 6.5s, 2026 9,726 9,134,854
GOV U.S. Treasury Bonds, 6.625s, 2027 8,850 8,491,841
GOV U.S. Treasury Notes, 6.625s, 2002 3,250 3,257,605
GOV U.S. Treasury Notes, 6.25s, 2007 5,000 4,837,500
------------
$104,448,284
- - ----------------------------------------------------------------------------------------------------------
Utilities - Electric - 12.0%
BBB Arkansas Power & Light Co.,
8.75s, 2026 $ 500 $ 493,550
B+ Beaver Valley II Funding, 9s, 2017 3,000 3,025,050
BB Central Maine Power Co.,
7.45s, 1999 1,500 1,482,795
BB Cleveland Electric
Illumination, 9.05s, 2001 2,300 2,432,917
BB Cleveland Electric
Illumination, 9.375s, 2017 4,163 4,276,609
BB Cleveland Electric
Illumination, 9s, 2023 4,677 4,799,631
BBB- Comed Financing II,
8.5s, 2027## 1,000 973,750
BBB Commonwealth Edison,
8.375s, 2006 800 844,208
BBB- Commonwealth Edison,
7.625s, 2007 2,460 2,425,954
NR Edison Mission Energy,
7.33s, 2008## 725 714,234
BB- El Paso Electric Co.,
8.9s, 2006 1,750 1,818,775
BBB+ Empresa Electrica, 7.3s, 2003 2,385 2,370,261
BBB Edelnor, 7.75s, 2006 1,150 1,134,786
BB- First PV Funding Corp.,
10.3s, 2014 1,598 1,693,880
BB- First PV Funding Corp.,
10.15s, 2016 826 879,690
BB+ Long Island Lighting Co.,
7.5s, 2007 1,500 1,473,435
BB+ Long Island Lighting Co.,
8.9s, 2019 7,393 7,659,296
BB+ Long Island Lighting Co.,
9s, 2022 6,215 6,735,009
BB+ Long Island Lighting Co.,
8.2s, 2023 125 125,765
BBB- Louisiana Power & Light Co.,
10.67s, 2017 490 524,256
BBB- Louisiana Power & Light Co.,
10.67s, 2017 1,450 1,551,312
BBB Louisiana Power & Light Co.,
8.75s, 2026 567 568,508
BB Midland Corp., 10.33s, 2002 2,686 2,874,716
BBB Montana Power Co., 7.875s, 2026 1,000 970,000
BB- Niagara Mohawk Power Co.,
6.875s, 2001 3,500 3,390,975
BB- Niagara Mohawk Power Co.,
8s, 2004 2,425 2,388,480
B+ North Atlantic Energy,
9.05s, 2002 4,378 4,322,618
BBB- Salton Sea Funding Corp.,
6.69s, 2000 2,779 2,773,521
BBB- Salton Sea Funding Corp.,
7.37s, 2005 2,655 2,615,679
BBB- Salton Sea Funding Corp.,
7.84s, 2010 3,775 3,708,749
BBB- Salton Sea Funding Corp.,
8.3s, 2011 1,500 1,535,325
A- Southern Co., Capital Trust,
8.19s, 2037## 3,660 3,641,700
BBB- System Energy Resources, 7.8s, 2000 3,990 3,991,077
B+ Texas & New Mexico Power Co.,
12.5s, 1999 2,700 2,904,741
------------
$ 83,121,252
- - ----------------------------------------------------------------------------------------------------------
Utilities - Gas - 3.5%
BB+ California Energy Co., 0s, 2004 $ 2,350 $ 2,502,750
BBB- Coastal Corp., 7.42s, 2037 10,736 10,209,614
BB+ Louis Dreyfus Natural
Gas, 9.25s, 2004 4,055 4,288,163
BBB+ Ras Laffan Liquefied Natural
Gas, 7.628s, 2006## 1,500 1,503,750
BBB+ Ras Laffan Liquefied Natural
Gas, 8.294s, 2014## 2,075 2,077,594
BBB Tennessee Gas Pipeline,
7.625s, 2037 4,000 3,940,000
------------
$ 24,521,871
- - ----------------------------------------------------------------------------------------------------------
Total U.S. Bonds $647,735,906
- - ----------------------------------------------------------------------------------------------------------
Foreign Bonds - 4.1%
Australia - 0.7%
AAA Commonwealth of Australia,
8.75s, 2001 AUD 2,090 $ 1,718,384
NR Commonwealth of Australia,
10s, 2002 3,470 3,009,933
------------
$ 4,728,317
- - ----------------------------------------------------------------------------------------------------------
Canada - 0.2%
AAA Government of Canada, 8.75s, 2005 CAD 1,890 $ 1,546,646
- - ----------------------------------------------------------------------------------------------------------
Denmark - 0.2%
NR Danish Nykredit, 8s, 2026 DKK 9,164 $ 1,415,187
AAA Kingdom of Denmark, 8s, 2001 325 54,667
------------
$ 1,469,854
- - ----------------------------------------------------------------------------------------------------------
Greece - 0.3%
NR Hellenic Republic, Floating
Rate, 2003 GRD 555,000 $ 2,118,760
- - ----------------------------------------------------------------------------------------------------------
Ireland - 0.3%
NR Republic of Ireland,
6.25s, 1999 IEP 300 $ 450,972
NR Republic of Ireland, 8s, 2000 995 1,580,685
------------
$ 2,031,657
- - ----------------------------------------------------------------------------------------------------------
Italy - 0.5%
AAA Republic of Italy, 9.5s, 1999 ITL 2,515,000 $ 1,534,731
AAA Republic of Italy, 9.5s, 2001 2,435,000 1,537,018
------------
$ 3,071,749
- - ----------------------------------------------------------------------------------------------------------
Japan - 0.6%
AAA International Bank of
Reconstruction &
Development, 4.75s, 2004 JPY 464,000 $ 4,278,157
- - ----------------------------------------------------------------------------------------------------------
New Zealand - 0.2%
AAA Government of New Zealand, 8s, 2001 NZD 2,210 $ 1,548,025
- - ----------------------------------------------------------------------------------------------------------
Spain - 0.5%
NR Kingdom of Spain, 10.1s, 2001 ESP 187,490 $ 1,469,006
NR Kingdom of Spain, 10.5s, 2003 188,010 1,562,756
NR Kingdom of Spain, 7.35s, 2007 94,560 671,873
------------
$ 3,703,635
- - ----------------------------------------------------------------------------------------------------------
Sweden - 0.2%
NR Kingdom of Sweden, 10.25s, 2000 SEK 9,800 $ 1,408,101
- - ----------------------------------------------------------------------------------------------------------
United Kingdom - 0.4%
NR United Kingdom Conversion,
9.5s, 2004 GBP 1,200 $ 2,184,350
NR United Kingdom Treasury,
9.75s, 2002 180 323,819
------------
$ 2,508,169
- - ----------------------------------------------------------------------------------------------------------
Total Foreign Bonds $ 28,413,070
- - ----------------------------------------------------------------------------------------------------------
Total Bonds (Identified Cost, $677,750,459) $676,148,976
- - ----------------------------------------------------------------------------------------------------------
Preferred Stocks - 0.8%
- - ------------------------------------------------------------------------------------------------------------
Shares
- - ------------------------------------------------------------------------------------------------------------
Oils - 0.2%
El Paso Tennessee Pipeline, "A" 30,000 $ 1,620,000
- - ------------------------------------------------------------------------------------------------------------
Utilities - Electric - 0.6%
Long Island Lighting Co., 7.95% 150,000 $ 3,900,000
- - ----------------------------------------------------------------------------------------------------------
Total Preferred Stocks (Identified Cost, $5,164,500) $ 5,520,000
- - ----------------------------------------------------------------------------------------------------------
Total Investments (Identified Cost, $682,914,959) $681,668,976
Other Assets, Less Liabilities - 1.8% 12,637,506
- - ------------------------------------------------------------------------------------------------------------
Net Assets - 100.0% $694,306,482
- - ------------------------------------------------------------------------------------------------------------
##SEC Rule 144A restriction.
+Restricted security.
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 IEP = Irish Punts
CAD = Canadian Dollars ITL = Italian Lire
DKK = Danish Kroner JPY = Japanese Yen
ESP = Spanish Pesetas NZD = New Zealand Dollars
GBP = British Pounds SEK = Swedish Kronor
GRD = Greek Drachmas
</TABLE>
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS
<TABLE>
Statement of Assets and Liabilities
- - --------------------------------------------------------------------------------------------
April 30, 1997
- - --------------------------------------------------------------------------------------------
Assets:
<S> <C>
Investments, at value (identified cost, $682,914,959) $681,668,976
Cash 97,574
Net receivable for forward foreign currency exchange contracts sold 1,135,358
Net receivable for masternetting agreements and closed foreign currency
exchange contracts purchased 884,204
Receivable for Fund shares sold 2,378,822
Receivable for investments sold 28,941,395
Interest and dividends receivable 13,153,242
Other assets 46,598
------------
Total assets $728,306,169
------------
Liabilities:
Payable for Fund shares reacquired $ 1,814,769
Payable for investments purchased 31,116,288
Net payable for forward foreign currency exchange contracts purchased 652,976
Payable to affiliates -
Management fee 7,499
Administrative fee 284
Shareholder servicing agent fee 2,462
Distribution and service fee 174,866
Accrued expenses and other liabilities 230,543
------------
Total liabilities $ 33,999,687
------------
Net assets $694,306,482
============
Net assets consist of:
Paid-in capital $709,152,020
Unrealized appreciation on investments and translation of assets and
liabilities in foreign currencies 93,916
Accumulated net realized loss on investments and foreign
currency transactions (14,389,593)
Accumulated distributions in excess of net investment income (549,861)
------------
Total $694,306,482
============
Shares of beneficial interest outstanding 53,281,347
==========
Class A shares:
Net asset value per share
(net assets of $541,709,680 / 41,536,538 shares of beneficial interest
outstanding) $13.04
======
Offering price per share (100 / 95.25) $13.69
======
Class B shares:
Net asset value and offering price per share
(net assets of $123,000,129 / 9,468,112 shares of beneficial interest
outstanding) $12.99
======
Class C shares:
Net asset value and offering price per share
(net assets of $20,003,387 / 1,541,622 shares of beneficial interest
outstanding) $12.98
======
Class I shares:
Net asset value, offering price and redemption price per share
(net assets of $9,593,286 / 735,075 shares of beneficial interest
outstanding) $13.05
======
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
</TABLE>
<PAGE>
FINANCIAL STATEMENTS - continued
<TABLE>
Statement of Operations
- - --------------------------------------------------------------------------------------------
Year Ended April 30, 1997
- - --------------------------------------------------------------------------------------------
<S> <C>
Net investment income:
Income -
Interest $54,358,273
Dividends 257,770
-----------
Total investment income $54,616,043
-----------
Expenses -
Management fee $ 2,708,535
Trustees' compensation 53,179
Shareholder servicing agent fee 298,027
Shareholder servicing agent fee (Class A) 522,171
Shareholder servicing agent fee (Class B) 167,693
Shareholder servicing agent fee (Class C) 17,546
Distribution and service fee (Class A) 1,596,084
Distribution and service fee (Class B) 1,165,096
Distribution and service fee (Class C) 178,635
Administrative fee 17,658
Custodian fee 257,141
Postage 168,564
Printing 111,202
Auditing fees 68,919
Legal fees 7,031
Miscellaneous 505,785
-----------
Total expenses $ 7,843,266
Fees paid indirectly (74,290)
-----------
Net expenses $ 7,768,976
-----------
Net investment income $46,847,067
-----------
Realized and unrealized gain (loss) on investments:
Realized gain (loss) (identified cost basis) -
Investment transactions $(3,310,886)
Foreign currency transactions (470,892)
Futures contracts 1,914,100
-----------
Net realized loss on investments and foreign currency transactions $(1,867,678)
-----------
Change in unrealized appreciation (depreciation) -
Investments $12,201,565
Translation of assets and liabilities in foreign currencies 1,232,344
Futures contracts (1,955,578)
-----------
Net unrealized gain on investments and foreign currency translation $11,478,331
-----------
Net realized and unrealized gain on investments and foreign
currency $ 9,610,653
-----------
Increase in net assets from operations $56,457,720
===========
See notes to financial statements
</TABLE>
<PAGE>
FINANCIAL STATEMENTS - continued
<TABLE>
Statement of Changes in Net Assets
- - -------------------------------------------------------------------------------------------------------
Year Ended April 30, 1997 1996
- - -------------------------------------------------------------------------------------------------------
<S> <C> <C>
Increase (decrease) in net assets:
From operations -
Net investment income $ 46,847,067 $ 43,924,568
Net realized gain (loss) on investments and foreign
currency transactions (1,867,678) 19,192,453
Net unrealized gain (loss) on investments and foreign
currency translation 11,478,331 (15,177,127)
-------------- --------------
Increase in net assets from operations $ 56,457,720 $ 47,939,894
-------------- --------------
Distributions declared to shareholders -
From net investment income (Class A) $ (37,940,150) $ (36,559,090)
From net investment income (Class B) (7,378,321) (6,140,409)
From net investment income (Class C) (1,163,047) (908,862)
From net investment income (Class I) (232,891) --
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)
-------------- --------------
Total distributions declared to shareholders $ (46,714,409) $ (44,535,871)
-------------- --------------
Fund share (principal) transactions -
Net proceeds from sale of shares $ 373,868,501 $ 345,474,743
Net asset value of shares issued to shareholders in
reinvestment of distributions 32,545,850 30,698,182
Cost of shares reacquired (356,986,978) (305,118,806)
-------------- --------------
Increase in net assets from Fund share transactions $ 49,427,373 $ 71,054,119
-------------- --------------
Total increase in net assets $ 59,170,684 $ 74,458,142
Net assets:
At beginning of period 635,135,798 560,677,656
-------------- --------------
At end of period (including accumulated distributions in
excess of net investment income of $549,861 and $228,954,
respectively) $ 694,306,482 $ 635,135,798
============== ==============
See notes to financial statements
</TABLE>
<PAGE>
FINANCIAL STATEMENTS - continued
<TABLE>
Financial Highlights
<CAPTION>
- - ---------------------------------------------------------------------------------------------------------------------
Year Ended April 30, 1997 1996 1995 1994 1993
- - -------------------------------------------------------------------------------------------------------------------
Class A
- - -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value - beginning of period $12.85 $12.71 $12.75 $14.39 $13.70
------ ------ ------ ------ ------
Income from investment operations# -
Net investment income(S) $ 0.94 $ 0.95 $ 0.98 $ 1.02 $ 1.04
Net realized and unrealized gain
(loss) on investments and foreign
currency transactions 0.18 0.15 (0.05) (0.63) 0.74
------ ------ ------ ------ ------
Total from investment operations $ 1.12 $ 1.10 $ 0.93 $ 0.39 $ 1.78
------ ------ ------ ------ ------
Less distributions declared to shareholders -
From net investment income $(0.93) $(0.94) $(0.89) $(1.06) $(1.04)
From net realized gain on investments
and foreign currency transactions -- -- -- (0.80) (0.05)
In excess of net investment income -- -- -- (0.02) --
In excess of net realized gain on
investments and foreign currency
transactions -- -- -- (0.01) --
From paid-in capital -- (0.02) (0.08) (0.14) --
------ ------ ------ ------ ------
Total distributions declared to
shareholders $(0.93) $(0.96) $(0.97) $(2.03) $(1.09)
------ ------ ------ ------ ------
Net asset value - end of period $13.04 $12.85 $12.71 $12.75 $14.39
====== ====== ====== ====== ======
Total return(+) 8.99% 8.67% 7.78% 2.12% 13.42%
Ratios (to average net assets)/Supplemental
data(S):
Expenses## 1.02% 1.00% 1.00% 0.96% 0.88%
Net investment income 7.12% 7.10% 7.91% 7.17% 7.82%
Portfolio turnover 446% 377% 306% 410% 330%
Net assets at end of period (000
omitted) $541,710 $514,892 $477,056 $459,311 $490,417
#Per share data for the periods subsequent to April 30, 1993, are based on
average shares outstanding.
##For fiscal years ending after September 1, 1995, the Fund's expenses are
calculated without reduction for fees paid indirectly.
(+)Total returns for Class A shares do not include the applicable sales
charge. If the charge had been included, the results would have been
lower.
(S)The distributor did not impose a portion of its distribution fee for
certain of 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% --
See notes to financial statements
</TABLE>
<PAGE>
FINANCIAL STATEMENTS - continued
<TABLE>
Financial Highlights - continued
<CAPTION>
- - -------------------------------------------------------------------------------------------------------------------
Year Ended April 30, 1992 1991 1990 1989 1988
- - -------------------------------------------------------------------------------------------------------------------
Class A
- - -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value - beginning of period $13.25 $12.69 $12.80 $13.20 $14.04
------ ------ ------ ------ ------
Income from investment operations -
Net investment income $ 1.13 $ 1.14 $ 1.20 $ 1.15 $ 1.16
Net realized and unrealized gain
(loss) on investments and foreign
currency transactions 0.45 0.59 (0.14) (0.38) (0.42)
------ ------ ------ ------ ------
Total from investment operations $ 1.58 $ 1.73 $ 1.06 $ 0.77 $ 0.74
------ ------ ------ ------ ------
Less distributions declared to shareholders -
From net investment income $(1.13) $(1.17) $(1.17) $(1.17) $(1.15)
From net realized gain on investments
and foreign currency transactions -- -- -- -- (0.43)
------ ------ ------ ------ ------
Total distributions declared to
shareholders $(1.13) $(1.17) $(1.17) $(1.17) $(1.58)
------ ------ ------ ------ ------
Net asset value - end of period $13.70 $13.25 $12.69 $12.80 $13.20
====== ====== ====== ====== ======
Total return(+) 12.39% 13.65% 7.69% 5.49% 5.18%
Ratios (to average net assets)/Supplemental data:
Expenses 0.91% 0.79% 0.75% 0.83% 0.76%
Net investment income 8.39% 8.82% 9.10% 8.93% 8.85%
Portfolio turnover 243% 189% 186% 160% 287%
Net assets at end of period (000
omitted) $448,261 $315,722 $293,242 $299,485 $310,403
(+)Total returns for Class A shares do not include the applicable sales charge
(except for reinvested dividends prior to March 1, 1991). If the charge had
been included, the results would have been lower.
See notes to financial statements
</TABLE>
<PAGE>
FINANCIAL STATEMENTS - continued
<TABLE>
Financial Highlights - continued
<CAPTION>
- - -----------------------------------------------------------------------------------------------------------
Year Ended April 30, 1997 1996 1995 1994*
- - -----------------------------------------------------------------------------------------------------------
Class B
- - -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value - beginning of period $12.79 $12.69 $12.73 $14.99
------ ------ ------ ------
Income from investment operations# -
Net investment income $ 0.83 $ 0.85 $ 0.88 $ 0.56
Net realized and unrealized gain (loss) on
investments and foreign currency transactions 0.19 0.13 (0.05) (1.30)
------ ------ ------ ------
Total from investment operations $ 1.02 $ 0.98 $ 0.83 $(0.74)
------ ------ ------ ------
Less distributions declared to shareholders -
From net investment income $(0.82) $(0.85) $(0.80) $(0.59)
From net realized gain on investments and
foreign currency transactions -- -- -- (0.80)
In excess of net investment income -- (0.01) -- (0.02)
In excess of net realized gain on investments
and foreign currency transactions -- -- -- (0.01)
From paid-in capital -- (0.02) (0.07) (0.10)
------ ------ ------ ------
Total distributions declared to
shareholders $(0.82) $(0.88) $(0.87) $(1.52)
------ ------ ------ ------
Net asset value - end of period $12.99 $12.79 $12.69 $12.73
====== ====== ====== ======
Total return 8.16% 7.90% 6.90% (5.42)%++
Ratios (to average net assets)/Supplemental data:
Expenses## 1.76% 1.81% 1.84% 1.83%+
Net investment income 6.39% 6.29% 7.17% 6.39%+
Portfolio turnover 446% 377% 306% 410%
Net assets at end of period (000 omitted) $123,000 $102,914 $75,451 $33,413
*For the period from the commencement of offering of Class B shares, September 7, 1993, to
April 30, 1994.
+Annualized.
++Not annualized.
#Per share data are based on average shares outstanding.
##For fiscal years ending after September 1, 1995, the Fund's expenses are calculated
without reduction for fees paid indirectly.
See notes to financial statements
</TABLE>
<PAGE>
FINANCIAL STATEMENTS - continued
<TABLE>
Financial Highlights - continued
<CAPTION>
- - -----------------------------------------------------------------------------------------------------------------
Period
Year Ended April 30, Ended
---------------------------------------------------- April 30,
1997 1996 1995 1994** 1997***
- - --------------------------------------------------------------------------------------------------- ---------
Class C Class I
- - -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value - beginning of period $12.79 $12.68 $12.72 $13.57 $13.15
------ ------ ------ ------ ------
Income from investment operations# -
Net investment income $ 0.83 $ 0.85 $ 0.88 $ 0.29 $ 0.31
Net realized and unrealized gain
(loss)
on investments and foreign currency
transactions 0.20 0.15 (0.05) (0.90) (0.09)
------ ------ ------ ------ ------
Total from investment operations $ 1.03 $ 1.00 $ 0.83 $(0.61) $ 0.22
------ ------ ------ ------ ------
Less distributions declared to shareholders -
From net investment income $(0.84) $(0.85) $(0.80) $(0.22) $(0.32)
In excess of net investment income -- (0.02) -- -- --
From paid-in capital -- (0.02) (0.07) (0.02) --
------ ------ ------ ------ ------
Total distributions declared to
shareholders $(0.84) $(0.89) $(0.87) $(0.24) $(0.32)
------ ------ ------ ------ ------
Net asset value - end of period $12.98 $12.79 $12.68 $12.72 $13.05
====== ====== ====== ====== ======
Total return 8.27% 7.90% 7.00% 4.57%++ 1.70%++
Ratios (to average net assets)/Supplemental data:
Expenses## 1.74% 1.74% 1.75% 1.80%+ 0.69%+
Net investment income 6.44% 6.35% 7.17% 6.57%+ 7.19%+
Portfolio turnover 446% 377% 306% 410% 446%
Net assets at end of period (000 omitted) $20,003 $17,330 $8,171 $7,627 $9,593
**For the period from the commencement of offering of Class C shares, January 3, 1994, to
April 30, 1994.
***For the period from the commencement of offering of Class I shares, January 2, 1997, to
April 30, 1997.
+Annualized.
++Not annualized.
#Per share data are based on average shares outstanding.
##For fiscal years ending after September 1, 1995, the Fund's expenses are calculated
without reduction for fees paid indirectly.
See notes to financial statements
</TABLE>
<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. The Fund, along with other affiliated entities of
Massachusetts Financial Services Company, may utilize a joint trading account
for the purpose of entering into one or more repurchase agreements.
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 result from fluctuations in foreign currency
exchange rates is not separately disclosed.
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 into these contracts from the potential inability of counterparties
to meet the terms of their contracts and from unanticipated movements in the
value of a foreign currency relative to the U.S. dollar. The Fund will enter
into forward contracts for hedging purposes. The Fund may enter into contracts
to deliver or receive foreign currency it will receive from or require for its
normal investment activities. The Fund 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 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 taxable
income, including any net realized gain on investments. Accordingly, no
provision for federal income or excise tax is provided. The Fund files a tax
return annually using tax accounting methods required under provisions of the
Code which may differ from generally accepted accounting principles, the basis
on which these financial statements are prepared. Accordingly, the amount of
net investment income and net realized gain reported on these financial
statements may differ from that reported on the Fund's tax return and,
consequently, the character of distributions to shareholders reported in the
financial highlights may differ from that reported to shareholders on Form
1099-DIV.
Foreign taxes have been provided for on interest and dividend income earned on
foreign investments in accordance with the applicable country's tax rates and
to the extent unrecoverable are recorded as a reduction of investment income.
Distributions to shareholders are recorded on the ex-dividend date.
The Fund distinguishes between distributions on a tax basis and a financial
reporting basis and requires that only distributions in excess of tax basis
earnings and profits are reported in the financial statements as a tax return
of capital. Differences in the recognition or classification of income between
the financial statements and tax earnings and profits which result in
temporary over-distributions for financial statement purposes, are classified
as distributions in excess of net investment income or accumulated net
realized gains. During the year ended April 30, 1997, $453,565 was
reclassified to accumulated distributions in excess of net investment income
from accumulated net realized loss on investments 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, 1997, accumulated net realized loss on investments and
foreign currency transactions under book accounting were different from tax
accounting due to significant temporary differences in accounting for capital
losses.
At April 30, 1997, the Fund, for federal income tax purposes, had a capital
loss carryforward of $12,393,120 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, ($9,844,270) and April 30, 2005, ($2,548,850).
Multiple Classes of Shares of Beneficial Interest - The Fund offers Class A,
Class B, Class C, and Class I shares. The four classes of shares differ in their
respective distribution and service fees. All shareholders bear the common
expenses of the Fund pro rata based on average daily net assets of each class,
without distinction between share classes. Dividends are declared separately for
each class. No class has preferential dividend rights; differences in per share
dividend rates are generally due to differences in separate class expenses.
(3) Transactions with Affiliates
Investment Adviser - The Fund has an investment advisory agreement with
Massachusetts Financial Services Company (MFS) to provide overall investment
advisory and administrative services, and general office facilities. The
management fee is computed daily and paid monthly at an 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 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
$16,704 for the year ended April 30, 1997.
Administrator - Effective March 1, 1997, the Trust has an administrative
services agreement with MFS to provide the Trust with certain financial,
legal, compliance, shareholder communications, and other administrative
services. As a partial reimbursement for the cost of providing these services,
the Fund pays MFS an administrative fee up to 0.015% per annum of the Fund's
average daily net assets, provided that the administrative fee is not assessed
on Fund assets that exceed $3 billion.
Distributor - MFD, a wholly owned subsidiary of MFS, as distributor, received
$134,341 for the year ended April 30, 1997, as its portion of the sales charge
on sales of Class A shares of the Fund.
The Trustees have adopted a distribution plan for Class A, Class B, and Class
C pursuant to Rule 12b-1 of the Investment Company Act of 1940 as follows:
The Fund's distribution plan provides that the Fund will pay MFD up to 0.35%
per annum of its average daily net assets attributable to Class A shares in
order that MFD may pay expenses on behalf of the Fund related to the
distribution and servicing of its shares. These expenses include a service fee
to each securities dealer that enters into a sales agreement with MFD of up to
0.25% per annum of the Fund's average daily net assets attributable to Class A
shares which are attributable to that securities dealer, a distribution fee to
MFD of up to 0.10% per annum of the Fund's average daily net assets
attributable to Class A shares, commissions to dealers, and payments to MFD
wholesalers for sales at or above a certain dollar level, and other such
distribution-related expenses that are approved by the Fund. MFD retains the
service fee for accounts not attributable to a securities dealer which
amounted to $284,694 for the year ended April 30, 1997. The fund is currently
paying distribution fees of 0.05% per annum. Payment of the remaining portion
of the 0.10% per annum Class A distribution fee will commence on such date as
the Trustees of the Trust may determine. Fees incurred under the distribution
plan during the year ended April 30, 1997, were 0.30% of average daily net
assets attributable to Class A shares on an annualized basis.
The Trustees have adopted a distribution plan relating solely to Class B and
Class C shares pursuant to Rule 12b-1 of the Investment Company Act of 1940 as
follows:
The Fund's distribution plan provides that the Fund will pay MFD 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 $27,709
and $16,107 for Class B and Class C shares, respectively, for the year ended
April 30, 1997. Fees incurred under the distribution plan during the year
ended April 30, 1997, were 1.00% 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 by retirement
plans are subject to a contingent deferred sales charge in the event of a
shareholder redemption within 12 months following such purchase. A contingent
deferred sales charge is imposed on shareholder redemptions of Class B shares in
the event of a shareholder redemption within six years of purchase. A contingent
deferred sales charge is imposed on shareholder redemptions of Class C shares in
the event of a shareholder redemption within twelve months of 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, 1997,
were $38,472, $245,479, and $5,977 for Class A, Class B, and Class C shares,
respectively.
Shareholder Servicing Agent - MFSC, a wholly owned subsidiary of MFS, earns a
fee for its services as shareholder servicing agent. The fee is calculated as
a percentage of the fund's average daily net assets at an effective annual
rate of 0.13%. Prior to January 1, 1997, the fee was calculated as a
percentage of the average daily net assets of each class of shares at an
effective annual rate of up to 0.15%, up to 0.22%, and up to 0.15%
attributable to Class A, Class B, and Class C shares, respectively.
(4) Portfolio Securities
Purchases and sales of investments, other than purchased option transactions
and short-term obligations, were as follows:
<TABLE>
<CAPTION>
Purchases Sales
- - ------------------------------------------------------------------------------------------------
<S> <C> <C>
U.S. government securities $1,486,064,546 $1,510,375,064
============== ==============
Investments (non-U.S. government securities) $1,440,708,102 $1,368,604,285
============== ==============
</TABLE>
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:
<TABLE>
<S> <C>
Aggregate cost $683,310,424
============
Gross unrealized depreciation $ (6,954,179)
Gross unrealized appreciation 5,312,731
------------
Net unrealized depreciation $ (1,641,448)
============
</TABLE>
(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>
Class A Shares
<CAPTION>
1997 1996
Year Ended April 30, ------------------------------ -----------------------------
Shares Amount Shares Amount
- - -------------------------------------------------------------------- -----------------------------
<S> <C> <C> <C> <C>
Shares sold 19,892,064 $259,257,771 13,392,544 $177,853,643
Shares issued to shareholders in
reinvestment of distributions 2,100,680 27,188,616 1,990,650 26,407,792
Shares transferred to Class I (736,830) (9,689,294)
Shares reacquired (19,787,017) (257,602,400) (12,850,236) (170,615,920)
----------- ------------ ----------- ------------
Net increase 1,468,897 $ 19,154,693 2,532,958 $ 33,645,515
=========== ============ =========== ============
Class B Shares
1997 1996
Year Ended April 30, ------------------------------ ------------------------------
Shares Amount Shares Amount
- - -------------------------------------------------------------------- ------------------------------
Shares sold 7,303,701 $ 94,245,630 10,686,248 $141,536,278
Shares issued to shareholders in
reinvestment of distributions 346,001 4,490,950 278,128 3,686,196
Shares reacquired (6,225,167) (80,626,350) (8,868,575) (117,295,920)
----------- ------------ ----------- ------------
Net increase 1,424,535 $ 18,110,230 2,095,801 $ 27,926,554
=========== ============ =========== ============
Class C Shares
1997 1996
Year Ended April 30, ------------------------------ ------------------------------
Shares Amount Shares Amount
- - -------------------------------------------------------------------- ------------------------------
Shares sold 783,293 $ 10,174,727 1,964,041 $ 26,084,822
Shares issued to shareholders in
reinvestment of distributions 49,134 633,359 45,429 604,194
Shares reacquired (645,483) (8,302,572) (1,299,139) (17,206,966)
----------- ------------ ----------- ------------
Net increase 186,944 $ 2,505,514 710,331 $ 9,482,050
=========== ============ =========== ============
Class I Shares
1997*
Period Ended April 30, ------------------------------
Shares Amount
- - --------------------------------------------------------------------
Shares sold 38,538 $ 501,079
Shares issued to shareholders in
reinvestment of distributions 17,820 232,925
Shares transferred from Class A 736,830 9,689,294
Shares reacquired (58,113) (766,362)
----------- ------------
Net increase 735,075 $ 9,656,936
=========== ============
* For the period from commencement of offering of Class I shares, January 2,
1997, to April 30, 1997.
</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 $400 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,
1997, was $6,529.
(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 forward foreign currency exchange 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, 1997, is as follows:
Forward Foreign Currency Exchange Contracts
<TABLE>
<CAPTION>
NET UNREALIZED
CONTRACTS TO CONTRACTS APPRECIATION
SETTLEMENT DATE DELIVER/RECEIVE IN EXCHANGE FOR AT VALUE (DEPRECIATION)
- - -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Sales 6/30/97 AUD 11,799,249 $ 9,125,011 $ 9,196,131 $ (71,120)
6/30/97 CAD 12,328,908 9,126,536 8,864,775 261,761
8/26/97 DEM 19,638,099 11,943,694 11,413,320 530,374
9/30/97 DKK 9,952,404 1,569,953 1,525,062 44,891
1/15/98 ECU 1,906,344 2,262,122 2,177,617 84,505
8/26/97 ESP 631,567,013 4,433,055 4,334,534 98,521
6/30/97 GBP 1,921,357 3,164,279 3,114,648 49,631
6/30/97 IEP 1,430,470 2,240,116 2,141,413 98,703
9/30/97 ITL 5,348,274,180 3,137,257 3,115,203 22,054
9/30/97 NZD 2,264,718 1,548,614 1,561,081 (12,467)
9/30/97 SEK 12,039,529 1,573,801 1,545,296 28,505
----------- ----------- ------------
$50,124,438 $48,989,080 $ 1,135,358
=========== =========== ============
Purchases 6/30/97 CAD 7,615,129 $ 5,686,079 $ 5,472,257 $ (213,822)
6/30/97 DEM 14,588,582 8,857,028 8,457,278 (399,750)
9/30/97 ESP 159,690,951 1,120,717 1,094,880 (25,837)
6/30/97 ITL 624,853,500 367,992 364,550 (3,442)
6/30/97 NZD 743,519 510,924 513,906 2,982
6/30/97 SEK 895,396 127,546 114,439 (13,107)
----------- ----------- ------------
$16,670,286 $16,017,310 $ (652,976)
=========== =========== ============
</TABLE>
Forward foreign currency purchases and sales under masternetting arrangements
and closed forward foreign currency exchange contracts excluded above amounted
to a net receivable of $116,002 with First Boston, $169,692 with J.P. Morgan,
$426,524 with Merrill Lynch, $195,376 with Swiss Bank, and a net payable of
$21,037 with Bankers Trust and $2,353 with Deutsche Bank at April 30, 1997.
At April 30, 1997, the Fund had sufficient cash and/or securities to cover any
commitments under these contracts.
(8) Restricted Security
The Fund may invest not more than 10% of its net assets in securities which
are subject to legal or contractual restrictions on resale. At April 30, 1997,
the Fund owned the following restricted security (constituting 0.24% 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
security be registered. The value of this security is determined by valuations
supplied by a pricing service or brokers.
<TABLE>
<CAPTION>
Date of
Description Acquisition Par Amount Cost Value
- - ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Merrill Lynch Mortgage Investors, Inc.,
8.10s, 2022 6/22/94 $2,000,000 $1,386,250 $1,699,375
==========
</TABLE>
<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, 1997, the related statement
of operations for the year then ended, the statement of changes in net assets
for the years ended April 30, 1997 and 1996, and the financial highlights for
each of the years in the ten-year period ended April 30, 1997. 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, 1997, by correspondence with the custodian and
brokers; where replies were not received from brokers, we performed other
auditing procedures. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of MFS Bond Fund at
April 30, 1997, the results of its operations, the changes in its net assets,
and its financial highlights for the respective stated periods in conformity
with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Boston, Massachusetts
May 30, 1997
--------------------------------------------
This report is prepared for the general information of shareholders. It is
authorized for distribution to prospective investors only when preceded or
accompanied by a current prospectus.
<PAGE>
<TABLE>
MFS(R) Bond Fund
<S> <C>
Trustees Auditors
A. Keith Brodkin* - Chairman and President Deloitte & Touche LLP
Richard B. Bailey* - Private Investor; Investor Information For MFS stock and bond market
Former Chairman and Director (until 1991), outlooks, call toll free: 1-800-637-4458 anytime
Massachusetts Financial Services Company; from a touch-tone telephone.
Director, Cambridge Bancorp; Director,
Cambridge Trust Company For information on MFS mutual funds, call your
financial adviser or, for an information kit, call
Peter G. Harwood - Private Investor toll free: 1-800-637-2929 any business day from 9
a.m. to 5 p.m. Eastern time (or leave a message
J. Atwood Ives - Chairman and Chief anytime).
Executive Officer, Eastern Enterprises
Investor Service
Lawrence T. Perera - Partner, Hemenway & MFS Service Center, Inc.
Barnes P.O. Box 2281
Boston, MA 02107-9906
William J. Poorvu - Adjunct Professor,
Harvard University Graduate School of For general information, call toll free:
Business Administration 1-800-225-2606 any business day from
8 a.m. to 8 p.m. Eastern time.
Charles W. Schmidt - Private Investor
For service to speech- or hearing-impaired, call
Arnold D. Scott* - Senior Executive Vice toll free: 1-800-637-6576 any business day from 9
President, Director and Secretary, a.m. to 5 p.m. Eastern time. (To use this service,
Massachusetts Financial Services Company your phone must be equipped with a
Telecommunications Device for the Deaf.)
Jeffrey L. Shames* - President and Director,
Massachusetts Financial Services Company For share prices, account balances, and exchanges,
call toll free: 1-800-MFS-TALK (1-800-637-8255)
Elaine R. Smith - Independent Consultant anytime from a touch-tone telephone.
David B. Stone - Chairman, North American World Wide Web
Management Corp. (investment advisers) www.mfs.com
Investment Adviser
Massachusetts Financial Services Company [Dalbar Logo] For the third year in a row,
500 Boylston Street MFS earned a #1 ranking in
Boston, MA 02116-3741 the DALBAR, Inc. Broker/Dealer
Survey, Main Office Operations
Distributor Service Quality Category. The firm achieved
MFS Fund Distributors, Inc. a 3.48 overall score on a scale of 1 to 4 in
500 Boylston Street the 1996 survey. A total of 110 firms
Boston, MA 02116-3741 responded, offering input on the quality of
service they received from 29 mutual fund
Portfolio Manager companies nationwide. The survey contained
Geoffrey L. Kurinsky* questions about service quality in 15
categories, including "knowledge of phone
Treasurer service contacts," "accuracy of transaction
W. Thomas London* processing," and "overall ease of doing
business with the firm."
Assistant Treasurer
James O. Yost*
Secretary
Stephen E. Cavan*
Assistant Secretary
James R. Bordewick, Jr.*
Custodian
Investors Bank & Trust Company
*Affiliated with the Investment Adviser
</TABLE>
<PAGE>
------------
MFS(R) BOND [DALBAR Logo} Bulk Rate
FUND U.S. Postage
P A I D
500 Boylston Street MFS
Boston, MA 02116-3741 ------------
[MFS logo]
INVESTMENT MANAGEMENT
WE INVENTED THE MUTUAL FUND(SM)
(C)1997 MFS Fund Distributors, Inc., 500 Boylston Street, Boston, MA 02116-3741
MFB-2 6/97 74M 11/211/311/811
<PAGE>
MFS LIMITED MATURITY FUND
SUPPLEMENT TO THE SEPTEMBER 1, 1997 PROSPECTUS AND
STATEMENT OF ADDITIONAL INFORMATION
THE FOLLOWING INFORMATION SHOULD BE READ IN CONJUNCTION WITH THE FUND'S
PROSPECTUS AND STATEMENT OF ADDITIONAL INFORMATION ("SAI"), DATED SEPTEMBER 1,
1997, AND CONTAINS A DESCRIPTION OF CLASS I SHARES.
CLASS I SHARES ARE AVAILABLE FOR PURCHASE ONLY BY CERTAIN INVESTORS AS
DESCRIBED UNDER THE CAPTION "ELIGIBLE PURCHASERS" BELOW.
EXPENSE SUMMARY
SHAREHOLDER TRANSACTION EXPENSES: CLASS I
-------
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(3)....................................... 0.80%
- - -------------
(1) "Other Expenses" is based on Class A expenses incurred during the fiscal
year ended April 30, 1997.
(2) The Fund has an expense offset arrangement which reduces the Fund's
custodian fee based upon the amount of cash maintained by the Fund with its
custodian and dividend disbursing agent, and may enter into other such
arrangements and directed brokerage arrangements (which would also have the
effect of reducing the Fund's expenses). Any such fee reductions are not
reflected under "Other Expenses."
EXAMPLE OF EXPENSES
-------------------
An investor would pay the following dollar amounts of expenses on a $1,000
investment in Class I shares of the Fund, assuming (a) a 5% annual return and
(b) redemption at the end of each of the time periods indicated:
PERIOD CLASS I
------ -------
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.
CONDENSED FINANCIAL INFORMATION
The following information has been audited 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 independent auditors are
Deloitte & Touche LLP.
FINANCIAL HIGHLIGHTS - CLASS I SHARES
YEAR ENDED
APRIL 30, 1997***
--------------
Per share data (for a share outstanding throughout the period):
Net asset value - beginning of period $ 7.08
-------
Income from investment operations# -
Net investment incomes(S) $ 0.15
Net realized and unrealized loss
on investments (0.03)
Total from investment operations $ 0.12
-------
Less distributions declared to shareholders -
From net investment income $ (0.15)
In excess of net investment income (0.01)
-------
Total distributions declared to shareholders $ (0.16)
-------
Net asset value - end of period $ 7.04
=======
Total return 1.72%++
Ratios (to average net assets)/ Supplemental data(S):
Expenses## 1.17%+
Net investment income 8.68%+
Portfolio turnover 489%
Net assets at end of period
(000 omitted) $1,925
- - --------------------------
*** For the period from the commencement of offering of Class I shares, January
2, 1997 to April 30, 1997.
+ Annualized
++ Not annualized
# Per share data are based on average shares outstanding.
## The Fund's expenses are calculated without reduction for fees paid
indirectly.
(S) The investment adviser did not impose 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/or 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 $ 0.15
Ratios (to average net assets):
Expenses## 1.17%+
Net investment income 8.68%+
ELIGIBLE PURCHASERS
Class I shares are available for purchase only by the following purchasers
("Eligible Purchasers"):
(i) certain retirement plans established for the benefit of employees of
Massachusetts Financial Services Company ("MFS"), the Fund's investment
adviser, and employees of MFS' affiliates; and
(ii) any fund distributed by MFS Fund Distributors, Inc. ("MFD"), the Fund's
distributor, if the fund seeks to achieve its investment objective by
investing primarily in shares of the Fund and other funds distributed by
MFD.
In no event will the Fund, MFS, MFD or any of their affiliates pay any sales
commissions or compensation to any third party in connection with the sale of
Class I shares; the payment of any such sales commission or compensation would,
under the Fund's policies, disqualify the purchaser as an eligible investor of
Class I shares.
SHARE CLASSES OFFERED BY THE FUND
Four classes of shares of the Fund currently are offered for sale, Class A
shares, Class B shares, Class C shares and Class I shares. Class I shares are
available for purchase only by Eligible Purchasers, as defined above, and are
described in this Supplement. Class A shares, Class B shares and Class C shares
are described in the Fund's Prospectus and are available for purchase by the
general public.
Class A shares are offered at net asset value plus an initial sales charge
up to a maximum of 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 convert
to Class A shares approximately eight years after purchase. Class C shares are
offered at net asset value without an initial sales charge but are subject to a
CDSC upon redemption of 1.00% during the first year and an annual distribution
fee and service fee up to a maximum of 1.00% per annum. Class I shares are
offered at net asset value without an initial sales charge or CDSC and are not
subject to a distribution or service fee. Class C and Class I shares do not
convert to any other class of shares of the Fund.
OTHER INFORMATION
Eligible Purchasers may purchase Class I shares only directly through MFD.
Eligible Purchasers may exchange Class I shares of the Fund for Class I shares
of any other MFS Fund available for purchase by such Eligible Purchasers at
their net asset value (if available for sale), and may exchange Class I shares
of the Fund for shares of the MFS Money Market Fund (if available for sale), and
may redeem Class I shares of the Fund at net asset value. Distributions paid by
the Fund with respect to Class I shares generally will be greater than those
paid with respect to Class A shares, Class B shares and Class C shares because
expenses attributable to Class A shares, Class B shares and Class C shares
generally will be higher.
Subject to termination or revision at the sole discretion of MFS, MFS has
agreed to bear the Fund's expenses such that the Fund's "Other Expenses" which
are defined to include all Fund expenses except for management fees, Rule 12b-1
fees, taxes, extraordinary expenses, brokerage and termination costs do not
exceed 0.40% per annum of the Fund's average daily net assets (the "Maximum
Percentage"). The obligation of MFS to bear these expenses terminates on
February 28, 2002. The payments made by MFS on behalf of the Fund under this
arrangement are subject to reimbursement by the Fund to MFS, which will be
accomplished by the payment of an expense reimbursement fee by the Fund to MFS
computed and paid monthly at a percentage to its average daily net assets for
its then current fiscal year, with a limitation that immediately after such
payment, the Fund's "Other Expenses" will not exceed the Maximum Percentage.
This expense reimbursement by the Fund to MFS terminates on the earlier of the
date on which payments made by the Fund equal the prior payment of such
reimbursable expenses by MFS or February 28, 2002.
THE DATE OF THIS SUPPLEMENT IS SEPTEMBER 1, 1997
<PAGE>
PROSPECTUS
September 1, 1997
MFS(R) LIMITED Class A Shares of Beneficial Interest
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. Condensed Financial Information ................................. 4
3. The Fund ........................................................ 6
4. Investment Objectives and Policies .............................. 7
5. Investment Techniques ........................................... 7
6. Additional Risk Factors ......................................... 12
7. Management of the Fund .......................................... 13
8. Information Concerning Shares of the Fund ....................... 14
Purchases ................................................... 14
Exchanges ................................................... 19
Redemptions and Repurchases ................................. 20
Distribution Plan ........................................... 23
Distributions ............................................... 24
Tax Status .................................................. 25
Net Asset Value ............................................. 25
Description of Shares, Voting Rights and Liabilities ........ 25
Performance Information ..................................... 26
Expenses .................................................... 27
9. Shareholder Services ............................................ 27
Appendix A -- Waivers of Sales Charges .......................... A-1
Appendix B -- Description of Bond Ratings ....................... 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, 1997, 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 28 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 at
http://www.sec.gov that contains the SAI, materials that are incorporated by
reference into this Prospectus and the SAI, and other information regarding the
Fund. This Prospectus is available on the Adviser's Internet World Wide Web site
at http://www.mfs.com.
INVESTORS SHOULD READ THIS PROSPECTUS AND RETAIN IT FOR FUTURE REFERENCE.
<PAGE>
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 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) 0.98%(3) 1.00%(3)
Other Expenses(4) ................................................... 0.40% 0.40% 0.40%
----- ----- -----
Total Operating Expenses ............................................ 0.95% 1.78% 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 shares in accordance with Rule 12b-1 under the Investment Company
Act of 1940, as amended (the "1940 Act") (the "Distribution Plan"), which provides that it will pay
distribution/service fees aggregating up to (but not necessarily all of) 0.35% per annum of the average daily net
assets attributable to Class A shares. Payment of the 0.10% per annum Class A distribution fee will commence on
such date as the Trustees of the Trust may determine. 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. See "Information Concerning Shares of the Fund --
Distribution Plan" below).
(3) The Fund's Distribution Plan provides that it will pay distribution/ service fees aggregating up to (but not
necessarily all of) 1.00% per annum of the average daily net assets attributable to Class B shares and Class C
shares respectively. Except in the case of the 0.25% per annum Class B service fee paid by the Fund upon the sale
of Class B shares in the first year, 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 the Distribution Plan with respect to Class B or Class C shares, together with any CDSC
payable upon redemption of Class B shares, may cause long-term shareholders to pay more than the maximum sales
charge that would have been permissible if imposed entirely as an initial sales charge. See "Information
Concerning Shares of the Fund -- Distribution Plan" below.
(4) The Fund has an expense offset arrangement which reduces the Fund's custodian fee based upon the amount of cash
maintained by the Fund with its custodian and dividend disbursing agent, and may enter into other such
arrangements and directed brokerage arrangements (which would also have the effect of reducing the Fund's
expenses). Any such fee reductions are not reflected under "Other Expenses."
</TABLE>
<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 ....... $ 34 $ 58 $ 18 $ 28 $ 18
3 years ...... 55 86 56 57 57
5 years ...... 76 116 96 97 97
10 years ...... 139 187(2) 187(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 Plan."
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.
<PAGE>
2. CONDENSED FINANCIAL INFORMATION
The following information has been audited for at least the latest five fiscal
years of the Fund and should be read in conjunction with the financial
statements included in the Fund's Annual Report to shareholders which are
incorporated by reference into the SAI in reliance upon the report of the Fund's
independent auditors, given upon their authority as experts in accounting and
auditing. The Fund's current independent auditors are Deloitte & Touche, LLP.
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS
- - ----------------------------------------------------------------------------------------------------------------------
YEAR ENDED APRIL 30, 1997 1996 1995 1994 1993 1992*
- - ----------------------------------------------------------------------------------------------------------------------
CLASS A
- - ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
PER SHARE DATA (FOR A SHARE
OUTSTANDING THROUGHOUT EACH PERIOD):
Net asset value -- beginning of
period ....................... $ 7.12 $ 7.10 $ 7.14 $ 7.46 $ 7.29 $ 7.31
------ ------ ------ ------ ------ ------
Income from investment operations# --
Net investment income(S) ..... $ 0.47 $ 0.48 $ 0.46 $ 0.44 $ 0.48 $ 0.08
Net realized and unrealized
gain (loss) on investments . (0.06) 0.03 (0.04) (0.32) 0.17**** (0.02)****
------ ------ ------ ------ ------ ------
Total from investment
operations ............... $ 0.41 $ 0.51 $ 0.42 $ 0.12 $ 0.65 $ 0.06
------ ------ ------ ------ ------ ------
Less distributions declared to
shareholders(++) --
From net investment income ... $(0.47) $(0.48) $(0.46) $(0.42) $(0.48) $(0.08)
In excess of net investment
income ..................... (0.02) (0.01) -- (0.02) -- --
------ ------ ------ ------ ------ ------
Total distributions declared
to shareholders .......... $(0.49) $(0.49) $(0.46) $(0.44) $(0.48) $(0.08)
------ ------ ------ ------ ------ ------
Net asset value -- end of period $ 7.04 $ 7.12 $ 7.10 $ 7.14 $ 7.46 $ 7.29
====== ====== ====== ====== ====== ======
TOTAL RETURN(+) ................ 5.83% 7.50% 6.09% 1.61% 9.17% 4.98%+
RATIOS (TO AVERAGE NET ASSETS)/
SUPPLEMENTAL DATA(S):
Expenses## ................... 0.94% 0.95% 0.95% 0.85% 0.60% 0.55%+
Net investment income ........ 6.57% 6.73% 6.54% 5.99% 6.40% 6.22%+
PORTFOLIO TURNOVER ............. 489% 385% 498% 861% 472% 72%
NET ASSETS AT END OF PERIOD (000
OMITTED) ..................... $91,887 $98,582 $85,773 $100,297 $67,470 $4,924
- - ----------
* For the period from the commencement of investment operations, February 26, 1992 to April 30, 1992.
+ Annualized.
# Per share data for the periods subsequent to April 30, 1994, are based on average shares outstanding.
## For fiscal years ending after September 1, 1995, the Fund's expenses are calculated without reduction for fees
paid indirectly.
**** 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.
(+) 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 the year ended April 30, 1993, the per share distribution from net realized gain on investments was $0.0021.
(S) The investment adviser did not impose 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/or 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 ...... $ 0.47 $ 0.48 $ 0.46 $ 0.42 $ 0.43 $ 0.07
RATIOS (TO AVERAGE NET ASSETS):
Expenses## ............... 0.89% 0.91% 0.97% 1.07% 1.29% 1.44%+
Net investment income .... 6.62% 6.77% 6.52% 5.77% 5.70% 5.33%+
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS -- CONTINUED
- - -----------------------------------------------------------------------------------------------------------
YEAR ENDED APRIL 30, 1997 1996 1995 1994**
- - -----------------------------------------------------------------------------------------------------------
CLASS B
- - -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
PER SHARE DATA (FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD):
Net asset value -- beginning of period .......... $ 7.11 $ 7.10 $ 7.14 $ 7.50
------ ------ ------ ------
Income from investment operations# --
Net investment income(S) $ 0.41 $ 0.42 $ 0.41 $ 0.21
Net realized and unrealized gain (loss) on
investments ................................. (0.05) 0.03 (0.05) (0.33)
------ ------ ------ ------
Total from investment operations ............ $ 0.36 $ 0.45 $ 0.36 $(0.12)
------ ------ ------ ------
Less distributions declared to shareholders --
From net investment income .................... $(0.42) $(0.42) $(0.40) $(0.23)
In excess of net investment income ............ (0.02) (0.02) -- (0.01)
------ ------ ------ ------
Total distributions declared to shareholders $(0.44) $(0.44) $(0.40) $(0.24)
------ ------ ------ ------
Net asset value -- end of period ................ $ 7.03 $ 7.11 $ 7.10 $ 7.14
====== ====== ====== ======
TOTAL RETURN ............................... 4.99% 6.52% 5.20% (1.69)%++
RATIOS (TO AVERAGE NET ASSETS)/SUPPLEMENTAL DATA(S):
Expenses## .................................... 1.78% 1.75% 1.81% 1.74%+
Net investment income ......................... 5.75% 5.90% 5.73% 4.90%+
PORTFOLIO TURNOVER .............................. 489% 385% 498% 861%
NET ASSETS AT END OF PERIOD (000 OMITTED) ....... $34,875 $26,464 $17,334 $12,072
- - ----------
** For the period from the commencement of offering of Class B shares, September 7, 1993, to April 30,
1994.
+ Annualized.
++ Not annualized.
# Per share data for the periods subsequent to April 30, 1994, are based on average shares outstanding.
## For fiscal years ending after September 1, 1995, the Fund's expenses are calculated without reduction
for fees paid indirectly.
(S) The investment adviser did not impose 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/or 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 ....................... $ 0.41 $ 0.42 $ 0.41 $ 0.20
RATIOS (TO AVERAGE NET ASSETS):
Expenses## ................................ 1.77% 1.77% 1.82% 1.96%+
Net investment income ..................... 5.76% 5.88% 5.72% 4.68%+
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS -- CONTINUED
- - -----------------------------------------------------------------------------------------------------
YEAR ENDED APRIL 30, 1997 1996 1995***
- - -----------------------------------------------------------------------------------------------------
CLASS C
- - -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
PER SHARE DATA (FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD):
Net asset value -- beginning of period ................... $ 7.13 $ 7.11 $ 7.08
------ ------ ------
Income from investment operations# --
Net investment income(S) ............................... $ 0.41 $ 0.41 $ 0.37
Net realized and unrealized gain (loss) on investments . (0.06) 0.04 (0.01)
------ ------ ------
Total from investment operations ..................... $ 0.35 $ 0.45 $ 0.36
------ ------ ------
Less distributions declared to shareholders --
From net investment income ............................. $(0.41) $(0.41) $(0.33)
In excess of net investment income ..................... (0.02) (0.02) --
------ ------ ------
Total distributions declared to shareholders ......... $(0.43) $(0.43) $(0.33)
------ ------ ------
Net asset value -- end of period ......................... $ 7.05 $ 7.13 $ 7.11
====== ====== ======
TOTAL RETURN ............................................. 5.08% 6.44% 5.25%++
RATIOS (TO AVERAGE NET ASSETS)/SUPPLEMENTAL DATA(S):
Expenses## ............................................. 1.80% 1.80% 1.85%+
Net investment income .................................. 5.80% 5.76% 6.01%+
PORTFOLIO TURNOVER ....................................... 489% 385% 498%
NET ASSETS AT END OF PERIOD (000 OMITTED) ................ $18,862 $13,842 $4,450
- - ----------
*** For the period from the commencement of offering of Class C shares, July 1, 1994, to April 30, 1995.
+ Annualized.
++ Not annualized.
# Per share data are based on average shares outstanding.
## For fiscal years ending after September 1, 1995, the Fund's expenses are calculated without reduction
for fees paid indirectly.
(S) The investment adviser did not impose 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/or 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 ................................ $ 0.41 $ 0.41 $ 0.37
RATIOS (TO AVERAGE NET ASSETS):
Expenses## ......................................... 1.81% 1.75% 1.88%+
Net investment income .............................. 5.80% 5.81% 5.98%+
</TABLE>
3. 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. In addition, the Fund offers an additional class of shares, Class I
shares, exclusively to certain institutional investors. Class I shares are made
available by means of a separate Prospectus Supplement provided to institutional
investors eligible to purchase Class I shares and are offered at net asset value
without an initial sales charge or CDSC upon redemption and without an annual
distribution and service fee.
The Trust's Board of Trustees provides broad supervision over the affairs of the
Fund. The Adviser is responsible for the management of the Fund's assets and the
officers of the Trust are responsible for the Fund's operations. The Adviser
manages the portfolio from day to day in accordance with the Fund's investment
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.
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"), Fitch Investors Service, Inc. ("Fitch") or by Duff & Phelps
Credit Rating Co. ("Duff & Phelps") (AAA, AA, A or BBB) 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, Duff & Phelps 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, Duff & Phelps 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, Croatia, Dominican Republic, Ecuador, Jordan, Mexico, Morocco,
Nigeria, Panama, Peru, the Philippines, Poland, Slovenia, Uruguay and Venezuela.
Brady Bonds have been issued only recently, and for that reason do not have a
long payment history. Brady Bonds may be collateralized or uncollateralized, are
issued in various currencies (but primarily the U.S. dollar) and are actively
traded in over-the-counter secondary markets. U.S. dollar-denominated,
collateralized Brady Bonds, which may be fixed rate bonds or floating-rate
bonds, are generally collateralized in full as to principal by U.S. Treasury
zero coupon bonds having the same maturity as the bonds. Brady Bonds are often
viewed as having three or four valuation components: the collateralized
repayment of principal at final maturity; the collateralized interest payments;
the uncollateralized interest payments; and any uncollateralized repayment of
principal at maturity (these uncollateralized amounts constituting the "residual
risk"). In light of the residual risk of Brady Bonds and the history of defaults
of countries issuing Brady Bonds with respect to commercial bank loans by public
and private entities, investments in Brady Bonds may be viewed as speculative.
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 segregate liquid assets
sufficient to cover its commitments.
INDEXED SECURITIES: The Fund may invest in indexed securities whose value is
linked to foreign currencies, interest rates, commodities, indices or other
financial indicators. Most indexed securities are short to intermediate term
fixed-income securities whose values at maturity (i.e., principal value) or
interest rates rise or fall according to changes in the value of one or more
specified underlying instruments. Indexed securities may be positively or
negatively indexed (i.e., their principal value or interest rates may increase
or decrease if the underlying instrument appreciates), and may have return
characteristics similar to direct investments in the underlying instrument or to
one or more options on the underlying instrument. Indexed securities may be more
volatile than the underlying instrument itself and could involve the loss of all
or a portion of the principal amount of the investment.
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"). A determination is made, 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, retains oversight,
focusing on factors such as valuation, liquidity and availability of
information. Investing in Rule 144A securities could have the effect of
decreasing the level of liquidity in the Fund to the extent that qualified
institutional buyers become for a time uninterested in purchasing Rule 144A
securities held in the Fund's portfolio. Subject to the Fund's 15% limitation on
investments in illiquid investments, the Fund may also invest in restricted
securities that may not be sold under Rule 144A, which presents certain risks.
As a result, the Fund might not be able to sell these securities when the
Adviser wishes to do so, or might have to sell them at less than fair value. In
addition, market quotations are less readily available. Therefore, 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, 1997, the Fund had a portfolio turnover rate of over 100%. Transaction costs
incurred by the Fund and the realized capital gains and losses of the Fund may
be greater than that of a fund with a lesser portfolio turnover rate.
The 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
Conduct Rules of the National Association of Securities Dealers, Inc. (the
"NASD") and such other policies as the Trustees may determine, the Adviser may
consider sales of shares of the Fund and of the other investment company clients
of MFD, 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). Except with respect to the Fund's policy on borrowing and investing
in illiquid securities, 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"). Under the Advisory
Agreement, the Adviser provides the Fund with overall investment advisory
services. 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, 1997, MFS
received management fees under the Advisory Agreement of $573,843 (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, and seven variable accounts, each of which is a
registered investment company established by Sun Life Assurance Company of
Canada (U.S.) ("Sun Life of Canada (U.S.)") in connection with the sale of
various fixed/variable annuity contracts. MFS and its wholly owned subsidiary,
MFS Institutional Advisors, Inc. provide investment advice to substantial
private clients.
MFS is America's oldest mutual fund organization. MFS and its predecessor
organizations have a history of money management dating from 1924 and the
founding of the first mutual fund in the United States, Massachusetts Investors
Trust. Net assets under the management of the MFS organization were
approximately $64.3 billion on behalf of approximately 2.6 million accounts as
of July 31, 1997. As of such date, the MFS organization managed approximately
$40.6 billion of assets invested in equity securities and approximately $20.3
billion of assets invested in fixed income securities. Approximately $4.1
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.), a subsidiary of Sun Life of Canada
(U.S.) Holdings, Inc., which in turn is a wholly owned subsidiary of Sun Life
Assurance Company of Canada ("Sun Life"). The Directors of MFS are A. Keith
Brodkin, Jeffrey L. Shames, Arnold D. Scott, John D. McNeil and Donald A.
Stewart. Mr. Brodkin is the Chairman, Mr. Shames is the President and Mr. Scott
is the Secretary and a Senior Executive Vice President of MFS. Messrs. McNeil
and Stewart are the Chairman and the President, respectively, of Sun Life. Sun
Life, a mutual life insurance company, is one of the largest international life
insurance companies and has been operating in the United States since 1895,
establishing a headquarters office here in 1973. The executive officers of MFS
report 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, James O. Yost,
Ellen M. Moynihan and Mark E Bradley, 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.
ADMINISTRATOR -- MFS provides the Fund with certain financial, legal,
compliance, shareholder communications and other administrative services
pursuant to a Master Administrative Services Agreement dated March 1, 1997.
Under this Agreement, the Fund pays MFS an administrative fee up to 0.015% per
annum of the Fund's average daily net assets. This fee reimburses MFS for a
portion of the costs it incurs to provide such services.
DISTRIBUTOR -- MFD, a wholly owned subsidiary of MFS, is the distributor of
shares of the Fund and also serves as distributor for each of the other MFS
Funds.
SHAREHOLDER SERVICING AGENT -- MFS Service Center, Inc. (the "Shareholder
Servicing Agent"), a wholly owned subsidiary of MFS, performs transfer agency,
certain dividend disbursing agency and other services for the Fund.
8. INFORMATION CONCERNING SHARES OF THE FUND
PURCHASES
Class A, B and C shares of the Fund may be purchased at the public offering
price through any dealer. As used in the Prospectus and any appendices thereto,
the term "dealer" includes any broker, dealer, bank (including bank trust
departments), registered investment adviser, financial planner and any other
financial institutions having a selling agreement or other similar agreement
with MFD. Dealers may also charge their customers fees relating to investments
in the Fund.
This prospectus offers Class A, B and C shares, to the general public 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 AS 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 five circumstances, Class A shares are offered at net asset value
without an initial sales charge, but subject to a CDSC equal to 1% of the lesser
of the value of the shares redeemed (exclusive of reinvested dividend and
capital gain distributions) or the total cost of such shares, in the event of a
share redemption within 12 months following the purchase:
(i) on investments of $1 million or more in Class A shares;
(ii) on investments in Class A shares by certain retirement plans subject
to the Employee Retirement Income Security Act of 1974, as amended
("ERISA"), if, prior to July 1, 1996 (a) the Plan had established an
account with the Shareholder Servicing Agent and (b) the sponsoring
organization had demonstrated to the satisfaction of MFD that either
(i) the employer had at least 25 employees or (ii) the aggregate
purchases by the retirement plan of Class A shares of Funds in the
MFS Funds would be in an aggregate amount of at least $250,000
within a reasonable period of time, as determined by MFD in its sole
discretion;
(iii) on investments in Class A shares by certain retirement plans subject
to ERISA, if: (a) the retirement plan and/or sponsoring organization
subscribes to the MFS FUNDamental 401(k) Program or any similar
recordkeeping system made available by the Shareholder Servicing Agent
(the "MFS Participant Recordkeeping System"); (b) the plan establishes
an account with the Shareholder Servicing Agent on or after July 1,
1996; and (c) the aggregate purchases by the retirement plan of Class
A shares of the MFS Funds will be in an aggregate amount of at least
$500,000 within a reasonable period of time, as determined by MFD in
its sole discretion;
(iv) on investments in Class A shares by certain retirement plans subject to
ERISA, if: (a) the plan establishes an account with the Shareholder
Servicing Agent on or after July 1, 1996 and (b) the plan has, at the
time of purchase, a market value of $500,000 or more invested in shares
of any class or classes of the MFS Funds. THE RETIREMENT PLAN WILL
QUALIFY UNDER THIS CATEGORY ONLY IF THE PLAN OR ITS SPONSORING
ORGANIZATION INFORMS THE SHAREHOLDER SERVICING AGENT PRIOR TO THE
PURCHASE THAT THE PLAN HAS A MARKET VALUE OF $500,000 OR MORE INVESTED
IN SHARES OF ANY CLASS OR CLASSES OF THE MFS FUNDS. THE SHAREHOLDER
SERVICING AGENT HAS NO OBLIGATION INDEPENDENTLY TO DETERMINE WHETHER
SUCH A PLAN QUALIFIES UNDER THIS CATEGORY; AND
(v) on investments in Class A shares by certain retirement plans subject to
ERISA if: (a) the plan establishes an account with the Shareholder
Servicing Agent on or after July 1, 1997; (b) such plan's records are
maintained on a pooled basis by the Shareholder Servicing Agent; and (c)
the sponsoring organization demonstrates to the satisfaction of MFD
that, at the time of purchase, the employer has at least 200 eligible
employees and the plan has aggregate assets of at least $2,000,000.
In the case of all such purchases, MFD will pay commissions to dealers on new
investments in Class A shares made through such dealers as follows:
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.
See "Redemptions and Repurchases -- Contingent Deferred Sales Charge" for
further discussion of the CDSC.
Except as described below, MFD will pay commissions to dealers of 3.75% of the
purchase price of Class B shares purchased through dealers. MFD will also
advance to dealers the first year service fee payable under the Fund's
Distribution Plan (see "Distribution Plan" below) at a rate equal to 0.25% of
the purchase price of such shares. Therefore, the total amount paid to a dealer
upon the sale of Class B shares is 4% of the purchase price of the shares
(commission rate of 3.75% plus a service fee equal to 0.25% of the purchase
price).
Class B shares purchased by a retirement plan whose sponsoring organization
subscribes to the MFS Participant Recordkeeping System and which has established
its account with the Shareholder Servicing Agent on or after July 1, 1996, will
be subject to the CDSC described above, only under limited circumstances, as
explained below under "Waivers of CDSC." With respect to such purchases, MFD
pays an amount to dealers equal to 3.00% of the amount purchased through such
dealers (rather than the 4.00% payment described above), which is comprised of a
commission of 2.75% plus the advancement of the first year service fee equal to
0.25% of the purchase price payable under the Fund's Distribution Plan. As
discussed above, such retirement plans are eligible to purchase Class A shares
of the Fund at net asset value without an initial sales charge but subject to a
1% CDSC if the plan has, at the time of purchase, a market value of $500,000 or
more invested in shares of any class or classes of the MFS Funds. IN THIS EVENT,
THE PLAN OR ITS SPONSORING ORGANIZATION SHOULD INFORM THE SHAREHOLDER SERVICING
AGENT THAT THE PLAN IS ELIGIBLE TO PURCHASE CLASS A SHARES UNDER THIS CATEGORY;
THE SHAREHOLDER SERVICING AGENT HAS NO OBLIGATION INDEPENDENTLY TO DETERMINE
WHETHER SUCH A PLAN QUALIFIES UNDER THIS CATEGORY FOR THE PURCHASE OF CLASS A
SHARES.
WAIVERS OF CDSC. In certain circumstances, the CDSC imposed upon redemption
of Class B shares is waived. These circumstances are described in Appendix A to
this Prospectus. In addition to these circumstances, the CDSC imposed upon the
redemption of Class B shares is waived with respect to shares held by a
retirement plan whose sponsoring organization subscribes to the MFS Participant
Recordkeeping System and which has established an account with the Shareholder
Servicing Agent on or after July 1, 1996; provided, however, that the CDSC will
not be waived (i.e., it will be imposed) in the event that there is a change in
law or regulations which results in a material adverse change to the tax
advantaged nature of the plan, or in the event that the plan and/or sponsoring
organization: (i) becomes insolvent or bankrupt; (ii) is terminated or partially
terminated under ERISA or is liquidated or dissolved; or (iii) is acquired by,
merged into, or consolidated with, any other entity.
CONVERSION OF CLASS B SHARES. Class B shares of the Fund that remain
outstanding for approximately eight years will convert to Class A shares of the
same Fund. Shares purchased through the reinvestment of distributions paid in
respect of Class B shares will be treated as Class B shares for purposes of the
payment of the distribution and service fees under the Fund's Distribution Plan.
See "Information Concerning Shares of the Fund -- Distribution Plan" below.
However, for purposes of conversion to Class A shares, all shares in a
shareholder's account that were purchased through the reinvestment of dividends
and distributions paid in respect of Class B shares (and which have not
converted to Class A shares as provided in the following sentence) will be held
in a separate sub-account. Each time any Class B shares in the shareholder's
account (other than those in the sub-account) convert to Class A shares, a
portion of the Class B shares then in the sub-account will also convert to Class
A shares. The portion will be determined by the ratio that the shareholder's
Class B shares not acquired through reinvestment of dividends and distributions
that are converting to Class A shares bear to the shareholder's total Class B
shares not acquired through reinvestment. The conversion of Class B shares to
Class A shares is subject to the continuing availability of a ruling from the
Internal Revenue Service or an opinion of counsel that such conversion will not
constitute a taxable event for federal tax purposes. There can be no assurance
that such ruling or opinion will be available, and the conversion of Class B
shares to Class A shares will not occur if such ruling or opinion is not
available. In such event, Class B shares would continue to be subject to higher
expenses than Class A shares for an indefinite period.
CLASS C SHARES: Class C shares are offered at net asset value without an initial
sales charge but are subject to a CDSC upon redemption of 1.00% during the first
year. Class C shares do not convert to any other class of 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 Fund's Distribution Plan to
MFD for the first year after purchase (see "Distribution Plan" below).
Class C shares are not currently available for purchase by any retirement plan
qualified under Sections 401(a) or 403(b) of the 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.
SUBSEQUENT INVESTMENT BY TELEPHONE Each shareholder may purchase additional
shares of any MFS Fund by telephoning the Shareholder Servicing Agent toll-free
at (800) 225-2606. The minimum purchase amount is $50 and the maximum purchase
amount is $100,000. Shareholders wishing to avail themselves of this telephone
purchase privilege must so elect on their Account Application and designate
thereon a bank and account number from which purchases will be made. If a
telephone purchase request is received by the Shareholder Servicing Agent on any
business day prior to the close of regular trading on the Exchange (generally,
4:00 p.m., Eastern time), the purchase will occur at the closing net asset value
of the shares purchased on that day. The Shareholder Servicing Agent may be
liable for any losses resulting from unauthorized telephone transactions if it
does not follow reasonable procedures designed to verify the identity of the
caller. The Shareholder Servicing Agent will request personal or other
information from the caller, and will normally also record calls. Shareholders
should verify the accuracy of confirmation statements immediately after their
receipt.
RIGHT TO REJECT PURCHASE ORDERS/MARKET TIMING. Purchases and exchanges
should be made for investment purposes only. The Fund and MFD each reserve the
right to reject or restrict any specific purchase or exchange request. In the
event that the Fund or MFD rejects an exchange request, neither the redemption
nor the purchase side of the exchange will be processed.
The Fund is not designed for professional market timing organizations or other
entities using programmed or frequent exchanges. The Fund defines a "market
timer" as an individual, or organization acting on behalf of one or more
individudals, if (i) the individual or organization makes three or more exchange
requests out of the Fund per calendar year and (ii) any one of such exchange
requests represents shares equal in value to 1/2 of 1% or more of the Fund's net
assets at the time of the request. Accounts under common ownership or control,
including accounts administered by market timers, will be aggregated for
purposes of this definition.
As noted above, the Fund and MFD each reserves the right to reject or restrict
any specific purchase and exchange request and, in addition, may impose specific
limitations with respect to market timers, including delaying for up to seven
days the purchase side of an exchange request by market timers or specifically
rejecting or otherwise restricting purchase or exchange requests by market
timers. Other funds in the MFS Family of Funds may have different and/or more
restrictive policies with respect to market timers than the Fund. These policies
are disclosed in the prospectuses of these other MFS Funds.
DEALER CONCESSIONS. Dealers may receive different compensation with respect
to sales of Class A, Class B and Class C shares. In addition, from time to time,
MFD may pay dealers 100% of the applicable sales charge on sales of Class A
shares of certain specified MFS Funds sold by such dealer during a specified
sales period. In addition, MFD or its affiliates may, from time to time, pay
dealers an additional commission equal to 0.50% of the net asset value of all of
the Class B and/or Class C shares of certain specified MFS Funds sold by such
dealer during a specified sales period. In addition, from time to time, MFD, at
its expense, may provide additional commissions, compensation or promotional
incentives ("concessions") to dealers which sell 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 into
which an exchange is made and consider the differences in objectives, policies
and restrictions before making any exchange. Exchanges will be made only after
instructions in writing or by telephone (an "Exchange Request") are received for
an established account by the Shareholder Servicing Agent in proper form (i.e.,
if in writing -- signed by the record owner(s) exactly as the shares are
registered; if by telephone -- proper account identification is given by the
dealer or shareholder of record) and each exchange must involve either shares
having an aggregate value of at least $1,000 ($50 in 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.
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.
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 or exchanges, except in the case
of accounts being established for monthly automatic investments and certain
payroll savings programs, Automatic Exchange Plan accounts and tax-deferred
retirement plans, for which there is a lower minimum investment requirement. See
"Purchases -- General -- Minimum Investment." Shareholders will be notified that
the value of their account is less than the minimum investment requirement and
allowed 60 days to make an additional investment before the redemption is
processed.
DISTRIBUTION PLAN
The Trustees have a Distribution Plan for Class A, Class B and Class C shares
pursuant to Section 12(b) of the 1940 Act and Rule 12b-1 thereunder (the
"Distribution Plan"), after having concluded that there is a reasonable
likelihood that the Distribution Plan would benefit the Fund and its
shareholders.
In certain circumstances, the fees described below may not be imposed or are
being waived. These circumstances, if any, are described below under the heading
"Current Level of Distribution and Service Fees."
FEATURES COMMON TO EACH CLASS OF SHARES: There are certain features of the
Distribution Plan that are common to each class of shares as described below.
SERVICE FEES. The Distribution Plan provides that the Fund may pay MFD a
service fee of up to 0.25% of the average daily net assets attributable to the
class of shares to which the Distribution Plan relates (i.e., Class A, Class B
or Class C shares, as appropriate) (the "Designated Class") annually in order
that MFD may pay expenses on behalf of the Fund relating to the servicing of
shares of the Designated Class. The service fee is used by MFD to compensate
dealers which enter into a sales agreement with MFD in consideration for all
personal services and/or account maintenance services rendered by the dealer
with respect to shares of the Designated Class owned by investors for whom such
dealer is the dealer or holder of record. MFD may from time to time reduce the
amount of the service fees paid for shares sold prior to a certain date. Service
fees may be reduced for a dealer that is the holder or dealer of record for an
investor who owns shares of the Fund having an aggregate net asset value at or
above a certain dollar level. Dealers may from time to time be required to meet
certain criteria in order to receive service fees. MFD or its affiliates are
entitled to retain all service fees payable under the Distribution Plan for
which there is no dealer of record or for which qualification standards have not
been met as partial consideration for personal services and/or account
maintenance services performed by MFD or its affiliates to shareholder accounts.
DISTRIBUTION FEES. The Distribution Plan provides that the Fund may pay MFD
a distribution fee based on the average daily net assets attributable to the
Designated Class as partial consideration for distribution services performed
and expenses incurred in the performance of MFD's obligations under its
distribution agreement with the Fund. See "Management of the Fund --
Distributor" in the SAI. The amount of the distribution fee paid by the Fund
with respect to each class differs under the Distribution Plan, as does the use
by MFD of such distribution fees. Such amounts and uses are described below in
the discussion of the provisions of the Distribution Plan relating to each class
of shares.
OTHER COMMON FEATURES. Fees payable under the Distribution Plan are charged
to, and therefore reduce, income allocated to shares of the Designated Class.
The provisions of the Distribution Plan relating to operating policies as well
as initial approval, renewal, amendment and termination are substantially
identical as they relate to each class of shares covered by the Distribution
Plan.
FEATURES UNIQUE TO EACH CLASS OF SHARES: There are certain features of the
Distribution Plan that are unique to each class of shares, as described below.
CLASS A SHARES. Class A shares are generally offered pursuant to an initial
sales charge, a substantial portion of which is paid to or retained by the
dealer making the sale (the remainder of which is paid to MFD). See "Purchases
- - -- Class A Shares" above. In addition to the initial sales charge, the dealer
also generally receives the ongoing 0.25% per annum service fee, as discussed
above.
The distribution fee paid to MFD under the Distribution Plan is equal, on an
annual basis, to 0.10% of the Fund's average daily net assets attributable to
Class A shares. As noted above, MFD may use the distribution fee to cover
distribution-related expenses incurred by it under its distribution agreement
with the Fund, including commissions to dealers and payments to wholesalers
employed by MFD (e.g., MFD pays commissions to dealers with respect to purchases
of $1 million or more and purchases by certain retirement plans of Class A
shares which are sold at net asset value but which are subject to a 1% CDSC for
one year after purchase). See "Purchases -- Class A Shares" above. In addition,
to the extent that the aggregate service and distribution fees paid under the
Distribution Plan do not exceed 0.35% per annum of the average daily net assets
of the Fund attributable to Class A shares, the Fund is permitted to pay such
distribution-related expenses or other distribution-related expenses.
CLASS B SHARES. Class B shares are offered at net asset value without an
initial sales charge but subject to a CDSC. See "Purchases -- Class B Shares"
above. MFD will advance to dealers the first year service fee described above at
a rate equal to 0.25% of the purchase price of such shares and, as compensation
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 Distribution Plan, the Fund pays MFD a distribution fee equal, on an
annual basis, to 0.75% of the Fund's average daily net assets attributable to
Class B shares. As noted above, this distribution fee may be used by MFD to
cover its distribution-related expenses under its distribution agreement with
the Fund (including the 3.75% commission it pays to dealers upon purchase of
Class B shares, as described under "Purchases -- Class B Shares" above).
CLASS C SHARES. Class C shares are offered at net asset value without an
initial sales charge but subject to a CDSC. See "Purchases -- Class C Shares"
above. MFD will pay a commission to dealers of 1.00% of the purchase price of
Class C shares purchased through dealers at the time of purchase. In
compensation for this 1.00% commission paid by MFD to dealers, MFD will retain
the 1.00% per annum Class C distribution and service fees paid by the Fund with
respect to such shares for the first year after purchase, and dealers will
become eligible to receive from MFD the ongoing 1.00% per annum distribution and
service fees paid by the Fund to MFD with respect to such shares commencing in
the thirteenth month following purchase.
This ongoing 1.00% fee is comprised of the 0.25% per annum service fee paid to
MFD under the Distribution Plan (which MFD in turn pays to dealers), as
discussed above, and a distribution fee paid to MFD (which MFD also in turn pays
to dealers) under the Distribution Plan equal, on an annual basis, to 0.75% of
the Fund's average daily net assets attributable to Class C shares.
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%,
0.98% 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. Because the Fund
intends to distribute all of its net investment income and net realized capital
gains to its shareholders in accordance with the timing requirements imposed by
the Code, it is not expected that the Fund will be required to pay any federal
income or excise taxes, although the Fund's foreign-source income may be subject
to foreign withholding taxes.
Shareholders of the Fund normally will have to pay federal income taxes, and any
state or local taxes, on the dividends and capital gain distributions they
receive from the Fund, whether the distribution is 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 be sent a
statement setting forth the federal income tax status of all dividends and
distributions for that year, including the portion taxable as ordinary income,
the portion taxable as long-term capital gain, the portion, if any, representing
a return of capital (which is free of current taxes but results in a basis
reduction), 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 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 which it
offers to the general public, entitled Class A, Class B and Class C Shares of
Beneficial Interest (without par value). The Fund also has a class of shares
which it offers exclusively to certain institutional investors, entitled Class I
shares. The Trust has reserved the right to create and issue additional classes
and series of shares, in which case each class of shares of a series would
participate equally in the earnings, dividends and assets attributable to that
class of 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 the
Distribution Plan or on any other matter that affects solely that class of
shares, but will otherwise vote together with all other classes of shares of the
series on all other matters. The Trust does not intend to hold annual
shareholder meetings. The Declaration of Trust provides that a Trustee may be
removed from office in certain instances (see "Description of Shares, Voting
Rights and Liabilities" in the SAI).
Each share of a class of the Fund represents an equal proportionate interest in
the Fund with each other class share, subject to the liabilities of 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 Securities Corporation 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. The Fund offers multiple classes of shares which were
initially offered for sale to the public on different dates. The calculation of
total rate of return for a class of shares which initially was offered for sale
to the public subsequent to another class of shares of the Fund is based both on
(i) the performance of the Fund's newer class from the date it initially was
offered for sale to the public and (ii) the performance of the Fund's oldest
class from the date it initially was offered for sale to the public up to the
date that the newer class initially was offered for sale to the public. See the
SAI for further information on the calculation of total rate of return for share
classes initially offered for sale to the public on different dates.
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, 1997, please
see the Fund's Annual Report. A copy of the Annual Report may be obtained
without charge by contacting the Shareholder Servicing Agent (see back cover for
address and phone number). In addition to information provided in shareholder
reports, the Fund may, in its discretion from time to time, make a list of all
or a portion of its holdings available to investors upon request.
EXPENSES
Subject to termination or revision at the sole discretion of MFS, MFS has agreed
to bear the Fund's expenses such that the Fund's "Other Expenses" which are
defined to include all Fund expenses except for management fees, Rule 12b-1
fees, taxes, extraordinary expenses, brokerage and termination costs and class
specific expenses, do not exceed 0.40% per annum of the Fund's average daily net
assets (the "Maximum Percentage"). The obligation of MFS to bear these expenses
terminates on February 28, 2002. The payments made by MFS on behalf of the Fund
under this arrangement are subject to reimbursement by the Fund to MFS, which
will be accomplished by the payment of an expense reimbursement fee by the Fund
to MFS computed and paid monthly at a percentage of its average daily net assets
for its then current fiscal year, with a limitation that immedately after such
payment, the Fund's "Other Expenses" will not exceed the Maximum Percentage.
This expense reimbursement by the Fund to MFS terminates on the earlier of the
date on which payments made by the Fund equal the prior payment of such
reimbursable expenses by MFS or February 28, 2002.
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 Class A, B and C shares
of that shareholder in the MFS Funds or MFS Fixed Fund (a bank collective 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 on any day of the month. If the
Shareholder does not specify a date, the investment will automatically occur on
the first business day of the month. Required forms are available from the
Shareholder Servicing Agent or investment dealers.
AUTOMATIC EXCHANGE PLAN: Shareholders having account balances of at least
$5,000 in any MFS Fund may exchange their shares for the same class of shares of
other MFS Funds (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 six different funds. A shareholder should consider the objectives
and policies of a fund and review its prospectus before electing to exchange
money into such fund through the Automatic Exchange Plan. No transaction fee is
imposed in connection with exchange transactions under the Automatic Exchange
Plan. However, exchanges of shares of MFS Money Market Fund, MFS Government
Money Market Fund or Class A shares of MFS Cash Reserve Fund will be subject to
any applicable sales charge. For federal and (generally) state income tax
purposes, an exchange is treated as a sale of 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, 1997, 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 Distribution Plan 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). As used in this
Appendix, the term "dealer" includes any broker, dealer, bank (including bank
trust departments), registered investment adviser, financial planner and any
other financial institutions having a selling agreement with MFS Fund
Distributor, Inc., ("MFD").
I. WAIVERS OF ALL APPLICABLE SALES CHARGES
In the following circumstances, the initial sales charge imposed on purchases
of Class A shares and the CDSC imposed on certain redemptions of Class A
shares and on redemptions of Class B and Class C shares, as applicable, are
waived:
1. DIVIDEND REINVESTMENT
o Shares acquired through dividend or capital gain reinvestment; and
o Shares acquired by automatic reinvestment of distributions of dividends
and capital gains of any MFS Fund in the MFS Family of Funds ("MFS
Funds") pursuant to the Distribution Investment Program.
2. CERTAIN ACQUISITIONS/LIQUIDATIONS
o 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:
o 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;
o Trustees and retired trustees of any investment company for which MFD
serves as distributor;
o Employees, directors, partners, officers and trustees of any sub-adviser
to any MFS Fund;
o Employees or registered representatives of dealers and other financial
institution ("dealers") which have a sales agreement with MFD;
o 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
o Institutional Clients of MFS or MFS Institutional Advisors, Inc.
("MFSI").
4. INVOLUNTARY REDEMPTIONS (CDSC WAIVER ONLY)
o Shares redeemed at an MFS Fund's direction due to the small size of a
shareholder's account. See "Redemptions and Repurchases -- General --
Involuntary Redemptions/ Small Accounts" in the Prospectus.
5. RETIREMENT PLANS (CDSC WAIVER ONLY). Shares redeemed on account of
distributions made under the following circumstances:
INDIVIDUAL RETIREMENT ACCOUNTS ("IRA'S")
o Death or disability of the IRA owner.
SECTION 401(a) PLANS ("401(a) PLANS") AND SECTION 403(b) EMPLOYER
SPONSORED PLANS ("ESP PLANS")
o Death, disability or retirement of 401(a) or ESP Plan participant;
o Loan from 401(a) or ESP Plan (repayment of loans, however, will
constitute new sales for purposes of assessing sales charges);
o Financial hardship (as defined in Treasury Regulation Section
1.401(k)-1(d)(2), as amended from time to time);
o Termination of employment of 401(a) or ESP Plan participant (excluding,
however, a partial or other termination of the Plan);
o Tax-free return of excess 401(a) or ESP Plan contributions;
o 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
o 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")
o Death or disability of SRO Plan participant.
6. CERTAIN TRANSFERS OF REGISTRATION (CDSC WAIVER ONLY). Shares
transferred:
o 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
o From a single account maintained for a 401(a) Plan to multiple accounts
maintained by the Shareholder Servicing Agent on behalf of individual
participants of such Plan, provided that the Plan sponsor subscribes to
the MFS FUNDamental 401(k) Plan or another similar recordkeeping system
made available by the Shareholder Servicing Agent.
7. LOAN REPAYMENTS
o Shares acquired pursuant to repayments by retirement plan participants of
loans from 401(a) or ESP Plans with respect to which such Plan or its
sponsoring organization subscribes to the MFS FUNDamental 401(k) Program
or the MFS Recordkeeper Plus Program (but not the MFS Recordkeeper
Program).
II. WAIVERS OF CLASS A SALES CHARGES
In addition to the waivers set forth in Section I above, in the following
circumstances the initial sales charge imposed on purchases of Class A
shares and the CDSC imposed on certain redemption of Class A shares are
waived:
1. WRAP ACCOUNT AND FUND "SUPERMARKET" INVESTMENTS
o Shares acquired by investments through certain dealers (including
registered investment advisers and financial planners) which have
established certain operational arrangements with MFD which include a
requirement that such shares be sold for the sole benefit of clients
participating in a "wrap" account, mutual fund marketplace account or a
similar program under which such clients pay a fee to such dealer.
2. INVESTMENT BY INSURANCE COMPANY SEPARATE ACCOUNTS
o Shares acquired by insurance company separate accounts.
3. RETIREMENT PLANS
ADMINISTRATIVE SERVICES ARRANGEMENTS
o Shares acquired by retirement plans or trust accounts whose third party
administrators or dealers have entered into an administrative services
agreement with MFD or one of its affiliates to perform certain
administrative services, subject to certain operational and minimum size
requirements specified from time to time by MFD or one or more of its
affiliates.
REINVESTMENT OF DISTRIBUTIONS FROM QUALIFIED RETIREMENT PLANS
o 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
o Distributions made on or after the IRA owner has attained the age of
59-1/2 years old; and
o Tax-free returns of excess IRA contributions.
401(a) PLANS
o Distributions made on or after the 401(a) Plan participant has attained
the age of 59 1/2 years old; and
o Certain involuntary redemptions and redemptions in connection with
certain automatic withdrawals from a 401(a) Plan.
ESP PLANS AND SRO PLANS
o 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
o Systematic Withdrawal Plan redemptions with respect to up to 10% per year
(or 15% per year, in the case of accounts registered as IRAs where the
redemption is made pursuant to Section 72(t) of the Internal Revenue Code
of 1986, as amended) of the account value at the time of establishment.
2. DEATH OF OWNER
o 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
o Shares redeemed on account of the disability of the account owner if
shares are held either solely or jointly in the disabled individual's
name or in a living trust for the benefit of the disabled individual (in
which case a disability certification form is required to be submitted to
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
o 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")
o 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;
o 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-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>
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, MA02107-9906
Independent Auditors
Deloitte & Touche LLP
125 Summer Street
Boston, MA02110
[LOGO] M F S(SM)
INVESTMENT MANAGEMENT
We invented the mutual fund(SM)
MFS(R) LIMITED MATURITY FUND
500 Boylston Street
Boston, MA 02116
[LOGO] M F S(SM)
INVESTMENT MANAGEMENT
We invented the mutual fund(SM)
MFS(R) LIMITED MATURITY FUND
Prospectus
September 1, 1997
MLM-1-9/97/90M 36/236/336
<PAGE>
[LOGO] M F S(SM)
INVESTMENT MANAGEMENT
MFS(R) LIMITED STATEMENT OF
MATURITY FUND ADDITIONAL INFORMATION
(A Member of the MFS Family of Funds(R)) September 1, 1997
- - ------------------------------------------------------------------------------
Page
----
1. Definitions ...................................................... 2
2. Investment Objectives, Policies and Restrictions ................. 2
3. Management of the Fund ........................................... 7
Trustees ....................................................... 7
Officers ....................................................... 8
Trustee Compensation Table ..................................... 8
Investment Adviser ............................................. 9
Administrator .................................................. 9
Custodian ...................................................... 10
Shareholder Servicing Agent .................................... 10
Distributor .................................................... 10
4. Portfolio Transactions and Brokerage Commissions ................. 11
5. Shareholder Services ............................................. 11
Investment and Withdrawal Programs ............................. 11
Exchange Privilege ............................................. 13
Tax-Deferred Retirement Plans .................................. 14
6. Tax Status ....................................................... 14
7. Determination of Net Asset Value and Performance ................. 15
8. Distribution Plan ................................................ 17
9. Description of Shares, Voting Rights and Liabilities ............. 18
10. Independent Auditors and Financial Statements .................... 19
Appendix A -- Performance Information ............................ A-1
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, 1997. This SAI should be read in conjunction with the Prospectus, a
copy of which may be obtained without charge by contacting the Shareholder
Servicing Agent (see last page for address and phone number).
THIS SAI IS NOT A PROSPECTUS AND IS AUTHORIZED FOR DISTRIBUTION TO PROSPECTIVE
INVESTORS ONLY IF PRECEDED OR ACCOMPANIED BY A CURRENT PROSPECTUS.
<PAGE>
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,
1997, 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. The Fund records these transactions as sale and purchase transactions,
rather than as borrowing transactions. During the roll period, the Fund foregoes
principal and interest paid on the mortgage-backed securities. The Fund is
compensated for the lost interest by the difference between the current sales
price and the lower price for the future purchase (often referred to as the
"drop") as well as by the interest earned on the cash proceeds of the initial
sale. The Fund may also be compensated by receipt of a commitment fee.
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 liquid assets 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 liquid assets from its portfolio in an
amount equal to the difference between the fluctuating market value of such
Futures Contracts and the aggregate value of the initial and variation margin
payments made by the Fund with respect to such Futures Contracts.
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 liquid assets 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 liquid assets 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
liquid assets 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.
Except with respect to the Fund's policy on borrowing and investing in illiquid
securities, 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 net 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 (born 8/4/35)
Massachusetts Financial Services Company, Chairman
RICHARD B. BAILEY* (born 9/14/26)
Private Investor; Massachusetts Financial Services Company, former Chairman
(prior to September 30, 1991); Cambridge Bancorp, Director; Cambridge Trust
Company, Director
PETER G. HARWOOD (born 4/3/26)
Private Investor
Address: 211 Lindsay Pond Road, Concord, Massachusetts
J. ATWOOD IVES (born 5/1/36)
Eastern Enterprises (diversified services company), Chairman and Chief
Executive Officer
Address: 9 Riverside Road, Weston, Massachusetts
LAWRENCE T. PERERA (born 6/23/35)
Hemenway & Barnes (attorneys), Partner
Address: 60 State Street, Boston, Massachusetts
WILLIAM J. POORVU (born 4/10/35)
Harvard University Graduate School of Business Administration, Adjunct
Professor; CBL & Associates Properties, Inc. (a real estate investment trust),
Director; The Baupost Fund (a registered investment company), Vice Chairman
(since November 1993), Chairman and Trustee (prior to November 1993)
Address: Harvard Business School, Soldiers Field Road, Cambridge,
Massachusetts
CHARLES W. SCHMIDT (born 3/18/28)
Private Investor; OHM Corporation Director; Mohawk Paper Company, Director
Address: 30 Colpitts Road, Weston, Massachusetts
ARNOLD D. SCOTT* (born 12/16/42)
Massachusetts Financial Services Company, Senior Executive Vice President,
Secretary and Director
JEFFREY L. SHAMES* (born 6/2/55)
Massachusetts Financial Services Company, President and Director
ELAINE R. SMITH (born 4/25/46)
Independent Consultant; Brigham and Women's Hospital, Executive Vice President
and Chief Operating Officer (prior to September 1992)
Address: Weston, Massachusetts
DAVID B. STONE (born 9/2/27)
North American Management Corp. (investment adviser), Chairman and Director;
Eastern Enterprises, Director
Address: 10 Post Office Square, Suite 300, Boston, Massachusetts
OFFICERS
W. THOMAS LONDON,* Treasurer (born 3/1/44)
Massachusetts Financial Services Company, Senior Vice President
JAMES O. YOST,* Assistant Treasurer (born 6/12/60)
Massachusetts Financial Services Company, Vice President
ELLEN M. MOYNIHAN*, Assistant Treasurer (born 11/13/57)
Massachusetts Financial Services Company, Vice President (since September
1996); Deloitte & Touche LLP, Senior Manager (until September 1996).
MARK E. BRADLEY*, Assistant Treasurer (born 11/23/59)
Massachusetts Financial Services Company, Vice President (since March 1997);
Putnam Investments, Vice President (from September 1994 until March 1997);
Ernst & Young, Senior Tax Manager (until September 1994).
STEPHEN E. CAVAN,* Secretary and Clerk (born 11/6/53)
Massachusetts Financial Services Company, Senior Vice President, General
Counsel and Assistant Secretary
JAMES R. BORDEWICK, JR.,* Assistant Secretary (born 3/6/59)
Massachusetts Financial Services Company, Senior Vice President and Associate
General Counsel
ROBERT A. DENNIS,* Vice President (born 12/12/48)
Massachusetts Financial Services Company, Senior Vice President
GEOFFREY L. KURINSKY,* Vice President (born 7/7/53)
Massachusetts Financial Services Company, Senior Vice President
- - ----------
*"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 below is certain information concerning the cash compensation paid to
the Trustees and benefits accrued, and estimated benefits payable, under the
retirement plan.
TRUSTEE COMPENSATION TABLE
<TABLE>
<CAPTION>
TOTAL TRUSTEES
FEES FROM
RETIREMENT BENEFIT ESTIMATED FUND AND
TRUSTEES FEE ACCRUED AS PART OF CREDITED YEARS FUND
TRUSTEE FROM FUND(1) FUND'S EXPENSES(1) OF SERVICE(2) COMPLEX(3)
- - --------------------------- ------------ ------------------ -------------- ---------------
<S> <C> <C> <C> <C>
Richard B. Bailey ......... $1,815 $486 8 $247,168
A. Keith Brodkin .......... --0-- --0-- N/A --0--
Peter G. Harwood .......... 2,015 322 5 105,995
J. Atwood Ives ............ 1,915 505 17 98,750
Lawrence T. Perera ........ 2,050 495 16 98,310
William Poorvu ............ 1,950 532 16 102,840
Charles W. Schmidt ........ 2,015 519 9 105,995
Arnold D. Scott ........... --0-- --0-- N/A --0--
Jeffrey L. Shames ......... --0-- --0-- N/A --0--
Elaine R. Smith ........... 2,200 415 26 105,995
David B. Stone ............ 2,065 545 9 108,710
- - ------------
(1) For fiscal year ended April 30, 1997.
(2) Based on normal retirement age of 73.
(3) For calendar year 1996. All Trustees receiving compensation served as Trustees of 23 funds within the
MFS Fund complex (having aggregate net assets at December 31, 1996, of approximately $21.2 billion)
except Mr. Bailey, who served as Trustee of 81 funds within the MFS Fund complex (having aggregate
net assets at December 31, 1996, of approximately $38.5 billion).
</TABLE>
ESTIMATED ANNUAL BENEFITS PAYABLE BY FUND UPON RETIREMENT(4)
YEARS OF SERVICE
AVERAGE ----------------------------------------------------------
TRUSTEE FEES 3 5 7 10 OR MORE
- - ------------------------------------------------------------------------------
$1,634 $245 $408 $572 $ 817
1,791 269 448 627 895
1,948 292 487 682 974
2,105 316 526 737 1,053
2,263 339 566 792 1,131
2,420 363 605 847 1,210
(4) Other funds in the MFS Fund complex provide similar retirement benefits to
the Trustees.
As of July 31, 1997, all Trustees and officers as a group owned 1.77% of the
outstanding shares of the Fund. Certain employee benefit plans of MFS for which
Messrs. Brodkin, Scott and Shames are Trustees owed 1.31% of the outstanding
Shares of the Fund.
As of July 31, 1997, Merrill Lynch, Pierce, Fenner & Smith Inc., FBO its
Customers, Attention: Fund Administration, 4800 Deer Lake Drive East, 3rd Floor,
Jacksonville, Florida 32246-6484 was the owner of approximately 6.02%, 15.30%
and 7.50% of Class A, B, and C Shares of the Fund, respectively. As of July 31,
1997, US Clearing Corp., FBO 862-10016-12, 26 Broadway, New York, New York
10004-1798 was the owner of approximately 12.62% of Class C Shares of the Fund.
As of July 31, 1997, MFS Defined Contribution Plan, c/o Mark Leary,
Massachusetts Financial Services, 500 Boylston Street, Boston, MA 02116-3740 was
the record owner of approximately 100% of the outstanding Class I 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 an
indirect 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"). Under the Advisory
Agreement, the Adviser provides the Fund with overall investment advisory
services. Subject to such policies as the Trustees may determine, the Adviser
makes investment decisions for the Fund. For 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, 1997, the Fund incurred fees under
the Advisory Agreement of $573,843 (equivalent on an annualized basis to 0.40%
of average net assets).
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).
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, 1997, 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, 1998, and will
continue in effect thereafter only if such continuance is specifically approved
at least annually by the Board of Trustees or by vote of a majority of the
Fund's 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.
ADMINISTRATOR
MFS provides the Fund with certain financial, legal, compliance, shareholder
communications and other administrative services pursuant to a Master
Administrative Services Agreement dated March 1, 1997. Under this Agreement, the
Fund pays MFS an administrative fee up to 0.015% per annum of the Fund's average
daily net assets. This fee reimburses MFS for a portion of the costs it incurs
to provide such services. For the period ended April 30, 1997, MFS received
$3,750 under the Agreement, equivalent to 0.0026% of the Fund's average daily
net assets.
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, as amended (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
the Fund at an effective annual rate of 0.13%. In addition, the Shareholder
Servicing Agent will be reimbursed by the Fund for certain expenses incurred by
the Shareholder Servicing Agent on behalf of the Fund. 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, CLASS C AND CLASS I SHARES: MFD acts as agent in selling Class B, Class
C and Class I shares of the Fund. The public offering price of Class B, Class C
and Class I shares is their net asset value next computed after the sale (see
"Purchases" in the Prospectus and the Prospectus Supplement pursuant to which
Class I shares are offered).
GENERAL: Neither MFD nor dealers are permitted to delay 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, 1997, MFD received sales charges
of $57,812 and dealers received sales charges of $511,340 (as their concession
on gross sales charges of $569,152) for selling Class A shares of the Fund; the
Fund received $56,979,645 representing the aggregate net asset value of such
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 $401,616) 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.
For the fiscal years ended April 30, 1995, 1996 and 1997, the contingent
deferred sales charge ("CDSC") imposed on the redemption of Class A shares was
$-0-, $412, and $19,436, respectively. For the fiscal years ended April 30,
1995, 1996 and 1997, the contingent deferred sales charge ("CDSC") imposed on
redemptions of Class B shares was $54,304, $43,291 and $60,596, respectively.
For the fiscal years ended 1995, 1996 and 1997, the CDSC imposed on redemption
of Class C shares was $-0-, $-0- and $13,740, respectively.
The Distribution Agreement will remain in effect until August 1, 1998, and will
continue in effect thereafter only if such continuance is specifically approved
at least annually by the Board of Trustees or by vote of a majority of the
Trust's shares (as defined in "Investment Restrictions") and, in either case, by
a majority of the Trustees who are not parties to 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 Conduct Rules of 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, 1997, 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
Class A, B and C shares of that shareholder in the MFS Funds or MFS Fixed Fund
reaches a discount level. See "Purchases" in the Prospectus for the sales
charges on quantity 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.
SUBSEQUENT INVESTMENT BY TELEPHONE: Each shareholder may purchase additional
shares of any MFS Fund by telephoning the Shareholder Servicing Agent toll-free
at (800) 225-2606. The minimum purchase amount is $50 and the maximum purchase
amount is $100,000. Shareholders wishing to avail themselves of this telephone
purchase privilege must so elect on their Account Application and designate
thereon a bank and account number from which purchases will be made. If a
telephone purchase request is received by the Shareholder Servicing Agent on any
business day prior to the close of regular trading on the Exchange (generally,
4:00 p.m., Eastern time), the purchase will occur at the closing net asset value
of the shares purchased on that day. The Shareholder Servicing Agent may be
liable for any losses resulting from unauthorized telephone transactions if it
does not follow reasonable procedures designed to verify the identity of the
caller. The Shareholder Servicing Agent will request personal or other
information from the caller, and will normally also record calls. Shareholders
should verify the accuracy of confirmation statements immediately after their
receipt.
DISTRIBUTION INVESTMENT PROGRAM: Distributions of dividends and capital gains
made by the Fund with respect to a particular class of shares may be
automatically invested in shares of the same class of one of the other MFS
Funds, if shares of 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 six different funds effective on the seventh day of each
month or of every third month, depending whether monthly or quarterly exchanges
are elected by the shareholder. If the seventh day of the month is not a
business day, the transaction will be processed on the next business day.
Generally, the initial exchange will occur after receipt and processing by the
Shareholder Servicing Agent of an application in good order. Exchanges will
continue to be made from a shareholder's account in any MFS Fund, as long as the
balance of the account is sufficient to complete the exchanges. Additional
payments made to a shareholder's account 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 and if purchaser is eligible
to purchase the class of shares) at net asset value. Exchanges will be made only
after instructions in writing or by telephone (an "Exchange Request") are
received for an established account by the Shareholder Servicing Agent.
Each Exchange Request must be in proper form (i.e., 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 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, 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 the distributions are 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 for federal income tax
purposes without regard to the length of time shareholders have held their
shares. It is uncertain at this time whether all or any part of such capital
gains will be eligible to be taxed at a maximum rate below 28%. 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; a
long-term capital gain will be eligible for reduced tax rates if the shares were
held for more than 18 months. However, any loss realized upon a disposition of
shares in the Fund held for six months or less will be treated as a long-term
capital loss to the extent of any distributions of net capital gain made with
respect to those shares. Any loss realized upon a disposition of shares may also
be disallowed under rules relating to wash sales. Gain may be increased (or loss
reduced) upon a redemption of Class A shares of the Fund within 90 days after
their purchase followed by any purchase (including purchases by exchange or by
reinvestment) without payment of an additional sales charge of Class A shares of
the Fund or of another MFS Fund (or any other shares of an MFS Fund generally
sold subject to a sales charge).
The Fund's current dividend and accounting policies will affect the amount,
timing and character of distributions to shareholders. Any 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 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 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 or deductions with respect
to such foreign taxes. The United States has entered into tax treaties with many
foreign countries that may entitle the Fund to a reduced rate of tax or an
exemption from tax on such income; the Fund intends to qualify for treaty
reduced rates where available. It is not possible, however, to determine the
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 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 jurisdiction. The Fund is also
required in certain circumstances to apply backup withholding at the rate of 31%
on taxable dividends and redemption proceeds paid to any shareholder (including
a Non-U.S. Person) who does not furnish to the Fund certain information and
certifications or who is otherwise subject to backup withholding. Backup
withholding will not, however, be applied to payments that have been subject to
30% withholding.
As long as it qualifies as a regulated investment company under the Code, the
Fund will not be required to pay Massachusetts income or excise taxes.
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.
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 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, Martin Luther King 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) 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 offers multiple classes of shares which were
initially offered for sale to the public on different dates. The calculation of
total rate of return for a class of shares which initially was offered for sale
to the public subsequent to another class of shares of the Fund is based both on
(i) the performance of the Fund's newer class from the date it initially was
offered for sale to the public and (ii) the performance of the Fund's oldest
class from the date it initially was offered for sale to the public up to the
date that the newer class initially was offered for sale to the public.
As discussed in the Prospectus, the sales charges, expenses and expense ratios,
and therefore the performance, of the Fund's classes of shares differ. In
calculating total rate of return for a newer class of shares in accordance with
certain formulas required by the SEC, the performance will be adjusted to take
into account the fact that the newer class is subject to a different sales
charge than the oldest class (e.g., if the newer class is Class A shares, the
total rate of return quoted will reflect the deduction of the initial sales
charge applicable to Class A shares; if the newer class is Class B shares, the
total rate of return quoted will reflect the deduction of the CDSC applicable to
Class B shares). However, the performance will not be adjusted to take into
account the fact that the newer class of shares bears different class specific
expenses than the oldest shares (e.g., Rule 12b-1 fees). Therefore, the total
rate of return quoted for a newer class of shares will differ from the return
that would be quoted had the newer class of shares been outstanding for the
entire period over which the calculation is based (i.e., the total rate of
return quoted for the newer class will be higher than the return that would have
been quoted had the newer class of shares been outstanding for the entire period
over which the calculation is based if the class specific expenses for the newer
class are higher than the class specific expenses of the oldest class, and the
total rate of return quoted for the newer class will be lower than the return
that would be quoted had the newer class of shares been outstanding for this
entire period if the class specific expenses for the newer class are lower than
the class specific expenses of the oldest class).
Total rate of return quotations for each class are presented in Appendix A
attached hereto under the heading "Performance Quotations."
PERFORMANCE RESULTS: The performance results for Class A shares presented in
Appendix A attached hereto under the heading "Performance Results" assume an
initial investment of $10,000 in Class A shares, and cover the period from
February 26, 1992 to December 31, 1996. 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).
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. Yield
quotations for each class of shares are presented in Appendix A attached hereto
under the heading "Performance Quotations."
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%. Current distribution rate
quotations for each class of shares are presented in Appendix A attached hereto
under the heading "Performance Quotations."
From time to time the Fund may, as appropriate, quote Fund rankings or reprint
all or a portion of evaluations of fund performance and operations appearing in
various independent publications, including, but not limited to, the following:
Money, Fortune, U.S. News and World Report, Kiplinger's Personal Finance, The
Wall Street Journal, Barron's, Investors Business Daily, Newsweek, Financial
World, Financial Planning, Investment Advisor, USA Today, Pensions and
Investments, SmartMoney, Forbes, Global Finance, Registered Representative,
Institutional Investor, the Investment Company Institute, Johnson's Charts,
Morningstar, Lipper Analytical Securities Corporation, 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 PLAN
The Trustees have adopted a Distribution Plan for Class A, Class B and Class C
shares (the "Distribution Plan") pursuant to Section 12(b) of the 1940 Act and
Rule 12b-1 thereunder (the "Rule") after having concluded that there is a
reasonable likelihood that the Distribution Plan would benefit the Fund and each
respective class of shareholders. The provisions of the Distribution Plan are
severable with respect to each class of shares offered by the Fund. The
Distribution Plan is designed to promote sales, thereby increasing the net
assets of the Fund. Such an increase may reduce the expense ratio to the extent
the Fund's fixed costs are spread over a larger net asset base. Also, an
increase in net assets may lessen the adverse 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 Plan is described in the Prospectus under the caption
"Distribution Plan," which is incorporated herein by reference. The following
information supplements this Prospectus discussion.
SERVICE FEES:
With respect to Class A shares, no service fees will be paid: (i) to any dealer
who is the holder or dealer of record for investors who own Class A shares
having an aggregate net asset value less than $750,000, or such other amount as
may be determined from time to time by MFD (MFD, however, may waive this minimum
amount requirement from time to time); or (ii) to any insurance company which
has entered into an agreement with the Fund and MFD that permits such insurance
company to purchase Class A shares from the Fund at their net asset value in
connection with annuity agreements issued in connection with the insurance
company's separate accounts. Dealers may from time to time be required to meet
certain other criteria in order to receive service fees.
With respect to Class B shares, except in the case of the first year service
fee, no service fees will be paid to any securities dealer who is the holder or
dealer of record for investors who own Class B shares having an aggregate net
asset value of less than $750,000 or such other amount as may be determined by
MFD from time to time. MFD, however, may waive this minimum amount requirement
from time to time. Dealers may from time to time be required to meet certain
other criteria in order to receive service fees.
MFD or its affiliates shall be entitled to receive any service fee payable under
the Distribution Plan for which there is no dealer of record or for which
qualification standards have not been met as partial consideration for personal
services and/or account maintenance services performed by MFD or its affiliates
for shareholder accounts.
DISTRIBUTION FEES:
The purpose of distribution payments to MFD under the Distribution Plan is to
compensate MFD for its distribution services to the Fund. MFD pays commissions
to dealers as well as expenses of printing prospectuses and reports used for
sales purposes, expenses with respect to the preparation and printing of sales
literature and other distribution related expenses, including, without
limitation, the cost necessary to provide distribution-related services, or
personnel, travel, office expenses and equipment.
DISTRIBUTION AND SERVICE FEES PAID DURING THE FUND'S LAST FISCAL YEAR: During
the fiscal year ended April 30, 1997, 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
CLASS OF SHARES BY FUND BY MFD BY DEALERS
- - --------------- ----------- ------------- -----------
Class A Shares $144,717 $ 21,394 $123,323
Class B Shares $306,258 $239,315 $ 66,943
Class C Shares $161,296 $ 573 $160,723
GENERAL: The Distribution Plan will remain in effect until August 1, 1998, and
will continue in effect thereafter only if such continuance is specifically
approved at least annually by vote of both the Trustees and a majority of the
Trustees who are not "interested persons" or financially interested parties to
such Plan ("Distribution Plan Qualified Trustees"). The Distribution Plan 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. The Distribution Plan may be
terminated at any time by vote of a majority of the Distribution Plan Qualified
Trustees or by vote of the holders of a majority of the respective class of the
Fund's shares (as defined in "Investment Restrictions"). All agreements relating
to the Distribution Plan entered into between the Fund or MFD and other
organizations must be approved by the Board of Trustees, including a majority of
the Distribution Plan Qualified Trustees. Agreements under the Distribution Plan
must be in writing, will be terminated automatically if assigned, and may be
terminated at any time without payment of any penalty, by vote of a majority of
the Distribution Plan Qualified Trustees or by vote of the holders of a majority
of the respective class of the Fund's shares. The Distribution Plan may not be
amended to increase materially the amount of permitted distribution expenses
without the approval of a majority of the respective class of the Fund's shares
(as defined in "Investment Restrictions") or may not be materially amended in
any case without a vote of the Trustees and a majority of the Distribution Plan
Qualified Trustees. The selection and nomination of Distribution Plan Qualified
Trustees shall be committed to the discretion of the non-interested Trustees
then in office. No Trustee who is not an "interested person" has any financial
interest in the Distribution Plan or in any related agreement.
9. DESCRIPTION OF SHARES, VOTING RIGHTS AND LIABILITIES
The 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 as well as Class I shares for this Fund and one of the
Trust's other series. 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, 1997, the Statement of Assets and
Liabilities at April 30, 1997, the Statement of Operations for the year ended
April 30, 1997, the Statement of Changes in Net Assets for the two years ended
April 30, 1997, 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
PERFORMANCE INFORMATION
The performance results and quotations below should not be considered as
representative of the performance of the Fund in the future since the net asset
value and public offering price of shares of the Fund will vary. See
"Determination of Net Asset Value and Performance" in the SAI.
<TABLE>
<CAPTION>
PERFORMANCE RESULTS -- CLASS A SHARES
VALUE OF VALUE OF VALUE OF
INITIAL $10,000 CAPITAL GAIN REINVESTED TOTAL
YEAR ENDED INVESTMENT DISTRIBUTIONS DIVIDENDS VALUE
---------- ---------- ------------- --------- -----
<S> <C> <C> <C> <C>
December 31, 1992* $9,826 $2 $ 549 $10,377
December 31, 1993 9,826 2 1,213 11,041
December 31, 1994 9,266 2 1,798 11,066
December 31, 1995 9,666 2 2,686 12,354
December 31, 1996 9,453 2 3,503 12,958
* For the period from the commencement of investment operations, February 26, 1992, to December 31, 1992.
Explanatory Notes: The results assume that the initial investment in Class A shares was reduced by the current maximum
applicable sales charge. No adjustment has been made for income taxes, if any, payable by shareholders.
PERFORMANCE QUOTATIONS
All performance quotations are as of April 30, 1997.
<CAPTION>
ACTUAL
30-DAY
YIELD YIELD 30-DAY
AVERAGE ANNUAL TOTAL RETURNS* (INCLUDING (WITHOUT CURRENT
--------------------------------------- ANY ANY DISTRIBUTION
1 YEAR 5 YEAR LIFE OF FUND WAIVERS) WAIVERS) RATE
------ ------ ------------ -------- -------- ----
<S> <C> <C> <C> <C> <C> <C>
Class A Shares with sales charge ..... 3.23% 5.47% 5.46%(1) N/A 6.26% 6.83%
Class A Shares without sales charge .. 5.83% 6.01% 5.97%(1) N/A N/A N/A
Class B Shares with CDSC ............. 1.04% 5.04%(2) 5.19%(2) N/A N/A N/A
Class B Shares without CDSC .......... 4.99% 5.35%(2) 5.34%(2) N/A 5.83% 6.19%
Class C Shares with CDSC ............. 4.10% 5.51%(3) 5.49%(3) N/A N/A N/A
Class C Shares without CDSC .......... 5.08% 5.51%(3) 5.49%(3) N/A 5.30% 6.14%
Class I Shares ....................... 5.83%(4) 6.01%(4) 5.97%(4) N/A 6.04% 6.98%(4)
(1) From the initial public offering date of the Fund on February 26, 1992.
(2) Class B share performance includes the performance of the Fund's Class A shares for periods prior to the commencement
of offering of Class B shares on September 7, 1993. Sales charges, expenses and expense ratios, and therefore
performance, for Class A and Class B shares differ. Class B share performance has been adjusted to reflect that Class B
shares generally are subject to a CDSC (unless the performance quotation does not give effect to the CDSC) whereas
Class A shares generally are subject to an initial sales charge. Class B share performance has not, however, been
adjusted to reflect differences in operating expenses (e.g., Rule 12b-1 fees), which generally are lower for Class A
shares.
(3) Class C share performance includes the performance of the Fund's Class A shares for periods prior to the commencement
of offering of Class C shares on July 1, 1994. Sales charges, expenses and expense ratios, and therefore performance,
for Class A and Class C shares differ. Class C share performance has been adjusted to reflect that Class C shares
generally are subject to a CDSC (unless the performance quotation does not give effect to the CDSC) whereas Class A
shares generally are subject to an initial sales charge. Class C share performance has not, however, been adjusted to
reflect differences in operating expenses (e.g., Rule 12b-1 fees), which generally are lower for Class A shares.
(4) Class I share performance includes the performance of the Fund's Class A shares for the periods prior to the
commencement of offering of Class I shares on January 2, 1997. Sales charges, expenses and expense ratios, and
therefore performance for Class I and A shares differ. Class I share performance has been adjusted to reflect that
Class I shares are not subject to an initial sales charge, whereas Class A shares generally are subject to an initial
sales charge. Class I share performance has not, however, been adjusted to reflect differences in operating expenses
(e.g., Rule 12b-1 fees), which generally are lower for Class I shares. The current distribution rate for Class I shares
is calculated by annualizing the last dividend.
* Total rate of return figures would have been lower if an expense limitation was not in place.
</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
[LOGO] M F S(SM)
INVESTMENT MANAGEMENT
We invented the mutual fund(SM)
MLM-13-9/96/500 36/236/336
<PAGE>
<PAGE> 1
[MFS LOGO] Annual Report
for Year Ended
April 30, 1997
MFS(R) LIMITED MATURITY FUND
LEARNING FINANCIAL BASICS THE EASY WAY (see page 27)
<PAGE> 2
TABLE OF CONTENTS
Letter from the Chairman ...................................... 1
A Discussion with the Portfolio Manager ....................... 3
Portfolio Manager's Profile ................................... 6
Fund Facts .................................................... 7
Performance Summary ........................................... 7
Portfolio Concentration ....................................... 9
Tax Form Summary .............................................. 9
Portfolio of Investments ...................................... 11
Financial Statements .......................................... 13
Notes to Financial Statements ................................. 19
Independent Auditors' Report .................................. 26
The ABCs of Investing ......................................... 27
The MFS Family of Funds(R) .................................... 28
Trustees and Officers ......................................... 29
HIGHLIGHTS
- FOR THE 12 MONTHS ENDED APRIL 30, 1997, CLASS A SHARES OF THE FUND
PROVIDED A TOTAL RETURN AT NET ASSET VALUE OF 5.83%, CLASS B SHARES
4.99%, CLASS C SHARES 5.08%, AND CLASS I SHARES 5.83%.
- THE FUND'S PERFORMANCE WAS POSITIVELY AFFECTED BY ITS OVERWEIGHTING IN
INVESTMENT-GRADE CORPORATE SECURITIES, WHICH OUTPERFORMED TREASURY
SECURITIES BY ALMOST 50 BASIS POINTS (0.50%) OVER THE PAST YEAR.
(PRINCIPAL VALUE AND INTEREST ON TREASURY SECURITIES ARE GUARANTEED BY
THE U.S. GOVERNMENT IF HELD TO MATURITY.)
- AT THE SAME TIME, THE FUND'S UNDERWEIGHTING IN MORTGAGE-BACKED
SECURITIES WAS DETRIMENTAL TO ITS PERFORMANCE, AS THE RETURNS IN THIS
SECTOR WERE STRONGER THAN ANTICIPATED, WITH MORTGAGE SECURITIES
OUTPERFORMING TREASURIES BY ABOUT 150 BASIS POINTS (1.50%).
- ONE OF THE FUND'S BIGGEST WEIGHTINGS IS IN THE UTILITY SECTOR. AS A
RESULT OF VARIOUS RESTRUCTURING PLANS SPARKED BY DEREGULATION, WE
ANTICIPATE THAT MANY OF THE LOWER-RATED CREDITS IN THE ELECTRIC
UTILITY INDUSTRY WILL EVENTUALLY BECOME HIGHER RATED.
<PAGE> 3
LETTER FROM THE CHAIRMAN
[PHOTO: A. Keith Brodkin]
Dear Shareholders:
After more than six years of expansion, the U.S. economy is experiencing
another year of growth in 1997, although a few signs point to the possibility
of a modest rise in inflation during the year. On the positive side, the
pattern of moderate growth and inflation set over the past few years now seems
fairly well entrenched in the economy and, short of a major international or
domestic crisis, appears to have enough momentum to remain on track for some
time. Also, gains in such important sectors as housing, automobiles,
industrial production, and exports indicate a fair amount of underlying
strength in the economy. Some of that strength was seen in the first quarter,
when the U.S. economy grew at an annualized rate of 5.6% (based on preliminary
estimates), a pace that would be inflationary in the unlikely event that it
were to continue. The ongoing tightness in the labor market could also add some
inflationary pressures to the economy. At the same time, there is some reason
for caution as a result of the continuing high level of consumer debt and
rising personal bankruptcies. Given these somewhat conflicting indicators, we
expect real (inflation-adjusted) growth to revolve around 2% in 1997, with the
strength of the first quarter moderating as we move through the balance of
the year.
In the bond markets, conflicting signals over the strength of the economy
have also created near-term volatility, and the Federal Reserve Board has begun
taking measured steps to control inflation by raising short-term interest rates.
Although we do not expect a repeat of the rapid growth in the first quarter, we
would expect the Fed to raise interest rates at least one more time in reaction
to the economic momentum that was built up during the period. While inflationary
forces largely remained in check in 1996, the continued strength in the labor
market suggests that a pickup in inflation is still possible. At the same time,
the U.S. budget deficit continues to decline and, as a percentage of gross
domestic product, is now approaching 1%, which we consider a positive
development for the bond markets. Although interest rates
1
<PAGE> 4
LETTER FROM THE CHAIRMAN - continued
may remain volatile over the coming months, we believe that, at current levels,
fixed-income markets remain equitably valued.
We appreciate your support and welcome any questions or comments you may
have.
Respectfully,
/S/ A. Keith Brodkin
A. Keith Brodkin
Chairman and President
May 14, 1997
2
<PAGE> 5
A DISCUSSION WITH THE PORTFOLIO MANAGER
[PHOTO: GEOFFREY L. KURINSKY]
For the 12 months ended April 30, 1997, Class A shares of the Fund
provided a total return of 5.83%, Class B shares 4.99%, Class C shares 5.08%,
and Class I shares 5.82%. These returns assume the reinvestment of
distributions but exclude the effects of any sales charges and compare to a
6.23% return for the Merrill Lynch One- to Five-Year Government/Corporate Bond
Index (a total return index comprised of coupon-bearing U.S. Treasury issues,
debt of agencies of the U.S. government, and corporate debt rated "Baa" or
higher by Moody's Investors Services). The returns of the Fund's Class A and
Class I shares were comparable to the 5.80% return for the average short-term
investment-grade debt fund as reported by Lipper Analytical Services, an
independent firm that reports mutual fund performance.
Q. Could you talk about some of the reasons for the Fund's performance relative
to its benchmark indices?
A. The performance of the Fund's Class A shares over the past year was roughly
equivalent to that of the average fund in the Lipper category. Since interest
rates on two-year Treasuries were constrained to a tight range of 5 5/8% to
6 1/2%, the portfolio's duration, or interest-rate sensitivity, has had little
impact on the Fund's performance versus its peer group. The Fund's policy
generally is managed so as to keep the duration within about 15% of the average
for the Lipper universe, which is two years, so duration is usually not the most
important ingredient in its performance. Performance was positively affected by
the Fund's overweighting in investment-grade corporate securities, which
outperformed Treasury securities by almost 50 basis points (0.50%) over the past
year. (Principal value and interest on Treasury securities are guaranteed by the
U.S. government if held to maturity.) The Fund's holdings in corporates averaged
around 70% of the portfolio during the year, which is roughly double the average
for similar funds in Lipper's category.
On the negative side, the Fund's underweighting in mortgage-backed
securities was detrimental to performance, as this sector turned in strong
results, outperforming Treasury securities by about 150 basis points (1.50%).
The Fund maintained an average 10% weighting in mortgage-backed securities,
versus 18% for the average fund in the Lipper category.
3
<PAGE> 6
A DISCUSSION WITH THE PORTFOLIO MANAGER - continued
Q. In general, how would you describe the fixed-income environment over the past
year?
A. It was a relatively tranquil year in these markets, as the economy continued
to grow steadily and inflationary pressures remained dormant. As is typical
during periods of low volatility and steady growth, corporate and mortgage-
backed securities outperformed Treasury securities. This is a relatively good
environment for limited maturity investors. The Fund's net asset value averaged
$7.09 for the period and throughout remained at plus or minus 1%.
Q. How is your outlook for the fixed-income markets reflected in your weighting
in high-grade corporate bonds, which is now about 70% of the portfolio?
A. Environments like this, characterized by steady economic growth and low
inflation, are ideal for the cash flows of corporate America and, by extension,
high-grade corporate securities. Corporate securities generally underperform the
markets during periods of recession, when cash flows are declining or negative.
Despite the fact that the yield premium for corporate securities is as low today
as it has been in 10 years, we believe our outlook for continued strong growth
is consistent with the prospect of this sector's continuing to outperform
Treasury securities.
Q. One of your biggest weightings is in the utility sector, at about 21% of the
portfolio. What is it that you like about this sector, and are there any
utilities you particularly favor?
A. Under various restructuring plans sparked by deregulation in the electric
utility industry, many credits that are now rated low ("BBB" by Standard &
Poor's) will eventually become higher rated. Improvements in credit ratings are
generally accompanied by narrowing yield premiums, which means higher prices
compared to Treasury securities. Our favorite companies in this sector include
Long Island Lighting, Gulf States Utilities, and Systems Energy Resources.
Q. You also have about 22% of assets in the entertainment sector. Would you talk
about this sector and any companies you like there?
A. The companies in this sector are continuing their migration from their former
status as high-yield credits to solid investment-grade credits. They have
already made the crossover to lower investment-grade levels in the past two to
three years, and we believe that their continued focus on debt reduction and
increasing cash flows will result in further credit upgrades in upcoming months.
Still, we have chosen a "basket" approach to this sector to help reduce
4
<PAGE> 7
A DISCUSSION WITH THE PORTFOLIO MANAGER - continued
volatility in case any one company faces a bumpy road. Our favorite companies
include Telecommunications, Inc., the nation's largest cable television
operator, and Continental Cablevision, which is in the process of being
purchased by U.S. West Corp. On the programming side, we have major commitments
to Time Warner and Paramount (which are owned by Viacom, Inc. and News America
Holdings, respectively).
Q. We've talked about some sectors and industries that helped the Fund over the
past year; now, would you mind talking about any positions that did not perform
as well as you hoped?
A. The Fund maintains positions in a couple of companies that have been
adversely affected by the deteriorating patterns in consumer-debt delinquencies.
Advanta Corp., a credit-card issuer, had a significant pickup in delinquencies,
resulting in an unexpected loss in the first quarter of 1997. United Financial
Companies has seen some increase in delinquencies on home-equity loans. Although
we are very concerned about these trends and speak with company managements
frequently, we believe the securities of both of these companies represent good
value at current prices.
Q. You have almost 80% of the Fund's assets in securities rated "BBB," the
lowest of the investment-grade categories. Why do you feel comfortable with that
position?
A. For the same reason we like the corporate asset class as a whole. As long as
the pace of economic activity is strong, securities of lower-quality issuers
perform well. In addition, we have focused on sectors that are continuing in a
period of secular credit-quality improvement; that is, that are moving toward
higher ratings, such as the utility and cable sectors discussed above.
Q. As you look ahead, what changes do you see in the general economic
environment and your market, and how are you positioning the Fund for those
changes?
A. We are watching the current pace of economic growth and inflation very
closely. While the economy has been growing at a steady pace, we are on the
lookout for signs of an economic slowdown. If we see any of these signs, we will
increase the duration of the portfolio to take advantage of a likely move to
lower interest rates. If we see signs of a protracted slowdown, we will reduce
our exposure to investment-grade securities. Finally, inflation is the enemy of
every bond investor, and it has failed to show up in the current cycle, despite
the strong pace of growth and resource utilization. If we begin to see signs of
inflation, we will reduce the duration of the portfolio to help protect the Fund
5
<PAGE> 8
A DISCUSSION WITH THE PORTFOLIO MANAGER - continued
against the potential for lower bond prices that could result from higher
interest rates.
/S/ Geoffrey L. Kurinsky
Geoffrey L. Kurinsky
Portfolio Manager
PORTFOLIO MANAGER'S PROFILE
GEOFFREY L. KURINSKY BEGAN HIS CAREER AT MFS IN 1987 IN THE FIXED INCOME
DEPARTMENT. A GRADUATE OF THE UNIVERSITY OF MASSACHUSETTS AND BOSTON
UNIVERSITY'S GRADUATE SCHOOL OF MANAGEMENT, HE WAS NAMED ASSISTANT VICE
PRESIDENT IN 1988, VICE PRESIDENT IN 1989, AND SENIOR VICE PRESIDENT IN
1993. HE HAS MANAGED MFS(R) LIMITED MATURITY FUND SINCE ITS INCEPTION IN
1992.
6
<PAGE> 9
<TABLE>
<S> <C>
FUND FACTS
STRATEGY: 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.
COMMENCEMENT OF
INVESTMENT
OPERATIONS: CLASS A: FEBRUARY 26, 1992
CLASS B: SEPTEMBER 7, 1993
CLASS C: JULY 1, 1994
CLASS I: JANUARY 2, 1997
SIZE: $147.5 MILLION NET ASSETS AS OF APRIL 30, 1997
</TABLE>
PERFORMANCE SUMMARY
The information below illustrates the historical performance of MFS Limited
Maturity Fund - Class A shares in comparison to various market indicators. Class
A share performance results reflect the deduction of the 2.50% maximum sales
charge; benchmark comparisons are unmanaged and do not reflect any fees or
expenses. The performance of other share classes will be greater than or less
than the line shown, based on differences in loads and fees paid by shareholders
investing in the different classes. It is not possible to invest in an index.
GROWTH OF A HYPOTHETICAL $10,000 INVESTMENT
(For the period from March 1, 1992, through April 30, 1997)
[GRAPH]
<TABLE>
<CAPTION>
Merrill Lynch One-
to Five-Year
Government/Corporate MFS Limited Maturity Consumer Price
Bond Index Fund - Class A Index - U.S.
-------------------- -------------------- --------------
<S> <C> <C> <C>
3/92 10,000 9,747 10,000
4/93 11,130 10,732 10,390
4/94 11,280 10,905 10,635
4/95 11,970 11,569 10,960
4/96 12,859 12,436 11,268
4/97 13,660 13,162 11,583
</TABLE>
7
<PAGE> 10
PERFORMANCE SUMMARY - continued
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS Life of
AS OF APRIL 30, 1997 1 Year 3 Years 5 Years Fund+
- - -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
MFS Limited Maturity Fund (Class A) including
2.50% sales charge (SEC results) +3.23% +5.59% +5.47% +5.46%
- - -------------------------------------------------------------------------------------------
MFS Limited Maturity Fund (Class A) at net asset
value +5.83% +6.47% +6.01% +5.97%
- - -------------------------------------------------------------------------------------------
MFS Limited Maturity Fund (Class B) with CDSC (SEC
results) +1.04% +4.68% +5.04% +5.19%
- - -------------------------------------------------------------------------------------------
MFS Limited Maturity Fund (Class B) at net asset
value +4.99% +5.57% +5.35% +5.34%
- - -------------------------------------------------------------------------------------------
MFS Limited Maturity Fund (Class C) with CDSC (SEC
results) +4.10% +5.64% +5.51% +5.49%
- - -------------------------------------------------------------------------------------------
MFS Limited Maturity Fund (Class C) at net asset
value +5.08% +5.64% +5.51% +5.49%
- - -------------------------------------------------------------------------------------------
MFS Limited Maturity Fund (Class I) with CDSC (SEC
results) +5.83% +6.47% +6.01% +5.97%
- - -------------------------------------------------------------------------------------------
MFS Limited Maturity Fund (Class I) at net asset
value +5.83% +6.47% +6.01% +5.97%
- - -------------------------------------------------------------------------------------------
Average short-term investment- grade debt fund* +5.80% +5.78% +5.45% +5.36%
- - -------------------------------------------------------------------------------------------
Merrill Lynch One- to Five-Year
Government/Corporate Bond Index++ +6.23% +6.59% +6.27% +7.73%
- - -------------------------------------------------------------------------------------------
Consumer Price Index** +2.80% +2.89% +2.85% +3.60%
- - -------------------------------------------------------------------------------------------
</TABLE>
+For the period from the commencement of the Fund's investment operations,
February 26, 1992, through April 30, 1997.
++Source: CDA/Wiesenberger.
*Source: Lipper Analytical Services.
**The Consumer Price Index is published by the U.S. Bureau of Labor Statistics
and measures the cost of living (inflation).
All results are historical and assume the reinvestment of dividends and capital
gains. Investment return and principal value will fluctuate, and shares, when
redeemed, may be worth more or less than their original cost. Past performance
is no guarantee of future results.
Class A share SEC results include the maximum 2.50% sales charge. Class B share
SEC results reflect the applicable contingent deferred sales charge (CDSC),
which declines over six years as follows: 4%, 4%, 3%, 3%, 2%, 1%, 0%. Class C
shares have no initial sales charge but, along with Class B shares have higher
annual fees and expenses than Class A shares. Class C share purchases are
subject to a 1% CDSC if redeemed within 12 months of purchase. Class I shares,
which became available on January 2, 1997, have no sales charge or Rule 12b-1
fees and are only available to certain institutional investors.
8
<PAGE> 11
PERFORMANCE SUMMARY - continued
Class B and Class C share results include the performance and the operating
expenses (e.g., Rule 12b-1 fees) of the Fund's Class A shares for periods prior
to the commencement of offering of Class B and Class C shares. Because operating
expenses attributable to Class B and Class C shares are higher than those of
Class A shares, Class B, and Class C share performance generally would have been
lower than Class A share performance. The Class A share performance included in
the Class B and Class C share SEC performance has been adjusted to reflect the
CDSC generally applicable to Class B and Class C shares rather than the sales
charge generally applicable to Class A shares.
Class I share results include the performance and operating expenses (e.g., Rule
12b-1 fees) of Class A shares for periods prior to the commencement of offering
of Class I shares. Because operating expenses attributable to Class A shares are
greater than those of Class I shares, Class I share performance generally would
have been higher than Class A share performance. The Class A share performance
included in the Class I share SEC performance has been adjusted to reflect the
fact that Class I shares have no initial sales charge. These results represent
the percentage change in net asset value.
Performance results reflect any applicable expense subsidies and waivers,
without which the results would have been less favorable. Current subsidies and
waivers may be discontinued at any time.
9
<PAGE> 12
PORTFOLIO CONCENTRATION AS OF APRIL 30, 1997
[PIE CHART] LARGEST SECTORS
High Grade Corporates 59.0%
Cash 3.0%
Asset-Backed 4.0%
U.S. Treasuries 6.0%
Yankee 6.0%
Mortgage-Backed Securities 9.0%
Miscellaneous 13.0%
For a more complete breakdown, refer to the Portfolio of Investments.
TAX FORM SUMMARY
IN JANUARY 1997, SHAREHOLDERS WERE MAILED A TAX FORM SUMMARY REPORTING
THE FEDERAL TAX STATUS OF ALL DISTRIBUTIONS PAID DURING THE CALENDAR
YEAR 1996.
10
<PAGE> 13
PORTFOLIO OF INVESTMENTS - April 30, 1997
Bonds - 97.2%
<TABLE>
<CAPTION>
- - ----------------------------------------------------------------------------------------------
S&P Bond
Rating Principal Amount
(Unaudited) Issuer (000 Omitted) Value
- - ----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Banks and Finance - 17.9%
BB ADVANTA Corp., 6.574s, 2000 $3,780 $ 3,686,558
NR Banamex Credit Corp., 6.25s, 2003## 7,800 7,440,030
BBB- Capital One Bank, 6.97s, 2002 3,000 2,969,490
A Countrywide Funding Corp., 6.57s, 1997 500 500,605
A Lehman Brothers Holdings, Inc., 7.375s, 2007 5,000 5,077,100
BBB- United Cos. Financial Corp., 7s, 1998 3,750 3,752,550
BBB- United Cos. Financial Corp., 9.35s, 1999 2,870 3,008,248
-----------
$ 26,434,581
- - ----------------------------------------------------------------------------------------------
Consumer Goods and Services - 3.7%
BBB- Fingerhut Cos., Inc., 7.375s, 1999 $5,500 $ 5,497,415
- - ----------------------------------------------------------------------------------------------
Corporate Asset Backed - 4.4%
NR CST Export, 97-1, 8.22s, 2004 $3,000 $ 2,996,250
NR Merrill Lynch Mortgage Investors, Inc., 9.7s, 513 519,109
2010
NR Merrill Lynch Mortgage Investors, Inc., 9.75s, 204 207,068
2010
NR Merrill Lynch Mortgage Investors, Inc., 8.3s, 33 32,848
2011
NR Merrill Lynch Mortgage Investors, Inc., 10s, 28 29,492
2011
NR Merrill Lynch Mortgage Investors, Inc., 8.19s, 2,666 2,677,093
2022
-----------
$ 6,461,860
- - ----------------------------------------------------------------------------------------------
Entertainment - 21.8%
BBB Continental Cablevision, Inc., 11s, 2007 $7,000 $ 7,877,170
BBB- NWCG Holdings Corp., 0s, 1999 9,360 8,073,000
BB+ Paramount Communications, Inc., 7.5s, 2002 4,000 3,976,920
BBB- TCI Communications, Inc., 7.385s, 2001 5,000 4,946,800
BBB- Tele-Communications, Inc., 10.125s, 2001 3,000 3,247,470
BBB- Time Warner, Inc., 6.1s, 2001## 4,330 4,100,986
-----------
$ 32,222,346
- - ----------------------------------------------------------------------------------------------
Food and Beverage Products - 4.6%
BBB- Great Atlantic & Pacific Tea Co., Inc., 9.125s, $3,500 $ 3,567,620
1998
BBB- RJR Nabisco, Inc., 8s, 2001 3,250 3,202,453
-----------
$ 6,770,073
- - ----------------------------------------------------------------------------------------------
Foreign - U.S. Dollars - 5.7%
BBB- Hero Asia BVI Co. Ltd., 9.11s, 2001## $2,090 $ 2,166,278
BBB- Republic of Colombia, 8.75s, 1999 3,000 3,138,750
NR United Mexican States, Floating Rate, 2001## 3,000 3,030,000
-----------
$ 8,335,028
- - ----------------------------------------------------------------------------------------------
Forest and Paper Products - 3.5%
BBB- Boise Cascade Co., 9.9s, 2001 $4,715 $ 5,184,614
- - ----------------------------------------------------------------------------------------------
</TABLE>
11
<PAGE> 14
PORTFOLIO OF INVESTMENTS - continued
Bonds - continued
<TABLE>
<CAPTION>
- - ----------------------------------------------------------------------------------------------
S&P Bond
Rating Principal Amount
(Unaudited) Issuer (000 Omitted) Value
- - ----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
U.S. Government and Agency Obligations - 14.9%
GOV Federal National Mortgage Assn., 7.5s, 2001 $3,571 $ 3,605,100
GOV Government National Mortgage Assn., 7.5s, 8,782 8,885,790
2007 - 2011
GOV Government National Mortgage Assn., 12.5s, 2011 448 517,637
GOV U.S.Treasury Notes, 6.25s, 1999 5,085 5,084,186
GOV U.S.Treasury Notes, 6.625s, 2002 3,850 3,857,200
-----------
$ 21,949,913
- - ----------------------------------------------------------------------------------------------
Utilities - Electric - 20.7%
BB Central Maine Power Co., 7.5s, 1997 $4,500 $ 4,502,340
BBB Edison Mission Energy Funding Corp., 6.77s, 2,653 2,626,265
2003##
BBB- Empresa Electrica Guacolda S.A., 7.6s, 2001## 3,305 3,326,879
BBB- Gulf States Utilities Co., 8.21s, 2002 6,000 6,122,880
BBB- Long Island Lighting Co., 9.625s, 2024 2,500 2,614,325
BBB- Louisiana Power & Light Co., 10.67s, 2017 2,500 2,674,775
BBB- Salton Sea Funding Corp., 6.69s, 2000 695 693,380
BBB- Salton Sea Funding Corp., 7.02s, 2000 4,000 4,006,360
BBB- Systems Energy Resources, 7.8s, 2000 4,000 4,001,080
-----------
$ 30,568,284
- - ----------------------------------------------------------------------------------------------
Total Investments (Identified Cost, $144,153,323) $143,424,114
Other Assets, Less Liabilities - 2.8% 4,125,777
- - ----------------------------------------------------------------------------------------------
Net Assets - 100.0% $147,549,891
- - ----------------------------------------------------------------------------------------------
</TABLE>
##SEC 144A Rule restriction.
See notes to financial statements
12
<PAGE> 15
FINANCIAL STATEMENTS
Statement of Assets and Liabilities
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------
April 30, 1997
-----------------------------------------------------------------------------------
<S> <C> <C>
Assets:
Investments, at value (identified cost, $144,153,323) $143,424,114
Cash 107,686
Receivable for Fund shares sold 993,086
Receivable for investments sold 1,006,393
Interest receivable 2,539,742
Other assets 1,420
-----------
Total assets $148,072,441
-----------
Liabilities:
Distributions payable $ 238,624
Payable for Fund shares reacquired 179,487
Payable for daily variation margin on open futures contracts 43,843
Payable to affiliates -
Management fee 1,594
Distribution fee 57,148
Accrued expenses and other liabilities 1,854
-----------
Total liabilities $ 522,550
-----------
Net assets $147,549,891
-----------
Net assets consist of:
Paid-in capital $154,344,699
Unrealized depreciation on investments (904,244)
Accumulated net realized loss on investments (5,069,444)
Accumulated distributions in excess of net investment income (821,120)
-----------
Total $147,549,891
-----------
Shares of beneficial interest outstanding 20,952,583
--------
Class A shares:
Net asset value per share
(net assets of $91,887,487 / 13,046,497 shares of beneficial
interest outstanding) $7.04
----
Offering price per share (100 / 97.5) $7.22
----
Class B shares:
Net asset value and offering price per share
(net assets of $34,875,396 / 4,958,818 shares of beneficial
interest outstanding) $7.03
----
Class C shares:
Net asset value and offering price per share
(net assets of $18,861,581 / 2,673,934 shares of beneficial
interest outstanding) $7.05
----
Class I shares:
Net asset value, offering price and redemption price per share
(net assets of $1,925,427 / 273,334 shares of beneficial
interest outstanding) $7.04
-----
</TABLE>
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
13
<PAGE> 16
FINANCIAL STATEMENTS - continued
Statement of Operations
<TABLE>
<CAPTION>
- - ------------------------------------------------------------------------------------
Year Ended April 30, 1997
- - ------------------------------------------------------------------------------------
<S> <C>
Net investment income:
Interest Income $10,960,475
-----------
Expenses -
Management fee $ 573,843
Administrative fee 3,750
Trustees' compensation 21,166
Shareholder servicing agent fee 63,841
Shareholder servicing agent fee (Class A) 96,736
Shareholder servicing agent fee (Class B) 44,464
Shareholder servicing agent fee (Class C) 15,569
Distribution and service fee (Class A) 144,717
Distribution and service fee (Class B) 306,258
Distribution and service fee (Class C) 161,296
Printing 51,949
Custodian fee 48,728
Auditing fees 36,467
Postage 22,618
Amortization of organization expenses 3,753
Legal fees 3,578
Miscellaneous 111,618
-----------
Total expenses $ 1,710,351
Fees paid indirectly (3,158)
Refund of expenses to investment adviser 52,764
-----------
Net expenses $ 1,759,957
-----------
Net investment income $ 9,200,518
-----------
Realized and unrealized gain (loss) on investments:
Realized loss (identified cost basis) -
Investment transactions $ (550,918)
Futures contracts (220,761)
-----------
Net realized loss on investments $ (771,679)
-----------
Change in unrealized appreciation (depreciation) -
Investments $ 379,726
Futures contracts (922,478)
-----------
Net unrealized loss on investments $ (542,752)
-----------
Net realized and unrealized loss on investments $(1,314,431)
-----------
Increase in net assets from operations $ 7,886,087
-----------
</TABLE>
See notes to financial statements
14
<PAGE> 17
FINANCIAL STATEMENTS - continued
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
- - ---------------------------------------------------------------------------------------
Year Ended April 30, 1997 1996
- - ---------------------------------------------------------------------------------------
<S> <C> <C>
Increase in net assets:
From operations -
Net investment income $ 9,200,518 $ 7,954,234
Net realized gain (loss) on investments (771,679) 1,310,598
Net unrealized loss on investments (542,752) (1,277,654)
------------- -------------
Increase in net assets from operations $ 7,886,087 $ 7,987,178
------------- -------------
Distributions declared to shareholders -
From net investment income (Class A) $ (6,384,077) $ (6,197,868)
From net investment income (Class B) (1,840,820) (1,273,328)
From net investment income (Class C) (942,712) (483,038)
From net investment income (Class I) (32,909) --
In excess of net investment income (Class A) (295,355) (105,605)
In excess of net investment income (Class B) (85,164) (37,487)
In excess of net investment income (Class C) (43,614) (27,955)
In excess of net investment income (Class I) (1,523) --
------------- -------------
Total distributions declared to shareholders $ (9,626,174) $ (8,125,281)
------------- -------------
Fund share (principal) transactions -
Net proceeds from sale of shares $ 179,171,541 $ 78,771,957
Net asset value of shares issued to shareholders in
reinvestment of distributions 6,883,872 5,979,726
Cost of shares reacquired (175,292,658) (53,643,464)
------------- -------------
Increase in net assets from Fund share transactions $ 10,762,755 $ 31,108,219
------------- -------------
Total increase in net assets $ 9,022,668 $ 30,970,116
Net assets:
At beginning of period $ 138,527,223 $ 107,557,107
------------- -------------
At end of period (including accumulated distributions
in excess of net investment income of $821,120 and
$530,649, respectively) $ 147,549,891 $ 138,527,223
------------- -------------
</TABLE>
See notes to financial statements
15
<PAGE> 18
FINANCIAL STATEMENTS - continued
<TABLE>
Financial Highlights
- - ------------------------------------------------------------------------------------------
<CAPTION>
Year Ended April 30, 1997 1996 1995 1994 1993 1992*
- - ------------------------------------------------------------------------------------------
Class A
- - ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value - beginning
of period $ 7.12 $ 7.10 $ 7.14 $ 7.46 $ 7.29 $ 7.31
------- ------- ------- -------- ------- -------
Income from investment
operations# -
Net investment
income[sec.] $ 0.47 $ 0.48 $ 0.46 $ 0.44 $ 0.48 $ 0.08
Net realized and
unrealized gain (loss)
on investments (0.06) 0.03 (0.04) (0.32) 0.17+ (0.02)+
------- ------- ------- -------- ------- -------
Total from
investment
operations $ 0.41 $ 0.51 $ 0.42 $ 0.12 $ 0.65 $ 0.06
------- ------- ------- -------- ------- -------
Less distributions
declared to
shareholders++++ -
From net investment
income $ (0.47) $ (0.48) $ (0.46) $ (0.42) $ (0.48) $ (0.08)
In excess of net
investment income (0.02) (0.01) -- (0.02) -- --
------- ------- ------- -------- ------- -------
Total distributions
declared to
shareholders $ (0.49) $ (0.49) $ (0.46) $ (0.44) $ (0.48) $ (0.08)
------- ------- ------- -------- ------- -------
Net asset value - end of
period $ 7.04 $ 7.12 $ 7.10 $ 7.14 $ 7.46 $ 7.29
------ ------ ------ ------- ------ ------
Total return++ 5.83% 7.50% 6.09% 1.61% 9.17% 4.98%+
Ratios (to average net assets)/Supplemental data[SEC.]:
Expenses## 0.94% 0.95% 0.95% 0.85% 0.60% 0.55%+
Net investment income 6.57% 6.73% 6.54% 5.99% 6.40% 6.22%+
Portfolio turnover 489% 385% 498% 861% 472% 72%
Net assets at end of
period (000 omitted) $91,887 $98,582 $85,773 $100,297 $67,470 $ 4,924
* For the period from the commencement of investment operations, February 26, 1992,
to April 30, 1992.
+ Annualized.
# Per share data for the periods subsequent to April 30, 1994, are based on average
shares outstanding.
## For fiscal years ending after September 1, 1995, the Fund's expenses are
calculated without reduction for fees paid indirectly.
+ 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.
++ 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 the year ended April 30, 1993, the per share distribution from net realized
gain on investments was $0.0021.
[SEC.] The investment adviser did not impose 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/or 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 $ 0.47 $ 0.48 $ 0.46 $ 0.42 $ 0.43 $ 0.07
Ratios (to average
net assets):
Expenses## 0.89% 0.91% 0.97% 1.07% 1.29% 1.44%+
Net investment income 6.62% 6.77% 6.52% 5.77% 5.70% 5.33%+
</TABLE>
See notes to financial statements
16
<PAGE> 19
FINANCIAL STATEMENTS - continued
Financial Highlights - continued
<TABLE>
<CAPTION>
- - --------------------------------------------------------------------------------------
Year Ended April 30, 1997 1996 1995 1994**
- - --------------------------------------------------------------------------------------
Class B
- - --------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value - beginning of period $ 7.11 $ 7.10 $ 7.14 $ 7.50
------- ------- ------- --------
Income from investment operations# -
Net investment income[sec.] $ 0.41 $ 0.42 $ 0.41 $ 0.21
Net realized and unrealized gain (loss)
on investments (0.05) 0.03 (0.05) (0.33)
------- ------- ------- --------
Total from investment operations $ 0.36 $ 0.45 $ 0.36 $ (0.12)
------- ------- ------- --------
Less distributions declared to
shareholders -
From net investment income $ (0.42) $ (0.42) $ (0.40) $ (0.23)
In excess of net investment income (0.02) (0.02) -- (0.01)
------- ------- ------- --------
Total distributions declared to
shareholders $ (0.44) $ (0.44) $ (0.40) $ (0.24)
------- ------- ------- --------
Net asset value - end of period $ 7.03 $ 7.11 $ 7.10 $ 7.14
------- ------- ------- --------
Total return++ 4.99% 6.52% 5.20% (1.69)%++
Ratios (to average net assets)/Supplemental data[SEC.]:
Expenses## 1.78% 1.75% 1.81% 1.74%+
Net investment income 5.75% 5.90% 5.73% 4.90%+
Portfolio turnover 489% 385% 498% 861%
Net assets at end of period (000 omitted) $34,875 $26,464 $17,334 $ 12,072
** For the period from the commencement of offering of Class B shares, September 7,
1993, to April 30, 1994.
+ Annualized.
++ Not annualized.
# Per share data for the periods subsequent to April 30, 1994, are based on average
shares outstanding.
## For fiscal years ending after September 1, 1995, the Fund's expenses are
calculated without reduction for fees paid indirectly.
[SEC.] The investment adviser did not impose 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/or 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 $ 0.41 $ 0.42 $ 0.41 $ 0.20
Ratios (to average net assets):
Expenses## 1.77% 1.77% 1.82% 1.96%+
Net investment income 5.76% 5.88% 5.72% 4.68%+
</TABLE>
See notes to financial statements
17
<PAGE> 20
FINANCIAL STATEMENTS - continued
Financial Highlights - continued
<TABLE>
<CAPTION>
- - ----------------------------------------------------------------------------------------
Year Ended April 30, 1997 1996 1995*** 1997****
- - ----------------------------------------------------------------------------------------
Class C Class I
- - ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value - beginning of period $ 7.13 $ 7.11 $ 7.08 $ 7.08
------- ------- ------- -------
Income from investment operations# -
Net investment income[section] $ 0.41 $ 0.41 $ 0.37 $ 0.15
Net realized and unrealized gain (loss)
on investments (0.06) 0.04 (0.01) (0.03)
------- ------- ------- -------
Total from investment operations $ 0.35 $ 0.45 $ 0.36 $ 0.12
------- ------- ------- -------
Less distributions declared to
shareholders -
From net investment income $ (0.41) $ (0.41) $ (0.33) $ (0.15)
In excess of net investment income (0.02) (0.02) -- (0.01)
------- ------- ------- -------
Total distributions declared to
shareholders $ (0.43) $ (0.43) $ (0.33) $ (0.16)
------- ------- ------- -------
Net asset value - end of period $ 7.05 $ 7.13 $ 7.11 $ 7.04
------- ------- ------- -------
Total return 5.08% 6.44% 5.25%++ 1.72%++
Ratios (to average net assets)/Supplemental data[SECTION]:
Expenses## 1.80% 1.80% 1.85%+ 1.17%+
Net investment income 5.80% 5.76% 6.01%+ 8.68%+
Portfolio turnover 489% 385% 498% 489%
Net assets at end of period (000 omitted) $18,862 $13,842 $ 4,450 $ 1,925
*** For the period from the commencement of offering of Class C shares, July 1,
1994, to April 30, 1995.
**** For the period from the commencement of offering of Class I shares, January 2,
1997, to April 30, 1997.
+ Annualized.
++ Not annualized.
# Per share data are based on average shares outstanding.
## For fiscal years ending after September 1, 1995, the Fund's expenses are
calculated without reduction for fees paid indirectly.
[SECTION] The investment adviser did not impose 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/or 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 $ 0.41 $ 0.41 $ 0.37 $ 0.15
Ratios (to average net assets):
Expenses## 1.81% 1.75% 1.88%+ 1.17%+
Net investment income 5.80% 5.81% 5.98%+ 8.68%+
</TABLE>
See notes to financial statements
18
<PAGE> 21
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. The
Fund, along with other affiliated entities of Massachusetts Financial Services
Company (MFS), may utilize a joint trading account for the purpose of entering
into one or more repurchase agreements.
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 Fund
operations.
19
<PAGE> 22
NOTES TO FINANCIAL STATEMENTS - continued
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. 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.
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.
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
Funds'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 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.
20
<PAGE> 23
NOTES TO FINANCIAL STATEMENTS - continued
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, 1997, $135,185 and $69,145 were
reclassified from paid-in capital to accumulated distributions in excess of net
investment income and accumulated net realized loss on investments,
respectively, 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, 1997, the Fund, for federal income tax purposes, had a capital loss
carryforward of $4,844,580 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 ($3,619,464) and April 30, 2005 ($1,225,116).
Multiple Classes of Shares of Beneficial Interest - The Fund offers Class A,
Class B, Class C, and Class I shares. The four classes of shares differ in their
respective distribution and service fees. All shareholders bear the common
expenses of the Fund pro rata based on average daily net assets of each class,
without distinction between share classes. Dividends are declared separately for
each class. No class has preferential dividend rights; differences in per share
dividend rates are generally due to differences in separate class expenses.
(3) TRANSACTIONS WITH AFFILIATES
Investment Adviser - The Fund has an investment advisory agreement with
Massachusetts Financial Services Company (MFS) to provide overall investment
advisory and administrative services, and general office facilities. The
management fee is computed daily and paid monthly at an annual rate of 0.40% 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 in turn will 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,
1997, the aggregate unreimbursed expenses owed to MFS by the Fund amounted to
$53,595, after $52,764 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 officers and Trustees of the
Fund are officers or directors of MFS, MFS Fund Distributors, Inc. (MFD), and
MFS Service
21
<PAGE> 24
NOTES TO FINANCIAL STATEMENTS - continued
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 $5,141 for the year ended April 30, 1997.
Administrator - Effective March 1, 1997, the Trust has an administrative
services agreement with MFS to provide the Trust with certain financial, legal,
compliance, shareholder communications, and other administrative services. As a
partial reimbursement for the cost of providing these services, the Fund pays
MFS an administrative fee up to 0.015% per annum of the Fund's average daily net
assets, provided that the administrative fee is not assessed on Fund assets that
exceed $3 billion.
Distributor - MFD, a wholly owned subsidiary of MFS, as distributor, received
$57,812 for the year ended April 30, 1997, as its portion of the sales charge on
sales of Class A shares of the Fund.
The Trustees have adopted a distribution plan for Class A, Class B, and Class C
shares pursuant to Rule 12b-1 of the Investment Company Act of 1940 as follows:
The Fund's distribution plan provides that the Fund will pay MFD up to 0.35% per
annum of its average daily net assets attributable to Class A shares in order
that MFD may pay expenses on behalf of the Fund related to the distribution and
servicing of its shares. These expenses include a service fee to each securities
dealer that enters into a sales agreement with MFD of up to 0.25% per annum
(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 $21,394 for the year ended April 30, 1997.
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, 1997, were
0.15% of average daily net assets attributable to Class A shares on an
annualized basis.
The Fund's distribution plan provides that the Fund will pay MFD a distribution
fee of 0.75% per annum, and a service fee of up to 0.25% per annum, of the
Fund's average daily net assets attributable to Class B and Class C shares. 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
22
<PAGE> 25
NOTES TO FINANCIAL STATEMENTS - continued
to a securities dealer, which amounted to $5,362 and $573 for Class B and Class
C shares, respectively, for the year ended April 30, 1997. Fees incurred under
the distribution plan during the year ended April 30, 1997, were 1.00% 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 by retirement
plans are subject to a contingent deferred sales charge in the event of a
shareholder redemption within 12 months following such purchase. A contingent
deferred sales charge is imposed on shareholder redemptions of Class B shares in
the event of a shareholder redemption within six years of purchase. A contingent
deferred sales charge is imposed on shareholder redemptions of Class C shares in
the event of a shareholder redemption within twelve months of 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, 1997,
were $19,436, $60,596, and $13,740 for Class A, Class B, and Class C shares,
respectively.
Shareholder Servicing Agent - MFSC, a wholly owned subsidiary of MFS, earns a
fee for its services as shareholder servicing agent. The fee is calculated as a
percentage of the fund's average daily net assets at an effective annual rate of
0.13%. Prior to January 1, 1997, the fee was calculated as a percentage of the
average daily net assets of each class of shares at an effective annual rate of
up to 0.15%, up to 0.22%, and up to 0.15% attributable to Class A, Class B, and
Class C shares, respectively.
(4) Portfolio Securities
Purchases and sales of investments, other than purchased option transactions and
short-term obligations, were as follows:
<TABLE>
<CAPTION>
Purchases Sales
----------------------------------------------------------------------------------
<S> <C> <C>
U.S. government securities $442,768,329 $467,114,907
Investments (non-U.S. government securities) $253,928,444 $220,205,780
</TABLE>
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:
<TABLE>
<S> <C>
Aggregate cost $144,153,323
------------
Gross unrealized depreciation $ (1,018,626)
Gross unrealized appreciation 289,417
------------
Net unrealized depreciation $ (729,209)
------------
</TABLE>
23
<PAGE> 26
NOTES TO FINANCIAL STATEMENTS - continued
(5) Shares of Beneficial Interest
The Fund's Declaration of Trust permits the Trustees to issue an unlimited
number of full and fractional shares of beneficial interest (without par value).
Transactions in Fund shares were as follows:
Class A Shares
<TABLE>
<CAPTION>
Year Ended April 30, 1997 Year Ended April 30, 1996
--------------------------- --------------------------
Shares Amount Shares Amount
- - --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Shares sold 18,594,948 $ 131,842,272 5,978,674 $ 43,102,663
Shares issued to shareholders
in reinvestment of
distributions 679,953 4,817,456 638,556 4,600,038
Transfer to Class I (208,928) (1,608,228) -- --
Shares reacquired (19,861,941) (140,565,252) (4,851,688) (34,933,425)
----------- ------------- ---------- ------------
Net increase (decrease) (795,968) $ (5,513,752) 1,765,542 $ 12,769,276
----------- ------------- ---------- ------------
<CAPTION>
Class B Shares
Year Ended April 30, 1997 Year Ended April 30, 1996
--------------------------- --------------------------
Shares Amount Shares Amount
- - --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Shares sold 4,460,355 $ 31,584,299 2,854,814 $ 20,545,660
Shares issued to shareholders
in reinvestment of
distributions 179,795 1,272,096 135,072 971,974
Shares reacquired (3,401,650) (24,063,061) (1,712,548) (12,331,259)
----------- ------------- ---------- ------------
Net increase 1,238,500 $ 8,793,334 1,277,338 $ 9,186,375
----------- ------------- ---------- ------------
<CAPTION>
Class C Shares
Year Ended April 30, 1997 Year Ended April 30, 1996
--------------------------- --------------------------
Shares Amount Shares Amount
- - --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Shares sold 1,857,379 $ 13,187,162 2,095,271 $ 15,123,634
Shares issued to shareholders
in reinvestment of
distributions 107,096 759,821 56,575 407,714
Shares reacquired (1,182,437) (8,400,483) (886,139) (6,378,780)
----------- ------------- ---------- ------------
Net increase 782,038 $ 5,546,500 1,265,707 $ 9,152,568
----------- ------------- ---------- ------------
</TABLE>
Class I Shares
<TABLE>
<CAPTION>
Year Ended April 30,
1997*
------------------------
Shares Amount
---------------------------------------------------------
<S> <C> <C>
Shares sold 152,170 $ 949,580
Shares issued to shareholders in
reinvestment of distributions 4,893 34,499
Transfer from Class A 208,928 1,608,228
Shares reacquired (92,657) (655,634)
------- ----------
Net increase 273,334 $1,936,673
------- ----------
</TABLE>
*For the period from commencement of offering of Class I shares, January 2,
1997, to April 30, 1997.
24
<PAGE> 27
NOTES TO FINANCIAL STATEMENTS - continued
(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 $400 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,
1997, was $1,420.
(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, 1997, is
as follows:
Futures Contracts
<TABLE>
<CAPTION>
Unrealized
Appreciation
Expiration Contracts Position (Depreciation)
- - ---------------------------------------------------------------------------------
<S> <C> <C> <C>
September 1997 77 Treasury Notes Long $ 9,241
June 1997 234 Treasury Notes Short (184,276)
---------
$(175,035)
---------
</TABLE>
At April 30, 1997, the Fund had sufficient cash and/or securities to cover
margin requirements on open futures contracts.
25
<PAGE> 28
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, 1997, the related statement of operations for
the year then ended, the statement of changes in net assets for the years ended
April 30, 1997 and 1996, and the financial highlights for each of the years in
the six-year period ended April 30, 1997. 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, 1997, by correspondence with the custodian. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of MFS Limited Maturity
Fund at April 30, 1997, the results of its operations, the changes in its net
assets, and its financial highlights for the respective stated periods in
conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Boston, Massachusetts
May 30, 1997
---------------------------------------------------------------------
This report is prepared for the general information of shareholders. It is
authorized for distribution to prospective investors only when preceded or
accompanied by a current prospectus.
26
<PAGE> 29
INTRODUCING A QUICK AND EASY WAY TO LEARN SOME FINANCIAL BASICS:
THE ABCS OF INVESTING
part of MFS(R) Heritage Planning(SM)
[Picture]
This series of brief messages provides an overview of investment topics,
including:
* Dollar-cost Averaging: a simple method of investing that could work for
anyone
* Interest Rate Changes: what every fixed-income investor should know
* Lump-sum Rollovers: how to handle a windfall
* Professional Financial Advisers: why even smart investors may need one
* Straw into Gold: tips for weaving small lifestyle changes into dollars to
invest
* Weathering Market Downturns: how to maintain perspective
* Basic Steps Smart Investors Take Automatically
The series will include messages on other topics as they become available.
You can read through each topic quickly in five minutes at most. Of course,
these materials are not designed to turn you into an expert. Your financial
adviser can provide more information on any of the ABC subjects. A conversation
with your adviser might also provide an opportune occasion to review your
portfolio and to assess your present and future financial needs.
To request your free copy of The ABCs of Investing series, call MFS at
1-800-225-2606 any business day from 8 a.m. to 8 p.m. Eastern time.
As part of MFS Heritage Planning, your adviser has access to a wide range of MFS
materials he or she would be happy to share with you on topics related to the
intergenerational concerns of people today. These include financing college
tuition and a secure retirement, eldercare, tax-smart gifting strategies, estate
and health care planning, and other issues.
27
<PAGE> 30
THE MFS FAMILY OF FUNDS(R)
AMERICA'S OLDEST MUTUAL FUND GROUP
The members of the MFS Family of Funds are grouped below according to the types
of securities in their portfolios. For free prospectuses containing more
complete information, including the exchange privilege and all charges and
expenses, please contact your financial adviser or call MFS at 1-800-225-2606
any business day from 8 a.m. to 8 p.m. Eastern time. This material should be
read carefully before investing or sending money.
STOCK
- - --------------------------------------------------------------------------------
Massachusetts Investors Trust
Massachusetts Investors Growth Stock Fund
MFS(R) Capital Growth Fund
MFS(R) Emerging Growth Fund
MFS(R) Gold & Natural Resources Fund
MFS(R) Growth Opportunities Fund
MFS(R) Managed Sectors Fund
MFS(R) OTC Fund
MFS(R) Research Fund
MFS(R) Research Growth and Income Fund
MFS(R) Strategic Growth Fund
MFS(R) Value Fund
STOCK AND BOND
- - --------------------------------------------------------------------------------
MFS(R) Total Return Fund
MFS(R) Utilities Fund
BOND
- - --------------------------------------------------------------------------------
MFS(R) Bond Fund
MFS(R) Government Mortgage Fund
MFS(R) Government Securities Fund
MFS(R) High Income Fund
MFS(R) Intermediate Income Fund
MFS(R) Strategic Income Fund
Limited Maturity Bond
MFS(R) Government Limited Maturity Fund
MFS(R) Limited Maturity Fund
MFS(R) Municipal Limited Maturity Fund
WORLD
- - --------------------------------------------------------------------------------
MFS(R)/Foreign & Colonial Emerging Markets Equity Fund
MFS(R)/Foreign & Colonial International Growth Fund
MFS(R)/Foreign & Colonial International Growth and Income Fund
MFS(R) World Asset Allocation Fund(SM)
MFS(R) World Equity Fund
MFS(R) World Governments Fund
MFS(R) World Growth Fund
MFS(R) World Total Return Fund
NATIONAL TAX-FREE BOND
- - --------------------------------------------------------------------------------
MFS(R) Municipal Bond Fund
MFS(R) Municipal High Income Fund
MFS(R) Municipal Income Fund
STATE TAX-FREE BOND
- - --------------------------------------------------------------------------------
Alabama, Arkansas, California, Florida, Georgia, Maryland, Massachusetts,
Mississippi, New York, North Carolina, Pennsylvania, South Carolina,
Tennessee, Virginia, West Virginia
MONEY MARKET
- - --------------------------------------------------------------------------------
MFS(R) Cash Reserve Fund
MFS(R) Government Money Market Fund
MFS(R) Money Market Fund
28
<PAGE> 31
MFS(R) LIMITED MATURITY FUND
TRUSTEES
A. KEITH BRODKIN* - Chairman and President
RICHARD B. BAILEY* - Private Investor;
Former Chairman and Director (until 1991), Massachusetts Financial Services
Company; Director, Cambridge Bancorp; Director, Cambridge Trust Company
PETER G. HARWOOD - Private Investor
J. ATWOOD IVES - Chairman and Chief Executive Officer, Eastern Enterprises
LAWRENCE T. PERERA - Partner, Hemenway & Barnes
WILLIAM J. POORVU - Adjunct Professor, Harvard University Graduate School of
Business Administration
CHARLES W.SCHMIDT - Private Investor
ARNOLD D. SCOTT* - Senior Executive Vice President, Director and Secretary,
Massachusetts Financial Services Company
JEFFREY L. SHAMES* - President and Director, Massachusetts Financial Services
Company
ELAINE R. SMITH - Independent Consultant
DAVID B. STONE - Chairman, North American Management Corp. (investment
advisers)
INVESTMENT ADVISER
Massachusetts Financial Services Company
500 Boylston Street
Boston, MA 02116-3741
DISTRIBUTOR
MFS Fund Distributors, Inc.
500 Boylston Street
Boston, MA 02116-3741
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
*Affiliated with the Investment Adviser
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
MFSService Center, Inc.
P.O. Box 2281
Boston, MA 02107-9906
For general information, call toll free:
1-800-225-2606 any business day from
8 a.m. to 8 p.m. Eastern time.
For service to speech- or hearing-impaired, call toll free: 1-800-637-6576 any
business day from 9 a.m. to 5 p.m. Eastern time. (To use this service, your
phone must be equipped with a Telecommunications Device for the Deaf.)
For share prices, account balances, and exchanges, call toll free:
1-800-MFS-TALK (1-800-637-8255) anytime from a touch-tone telephone.
World Wide Web
www.mfs.com
[DALBAR Logo] For the third year in a row, MFS earned a #1 ranking in the
DALBAR, Inc. Broker/Dealer Survey, Main Office Operations Service Quality
Category. The firm achieved a 3.48 overall score on a scale of 1 to 4 in the
1996 survey. A total of 110 firms responded, offering input on the quality of
service they received from 29 mutual fund companies nationwide. The survey
contained questions about service quality in 15 categories, including "knowledge
of phone service contacts," "accuracy of transaction processing," and "overall
ease of doing business with the firm."
29
<PAGE> 32
<TABLE>
<S> <C> <C>
----------------------
MFS(R) LIMITED [LOGO] BULK RATE
MATURITY FUND U.S. POSTAGE
PAID
500 Boylston Street MFS
Boston, MA 02116-3741 ----------------------
[LOGO: MFS]SM
INVESTMENT MANGEMENT
We invented the mutual fundSM
(C)1997 MFS Fund Distributors, Inc., 500 Boylston Street, Boston, MA 02116-3741 MLM-2 6/97 9.5M 36/236/336/836
</TABLE>
<PAGE>
PROSPECTUS
September 1, 1997
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. Condensed Financial Information ................................... 4
3. The Fund .......................................................... 6
4. Investment Objective and Policies ................................. 7
5. Investment Techniques ............................................. 7
6. Additional Risk Factors ........................................... 9
7. Management of the Fund ............................................ 10
8. Information Concerning Shares of the Fund ......................... 12
Purchases ...................................................... 12
Exchanges ...................................................... 17
Redemptions and Repurchases .................................... 18
Distribution Plan .............................................. 20
Distributions .................................................. 22
Tax Status ..................................................... 22
Net Asset Value ................................................ 23
Description of Shares, Voting Rights and Liabilities ........... 23
Performance Information ........................................ 24
Expenses ....................................................... 24
9. Shareholder Services .............................................. 25
Appendix A -- Waivers of Sales Charges ............................ A-1
Appendix B -- Tax Equivalent Yield Table .......................... B-1
Appendix C -- Description of Municipal Bonds and Ratings .......... 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, 1997, 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 at
http;//www.sec.gov that contains the SAI, materials that are incorporated by
reference into this Prospectus and the SAI, and other information regarding the
Fund. This Prospectus is available on the Adviser's Internet World Wide Web site
at http://www.mfs.com.
INVESTORS SHOULD READ THIS PROSPECTUS AND RETAIN IT FOR FUTURE REFERENCE.
<PAGE>
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(2) 4.00% 1.00%
ANNUAL OPERATING EXPENSES (AS A PERCENTAGE OF AVERAGE NET ASSETS):
Management Fees (after expense limitation)(1) .............. 0.30% 0.30% 0.30%
Rule 12b-1 Fees ............................................ 0.15%(3) 0.94%(4) 1.00%(4)
Other Expenses (after expense limitation)(5)(6) ............ 0.40% 0.40% 0.40%
----- ----- -----
Total Operating Expenses (after expense limitations)(5) .... 0.85% 1.64% 1.70%
- - ----------
(1) Effective July 1, 1997, the Adviser has reduced its advisory fee to 0.30% per annum of the Fund's average
daily net assets. This temporary fee reduction may be rescinded without notice to shareholders by the
Adviser, with the consent of the Fund's Board of Trustees. Absent this reduction, management fees would have
been 0.40%.
(2) 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).
(3) The Fund has adopted a distribution plan for its shares in accordance with Rule 12b-1 under the Investment
Company Act of 1940, as amended (the "1940 Act") (the "Distribution Plan"), which provides that it will pay
distribution/service fees aggregating up to (but not necessarily all of) 0.35% per annum of the average
daily net assets attributable to Class A shares. Payment of the 0.10% per annum Class A distribution fee
will commence on such date as the Trustees of the Trust may determine. 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. See "Information Concerning Shares of the Fund -- Distribution Plan" below.
(4) The Fund's Distribution Plan provides that it will pay distribution/ service fees aggregating up to (but not
necessarily all of) 1.00% per annum of the average daily net assets attributable to the Class B shares and
Class C shares, respectively. Except in the case of the 0.25% per annum Class B service fee paid by the Fund
upon the sale of Class B shares in the first year, 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 the Distribution Plan with respect to Class B or Class C shares
together with the CDSC payable upon redemption of Class B or Class C shares, may cause long-term
shareholders to pay more than the maximum sales charge that would have been permissible if imposed entirely
as an initial sales charge. See "Information Concerning Shares of the Fund -- Distribution Plan" below.
(5) The Adviser has agreed to bear the Fund's expenses, subject to reimbursement by the Fund, such that "Other
Expenses" do not exceed 0.40% per annum of the Fund's average daily net assets during the current fiscal
year. Otherwise, "Other Expenses" for the Fund would be 0.46%, 0.46% and 0.46% per annum for Class A, B and
C shares, respectively, and "Total Operating Expenses" for the Fund would be 1.01%, 1.80% and 1.86% per
annum for Class A, B and C shares, respectively. See "Information Concerning Shares of the Fund --
Expenses."
(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."
</TABLE>
<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 ...... $ 33 $ 57 $ 17 $ 27 $ 17
3 years ..... 51 82 52 54 54
5 years ..... 71 109 89 92 92
10 years ..... 127 173(2) 173(2) 201 201
- - ------------
(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 Plan."
THE "EXAMPLE" SET FORTH ABOVE SHOULD NOT BE CONSIDERED A REPRESENTATION OF
PAST OR FUTURE EXPENSES OF THE FUND; ACTUAL EXPENSES MAY BE GREATER OR LESS
THAN THOSE SHOWN.
<PAGE>
2. CONDENSED FINANCIAL INFORMATION
The following information has been audited for 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.
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS
EIGHT
MONTHS YEAR ENDED
YEAR ENDED APRIL 30, ENDED AUGUST 31,
------------------------------------ APRIL 30, -------------------------
1997 1996 1995 1994 1993 1992*
------------------------------------------------------------------------------
CLASS A
------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
PER SHARE DATA (FOR A SHARE OUTSTANDING
THROUGHOUT EACH PERIOD):
Net asset value -- beginning of
period .......................... $ 7.53 $ 7.45 $ 7.47 $ 7.72 $ 7.43 $ 7.31
------ ------ ------ ------ ------ ------
Income from investment operations# --
Net investment income(S) ........ $ 0.29 $ 0.30 $ 0.28 $ 0.19 $ 0.31 $ 0.15
Net realized and unrealized gain
(loss) on investments .......... (0.03) 0.08 (0.02) (0.22) 0.30 0.12
------ ------ ------ ------ ------ ------
Total from investment
operations .................. $ 0.26 $ 0.38 $ 0.26 $(0.03) $ 0.61 $ 0.27
------ ------ ------ ------ ------ ------
Less distributions declared to shareholders --
From net investment income(+++) . $(0.29) $(0.30) $(0.28) $(0.19) $(0.31) $(0.15)
From net realized gain on
investments .................... -- -- -- -- (0.01) --
In excess of net investment
income(++) .................... -- -- (0.00) (0.00) -- --
In excess of net realized gain on
investments ................... -- -- -- (0.03) -- --
------ ------ ------ ------ ------ ------
Total distributions declared to
shareholders ................. $(0.29) $(0.30) $(0.28) $(0.22) $(0.32) $(0.15)
------ ------ ------ ------ ------ ------
Net asset value -- end of period .. $ 7.50 $ 7.53 $ 7.45 $ 7.47 $ 7.72 $ 7.43
====== ====== ====== ====== ====== ======
Total return(+) ................... 3.51% 5.11% 3.55% (0.59)%+ 8.47% 8.26%+
RATIOS (TO AVERAGE NET ASSETS)/
SUPPLEMENTAL DATA:(S)
Expenses## ...................... 0.95% 0.95% 0.95% 0.89%+ 0.68% 0.55%+
Net investment income ........... 3.86% 4.00% 3.74% 3.72%+ 4.04% 4.25%+
PORTFOLIO TURNOVER ................ 78% 43% 50% 48% 69% 8%
NET ASSETS AT END OF PERIOD (000
OMITTED) ........................ $40,953 $50,387 $64,329 $83,367 $87,192 $21,312
- - ----------
* 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 are based on average shares outstanding.
## For fiscal years ending after September 1, 1995, the Fund's expenses are calculated without reduction for fees paid
indirectly.
(+) Total returns for Class A shares do not include the applicable sales charge. If the charge had been included, the
results would have been lower.
(++) For the year ended April 30, 1995, and the eight months ended April 30, 1994, the per share distributions in
excess of net investment income were $0.002 and $0.002, respectively.
(+++) For the period ended August 31, 1992, the per share distributions from net investment income includes a per share
distribution from paid-in capital of $0.0007.
(S) The investment adviser voluntarily agreed to maintain the expenses of the Fund at not more than 0.95% of average
daily net assets. To the extent actual expenses exceeded the limitation, the net investment income per share and
the ratios would have been:
Net investment income ......... $ 0.29 $ 0.30 $ 0.28 $ 0.18 $ 0.28 $ 0.13
RATIOS (TO AVERAGE NET ASSETS):
Expenses## .................. 1.02% 0.99% 0.95% 1.12%+ 1.16% 1.16%+
Net investment income ....... 3.79% 3.96% 3.74% 3.49%+ 3.57% 3.64%+
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS - continued
YEAR ENDED APRIL 30,
--------------------------------------------------
1997 1996 1995 1994**
--------------------------------------------------
CLASS B
-------------------------------------------------
<S> <C> <C> <C> <C>
PER SHARE DATA (FOR A SHARE OUTSTANDING THROUGHOUT
EACH PERIOD):
Net asset value -- beginning of period ........... $ 7.52 $ 7.44 $ 7.46 $ 7.75
------ ------ ------ ------
Income from investment operations# --
Net investment income(S) ....................... $ 0.23 $ 0.25 $ 0.21 $ 0.14
Net realized and unrealized gain (loss) on
investments ................................... (0.03) 0.07 (0.02) (0.26)
------ ------ ------ ------
Total from investment operations ............. $ 0.20 $ 0.32 $ 0.19 $(0.12)
------ ------ ------ ------
Less distributions declared to shareholders --
From net investment income ..................... $(0.23) $(0.24) $(0.21) $(0.13)
In excess of net investment income(++) ......... -- -- (0.00) (0.01)
In excess of net realized gain on investments .. -- -- -- (0.03)
------ ------ ------ ------
Total distributions declared to shareholders . $(0.23) $(0.24) $(0.21) $(0.17)
------ ------ ------ ------
Net asset value -- end of period ................. $ 7.49 $ 7.52 $ 7.44 $ 7.46
====== ====== ====== ======
Total return ..................................... 2.71% 4.34% 2.67% (2.37)%+
RATIOS (TO AVERAGE NET ASSETS)/SUPPLEMENTAL DATA(S):
Expenses## ..................................... 1.73% 1.70% 1.80% 1.74%+
Net investment income .......................... 3.08% 3.25% 2.88% 2.79%+
PORTFOLIO TURNOVER ............................... 78% 43% 50% 48%
NET ASSETS AT END OF PERIOD (000 OMITTED) ........ $6,503 $7,749 $7,792 $7,415
- - ----------
** For the period from the commencement of offering of Class B shares, September 7, 1993, to April 30, 1994.
+ Annualized.
# Per share data for the periods subsequent to April 30, 1994, are based on average shares outstanding.
## For fiscal years ending after September 1, 1995, the Fund's expenses are calculated without reduction for
fees paid indirectly.
(++) For the year ended April 30, 1995, the per share distribution in excess of net investment income was
$0.001.
(S) The investment adviser voluntarily agreed to maintain the expenses of the Fund at not more than 1.80% of
average daily net assets. To the extent actual expenses were over the limitations, the net investment
income per share and the ratios would have been:
Net investment income ........................ $ 0.23 $ 0.25 $ 0.21 $ 0.12
RATIOS (TO AVERAGE NET ASSETS):
Expenses## ................................. 1.80% 1.74% 1.80% 2.05%+
Net investment income ...................... 3.01% 3.21% 2.88% 2.48%+
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS - continued
YEAR ENDED APRIL 30,
------------------------------------
1997 1996 1995***
------------------------------------
CLASS C
-----------------------------------
<S> <C> <C> <C>
PER SHARE DATA (FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD):
Net asset value -- beginning of period .................... $ 7.53 $ 7.45 $ 7.45
------ ------ ------
Income from investment operations# --
Net investment income(S) ................................ $ 0.23 $ 0.23 $ 0.21
Net realized and unrealized gain (loss) on investments .. (0.03) 0.08 (0.02)
------ ------ ------
Total from investment operations ...................... $ 0.20 $0.31 $ 0.19
------ ------ ------
Less distributions declared to shareholders --
From net investment income .............................. $(0.23) $(0.23) $(0.19)
In excess of net investment income(++) .................. -- -- (0.00)
------ ------ ------
Total distributions declared to shareholders .......... $(0.23) $(0.23) $(0.19)
------ ------ ------
Net asset value -- end of period .......................... $ 7.50 $ 7.53 $ 7.45
====== ====== ======
Total return .............................................. 2.64% 4.23% 2.53%+
RATIOS (TO AVERAGE NET ASSETS)/SUPPLEMENTAL DATA(S):
Expenses## .............................................. 1.80% 1.80% 1.79%+
Net investment income ................................... 3.03% 3.16% 2.77%+
PORTFOLIO TURNOVER ........................................ 78% 43% 50%
NET ASSETS AT END OF PERIOD (000 OMITTED) ................. $3,297 $3,013 $1,934
- - ----------
*** For the period from the commencement of offering of Class C shares, July 1, 1994, to April 30, 1995.
+ Annualized.
# Per share data for the periods subsequent to April 30, 1994, are based on average shares outstanding.
## For fiscal years ending after September 1, 1995, the Fund's expenses are calculated without reduction for
fees paid indirectly.
(++) For the period ended April 30, 1995, the per share distribution in excess of net investment income was
$0.001.
(S) The investment adviser voluntarily agreed to maintain the expenses of the Fund at not more than 1.80% of
average daily net assets. To the extent actual expenses were over the limitations, the net investment
income per share and the ratios would have been:
Net investment income ................................. $ 0.22 $ 0.23 $ 0.21
RATIOS (TO AVERAGE NET ASSETS):
Expenses## .......................................... 1.87% 1.84% 1.79%+
Net investment income ............................... 2.96% 3.12% 2.77%+
</TABLE>
<PAGE>
3. THE FUND
The Fund is a diversified series of the Trust, an open-end management investment
company which was organized as a business trust under the laws of The
Commonwealth of Massachusetts in 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.
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"), Fitch Investors Service,
Inc. ("Fitch") or by Duff & Phelps Credit Rating Co. ("Duff & Phelps"),
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, Fitch or by Duff & Phelps, 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, Duff & Phelps and Moody's for Municipal Bonds, see
Appendix C to this Prospectus.
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. While awaiting delivery
of securities purchased on such bases, the Fund will segregate liquid assets
sufficient to cover its commitments. Although the Fund does not intend to make
such purchases for speculative purposes, purchases of securities on such bases
may involve more risk than other types of purchases.
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"). A determination is made, based upon a continuing review of the
trading markets for a specific Rule 144A security, whether such security is
liquid and thus not subject to the Fund's 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, retains oversight,
focusing on factors such as valuation, liquidity and availability of
information. Investing in Rule 144A securities could have the effect of
decreasing the level of liquidity in the Fund to the extent that qualified
institutional buyers become for a time uninterested in purchasing Rule 144A
securities held in the Fund's portfolio. Subject to the Fund's 15% limitation on
investments in illiquid investments, the Fund may also invest in restricted
securities that may not be sold under Rule 144A, which presents certain risks.
As a result, the Fund might not be able to sell these securities when the
Adviser wishes to do so, or might have to sell them at less than fair value. In
addition, market quotations are less readily available. Therefore, 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 liquid assets which can be liquidated
promptly to satisfy any obligation of the Fund to purchase the underlying
securities. The Fund may also write straddles (combinations of puts and calls on
the same underlying security). The writing of straddles generates additional
premium income but may present greater risk.
The Fund will receive a premium from writing a put or call option, which
increases the Fund's gross income in the event the option expires unexercised or
is closed out at a profit. The amount of the premium will reflect, among other
things, the relationship of the exercise price to the market price and
volatility of the underlying security, the remaining term of the option, supply
and demand and interest rates. By writing a call option, the Fund limits its
opportunity to profit from any increase in the market value of the underlying
security above the exercise price of the option. By writing a put option, the
Fund assumes the risk that it may be required to purchase the underlying
security for an exercise price higher than its then-current market value,
resulting in a potential capital loss unless the security subsequently
appreciates in value.
The Fund may terminate an option that it has written prior to its expiration by
entering into a closing purchase transaction in which it purchases an option
having the same terms as the option written. It is possible, however, that
illiquidity in the options markets may make it difficult from time to time for
the Fund to close out its written option positions.
The Fund may also purchase put or call options in anticipation of changes in
interest rates which may adversely affect the value of its portfolio or the
prices of securities that the Fund wants to purchase at a later date. The
premium paid for a put or call option plus any transaction costs will reduce the
benefit, if any, realized by the Fund upon exercise of the option, and, unless
the price of the underlying security changes sufficiently 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 changes in the value of one or more
specified underlying instruments. Indexed securities may be positively or
negatively indexed (i.e., their principal value or interest rates may increase
or decrease if the underlying instrument appreciates), and may have return
characteristics similar to direct investments in the underlying instrument or to
one or more options on the underlying instrument. Indexed securities may be more
volatile than the underlying instrument itself and could involve the loss of all
or a portion of the principal amount.
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
Conduct Rules of the National Association of Securities Dealers, Inc. (the
"NASD") and such other policies as the Trustees may determine, the Adviser may
consider sales of shares of the Fund and of the other investment company clients
of MFD 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). Except with respect to the fund's policy on borrowing or investing
in illiquid securities. The Fund's investment limitations, policies and rating
standards are adhered to at the time of purchase or utilization of assets; a
subsequent change in circumstances will not be considered to result in a
violation of policy.
7. MANAGEMENT OF THE FUND
INVESTMENT ADVISER -- The Adviser manages the Fund pursuant to an Investment
Advisory Agreement dated September 1, 1993 (the "Advisory Agreement"). Under the
Advisory Agreement, the Adviser provides the Fund with overall investment
advisory services. 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, 1997, MFS received
management fees under the Advisory Agreement of $226,043, equivalent to 0.40% of
the Fund's average daily net assets. Effective July 1, 1997 the Adviser has
reduced its right to receive the fee set forth in the Advisory Agreement to a
maximum of 0.30% of the average daily net assets of the Fund. This temporary
reduction may be rescinded without notice to shareholders by the Adviser with
the consent of the Fund's Board of Trustees.
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, MFS/Sun Life
Series Trust and seven variable accounts, each of which is a registered
investment company established by Sun Life Assurance Company of Canada (U.S.)
("Sun Life of Canada (U.S.)") in connection with the sale of various
fixed/variable annuity contracts. MFS and its wholly owned subsidiary, MFS
Institutional Advisors, Inc., provide investment advice to substantial private
clients.
MFS is America's oldest mutual fund organization. MFS and its predecessor
organizations have a history of money management dating from 1924 and the
founding of the first mutual fund in the United States, Massachusetts Investors
Trust. Net assets under the management of the MFS organization were
approximately $64.3 billion on behalf of approximately 2.6 million accounts as
of July 31, 1997. As of such date, the MFS organization managed approximately
$40.6 billion of assets in equity portfolios and approximately $20.3 billion of
assets invested in fixed income portfolios. Approximately $4.1 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.), a subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.,
which in turn is a wholly owned subsidiary of Sun Life Assurance Company of
Canada ("Sun Life"). The Directors of MFS are A. Keith Brodkin, Jeffrey L.
Shames, Arnold D. Scott, John D. McNeil and Donald A. Stewart. Mr. Brodkin is
the Chairman, Mr. Shames is the President and Mr. Scott is the Secretary and a
Senior Executive Vice President of MFS. Messrs. McNeil and Stewart are the
Chairman and the President, respectively, of Sun Life. Sun Life, a mutual life
insurance company, is one of the largest international life insurance companies
and has been operating in the United States since 1895, establishing a
headquarters office here in 1973. The executive officers of MFS report to the
Chairman of Sun Life.
A. Keith Brodkin, the Chairman and a Director of MFS, is 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., James O. Yost,
Ellen M. Moynihan and Mark E. Bradley, 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.
ADMINISTRATOR -- MFS provides the Fund with certain financial, legal,
compliance, shareholder communications and other administrative services
pursuant to a Master Administrative Services Agreement dated March 1, 1997.
Under this Agreement, the Fund pays MFS an administrative fee up to 0.015% per
annum of the Fund's average daily net assets. This fee reimburses MFS for a
portion of the costs it incurs to provide such services.
DISTRIBUTOR -- MFD, a wholly owned subsidiary of MFS, is the distributor of
shares of the Fund and also serves as distributor for each of the other MFS
Funds.
SHAREHOLDER SERVICING AGENT -- MFS Service Center, Inc. (the "Shareholder
Servicing Agent"), a wholly owned subsidiary of MFS, performs transfer agency
and certain other services for the Fund.
8. INFORMATION CONCERNING SHARES OF THE FUND
PURCHASES
Class A, B and C shares of the Fund may be purchased at the public offering
price through any dealer. As used in the Prospectus and any appendices thereto,
the term "dealer" includes any broker, dealer, bank (including bank trust
departments), registered investment adviser, financial planner and any other
financial institutions having a selling agreement or other similar agreement
with MFD. Dealers may also charge their customers fees relating to investments
in the Fund.
This Prospectus offers Class A, B and C shares, which bear sales charges and
distribution fees in different forms and amounts, as described below:
CLASS A SHARES: Class A shares are generally offered at net asset value plus an
initial sales charge, but in certain cases are offered at net asset value
without an initial sales charge but subject to a CDSC.
PURCHASES SUBJECT TO INITIAL SALES CHARGE. Class A shares are offered at
net asset value plus an initial sales charge as follows:
<TABLE>
<CAPTION>
SALES CHARGE* AS
PERCENTAGE OF:
-------------------------------- DEALER ALLOWANCE
NET AMOUNT AS A PERCENTAGE
AMOUNT OF PURCHASE OFFERING PRICE INVESTED OF OFFERING PRICE
- - ------------------ -------------- -------- -----------------
<S> <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 five circumstances, Class A shares are offered at net asset value
without an initial sales charge, but subject to a CDSC equal to 1% of the lesser
of the value of the shares redeemed (exclusive of reinvested dividend and
capital gain distributions) or the total cost of such shares, in the event of a
share redemption within 12 months following the purchase:
(i) on investments of $1 million or more in Class A shares;
(ii) on investments in Class A shares by certain retirement plans subject
to the Employee Retirement Income Security Act of 1974, as amended
("ERISA"), if prior to July 1, 1996: (a) the Plan had established an
account with the Shareholder Servicing Agent and (b) the sponsoring
organization has demonstrated to the satisfaction of MFD that either
(i) the employer had at least 25 employees or (ii) the aggregate
purchases by the retirement plan of Class A shares of Funds in the
MFS Funds would be in an aggregate amount of at least $250,000
within a reasonable period of time, as determined by MFD in its sole
discretion;
(iii) on investments in Class A shares by certain retirement plans subject
to ERISA, if: (a) the retirement plan and/or sponsoring organization
subscribes to the MFS FUNDamental 401(k) Program or any similar
recordkeeping system made available by the Shareholder Servicing Agent
(the "MFS Participant Recordkeeping System"); (b) the plan establishes
an account with the Shareholder Servicing Agent on or after July 1,
1996; and (c) the aggregate purchases by the retirement plan of Class
A shares of the MFS Funds will be in an aggregate amount of at least
$500,000 within a reasonable period of time, as determined by MFD in
its sole discretion;
(iv) on investments in Class A shares by certain retirement plans subject to
ERISA, if: (a) the plan establishes an account with the Shareholder
Servicing Agent on or after July 1, 1996 and (b) the plan has, at the
time of purchase, a market value of $500,000 or more invested in shares
of any class or classes of the MFS Funds. THE RETIREMENT PLAN WILL
QUALIFY UNDER THIS CATEGORY ONLY IF THE PLAN OR ITS SPONSORING
ORGANIZATION INFORMS THE SHAREHOLDER SERVICING AGENT PRIOR TO THE
PURCHASE THAT THE PLAN HAS A MARKET VALUE OF $500,000 OR MORE INVESTED
IN SHARES OF ANY CLASS OR CLASSES OF THE MFS FUNDS. THE SHAREHOLDER
SERVICING AGENT HAS NO OBLIGATION INDEPENDENTLY TO DETERMINE WHETHER
SUCH A PLAN QUALIFIES UNDER THIS CATEGORY; and
(v) on investments in Class A shares by certain retirement plans subject to
ERISA if: (a) the plan establishes an account with the Shareholder
Servicing Agent on or after July 1, 1997; (b) such plan's records are
maintained on a pooled basis by the Shareholder Servicing Agent; and (c)
the sponsoring organization demonstrates to the satisfaction of MFD
that, at the time of purchase, the employer has at least 200 eligible
employees and the plan has aggregate assets of at least $2,000,000.
In the case of all such purchases, MFD will pay commissions to dealers on new
investments in Class A shares made through such dealers as follows:
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.
See "Redemptions and Repurchases -- Contingent Deferred Sales Charge" for
further discussion of the CDSC.
Except as described below, MFD will pay commissions to dealers of 3.75% of the
purchase price of Class B shares purchased through dealers. MFD will also
advance to dealers the first year service fee payable under the Fund's
Distribution Plan (see "Distribution Plan" below) at a rate equal to 0.25% of
the purchase price of such shares. Therefore, the total amount paid to a dealer
upon the sale of Class B shares is 4% of the purchase price of the shares
(commission rate of 3.75% plus a service fee equal to 0.25% of the purchase
price).
Class B shares purchased by a retirement plan whose sponsoring organization
subscribes to the MFS Participant Recordkeeping System and which has established
its account with the Shareholder Servicing Agent on or after July 1, 1996, will
be subject to the CDSC described above, only under limited circumstances, as
explained below under "Waivers of CDSC." With respect to such purchases, MFD
pays an amount to dealers equal to 3.00% of the amount purchased through such
dealers (rather than the 4.00% payment described above), which is comprised of a
commission of 2.75% plus the advancement of the first year service fee equal to
0.25% of the purchase price payable under the Fund's Distribution Plan. As
discussed above, such retirement plans are eligible to purchase Class A shares
of the Fund at net asset value without an initial sales charge but subject to a
1% CDSC if the plan has, at the time of purchase, a market value of $500,000 or
more invested in shares of any class or classes of the MFS Funds. IN THIS EVENT,
THE PLAN OR ITS SPONSORING ORGANIZATION SHOULD INFORM THE SHAREHOLDER SERVICING
AGENT THAT THE PLAN IS ELIGIBLE TO PURCHASE CLASS A SHARES UNDER THIS CATEGORY;
THE SHAREHOLDER SERVICING AGENT HAS NO OBLIGATION INDEPENDENTLY TO DETERMINE
WHETHER SUCH A PLAN QUALIFIES UNDER THIS CATEGORY FOR THE PURCHASE OF CLASS A
SHARES.
WAIVERS OF CDSC. In certain circumstances, the CDSC imposed upon redemption
of Class B shares is waived. These circumstances are described in Appendix A to
this Prospectus. In addition to these circumstances, the CDSC imposed upon the
redemption of Class B shares is waived with respect to shares held by a
retirement plan whose sponsoring organization subscribes to the MFS Participant
Recordkeeping System and which has established an account with the Shareholder
Servicing Agent on or after July 1, 1996; provided, however, that the CDSC will
not be waived (i.e., it will be imposed) in the event that there is a change in
law or regulations which results in a material adverse change to the tax
advantaged nature of the plan, or in the event that the plan and/or sponsoring
organization: (i) becomes insolvent or bankrupt; (ii) is terminated or partially
terminated under ERISA or is liquidated or dissolved; or (iii) is acquired by,
merged into, or consolidated with, any other entity.
CONVERSION OF CLASS B SHARES. Class B shares of the Fund that remain
outstanding for approximately eight years will convert to Class A shares of the
same Fund. Shares purchased through the reinvestment of distributions paid in
respect of Class B shares will be treated as Class B shares for purposes of the
payment of the distribution and service fees under the Fund's Distribution Plan
. See "Information Concerning Shares of the Fund -- Distribution Plan" below.
However, for purposes of conversion to Class A shares, all shares in a
shareholder's account that were purchased through the reinvestment of dividends
and distributions paid in respect of Class B shares (and which have not
converted to Class A shares as provided in the following sentence) will be held
in a separate sub-account. Each time any Class B shares in the shareholder's
account (other than those in the sub-account) convert to Class A shares, a
portion of the Class B shares then in the sub-account will also convert to Class
A shares. The portion will be determined by the ratio that the shareholder's
Class B shares not acquired through reinvestment of dividends and distributions
that are converting to Class A shares bear to the shareholder's total Class B
shares not acquired through reinvestment. The conversion of Class B shares to
Class A shares is subject to the continuing availability of a ruling from the
Internal Revenue Service or an opinion of counsel that such conversion will not
constitute a taxable event for federal tax purposes. There can be no assurance
that such ruling or opinion will be available, and the conversion of Class B
shares to Class A shares will not occur if such ruling or opinion is not
available. In such event, Class B shares would continue to be subject to higher
expenses than Class A shares for an indefinite period.
CLASS C SHARES: Class C shares are offered at net asset value without an initial
sales charge but are subject to a CDSC upon redemption of 1.00% during the first
year. Class C shares do not convert to any other class of 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 Fund's Distribution Plan to
MFD for the first year after purchase (see "Distribution Plan" below).
Class C shares are not currently available for purchase by any retirement plan
qualified under Sections 401(a) or 403(b) of the 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.
SUBSEQUENT INVESTMENT BY TELEPHONE: Each shareholder may purchase additional
shares of any MFS Fund by telephoning the Shareholder Servicing Agent toll-free
at (800) 225-2606. The minimum purchase amount is $50 and the maximum purchase
amount is $100,000. Shareholders wishing to avail themselves of this telephone
purchase privilege must so elect on their Account Application and designate
thereon a bank and account number from which purchases will be made. If a
telephone purchase request is received by the Shareholder Servicing Agent on any
business day prior to the close of regular trading on the Exchange (generally,
4:00 p.m., Eastern time), the purchase will occur at the closing net asset value
of the shares purchased on that day. The Shareholder Servicing Agent may be
liable for any losses resulting from unauthorized telephone transactions if it
does not follow reasonable procedures designed to verify the identity of the
caller. The Shareholder Servicing Agent will request personal or other
information from the caller, and will normally also record calls. Shareholders
should verify the accuracy of confirmation statements immediately after their
receipt.
RIGHT TO REJECT PURCHASE ORDERS/MARKET TIMING. Purchases and exchanges
should be made for investment purposes only. The Fund and MFD each reserves the
right to reject or restrict any specific purchase or exchange request. In the
event that the Fund or MFD rejects an exchange request, neither the redemption
nor the purchase side of the exchange will be processed.
The Fund is not designed for professional market timing organizations or other
entities using programmed or frequent exchanges. The Fund defines a "market
timer" as an individual, or organization acting on behalf of one or more
individudals, if (i) the individual or organization makes three or more exchange
requests out of the Fund per calender year and (ii) any one of such exchange
requests represents shares equal in value to 1/2 of 1% or more of the Fund's net
assets at the time of the request. Accounts under common ownership or control,
including accounts administered by market timers, will be aggregated for
purposes of this definition.
As noted above, the Fund and MFD each reserves the right to reject or restrict
any specific purchase and exchange request and, in addition, may impose specific
limitations with respect to market timers, including delaying for up to seven
days the purchase side of an exchange request by market timers or specifically
rejecting or otherwise restricting purchase or exchange requests by market
timers. In the event that any individual or entity is determined either by the
Fund or MFD in its sole discretion, to be a market timer with respect to any
calendar year, the Fund and/or MFD will reject all exchange requests into the
Fund during the remainder of that calendar year. Other funds in the MFS Family
of Funds may have different and/or more restrictive policies with respect to
market timers than the Fund. These policies are disclosed in the prospectuses of
these other MFS Funds.
DEALER CONCESSIONS. Dealers may receive different compensation with respect
to sales of Class A, Class B and Class C shares. In addition, from time to time,
MFD may pay dealers 100% of the applicable sales charge on sales of Class A
shares of certain specified MFS Funds sold by such dealer during a specified
sales period. In addition, MFD or its affiliates may, from time to time, pay
dealers an additional commission equal to 0.50% of the net asset value of all of
the Class B and/or Class C shares of certain specified MFS Funds sold by such
dealer during a specified sales period. In addition, from time to time, MFD, at
its expense, may provide additional commissions, compensation or promotional
incentives ("concessions") to dealers which sell 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 into
which an exchange is made and consider the differences in objectives, policies
and restrictions before making any exchange. Exchanges will be made only after
instructions in writing or by telephone (an "Exchange Request") are received for
an established account by the Shareholder Servicing Agent in proper form (i.e.,
if in writing -- signed by the record owner(s) exactly as the shares are
registered; if by telephone -- proper account identification is given by the
dealer or shareholder of record) and each exchange must involve either shares
having an aggregate value of at least $1,000 ($50 in 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.
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.
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 or exchanges, except in the case
of accounts being established for monthly automatic investments and certain
payroll savings programs, Automatic Exchange Plan accounts and tax-deferred
retirement plans, for which there is a lower minimum investment requirement. See
"Purchases -- General -- Minimum Investment." Shareholders will be notified that
the value of their account is less than the minimum investment requirement and
allowed 60 days to make an additional investment before the redemption is
processed.
DISTRIBUTION PLAN
The Trustees have adopted a Distribution Plan for Class A, Class B and Class C
shares pursuant to Section 12(b) of the 1940 Act and Rule 12b-1 thereunder (the
"Distribution Plan"), after having concluded that there is a reasonable
likelihood that the Distribution Plan would benefit the Fund and its
shareholders.
In certain circumstances, the fees described below may not be imposed or are
being waived. These circumstances, if any, are described below under the heading
"Current Level of Distribution and Service Fees."
FEATURES COMMON TO EACH CLASS OF SHARES: There are certain features of the
Distribution Plan that are common to each class of shares, as described below.
SERVICE FEES. The Distribution Plan provides that the Fund may pay MFD a
service fee of up to 0.25% of the average daily net assets attributable to the
class of shares to which the Distribution Plan relates (i.e., Class A, Class B
or Class C shares, as appropriate) (the "Designated Class") annually in order
that MFD may pay expenses on behalf of the Fund relating to the servicing of
shares of the Designated Class. The service fee is used by MFD to compensate
dealers which enter into a sales agreement with MFD in consideration for all
personal services and/or account maintenance services rendered by the dealer
with respect to shares of the Designated Class owned by investors for whom such
dealer is the dealer or holder of record. MFD may from time to time reduce the
amount of the service fees paid for shares sold prior to a certain date. Service
fees may be reduced for a dealer that is the holder or dealer of record for an
investor who owns shares of the Fund having an aggregate net asset value at or
above a certain dollar level. Dealers may from time to time be required to meet
certain criteria in order to receive service fees. MFD or its affiliates are
entitled to retain all service fees payable under the Distribution Plan for
which there is no dealer of record or for which qualification standards have not
been met as partial consideration for personal services and/or account
maintenance services performed by MFD or its affiliates to shareholder accounts.
DISTRIBUTION FEES. The Distribution Plan provides that the Fund may pay MFD
a distribution fee based on the average daily net assets attributable to the
Designated Class as partial consideration for distribution services performed
and expenses incurred in the performance of MFD's obligations under its
distribution agreement with the Fund. See "Management of the Fund --
Distributor" in the SAI. The amount of the distribution fee paid by the Fund
with respect to each class differs under the Distribution Plan, as does the use
by MFD of such distribution fees. Such amounts and uses are described below in
the discussion of the provisions of the Distribution Plan relating to each class
of shares.
OTHER COMMON FEATURES. Fees payable under the Distribution Plan are charged
to, and therefore reduce, income allocated to shares of the Designated Class.
The provisions of the Distribution Plan relating to operating policies as well
as initial approval, renewal, amendment and termination are substantially
identical as they relate to each class of shares covered by the Distribution
Plan.
FEATURES UNIQUE TO EACH CLASS OF SHARES: There are certain features of the
Distribution Plan that are unique to each class of shares, as described below.
CLASS A SHARES. Class A shares are generally offered pursuant to an initial
sales charge, a substantial portion of which is paid to or retained by the
dealer making the sale (the remainder of which is paid to MFD). See "Purchases
- - -- Class A Shares" above. In addition to the initial sales charge, the dealer
also generally receives the ongoing 0.25% per annum service fee, as discussed
above.
The distribution fee paid to MFD under the Distribution Plan is equal, on an
annual basis, to 0.10% of the Fund's average daily net assets attributable to
Class A shares. As noted above, MFD may use the distribution fee to cover
distribution-related expenses incurred by it under its distribution agreement
with the Fund, including commissions to dealers and payments to wholesalers
employed by MFD (e.g., MFD pays commission to dealers with respect to purchases
of $1 million or more and purchases by certain retirement plans of Class A
shares which are sold at net asset value but which are subject to a 1% CDSC for
one year after purchase). See "Purchases -- Class A Shares" above. In addition,
to the extent that the aggregate service and distribution fees paid under the
Distribution Plan do not exceed 0.35% per annum of the average daily net assets
of the Fund attributable to Class A shares, the Fund is permitted to pay such
distribution-related expenses or other distribution-related expenses.
CLASS B SHARES 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 Distribution Plan, the Fund pays MFD a distribution fee equal, on an
annual basis, to 0.75% of the Fund's average daily net assets attributable to
Class B shares. As noted above, this distribution fee may be used by MFD to
cover its distribution-related expenses under its distribution agreement with
the Fund (including the 3.75% commission it pays to dealers upon purchase of
Class B shares, as described under "Purchases -- Class B Shares" above).
CLASS C SHARES 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 Distribution Plan (which MFD in turn pays to dealers), as
discussed above, and a distribution fee paid to MFD (which MFD also in turn pays
to dealers) under the Distribution Plan equal, on an annual basis, to 0.75% of
the Fund's average daily net assets attributable to Class C shares.
CURRENT LEVEL OF DISTRIBUTION AND SERVICE FEES: The Fund's Class A, Class B and
Class C distribution and service fees for its current fiscal year are 0.15%,
0.94% 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. 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 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 the distribution is
paid in cash or reinvested in additional shares. Interest on indebtedness
incurred by shareholders to purchase or carry shares of the Fund will not be
deductible for federal income tax purposes. Exempt-interest dividends are taken
into account in calculating the amount of social security and railroad
retirement benefits that may be subject to federal income tax, and certain
distributions of exempt-interest dividends may also be a tax preference item for
purposes of the federal individual and corporate alternative minimum tax. All
exempt-interest dividends may affect a corporate shareholder's alternative
minimum tax liability. Fund distributions may be subject to state and local
income taxes, depending on the nature of the distribution and the residence of
the shareholder. Entities or persons who are "substantial users" (or persons
related to "substantial users") of facilities financed by private activity bonds
should consult their tax advisers before purchasing shares of the Fund.
Shortly after the end of each calendar year, each shareholder will be sent a
statement setting forth the federal income tax status of all dividends and
distributions for that year, including the portion exempt from federal income
taxes as "exempt-interest dividends," the portion, if any, that is a tax
preference item under the federal alternative minimum tax, the portion, if any,
taxable as ordinary income, the portion, if any, taxable as long term capital
gain, the portion, if any, representing a return of capital (which is free of
current taxes but results in a basis reduction), and the amount, if any, of
federal income tax withheld.
Fund distributions will reduce the Fund's net asset value per share.
Shareholders who buy shares shortly before the Fund makes a distribution of net
capital gains or net short-term capital gains may thus pay the full price for
the shares and then effectively receive a portion of the purchase price back as
a taxable distribution.
The Fund intends to withhold U.S. federal income tax at the rate of 30% on
taxable dividends and other payments that are subject to such withholding and
that are made to persons who are neither citizens nor residents of the U.S.,
regardless of whether a lower rate may be permitted under an applicable treaty.
The Fund is also required in certain circumstances to apply backup withholding
at the rate of 31% on taxable dividends and redemption proceeds paid to any
shareholder (including a shareholder who is neither a citizen nor a resident of
the U.S.) who does not furnish to the Fund certain information and
certifications or who is otherwise subject to backup withholding. Backup
withholding will not, however, be applied to payments that have been subject to
30% withholding. Prospective investors should read the Fund's Account
Application for additional information regarding backup withholding of federal
income tax and should consult their own tax advisers as to the tax consequences
to them of an investment in the Fund.
NET ASSET VALUE
The net asset value per share of each class of shares of the Fund is determined
each day during which the Exchange is open for trading. This determination is
made once 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 which it
offers to the general public, 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 the Distribution Plan or on any other
matter that affects solely that class of shares, but will otherwise vote
together with all other classes of shares of the series on all other matters.
The Trust does not intend to hold annual shareholder meetings. The Declaration
of Trust provides that a Trustee may be removed from office in certain instances
(see "Description of Shares, Voting Rights and Liabilities" in the SAI.
Each share of a class of the Fund represents an equal proportionate interest in
the Fund with each other class, 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 Securities Corporation 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. The
Fund offers multiple classes of shares which were initially offered for sale to
the public on different dates. The calculation of total rate of return for a
class of shares which initially was offered for sale to the public subsequent to
another class of shares of the Fund is based both on (i) the performance of the
Fund's newer class from the date it initially was offered for sale to the public
and (ii) the performance of the Fund's oldest class from the date it initially
was offered for sale to the public up to the date that the newer class initially
was offered for sale to the public. See the SAI for further information on the
calculation of total rate of return for share classes initially offered for sale
to the public on different dates. 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, 1997, please see the Fund's Annual Report. A copy of the
Annual Report may be obtained without charge by contacting the Shareholder
Servicing Agent (see back cover for address and phone number). In addition to
information provided in shareholder reports, the Fund may, in its discretion,
from time to time, make a list of all or a portion of its holdings available to
investors upon request.
EXPENSES
Subject to termination or revision at the sole discretion of MFS, MFS has agreed
to bear the Fund's expenses such that the Fund's "Other Expenses" which are
defined to include all Fund expenses except for management fees, Rule 12b-1
fees, taxes, extraordinary expenses, brokerage and termination costs, do not
exceed 0.40% per annum of the Fund's average daily net assets (the "Maximum
Percentage"). The obligation of MFS to bear these expenses terminates on
February 28, 2002. The payments made by MFS on behalf of the Fund under this
arrangement are subject to reimbursement by the Fund to MFS, which will be
accomplished by the payment of an expense reimbursement fee by the Fund to MFS
computed and paid monthly at a percentage of its average daily net assets for
its then current fiscal year, with a limitation that immediately after such
payment, the Fund's "Other Expenses" will not exceed the Maximum Percentage.
This expense reimbursement by the Fund to MFS terminates on the earlier of the
date on which payments made by the Fund equal the prior payment of such
reimbursable expenses by MFS or February 28, 2002.
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 Class A, B and C shares
of that shareholder in the MFS Funds or MFS Fixed Fund (a bank collective 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 on any day of the month. If the
shareholder does not specify a date, the investment will automatically occur on
the first business day of the month. Required forms are available from the
Shareholder Servicing Agent or investment dealers.
AUTOMATIC EXCHANGE PLAN: Shareholders having account balances of at least
$5,000 in any MFS Fund may exchange their shares for the same class of shares of
other MFS Funds (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 six different funds. A shareholder should consider the differences
in objectives and policies of a fund and review its prospectus before electing
to exchange money into 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, 1997, 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 Distribution Plan
and (vi) various services and privileges provided by the Fund for the benefit of
its shareholders, including additional information with respect to the exchange
privilege.
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). As used in this
Appendix, the term "dealer" includes any broker, dealer, bank (including bank
trust departments), registered investment adviser, financial planner and any
other financial institutions having a selling agreement or other similar
agreement with MFS Fund Distributor, Inc. ("MFD").
I.
WAIVERS OF ALL APPLICABLE SALES CHARGES
In the following circumstances, the initial sales charge imposed on purchases
of Class A shares and the CDSC imposed on certain redemptions of Class A
shares and on redemptions of Class B and Class C shares, as applicable, are
waived:
1. DIVIDEND REINVESTMENT
o Shares acquired through dividend or capital gain reinvestment; and
o Shares acquired by automatic reinvestment of distributions of dividends
and capital gains of any MFS Fund in the MFS Family of Funds ("MFS
Funds") pursuant to the Distribution Investment Program.
2. CERTAIN ACQUISITIONS/LIQUIDATIONS
o 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:
o 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;
o Trustees and retired trustees of any investment company for which MFD
serves as distributor;
o Employees, directors, partners, officers and trustees of any sub-adviser
to any MFS Fund;
o Employees or registered representatives of dealers and other financial
institution ("dealers") which have a sales agreement with MFD;
o 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
o Institutional Clients of MFS or MFS Institutional Advisors, Inc.
("MFSI").
4. INVOLUNTARY REDEMPTIONS (CDSC WAIVER ONLY)
o Shares redeemed at an MFS Fund's direction due to the small size of a
shareholder's account. See "Redemptions and Repurchases -- General --
Involuntary Redemptions/ Small Accounts" in the Prospectus.
5. RETIREMENT PLANS (CDSC WAIVER ONLY). Shares redeemed on account of
distributions made under the following circumstances:
INDIVIDUAL RETIREMENT ACCOUNTS ("IRA'S")
o Death or disability of the IRA owner.
SECTION 401(a) PLANS ("401(a) PLANS") AND SECTION 403(b) EMPLOYER
SPONSORED PLANS ("ESP PLANS")
o Death, disability or retirement of Plan 401(a) or ESP participant;
o Loan from 401(a) or ESP Plan (repayment of loans, however, will
constitute new sales for purposes of assessing sales charges);
o Financial hardship (as defined in Treasury Regulation Section
1.401(k)-1(d)(2), as amended from time to time);
o Termination of employment of 401(a) or ESP Plan participant (excluding,
however, a partial or other termination of the Plan);
o Tax-free return of excess 401(a) or ESP Plan contributions;
o 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
o 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")
o Death or disability of SRO Plan participant.
6. CERTAIN TRANSFERS OF REGISTRATION (CDSC WAIVER ONLY). Shares
transferred:
o To an IRA rollover account where any sales charges with respect to the
shares being reregistered would have been waived had they been redeemed;
and
o From a single account maintained for a 401(a) Plan to multiple accounts
maintained by the Shareholder Servicing Agent on behalf of individual
participants of such Plan, provided that the Plan sponsor subscribes to
the MFS FUNDamental 401(k) Plan or another similar recordkeeping system
made available by the Shareholder Servicing Agent.
7. LOAN REPAYMENTS
o Shares acquired pursuant to repayments by retirement plan participants of
loans from 401(a) of ESP Plans with respect to which such Plan or its
sponsoring organization subscribes to the MFS FUNDamental 401(k) Program
or the MFS Recordkeeper Plus Program (but not the MFS Recordkeeper
Program).
II. WAIVERS OF CLASS A SALES CHARGES
In addition to the waivers set forth in Section I above, in the following
circumstances the initial sales charge imposed on purchases of Class A
shares and the CDSC imposed on certain redemption of Class A shares are
waived:
1. WRAP ACCOUNT AND FUND "SUPERMARKET" INVESTMENTS
o Shares acquired by investments through certain dealers (including
registered investment advisers and financial planners) which have
established certain operational arrangements with MFD which include a
requirement that such shares be sold for the sole benefit of clients
participating in a "wrap" account, mutual fund marketplace account or a
similar program under which such clients pay a fee to such dealer.
2. INVESTMENT BY INSURANCE COMPANY SEPARATE ACCOUNTS
o Shares acquired by insurance company separate accounts.
3. RETIREMENT PLANS
ADMINISTRATIVE SERVICES ARRANGEMENTS
o Shares acquired by retirement plans or trust accounts whose third party
administrators or dealers have entered into an administrative services
agreement with MFD or one of its affiliates to perform certain
administrative services, subject to certain operational and minimum size
requirements specified from time to time by MFD or one or more of its
affiliates.
REINVESTMENT OF DISTRIBUTIONS FROM QUALIFIED RETIREMENT PLANS.
o 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
o Distributions made on or after the IRA owner has attained the age of 59
1/2 years old; and
o Tax-free returns of excess IRA contributions.
401(a) PLANS
o Distributions made on or after the 401(a) Plan participant has attained
the age of 59 1/2 years old; and
o Certain involuntary redemptions and redemptions in connection with
certain automatic withdrawals from a 401(a) Plan.
ESP PLANS AND SRO PLANS
o 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
o Systematic Withdrawal Plan redemptions with respect to up to 10% per year
(or 15% per year, in the case of accounts registered as IRAs where the
redemption is made pursuant to Section 72(t) of the Internal Revenue Code
of 1986, as amended) of the account value at the time of establishment.
2. DEATH OF OWNER
o 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
o Shares redeemed on account of the disability of the account owner if
shares are held either solely or jointly in the disabled individual's
name or in a living trust for the benefit of the disabled individual (in
which case a disability certification form is required to be submitted to
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
o 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")
o 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;
o Death or disability of a SAR-SEP Plan participant.
<PAGE>
APPENDIX B
TAXABLE EQUIVALENT YIELD TABLE*
(UNDER FEDERAL INCOME TAX LAW AND RATES FOR 1997)
The table below shows the approximate taxable bond yields which are
equivalent to tax-exempt bond yields from 3.0% to 8.0% under federal income tax
laws that apply in 1997. (Such yields may differ under the laws applicable to
subsequent years.) Separate calculations, showing the applicable taxable income
brackets, are provided for investors who file joint returns and for those
investors who file individual returns.
<TABLE>
<CAPTION>
SINGLE RETURN JOINT RETURN INCOME TAX-EXEMPT YIELD
- - ----------------------- -------------------- TAX ----------------------------------------------------------------------
(TAXABLE INCOME)* BRACKET** 3% 4% 5% 6% 7% 8%
- - --------------------------------------------- ------------ ----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1997 1997 EQUIVALENT TAXABLE YIELD
$ 0-$ 24,650 $ 0-$ 41,200 0.15% 3.53% 4.71% 5.88% 7.06% 8.24% 9.41%
$ 24,650-$ 59,750 $ 41,200-$ 99,600 0.28 4.17 5.56 6.94 8.33 9.72 11.11
$ 59,750-$124,650 $ 99,600-$151,750 0.31 4.35 5.80 7.25 8.70 10.14 11.59
$124,650-$271,050 $151,750-$271,050 0.36 4.69 6.25 7.81 9.38 10.94 12.50
$271,050 & Over $271,050 & Over 0.396 4.97 6.62 8.28 9.93 11.59 13.25
* Net amount subject to Federal income tax after deductions and exemptions.
** Effective federal tax bracket.
</TABLE>
<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.
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>
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, MA02107-9906
Independent Auditors [Graphic Omitted]
Deloitte & Touche LLP
125 Summer Street
Boston, MA02110
[LOGO] M F S(SM)
INVESTMENT MANAGEMENT
We invented the mutual fund(SM)
MFS(R) MUNICIPAL LIMITED
MATURITY FUND
500 Boylston Street
Boston, MA 02116
[LOGO] M F S(SM)
INVESTMENT MANAGEMENT
We invented the mutual fund(SM)
MFS(R) MUNICIPAL LIMITED MATURITY FUND
Prospectus
September 1, 1997
MML-1-9/97/35M 37/237/337
<PAGE>
[GRAPHIC OMITTED]
MFS(R) MUNICIPAL STATEMENT OF
LIMITED MATURITY FUND ADDITIONAL INFORMATION
(A Member of the MFS Family of Funds(R)) September 1, 1997
- - --------------------------------------------------------------------------------
Page
1. Definitions .................................................. 2
2. Investment Objective, Policies and Restrictions .............. 2
3. Management of the Fund ....................................... 7
Trustees ................................................... 7
Officers ................................................... 7
Trustee Compensation Table ................................. 8
Investment Adviser ......................................... 8
Administrator .............................................. 9
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 ................................................... 14
7. Determination of Net Asset Value and Performance ............. 15
8. Distribution Plan ............................................ 17
9. Description of Shares, Voting Rights and Liabilities ......... 18
10. Independent Auditors and Financial Statements ................ 19
Appendix A -- Performance Information ....................... A-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, 1997. This SAI should be read in conjunction with the
Prospectus, a copy of which may be obtained without charge by contacting the
Shareholder Servicing Agent (see last page for address and phone number).
THIS SAI IS NOT A PROSPECTUS AND IS AUTHORIZED FOR DISTRIBUTION TO PROSPECTIVE
INVESTORS ONLY IF PRECEDED OR ACCOMPANIED BY A CURRENT PROSPECTUS.
<PAGE>
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, 1997, as amended or
supplemented from time to time.
2. INVESTMENT OBJECTIVE, POLICIES AND
RESTRICTIONS
INVESTMENT OBJECTIVE. The Fund's investment objective is to provide as high a
level of current income exempt from federal income taxes as is considered
consistent with prudent investing and protection of shareholders' capital. Any
investment involves risk and there can be no assurance that the Fund will
achieve its investment objective.
INVESTMENT POLICIES. The investment policies of the Fund are described in the
Prospectus. In addition, certain of the Fund's investment policies are
described in greater detail below.
"WHEN-ISSUED" 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 liquid assets
sufficient to cover any commitments or to limit any potential risk. However,
although the Fund does not intend to make such purchases for speculative
purposes and intends to adhere to the provisions of the SEC policy, purchases
of securities on such bases may involve more risk than other types of
purchases. For example, the Fund may have to sell assets which have been set
aside in order to meet redemptions. Also, if the Fund determines it is
necessary to sell the "when-issued" or "forward delivery" securities before
delivery, the Fund may incur a loss because of market fluctuations since the
time the commitment to purchase such securities was made and any gain or loss
would not be tax-exempt.
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 liquid assets in a segregated account with its
custodian. A put option written by the Fund is "covered" if the Fund maintains
liquid assets with a value equal to the exercise price in a segregated account
with its custodian, or else holds a put on the same security and in the same
principal amount as the put written where the exercise price of the put held
is (a) equal to or greater than the exercise price of the put written or (b)
is less than the exercise price of the put written if the difference is
maintained by the Fund in liquid assets in a segregated account with its
custodian. Put and call options written by the Fund may also be covered in
such other manner as may be in accordance with the requirements of the
exchange on which, or the counter party with which, the option is traded, and
applicable laws and regulations. The writer of an option may have no control
over when the underlying securities must be sold, in the case of a call
option, or purchased, in the case of a put option, since with regard to
certain options, the writer may be assigned an exercise notice at any time
prior to the termination of the obligation.
Effecting a closing transaction in the case of a written call option will
permit the Fund to write another call option on the underlying security with
either a different exercise price or expiration date or both, or in the case
of a written put option will permit the Fund to write another put option to
the extent that the exercise price thereof is secured by liquid assets. Such
transactions permit the Fund to generate additional premium income, which will
partially offset declines in the value of portfolio securities or increases in
the cost of securities to be acquired. Also, effecting a closing transaction
will permit the cash or proceeds from the concurrent sale of any securities
subject to the option to be used for other Fund investments. If the Fund
desires to sell a particular security from its portfolio on which it has
written a call option, it will effect a closing transaction prior to or
concurrent with the sale of the security.
The Fund will realize a profit from a closing transaction if the price of the
transaction is less than the premium received from writing the option or is
more than the premium paid to purchase the option; the Fund will realize a
loss from a closing transaction if the price of the transaction is more than
the premium received from writing the option or is less than the premium paid
to purchase the option. Because increases in the market price of a call option
will generally reflect increases in the market price of the underlying
security, any loss resulting from the closing out of a call option is likely
to be offset in whole or in part by appreciation of the underlying security
owned by the Fund.
An option position may be closed out only where there exists a secondary
market for an option of the same series. If a secondary market does not exist,
it might not be possible to effect closing transactions in particular options
with the result that the Fund would have to exercise the options in order to
realize any profit. If the Fund is unable to effect a closing purchase
transaction in a secondary market, it will not be able to sell the underlying
security until the option expires or it delivers the underlying security upon
exercise. Reasons for the absence of a liquid secondary market include the
following: (i) there may be insufficient trading interest in certain options;
(ii) restrictions may be imposed by a national securities exchange on opening
transactions or closing transactions or both; (iii) trading halts, suspensions
or other restrictions may be imposed with respect to particular classes or
series of options or underlying securities; (iv) unusual or unforeseen
circumstances may interrupt normal operations on an exchange; (v) the
facilities of an exchange or the Options Clearing Corporation (the "OCC") may
not at all times be adequate to handle current trading volume; or (vi) one or
more exchanges could, for economic or other reasons, decide or be compelled at
some future date to discontinue the trading of options (or a particular class
or series of options), in which event the secondary market on that exchange
(or in that class or series of options) would cease to exist, although
outstanding options on that exchange that had been issued by the OCC as a
result of trades on that exchange would continue to be exercisable in
accordance with their terms.
The Fund may write options in connection with buy-and-write transactions; that
is, the Fund may purchase a security and then write a call option against that
security. The exercise price of the call the Fund determines to write will
depend upon the expected price movement of the underlying security. The
exercise price of a call option may be below ("in-the-money"), equal to ("at-
the-money") or above ("out-of-the-money") the current value of the underlying
security at the time the option is written. If the call options are exercised
in such transactions, the Fund's maximum gain will be the premium received by
it for writing the option, adjusted upwards or downwards by the difference
between the Fund's purchase price of the security and the exercise price. If
the options are not exercised and the price of the underlying security
declines, the amount of such decline will be offset in part, or entirely, by
the premium received.
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 liquid assets from its portfolio in an amount equal to the
difference between the fluctuating market value of such Futures Contracts and
the aggregate value of the initial and variation margin payments made by the
Fund with respect to such Futures Contracts, thereby assuring that the
positions are unleveraged. 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 liquid assets in a segregated account
with its custodian. The Fund may cover the writing of put Options on Futures
Contracts (a) through sales of the underlying Futures Contract, (b) through
segregation of liquid assets in an amount equal to the value of the security
or index underlying the Futures Contract, or (c) through the holding of a put
on the same Futures Contract and in the same principal amount as the put
written where the exercise price of the put held is equal to or greater than
the exercise price of the put written, or is less than the exercise price of
the put written if the difference is maintained by the Fund in liquid assets
in a segregated account with its custodian. Put and call Options on Futures
Contracts written by the Fund may also be covered in such other manner as may
be in accordance with the requirements of the exchange on which they are
traded and applicable laws and regulations.
The purchase of a put Option on a Futures Contract is similar in some respects
to the purchase of protective put options on portfolio securities. The Fund
will purchase a put Option on a Futures Contract to hedge the Fund's portfolio
against the risk of rising interest rates.
The amount of risk the Fund assumes when it purchases an Option on a Futures
Contract is the premium paid for the option plus related transaction costs,
although in order to realize a profit it may be necessary to exercise the
option and close out the underlying Futures Contract. In addition to the
correlation risks discussed above, the purchase of an option also entails the
risk that changes in the value of the underlying Futures Contract will not be
fully reflected in the value of the option purchased.
ADDITIONAL RISKS OF OPTIONS ON 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
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.
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.
Except with respect to Investment Restriction (1) and the fund's policy on
investing in illiquid 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.
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 net assets (taken at market value) would be
invested in such securities. Repurchase agreements maturing in more than seven
days will be deemed to be illiquid for purposes of the Fund's limitation on
investment in illiquid securities. Securities that are 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 (born 8/4/35)
Massachusetts Financial Services Company, Chairman and Director
RICHARD B. BAILEY* (born 9/14/26)
Private investor; Massachusetts Financial Services Company, former Chairman
prior to September 30, 1991)
PETER G. HARWOOD (born 4/3/26)
Private Investor
Address: 211 Lindsay Pond Road, Concord, Massachusetts
J. ATWOOD IVES (born 5/1/36)
Eastern Enterprises (diversified services company), Chairman and Chief
Executive Officer;
LAWRENCE T. PERERA (born 6/23/35)
Hemenway & Barnes (attorneys), Partner
Address: 60 State Street, Boston, Massachusetts
WILLIAM J. POORVU (born 4/10/35)
Harvard University Graduate School of Business Administration, Adjunct
Professor; CBL & Associates Properties, Inc. (a real estate investment
trust), Director; The Baupost Fund (a registered investment company), Vice
Chairman (since November 1993). Chairman and Trustee (prior to November
1993)
Address: Harvard Business School, Soldiers Field Road, Cambridge,
Massachusetts
CHARLES W. SCHMIDT (born 3/18/28)
Private investor; OHM Corporation, Director; Mohawk Paper Company, Director.
Address: 30 Colpitts Road, Weston, Massachusetts
ARNOLD D. SCOTT* (born 12/16/42)
Massachusetts Financial Services Company, Senior Executive Vice President,
Secretary and Director
JEFFREY L. SHAMES* (born 6/2/55)
Massachusetts Financial Services Company, President and Director
ELAINE R. SMITH (born 4/25/46)
Independent Consultant; Brigham and Women's Hospital, Executive Vice President
and Chief Operating Officer (prior to September 1992)
Address: Weston, Massachusetts
DAVID B. STONE (born 9/2/27)
North American Management Corp. (investment adviser), Chairman and Director;
Eastern Enterprises, Director
Address: 10 Post Office Square, Suite 300, Boston, Massachusetts
OFFICERS
A. KEITH BRODKIN,* President (born 8/4/35)
Massachusetts Financial Services Company, Chairman and Director
ROBERT A. DENNIS,* Vice President (born 12/12/48)
Massachusetts Financial Services Company, Senior Vice President
GEOFFREY L. KURINSKY,* Vice President (born 7/7/53)
Massachusetts Financial Services Company, Senior Vice President
W. THOMAS LONDON,* Treasurer (born 3/1/44)
Massachusetts Financial Services Company, Senior Vice President
JAMES O. YOST,* Assistant Treasurer (born 6/12/60)
Massachusetts Financial Services Company, Vice President
ELLEN M. MOYNIHAN,* Assistant Treasurer (born 11/13/57)
Massachusetts Financial Services Company, Vice President (since September,
1996); Deloitte & Touche LLP, Senior Manager (until September 1996)
MARK E. BRADLEY,* Assistant Treasurer (born 11/23/59)
Massachusetts Financial Services Company, Vice President (since March, 1997);
Putnam Investments, Vice President (from September 1994 until March 1997;
Ernst & Young, Senior Tax Manager (until September 1994)
STEPHEN E. CAVAN,* Secretary and Clerk (born 11/6/53)
Massachusetts Financial Services Company, Senior Vice President, General
Counsel and Assistant Secretary
JAMES R. BORDEWICK, JR.,* Assistant Secretary (born 3/6/59)
Massachusetts Financial Services Company, Senior Vice President and Associate
General Counsel
- - ----------
*"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 below hereto is certain information concerning the cash compensation
paid to the Trustees and benefits accrued, and estimated benefits payable,
under the retirement plan.
TRUSTEE COMPENSATION TABLE
<TABLE>
<CAPTION>
TOTAL TRUSTEES
FEES FROM
RETIREMENT BENEFIT ESTIMATED FUND AND
TRUSTEES FEE ACCRUED AS PART OF CREDITED YEARS FUND
TRUSTEE FROM FUND(1) FUND'S EXPENSES(1) OF SERVICE(2) COMPLEX(3)
- - ------------------------ ------------ ------------------ ------------ -------------
<S> <C> <C> <C> <C>
Richard B. Bailey ...... $ 945 $258 8 $247,168
A. Keith Brodkin ..... -0- -0- N/A -0-
Peter G. Harwood ..... 1,065 173 5 105,995
J. Atwood Ives ........ 1,005 270 17 98,750
Lawrence T. Perera ...... 1,090 264 16 98,310
William Poorvu ...... 1,030 286 16 102,840
Charles W. Schmidt ..... 1,065 277 9 105,995
Arnold D. Scott ....... -0- -0- N/A -0-
Jeffrey L. Shames ...... -0- -0- N/A -0-
Elaine R. Smith ....... 1,180 277 26 105,995
David B. Stone ....... 1,095 294 9 108,710
</TABLE>
- - ------------
(1) For fiscal year ended April 30, 1997.
(2) Based on normal retirement age of 73.
(3) For calendar year 1996. All Trustees receiving compensation served as
Trustees of 23 funds within the MFS fund complex (having aggregate net
assets at December 31, 1996, of approximately $21.2 billion) except Mr.
Bailey, who served as Trustee of 81 funds within the MFS fund complex
(having aggregate net assets at December 31, 1996, of approximately $38.5
billion).
ESTIMATED ANNUAL BENEFITS PAYABLE BY FUND UPON RETIREMENT(4)
YEARS OF SERVICE
AVERAGE ----------------------------------------------------------
TRUSTEE FEES 3 5 7 10 OR MORE
- - ------------------------------------------------------------------------------
$ 851 $128 $213 $298 $425
940 141 235 329 470
1,030 154 257 360 515
1,119 168 280 392 560
1,209 181 302 423 604
1,298 195 325 454 649
(4) Other funds in the MFS fund complex provide similar retirement benefits to
the Trustees.
As of July 31, 1997, all Trustees and officers as a group owned less than 1%
of the outstanding shares of the Fund.
As of July 31, 1997, Merrill Lynch, Pierce, Fenner and Smith Inc., FBO its
Customers, Attention: Fund Administration, 4800 Deer Lake Drive East, 3rd
Floor, Jacksonville, Florida 32246-6484 was the owner of approximately 7.44%
and 14.13% of Class A and B Shares of the Fund, respectively. Painewebber,
Incorporated, FBO Granada Insurance Company, 3911 SW 67th Avenue, Miami,
Florida 33155-3710 was the owner of approximately 7.97% of outstanding Class B
shares of the Fund. As of July 31, 1997, 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 5.72% of the
outstanding Class C shares of the Fund. As of July 31, 1997, 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
15.12% of the outstanding Class C shares of the Fund. As of July 31, 1997,
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 13.72% 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 an indirect 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"). Under the
Advisory Agreement, the Adviser provides the Fund with overall investment
advisory services. Subject to such policies as the Trustees may determine, the
Adviser makes investment decisions for the Fund. For these services and
facilities, the Adviser receives a management fee computed and paid monthly at
the rate of 0.40% per annum of the Fund's average daily net assets. Prior to
July 1, 1997, the Adviser was entitled to receive a management fee computed
and paid monthly at the rate of 0.40% per annum of the Fund's average daily
net assets. Effective July 1, 1997, the Adviser reduced the management fee to
0.30% per annum of average net assets. This fee reduction may be revised or
rescinded without notice to shareholders by the Adviser with the consent of
the Fund's Board of Trustees.
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. 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, 1997, see "Financial Statements -- Statement of Operations" in the Fund's
Annual Report to shareholders.
For the fiscal year ended on April 30, 1997, MFS received management fees in
the amount of $226,043, (equivalent on an annualized basis to 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).
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).
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, 1998, and will
continue in effect thereafter only if such continuance is specifically
approved at least annually by the Board of Trustees or by vote of 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.
ADMINISTRATOR
MFS provides the Fund with certain financial, legal, compliance, shareholder
communications and other administrative services pursuant to a Master
Administrative Services Agreement dated March 1, 1997. Under this Agreement,
the Fund pays MFS an administrative fee up to 0.015% per annum of the Fund's
average daily net assets. This fee reimburses MFS for a portion of the costs
it incurs to provide such services. For the period ended April 30, 1997, MFS
received $1,298 under the Agreement, equivalent to 0.0023% of the Fund's
average daily net assets.
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, as amended
(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 the Fund at an effective annual rate of 0.13%.
In addition, the Shareholder Servicing Agent will be reimbursed by the Fund
for certain expenses incurred by the Shareholder Servicing Agent on behalf of
the Fund. 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, 1997, MFD received sales charges
of $5,862 and dealers received sales charges of $67,465 (as their concession
on gross sales charges of $73,327) for selling Class A shares of the Fund; the
Fund received $9,513,447 representing the aggregate net asset value of such
shares. 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.
For the fiscal years ended April 30, 1995, 1996 and 1997, the contingent
deferred sales charge ("CDSC") imposed on redemption of Class A shares was
$7,604, $112 and $121, respectively. For the year ended April 30, 1995, 1996
and 1997, the CDSC imposed on redemption of Class B shares was $40,063,
$33,644, and $35,651, respectively. For the fiscal years ended April 30, 1996
and 1997, the contingent deferred sales charge ("CDSC") imposed on redemption
of Class C shares was approximately $10 and $1,032, respectively.
The Distribution Agreement will remain in effect until August 1, 1998 and will
continue in effect thereafter only if such continuance is specifically
approved at least annually by the Board of Trustees or by vote of a majority
of the 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 Conduct Rules of the
NASD and such other policies as the Trustees may determine, the Adviser may
consider sales of shares of the Fund and of the other investment company
clients of MFD as a factor in the selection of broker-dealers to execute the
Fund's portfolio transactions.
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 Class A, B and C
shares of that shareholder in the MFS Funds or MFS Fixed Fund reaches a
discount level. See "Purchases" in the Prospectus for the sales charges on
quantity discounts. 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.
SUBSEQUENT INVESTMENT BY TELEPHONE: Each shareholder may purchase additional
shares of any MFS Fund by telephoning the Shareholder Servicing Agent toll-
free at (800) 225-2606. The minimum purchase amount is $50 and the maximum
purchase amount is $100,000. Shareholders wishing to avail themselves of this
telephone purchase privilege must so elect on their Account Application and
designate thereon a bank and account number from which purchases will be made.
If a telephone purchase request is received by the Shareholder Servicing Agent
on any business day prior to the close of regular trading on the Exchange
(generally, 4:00 p.m., Eastern time), the purchase will occur at the closing
net asset value of the shares purchased on that day. The Shareholder Servicing
Agent may be liable for any losses resulting from unauthorized telephone
transactions if it does not follow reasonable procedures designed to verify
the identity of the caller. The Shareholder Servicing Agent will request
personal or other information from the caller, and will normally also record
calls. Shareholders should verify the accuracy of confirmation statements
immediately after their receipt.
DISTRIBUTION INVESTMENT PROGRAM: Distributions of dividends and capital
gains made by the Fund with respect to a particular class of shares may be
automatically invested in 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 six different funds effective on the seventh day of each
month or of every third month, depending whether monthly or quarterly
exchanges are elected by the shareholder. If the seventh day of the month is
not a business day, the transaction will be processed on the next business
day. Generally, the initial exchange will occur after receipt and processing
by the Shareholder Servicing Agent of an application in good order. Exchanges
will continue to be made from a shareholder's account in 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 and if the purchaser is eligible to purchase
the class of shares) 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 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
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 taxes,
on the non-exempt interest dividends and capital gain distributions they
receive from the Fund; however, the Fund does not expect that the non-tax-
exempt portion of its net investment income, if any, will be substantial. That
portion of net investment income distributions not designated as an exempt-
interest dividend and any distributions from net short-term capital gains is
taxable to shareholders as ordinary income for federal income tax purposes
whether the distributions are paid in cash or reinvested in additional shares.
Because the Fund expects to earn primarily tax-exempt interest income, it is
expected that no Fund dividends will qualify for the dividends received
deduction for corporations. Distributions of net capital gains (i.e. the
excess of net long-term capital gains over net short-term capital losses),
whether paid in cash or in additional shares, are taxable to shareholders as
long-term capital gains for federal income tax purposes without regard to the
length of time the shareholders have held their shares. It is uncertain at
this time whether all or any part of such capital gains will be eligible to be
taxed at a maximum rate below 28%. Any Fund dividend that is declared in
October, November, or December of any calendar year, that is payable to
shareholders of record in such a month, and that is paid the following January
will be treated as if received by the shareholders on December 31 of the year
in which the dividend is declared. The Fund will notify shareholders regarding
the federal tax status of its distributions after the end of each calendar
year.
Any Fund distribution of net capital gains or net short-term capital gains
will have the effect of reducing the per share net asset value of shares in
the Fund by the amount of the distribution. Shareholders purchasing shares
shortly before the record date of any such distribution may thus pay the full
price for the shares and then effectively receive a portion of the purchase
price back as a taxable distribution.
Interest on indebtedness incurred by shareholders to purchase or carry shares
of the Fund will not be deductible for federal income tax purposes. Exempt-
interest dividends are taken into account in calculating the amount of social
security and railroad retirement benefits that may be subject to federal
income tax. Entities or persons who are "substantial users" (or persons
related to "substantial users") of facilities financed by certain private
activity bonds should consult their tax advisers before purchasing shares of
the Fund.
In general, any gain or loss realized upon a taxable disposition of shares of
the Fund by a shareholder that holds such shares as a capital asset will be
treated as long-term capital gain or loss if the shares have been held for
more than twelve months and otherwise as short-term capital gain or loss; a
long-term capital gain will be eligible for reduced tax rates if the shares
were held for more than 18 months. However, any loss realized upon a
disposition of shares in the Fund held for six months or less will be
disallowed to the extent of any exempt-interest dividends received with
respect to those shares. If not disallowed, any such loss will be treated as a
long-term capital loss to the extent of any distributions of net capital gain
made with respect to those shares. Any loss realized upon a disposition of
shares may also be disallowed under rules relating to wash sales. Gain may be
increased (or loss reduced) upon a redemption of Class A shares of the Fund
within 90 days after their purchase followed by any purchase (including
purchases by exchange or by reinvestment) without payment of an additional
sales charge of Class A shares of the Fund or of another MFS Fund (or any
other shares of an MFS Fund generally sold subject to a sales charge).
The Fund's current dividend and accounting policies will affect the amount,
timing, and character of distributions to shareholders. Any investment in zero
coupon bonds and certain securities purchased at a market discount will cause
the Fund to recognize income prior to the receipt of cash payments with
respect to those securities. In order to distribute this income and avoid a
tax on the Fund, the Fund may be required to liquidate portfolio securities
that it might otherwise have continued to hold, potentially resulting in
additional taxable gain or loss to the Fund.
The Fund's transactions in options and Futures Contracts will be subject to
special tax rules that may affect the amount, timing, and character of Fund
income and distributions to shareholders. For example, certain positions held
by the Fund on the last business day of each taxable year will be marked to
market (i.e., treated as if closed out) on that day, and any gain or loss
associated with the positions will be treated as 60% long-term and 40% short-
term capital gain or loss. Certain positions held by the Fund that
substantially diminish its risk of loss with respect to other positions in its
portfolio may constitute "straddles," and may be subject to special tax rules
that would cause deferral of Fund losses, adjustments in the holding periods
of Fund securities, and conversion of short-term into long-term capital
losses. Certain tax elections exist for straddles that may alter the effects
of these rules. The Fund will limit its activities in options and Futures
Contracts to the extent necessary to meet the requirements of Subchapter M of
the Code.
Dividends and certain other payments to persons who are not citizens or
residents of the United States or U.S. entities ("Non-U.S. Persons") are
generally subject to U.S. tax withholding at the 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 the rate of 31% on taxable dividends and redemption proceeds paid to any
shareholder (including a Non-U.S. Person) who does not furnish to the Fund
certain information and certifications or who is otherwise subject to backup
withholding. Backup withholding, will not however, be applied to payments that
have been subject to 30% withholding.
As long as it qualifies as a regulated investment company under the Code, the
Fund will not be required to pay Massachusetts income or excise taxes.
The exemption of exempt-interest dividends for federal income tax purposes
does not necessarily result in exemption under the 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. Each shareholder is advised to
consult his own tax adviser regarding the exemption of exempt-interest
dividends under applicable state and local law.
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, Martin Luther King 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.
PERFORMANCE INFORMATION
TOTAL RATE OF RETURN: The Fund will calculate its total rate of return for
each class of shares for certain periods by determining the average annual
compounded rates of return over those periods that would cause an investment
of $1,000 (made with all dividends and distributions reinvested and reflecting
the CDSC or the maximum public offering price) to reach the value of that
investment at the end of the periods. The Fund may also calculate (i) a total
return, which is not reduced by the CDSC (4% maximum for Class B shares and 1%
maximum for Class C shares), and therefore, may result in a higher rate of
return (ii) a total rate of return assuming an initial account value of
$1,000, which will result in a higher rate of return 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 Fund offers multiple classes of shares which were initially offered for
sale to the public on different dates. The calculation of total rate of return
for a class of shares which initially was offered for sale to the public
subsequent to another class of shares of the Fund is based both on (i) the
performance of the Fund's newer class from the date it initially was offered
for sale to the public and (ii) the performance of the Fund's oldest class
from the date it initially was offered for sale to the public up to the date
that the newer class initially was offered for sale to the public.
As discussed in the Prospectus, the sales charges, expenses and expense
ratios, and therefore the performance, of the Fund's classes of shares differ.
In calculating total rate of return for a newer class of shares in accordance
with certain formulas required by the SEC, the performance will be adjusted to
take into account the fact that the newer class is subject to a different
sales charge than the oldest class (e.g., if the newer class is Class A
shares, the total rate of return quoted will reflect the deduction of the
initial sales charge applicable to Class A shares; if the newer class is Class
B shares, the total rate of return quoted will reflect the deduction of the
CDSC applicable to Class B shares). However, the performance will not be
adjusted to take into account the fact that the newer class of shares bears
different class specific expenses than the oldest shares (e.g., Rule 12b-1
fees). Therefore, the total rate of return quoted for a newer class of shares
will differ from the return that would be quoted had the newer class of shares
been outstanding for the entire period over which the calculation is based
(i.e., the total rate of return quoted for the newer class will be higher than
the return that would have been quoted had the newer class of shares been
outstanding for the entire period over which the calculation is based if the
class specific expenses for the newer class are higher than the class specific
expenses of the oldest class, and the total rate of return quoted for the
newer class will be lower than the return that would be quoted had the newer
class of shares been outstanding for this entire period if the class specific
expenses for the newer class are lower than the class specific expenses of the
oldest class).
Total rate of return quotations for each class are presented in Appendix B
attached hereto under the heading "Performance Quotations."
PERFORMANCE RESULTS: The performance results for Class A shares presented in
Appendix B attached hereto under the heading "Performance Results" assume an
initial investment of $10,000 in Class A shares, and cover the period from
March 17, 1992 to December 31, 1996. 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).
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 assumes no CDSC is paid. Yield quotations for each class of
shares is presented in Appendix B attached hereto under the heading
"Performance Quotations."
TAX-EQUIVALENT YIELD: The Fund's tax-equivalent yield 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. Tax-equivalent yield quotations for each class
of shares are presented in Appendix B attached hereto under the heading
"Performance Quotations."
CURRENT DISTRIBUTION RATE: Yield, which is calculated according to a formula
prescribed by the 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%.
Current distribution rate quotations for each class of shares are presented in
Appendix B attached hereto under the heading "Performance Quotations."
From time to time, the Fund may 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 Securities Corporation, CDA
Wiesenberger, Shearson Lehman and Salomon Bros. Indices, Ibbotson, Business
Week, Lowry Associates, Media General, Investment Company Data, The New York
Times, Your Money, Strangers Investment Advisor, Financial Planning on Wall
Street, Standard and Poor's, Individual Investor, The 100 Best Mutual Funds
You Can Buy, by Gordon K. Williamson, Consumer Price Index, and Sanford C.
Bernstein & Co. Fund performance may also be compared to the performance of
other mutual funds tracked by financial or business publications or
periodicals.
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 PLAN
The Trustees have adopted a Distribution Plan for Class A, Class B and Class C
shares (the "Distribution Plan") pursuant to Section 12(b) of the 1940 Act and
Rule 12b-1 thereunder (the "Rule") after having concluded that there is a
reasonable likelihood that the Distribution Plan would benefit the Fund and
each respective class of shareholders. The Provisions of the Distribution Plan
are severable with respect to each class of shares offered by the Fund. The
Distribution Plan is designed to promote sales, thereby increasing the net
assets of the Fund. Such an increase may reduce the Fund's expense ratio to
the extent 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 Plan is described in the Prospectus under the caption
"Distribution Plan," which is incorporated herein by reference. The following
information supplements this Prospectus discussion.
SERVICE FEES: With respect to Class A shares, no service fees will be paid:
(i) to any dealer who is the holder or dealer of record for investors who own
Class A shares having an aggregate net asset value less than $750,000, or such
other amount as may be determined from time to time by MFD (MFD, however, may
waive this minimum amount requirement from time to time); or (ii) to any
insurance company which has entered into an agreement with the Fund and MFD
that permits such insurance company to purchase Class A shares from the Fund
at their net asset value in connection with annuity agreements issued in
connection with the insurance company's separate accounts. Dealers may from
time to time be required to meet certain other criteria in order to receive
service fees.
With respect to Class B Shares, except in the case of the first year service
fee, no service fees will be paid to any securities dealer who is the holder
or dealer of record for investors who own Class B shares having an aggregate
net asset value of less than $750,000 or such other amount as may be
determined by MFD from time to time. MFD, however, may waive this minimum
amount requirement from time to time. Dealers may from time to time be
required to meet certain other criteria in order to receive service fees.
MFD or its affiliates shall be entitled to receive any service fee payable
under the Distribution Plan for which there is no dealer of record or for
which qualification standards have not been met as partial consideration for
personal services and/or account maintenance services performed by MFD or its
affiliates for shareholder accounts.
DISTRIBUTION FEES: The purpose of distribution payments to MFD under the
Distribution Plan is to compensate MFD for its distribution services to the
Fund. MFD pays commissions to dealers as well as expenses of printing
prospectuses and reports used for sales purposes, expenses with respect to the
preparation and printing of sales literature and other distribution related
expenses, including, without limitation, the cost necessary to provide
distribution-related services, or personnel, travel, office expenses and
equipment.
DISTRIBUTION AND SERVICE FEES PAID DURING THE FUND'S LAST FISCAL YEAR: During
the fiscal year ended April 30, 1997, 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
CLASSES OF SHARES BY FUND BY MFD BY DEALERS
- - -------- ------ ------ ------
Class A Shares $69,278 $15,260 $54,018
Class B Shares $66,548 $54,962 $11,586
Class C Shares $32,339 $ 56 $32,283
GENERAL: The Distribution Plan will remain in effect until August 1, 1998, and
will continue in effect thereafter only if such continuance is specifically
approved at least annually by vote of both the Trustees and a majority of the
Trustees who are not "interested persons" or financially interested parties to
such Plan ("Distribution Plan Qualified Trustees"). The Distribution Plan 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. The Distribution Plan may be
terminated at any time by vote of a majority of the Distribution Plan
Qualified Trustees or by vote of the holders of a majority of the respective
class of the Fund's shares (as defined in "Investment Restrictions"). All
agreements relating to the Distribution Plan entered into between the Fund or
MFD and other organizations must be approved by the Board of Trustees,
including a majority of the Distribution Plan Qualified Trustees. Agreements
under the Distribution Plan must be in writing, will be terminated
automatically if assigned, and may be terminated at any time without payment
of any penalty, by vote of a majority of the Distribution Plan Qualified
Trustees or by vote of the holders of a majority of the respective class of
the Fund's shares. The Distribution Plan may not be amended to increase
materially the amount of permitted distribution expenses without the approval
of a majority of the respective class of the Fund's shares (as defined in
"Investment Restrictions") or may not be materially amended in any case
without a vote of the Trustees and a majority of the Distribution Plan
Qualified Trustees. The selection and nomination of Distribution Plan
Qualified Trustees shall be committed to the discretion of the non-interested
Trustees then in office. No Trustee who is not an "interested person" has any
financial interest in the Distribution Plan or in any related agreement.
9. DESCRIPTION OF SHARES, VOTING RIGHTS AND
LIABILITIES
The Declaration of Trust permits the Trustees to issue an unlimited number of
full and fractional Shares of Beneficial Interest (without par value) of one
or more separate series and to divide or combine the shares 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 four
classes of shares of the Fund, Class A, Class B and Class C shares as well as
Class I shares for two of the Trust's other Series. 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, 1997, the Statement of Assets and
Liabilities at April 30, 1997, the Statement of Operations for the year ended
April 30, 1997, the Statement of Changes in Net Assets for the two years ended
April 30, 1997, 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
PERFORMANCE INFORMATION
The performance results and quotations below should not be considered as
representative of the performance of the Fund in the future since the net
asset value and public offering price of shares of the Fund will vary. See
"Determination of Net Asset Value and Performance" in the SAI.
<TABLE>
<CAPTION>
PERFORMANCE RESULTS -- CLASS A SHARES
- - ---------------------------------------------------------------------------------------------------------------------------------
VALUE OF VALUE OF VALUE OF
YEAR ENDED INITIAL $10,000 CAP. GAIN REINVESTED TOTAL
DECEMBER 31 INVESTMENT DISTRIBUTIONS DIVIDENDS VALUE
------ ------- ------ ----- --
<S> <C> <C> <C> <C>
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
1996 10,079 17 2,156 12,252
- - ------------
</TABLE>
*From the period of commencement of investment of operations March 17, 1992 to
December 31, 1992.
Explanatory Notes: The results assume that the initial investment in Class A
shares was reduced by the current maximum applicable sales charge. No
adjustment has been made for income taxes, if any, payable by shareholders.
PERFORMANCE QUOTATIONS
All performance quotations are as of April 30, 1997.
<TABLE>
<CAPTION>
TAX
EQUIVALENT
ACTUAL TAX 30-DAY YIELD
ACTUAL EQUIVALENT 30-DAY (WITHOUT
30-DAY 30-DAY YIELD INCLUDING ANY
YIELD YIELD ANY WAIVERS WAIVERS
(INCLUDING (WITHOUT TAX BRACKETS: TAX BRACKETS: CURRENT
LIFE OF ANY ANY ------------ ----------- DISTRIBUTION
1 YEAR 5 YEAR FUND WAIVERS) WAIVERS) 28% 31% 28% 31% RATE
------ ------ ------- --------- ------- ----- ----- ----- ----- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Class A Shares with sales charge . 0.96% 4.27% 4.16%(1) 3.68% 3.64% 5.11% 5.33% 5.06% 5.28% 3.77%
Class A Shares without sales charge 3.51% 4.80% 4.67%(1) N/A N/A N/A N/A N/A N/A N/A
Class B Shares with CDSC ......... -1.27% 3.82%(2) 3.88%(2) N/A N/A N/A N/A N/A N/A N/A
Class B Shares without CDSC ...... 2.71% 4.16%(2) 4.05%(2) 3.00% 2.96% 4.17% 4.35% 4.11% 4.29% 3.09%
Class C Shares with CDSC ......... 1.64% 4.31%(3) 4.20%(3) N/A N/A N/A N/A N/A N/A N/A
Class C Shares without CDSC ...... 2.64%(3) 4.31%(3) 4.20%(3) 2.92% 2.88% 4.06% 4.23% 4.00% 4.17% 3.02%
</TABLE>
(1) From the initial public offering date of the Fund on March 17, 1992.
(2) Class B share performance includes the performance of the Fund's Class A
shares for periods prior to the commencement of offering of Class B shares
on September 7, 1993. Sales charges, expenses and expense ratios, and
therefore a performance, for Class A and Class B shares differ. Class B
share performance has been adjusted to reflect that Class B shares
generally are subject to a CDSC (unless the performance quotation does not
give effect to the CDSC) whereas Class A shares generally are subject to
an initial sales charge. Class B share performance has not, however, been
adjusted to reflect differences in operating expenses (e.g., Rule 12b-1
fees), which generally are lower for Class A shares.
(3) Class C share performance includes the performance of the Fund's Class A
shares for periods prior to the commencement of offering of Class C shares
on July 1, 1994. Sales charges, expenses and expense ratios, and therefore
performance, for Class A and Class C shares differ. Class C share
performance has been adjusted to reflect that Class C shares generally are
subject to a CDSC (unless the performance quotation does not give effect
to the CDSC) whereas Class A shares generally are subject to an initial
sales charge. Class C share performance has not, however, been adjusted to
reflect differences in operating expenses (e.g., Rule 12b-1 fees), which
generally are lower for Class A shares.
* Total rate of return figures would have been lower if an expense limitation
was not in place.
<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 ACCOUNTANTS
Deloitte & Touche LLP
125 Summer Street, Boston, MA 02110
MFS(R)
MUNICIPAL LIMITED
MATURITY FUND
500 BOYLSTON STREET
BOSTON, MA 02116
[LOGO] MFS
INVESTMENT MANAGEMENT
WE INVENTED THE MUTUAL FUND(SM)
MML-13-9/96/500 [37/237/337]
<PAGE> 1
[MFS LOGO] Annual Report
INVESTMENT MANAGEMENT for Year Ended
April 30, 1997
MFS(R) MUNICIPAL LIMITED MATURITY FUND
[ARTWORK]
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<S> <C>
Letter from the Chairman........................................................ 1
A Discussion with the Portfolio Manager......................................... 3
Portfolio Manager's Profile..................................................... 5
Fund Facts...................................................................... 6
Performance Summary............................................................. 6
Tax Form Summary................................................................ 8
Portfolio of Investments........................................................ 9
Financial Statements............................................................ 12
Notes to Financial Statements................................................... 18
Independent Auditors' Report.................................................... 24
Trustees and Officers........................................................... 25
</TABLE>
HIGHLIGHTS
- FOR THE 12 MONTHS ENDED APRIL 30, 1997, CLASS A SHARES OF THE FUND
PROVIDED A TOTAL RETURN AT NET ASSET VALUE OF 3.51%, CLASS B SHARES
2.71%, AND CLASS C SHARES 2.64%.
- THE FIXED-INCOME MARKETS WERE VOLATILE OVER THE PAST YEAR AS
INVESTORS' PERCEPTIONS ABOUT THE STRENGTH OF THE ECONOMY, THE
EXPECTATIONS FOR INFLATION, AND THE LIKELY COURSE OF FEDERAL RESERVE
BOARD MONETARY POLICY CHANGED FREQUENTLY AND, OFTEN, DRAMATICALLY.
- THE ALREADY NARROW YIELD DIFFERENTIAL BETWEEN HIGH- AND LOWER-RATED
INVESTMENT-GRADE BONDS CONTINUED TO DECLINE, AS THE STRONG NATIONAL
ECONOMY AND CONSERVATIVE FISCAL PRACTICES PUT MUNICIPAL CREDITS ON
THEIR STRONGEST FINANCIAL FOOTING IN MANY YEARS.
- BOND INSURANCE NOW ABSORBS ABOUT HALF OF THE NEW-ISSUE CALENDAR AS
WELL AS MUCH OF THE SECONDARY MARKET, CONTRIBUTING TO THE SCARCITY OF
HIGHER-YIELDING BONDS AND THE HISTORICALLY NARROW YIELD SPREADS
BETWEEN QUALITIES OF BONDS.
<PAGE> 3
LETTER FROM THE CHAIRMAN
Dear Shareholders:
After more than six years of expansion, the U.S.
economy is experiencing another year of growth
in 1997, although a few signs point to the
possibility of a modest rise in inflation during
[PHOTO] the year. On the positive side, the pattern of
moderate growth and inflation set over the past
few years now seems fairly well entrenched in
the economy and, short of a major international
A. Keith Brodkin or domestic crisis, appears to have enough
momentum to remain on track for some time. Also,
gains in such important sectors as housing, automobiles, industrial production,
and exports indicate a fair amount of underlying strength in the economy. Some
of that strength was seen in the first quarter, when the U.S. economy grew at an
annualized rate of 5.6% (based on preliminary estimates), a pace that would be
inflationary in the unlikely event that it were to continue. The ongoing
tightness in the labor market could also add some inflationary pressures to the
economy. At the same time, there is some reason for caution as a result of the
continuing high level of consumer debt and rising personal bankruptcies. Given
these somewhat conflicting indicators, we expect real (inflation-adjusted)
growth to revolve around 2% in 1997, with the strength of the first quarter
moderating as we move through the balance of the year.
In the bond markets, conflicting signals over the strength of the economy
have also created near-term volatility, and the Federal Reserve Board has begun
taking measured steps to control inflation by raising short-term interest rates.
Although we do not expect a repeat of the rapid growth in the first quarter, we
would expect the Fed to raise interest rates at least one more time in reaction
to the economic momentum that was built up during the period. While inflationary
forces largely remained in check in 1996, the continued strength in the labor
market suggests that a pickup in inflation is still possible. At the same time,
the U.S. budget deficit continues to decline and, as
1
<PAGE> 4
LETTER FROM THE CHAIRMAN - continued
a percentage of gross domestic product, is now approaching 1%, which we consider
a positive development for the bond markets. Although interest rates may remain
volatile over the coming months, we believe that, at current levels,
fixed-income markets remain equitably valued.
We appreciate your support and welcome any questions or comments you may
have.
Respectfully,
/S/ A. Keith Brodkin
A. Keith Brodkin
Chairman and President
May 14, 1997
2
<PAGE> 5
A DISCUSSION WITH THE PORTFOLIO MANAGER
For the 12 months ended April 30, 1997, Class A
shares of the Fund provided a total return of
3.51%, Class B shares 2.71%, and Class C shares
2.64%. These returns assume the reinvestment of
[PHOTO] distributions but exclude the effects of any
sales charges and compare to a 4.01% average
return for short/intermediate municipal bond
funds as compiled by Lipper Analytical Services,
Robert A. Dennis Inc., an independent firm that reports mutual
fund performance. The Fund's returns also
trailed the 4.60% and 4.66% 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. While we shortened the Fund's average maturity in recent months
in light of the volatile, generally rising course of interest rates, performance
might have been better relative to the funds in its Lipper universe if we had
shortened maturities somewhat sooner.
Q. In general, how would you describe the fixed-income environment over the past
year?
A. The fixed-income markets were volatile over the past year as investors'
perceptions about the strength of the economy, the expectations for inflation,
and the likely course of Federal Reserve Board monetary policy changed
frequently and, often, dramatically.
Q. And what about the municipal market? How would you describe the environment
there?
A. After the dissipation of the flat-tax scare that caused the market to cheapen
during the spring of 1996, the municipal market -- while reflecting the overall
volatility of the bond market -- has performed very well versus comparable
taxable-bond markets, as supply has remained moderate and demand has been
consistent. Nevertheless, the general trend of short- to intermediate-term
maturities has been toward higher rates, and three- and five-year high-grade
municipal bond interest rates have risen by 32 and 35 basis points (0.32% and
0.35%), respectively, over the past 12 months.
Q. Have there been any major developments in this market over the past year?
A. The already narrow yield differential between high- and lower-rated
investment-grade bonds declined further, as the strong national economy and
conservative fiscal practices put municipal credits on their strongest financial
3
<PAGE> 6
A DISCUSSION WITH THE PORTFOLIO MANAGER - continued
footing in many years. Nevertheless, there were a number of downgrades among
credits, particularly in the electric utility sector, in which competitiveness
has been threatened by deregulation trends.
Q. How has the rise in the use of bond insurance affected the market in general
and the Fund in particular?
A. It is truly startling that bond insurance now absorbs about half of the new-
issue calendar as well as much of the secondary market. This has clearly
contributed to the scarcity of higher-yielding bonds and to the historically
narrow yield spreads between qualities in the market.
Q. The credit quality of the Fund is fairly high, with over 70% of assets in
securities rated "AAA" or "AA." Is that unusually high for this Fund, or is it a
reflection of your outlook for the market?
A. It is not a reflection of our market outlook, but rather of the very narrow
yield spreads in the market and the fact that about half of available bonds now
carry bond insurance, giving them "Aaa" and "AAA" ratings from Moody's Investors
Service and Standard & Poor's, respectively. If and when credit spreads begin to
widen, we believe our experienced credit research staff will give us a clear
advantage in finding attractive investment opportunities.
Q. At the same time, the Fund's average maturity is under three years, which is
below its historical average. Why is that?
A. We have maintained a relatively short average maturity to help protect
shareholders' principal during this period of volatile interest rates.
Q. Do you foresee any reasons you might change the average maturity in the next
several months?
A. We will consider lengthening the average maturity when we feel confident that
the Federal Reserve has concluded its tightening cycle; that is, when it becomes
evident that economic growth has begun to slow in response to the recent rise in
interest rates.
Q. In your last report, you said there were few major changes in the trading
relationships among sectors, regions, rating categories, or individual credits.
Is this still the case, or have there been some changes in any of these areas?
A. There still have been no major changes but, as previously mentioned,
lower-investment-grade bonds, with "Baa" or "BBB" ratings, have generally been
the best performers since their yield advantage over high-grade bonds has
continued to tighten.
4
<PAGE> 7
A DISCUSSION WITH THE PORTFOLIO MANAGER - continued
Q. If there haven't been any changes, does this mean performance is still
closely tied to maturity selection, and have you carried out this strategy in
the past year?
A. Yes, maturity selection is still key. As the economy appeared to be in a
period of healthy growth and some wage pressures began to be reported, we
shortened the Fund's maturity in an effort to protect it against continued
market volatility and the trend toward higher interest rates.
/S/ Robert A. Dennis
Robert A. Dennis
Portfolio Manager
PORTFOLIO MANAGER'S PROFILE
ROBERT A. DENNIS HAS BEEN PORTFOLIO MANAGER OF MFS(R) MUNICIPAL LIMITED
MATURITY FUND SINCE 1992. MR. DENNIS JOINED MFS IN 1980 AND WAS NAMED
ASSISTANT VICE PRESIDENT - INVESTMENTS IN 1981, VICE
PRESIDENT - INVESTMENTS IN 1983, AND SENIOR VICE PRESIDENT IN 1986. HE
IS A GRADUATE OF THE MASSACHUSETTS INSTITUTE OF TECHNOLOGY AND OF ITS
SLOAN SCHOOL OF MANAGEMENT.
5
<PAGE> 8
<TABLE>
<S> <C>
FUND FACTS
STRATEGY: 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.
COMMENCEMENT OF
INVESTMENT
OPERATIONS: CLASS A: MARCH 17, 1992
CLASS B: SEPTEMBER 7, 1993
CLASS C: JULY 1, 1994
SIZE: $50.8 MILLION NET ASSETS AS OF APRIL 30, 1997
</TABLE>
PERFORMANCE SUMMARY
The information below illustrates the historical performance of MFS Municipal
Limited Maturity Fund - Class A shares in comparison to various market
indicators. Class A share performance results reflect the deduction of the 2.50%
maximum sales charge; benchmark comparisons are unmanaged and do not reflect any
fees or expenses. The performance of other share classes will be greater than or
less than the line shown, based on the differences in loads and fees paid by
shareholders investing in the different classes. It is not possible to invest in
an index.
GROWTH OF A HYPOTHETICAL $10,000 INVESTMENT
(For the period from April 1, 1992, through April 30, 1997)
[PERFORMANCE GRAPH]
6
<PAGE> 9
PERFORMANCE SUMMARY - continued
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS Life of
AS OF APRIL 30, 1997 1 Year 3 Years 5 Years Fund*
- - ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
MFS Municipal Limited Maturity Fund (Class A)
including 2.50% sales charge (SEC Results) +0.96% +3.19% +4.27% +4.16%
- - ---------------------------------------------------------------------------------------
MFS Municipal Limited Maturity Fund (Class A)
at net asset value +3.51% +4.06% +4.80% +4.67%
- - ---------------------------------------------------------------------------------------
MFS Municipal Limited Maturity Fund (Class B)
with CDSC (SEC Results) -1.27% +2.29% +3.82% +3.88%
- - ---------------------------------------------------------------------------------------
MFS Municipal Limited Maturity Fund (Class B)
at net asset value +2.71% +3.24% +4.16% +4.05%
- - ---------------------------------------------------------------------------------------
MFS Municipal Limited Maturity Fund (Class C)
with CDSC (SEC Results) +1.64% +3.25% +4.31% +4.20%
- - ---------------------------------------------------------------------------------------
MFS Municipal Limited Maturity Fund (Class C)
at net asset value +2.64% +3.25% +4.31% +4.20%
- - ---------------------------------------------------------------------------------------
Average short/intermediate municipal bond
index** +4.01% +4.51% +5.02% +5.00%
- - ---------------------------------------------------------------------------------------
Lehman Brothers Municipal Bond Three-Year
Index++ +4.60% +5.16% +5.26% +5.24%
- - ---------------------------------------------------------------------------------------
Lehman Brothers Municipal Bond Five-Year
Index++ +4.66% +5.66% +5.99% +5.96%
- - ---------------------------------------------------------------------------------------
Consumer Price Index+ +2.80% +2.89% +2.85% +2.91%
- - ---------------------------------------------------------------------------------------
</TABLE>
*For the period from the commencement of the Fund's investment operations,
March 17, 1992, to April 30, 1997.
**Source: Lipper Analytical Services.
+The Consumer Price Index is published by the U.S. Bureau of Labor Statistics
and measures the cost of living (inflation).
++Source: CDA/Wiesenberger.
All results are historical and assume the reinvestment of dividends and capital
gains. Investment return and principal value will fluctuate, and shares, when
redeemed, may be worth more or less than their original cost. Past performance
is no guarantee of future results.
Class A share SEC results include the 2.50% maximum sales charge. Class B share
SEC results reflect the applicable contingent deferred sales charge (CDSC) which
declines over six years as follows: 4%, 4%, 3%, 3%, 2%, 1%, 0%. Class C shares
have no initial sales charge but, along with Class B shares, have higher annual
fees and expenses than Class A shares. Class C share purchases are subject to a
1% CDSC if redeemed within 12 months of purchase.
Class B and Class C share SEC results include the performance and the operating
expenses (e.g., Rule 12b-1 fees) of the Fund's Class A shares for periods prior
to the commencement of offering of Class B and Class C shares. Because operating
expenses attributable to Class B and Class C shares are higher than those of
Class A shares, Class B and Class C share performance generally would have been
lower than Class A share performance. The Class A
7
<PAGE> 10
PERFORMANCE SUMMARY - continued
share performance included in the Class B and Class C share SEC performance has
been adjusted to reflect the CDSC generally applicable to Class B and Class C
shares rather than the sales charge generally applicable to Class A shares.
Performance results reflect any applicable expense subsidies and waivers,
without which the performance results would have been less favorable. Current
subsidies and waivers may be discontinued at any time.
TAX FORM SUMMARY
IN JANUARY 1997, SHAREHOLDERS WERE MAILED A TAX FORM SUMMARY REPORTING
THE FEDERAL TAX STATUS OF ALL DISTRIBUTIONS PAID DURING THE CALENDAR
YEAR 1996.
EXEMPT-INTEREST DIVIDENDS
FOR FEDERAL INCOME TAX PURPOSES, 100% OF THE TOTAL DIVIDENDS PAID BY THE
FUND FROM NET INVESTMENT INCOME DURING THE YEAR ENDED APRIL 30, 1997, IS
DESIGNATED AS AN EXEMPT-INTEREST DIVIDEND.
8
<PAGE> 11
PORTFOLIO OF INVESTMENTS - April 30, 1997
Municipal Bonds - 96.7%
<TABLE>
<CAPTION>
=========================================================================================
Principal Amount
Issuer (000 Omitted) Value
- - -----------------------------------------------------------------------------------------
<S> <C> <C>
General Obligation - 22.8%
Baltimore County, MD, Metropolitan District, 6.5s, 1997 $ 500 $ 502,035
Bridgeport, CT, AMBAC, 5.25s, 1999 1,155 1,175,351
Commonwealth of Massachusetts, 7s, 1999 1,000 1,050,940
Commonwealth of Puerto Rico, 5.5s, 2001 500 509,930
Cook County, IL, High School District No. 205 (Thornton
Township), FGIC, 5.4s, 1997 450 450,437
District of Columbia, AMBAC, 7.25s, 1998sec.sec. 500 515,110
Government of Guam, 5.75s, 1999 500 506,110
Indianapolis, IN, Local Public Improvement Bond Bank,
6.25s, 2001 1,000 1,047,320
Lawrence, MA, AMBAC, 9.7s, 2001 1,000 1,166,880
Milwaukee, WI, Metropolitan Sewage District, 6.7s, 2001 500 536,040
New York City, NY, 6s, 1999 100 102,473
New York City, NY, 6s, 1999 250 254,712
New York City, NY, 6.125s, 2001 600 626,550
New York City, NY, 5.7s, 2002 500 512,505
New York City, NY, 5.3s, 2003 500 497,495
North Slope Borough, AK, MBIA, 0s, 1999 375 339,596
State of Louisiana, FGIC, 6s, 2000 500 520,185
State of Pennsylvania, FGIC, 5.25s, 1999 500 508,245
State of Virginia, 5.375s, 1999 750 765,945
----------
$11,587,859
- - -----------------------------------------------------------------------------------------
State and Local Appropriation - 9.8%
Michigan Building Authority Rev., 6.2s, 2002 $1,000 $ 1,060,960
New York Dormitory Authority Rev. (City University),
5s, 2000 500 501,410
New York Dormitory Authority Rev. (State University),
4.9s, 2000 500 500,545
New York Medical Care Facilities Finance Agency Rev.,
5.9s, 2000 995 1,028,959
New York Urban Development (Correctional Facilities),
5.5s, 2001 375 380,415
New York Urban Development (Correctional Facilities),
5.5s, 2001 1,000 1,013,770
State of Utah Building Ownership Authority, 5.5s, 2000 500 511,580
----------
$ 4,997,639
- - -----------------------------------------------------------------------------------------
Refunded and Special Obligations - 1.5%
Detroit, MI, 5.625s, 1997 $ 750 $ 750,000
- - -----------------------------------------------------------------------------------------
Airport and Port Revenue - 5.9%
Atlanta, GA, Airport Facilities Rev., AMBAC, 5.5s, 2001 $ 500 $ 511,905
Denver, CO, City & County Airport Rev., 5.5s, 1999 650 656,234
Indianapolis, IN, Airport Authority Rev., FGIC, 5s,
1999 1,000 1,008,260
Metropolitan Nashville, TN, Airport Rev., FGIC, 6.125s,
1999 800 822,224
----------
$ 2,998,623
- - -----------------------------------------------------------------------------------------
Electric and Gas Utility Revenue - 20.0%
Hillsborough County, FL, Utility Refunding, MBIA, 0s,
1999 $1,000 $ 900,620
Intermountain Power Agency, UT, Power Supply Rev., FSA,
5.25s, 2001 500 507,725
</TABLE>
9
<PAGE> 12
PORTFOLIO OF INVESTMENTS - continued
Municipal Bonds - continued
<TABLE>
<CAPTION>
=========================================================================================
Principal Amount
Issuer (000 Omitted) Value
- - -----------------------------------------------------------------------------------------
<S> <C> <C>
Electric and Gas Utility Revenue - continued
Intermountain Power Agency, UT, Power Supply Rev.,
MBIA, 5.25s, 1999 $ 500 $ 506,565
Intermountain Power Agency, UT, Power Supply Rev.,
MBIA, 5.5s, 1999 2,500 2,548,075
Philadelphia, PA, Gas Works Rev., 5.4s, 1998 1,000 1,004,030
Sacramento, CA, Municipal Utility District Electric
Rev., FGIC, 6s, 2001 620 649,760
South Carolina Public Service Authority, AMBAC, 5s,
1999 500 503,675
Washington Public Power Supply System Rev., 5.45s, 2000 1,500 1,519,800
Washington Public Power Supply System Rev., "A", 5s,
2000 1,500 1,500,330
Washington Public Power Supply System Rev., "B", 5s,
2000 500 500,110
----------
$10,140,690
- - -----------------------------------------------------------------------------------------
Health Care Revenue - 2.1%
Denison, TX, Hospital Authority (Texoma Medical Center,
Inc.), 5.25s, 2001 $ 215 $ 214,443
Michigan Hospital Finance Authority Rev. (Mercy Health
Services), 5.5s, 2000 500 508,940
Stillwater, OK, Medical Center Authority (Stillwater
Medical Center), 5.55s, 2001 335 335,000
----------
$ 1,058,383
- - -----------------------------------------------------------------------------------------
Insured Health Care Revenue - 5.2%
Delaware County, IN, Hospital Authority (Ball Memorial
Hospital), AMBAC, 6.625s, 2001 $2,520 $ 2,641,867
- - -----------------------------------------------------------------------------------------
Multi-Family Housing Revenue - 4.0%
Rhode Island Housing & Mortgage Finance Corp., AMBAC,
5.15s, 2001 $1,000 $ 1,002,990
Rhode Island Housing & Mortgage Finance Corp., AMBAC,
5.25s, 2002 1,000 1,004,150
----------
$ 2,007,140
- - -----------------------------------------------------------------------------------------
Sales and Excise Tax Revenue - 2.0%
Arizona Transportation Board, Excise Tax Rev. (Maricopa
County Regional Area), MBIA, 6.8s, 1997 $1,000 $ 1,004,500
- - -----------------------------------------------------------------------------------------
Solid Waste Revenue - 2.0%
Delaware County, PA, Industrial Development Authority
Rev. (Recovery Facilities), 5.5s, 2000 $1,000 $ 1,011,970
- - -----------------------------------------------------------------------------------------
Student Loan Revenue - 5.2%
Colorado Student Obligation Bond Authority, 6.125s,
1998 $ 155 $ 157,246
Louisiana Public Facilities Authority (Student Loan
Rev.), 6.5s, 2002 1,000 1,061,420
Nebraska Higher Education Loan Program Rev., 5s, 1998 500 498,785
New Mexico Educational Assistance Foundation, 5.25s,
1998 925 933,843
----------
$ 2,651,294
- - -----------------------------------------------------------------------------------------
</TABLE>
10
<PAGE> 13
PORTFOLIO OF INVESTMENTS - continued
Municipal Bonds - continued
<TABLE>
<CAPTION>
=========================================================================================
Principal Amount
Issuer (000 Omitted) Value
- - -----------------------------------------------------------------------------------------
<S> <C> <C>
Universities - 1.7%
California Educational Facilities Authority Rev.
(College & University), 5.15s, 2000 $ 360 $ 359,309
District of Columbia Rev. (Georgetown University),
MBIA, 5.5s, 2001 500 504,860
-----------
$ 864,169
- - -----------------------------------------------------------------------------------------
Water and Sewer Utility Revenue - 2.8%
Philadelphia, PA, Water & Sewer Rev., MBIA, 0s, 2002 $ 500 $ 380,815
San Antonio, TX, Water Rev., FGIC, 5.8s, 1999 1,000 1,025,690
-----------
$ 1,406,505
- - -----------------------------------------------------------------------------------------
Other - 11.7%
Connecticut Special Assessment, AMBAC, 5s, 1999 $1,000 $ 1,012,760
Michigan Underground Storage, AMBAC, 5s, 1999 3,365 3,401,107
State of Minnesota Rev., AMBAC, 5s, 1999 1,500 1,515,135
-----------
$ 5,929,002
- - -----------------------------------------------------------------------------------------
Total Municipal Bonds (Identified Cost, $48,762,807) $49,049,641
- - -----------------------------------------------------------------------------------------
</TABLE>
Floating Rate Demand Note - 4.5%
<TABLE>
<S> <C> <C>
=========================================================================================
Jackson County, MS, Pollution Control Rev. (Chevron),
due 5/01/97
(Identified Cost, $2,300,000) $2,300 $ 2,300,000
- - -----------------------------------------------------------------------------------------
Total Investments (Identified Cost, $51,062,807) $51,349,641
Other Assets, Less Liabilities - (1.2)% (596,057)
=========================================================================================
Net Assets - 100.0% $50,753,584
- - -----------------------------------------------------------------------------------------
</TABLE>
(sec.sec.) When-issued security. At April 30, 1997, the Fund had sufficient cash
and/or securities at least equal to the value of the when-issued
security.
See notes to financial statements
11
<PAGE> 14
FINANCIAL STATEMENTS
Statement of Assets and Liabilities
<TABLE>
<CAPTION>
======================================================================================
April 30, 1997
- - --------------------------------------------------------------------------------------
<S> <C>
Assets:
Investments, at value (identified cost, $51,062,807) $51,349,641
Cash 58,371
Receivable for Fund shares sold 27,107
Interest receivable 820,110
Other assets 165
-----------
Total assets $52,255,394
-----------
Liabilities:
Distributions payable $ 53,752
Payable for Fund shares reacquired 72,076
Payable for investments purchased 846,624
Payable for when-issued investment purchased 507,335
Payable to affiliates -
Management fee 556
Distribution and service fee 13,290
Accrued expenses and other liabilities 8,177
-----------
Total liabilities $ 1,501,810
-----------
Net assets $50,753,584
===========
Net assets consist of:
Paid-in capital $51,309,907
Unrealized appreciation on investments 286,834
Accumulated net realized loss on investments (873,818)
Accumulated undistributed net investment income 30,661
-----------
Total $50,753,584
===========
Shares of beneficial interest outstanding 6,770,143
===========
Class A shares:
Net asset value per share (net assets of $40,953,175 / 5,461,987
shares of beneficial interest outstanding) $7.50
=====
Offering price per share (100/97.5) $7.69
=====
Class B shares:
Net asset value and offering price per share
(net assets of $6,503,337 / 868,468 shares of beneficial
interest outstanding) $7.49
=====
Class C shares:
Net asset value and offering price per share
(net assets of $3,297,072 / 439,688 shares of beneficial
interest outstanding) $7.50
=====
</TABLE>
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
12
<PAGE> 15
FINANCIAL STATEMENTS - continued
Statement of Operations
<TABLE>
<CAPTION>
=====================================================================================
Year Ended April 30, 1997
- - -------------------------------------------------------------------------------------
<S> <C>
Net investment income:
Interest income $2,731,886
----------
Expenses -
Management fee $ 226,043
Trustees' compensation 11,365
Shareholder servicing agent fee 22,347
Shareholder servicing agent fee (Class A) 48,863
Shareholder servicing agent fee (Class B) 10,850
Shareholder servicing agent fee (Class C) 3,263
Distribution and service fee (Class A) 69,278
Distribution and service fee (Class B) 66,548
Distribution and service fee (Class C) 32,339
Administrative fee 1,298
Registration fee 47,638
Auditing fees 33,853
Custodian fee 31,587
Printing 26,738
Postage 6,078
Amortization of organization expenses 3,637
Legal fees 2,914
Miscellaneous 18,747
----------
Total expenses $ 663,386
Reduction of expenses pursuant to reimbursement agreement (37,574)
Fees paid indirectly (5,561)
----------
Net expenses $ 620,251
----------
Net investment income $2,111,635
----------
Realized and unrealized gain (loss) on investments:
Realized gain on investment transactions (identified cost basis) $ 56,348
Change in unrealized appreciation on investments (260,759)
----------
Net realized and unrealized loss on investments $ (204,411)
----------
Increase in net assets from operations $1,907,224
==========
</TABLE>
See notes to financial statements
13
<PAGE> 16
FINANCIAL STATEMENTS - continued
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
=======================================================================================
Year Ended April 30, 1997 1996
- - ---------------------------------------------------------------------------------------
<S> <C> <C>
Increase (decrease) in net assets:
From operations -
Net investment income $ 2,111,635 $ 2,600,902
Net realized gain (loss) on investments 56,348 (40,278)
Net unrealized gain (loss) on investments (260,759) 816,807
------------ ------------
Increase in net assets from operations $ 1,907,224 $ 3,377,431
------------ ------------
Distributions declared to shareholders -
From net investment income (Class A) $ (1,788,875) $ (2,223,764)
From net investment income (Class B) (218,897) (253,938)
From net investment income (Class C) (97,816) (70,381)
------------ ------------
Total distributions declared to shareholders $ (2,105,588) $ (2,548,083)
------------ ------------
Fund share (principal) transactions -
Net proceeds from sale of shares $ 15,035,170 $ 21,822,226
Net asset value of shares issued to shareholders in
reinvestment of distributions 1,422,095 1,783,696
Cost of shares reacquired (26,654,645) (37,340,487)
------------ ------------
Decrease in net assets from Fund share transactions $(10,197,380) $(13,734,565)
------------ ------------
Total decrease in net assets $(10,395,744) $(12,905,217)
Net assets:
At beginning of period 61,149,328 74,054,545
------------ ------------
At end of period (including accumulated undistributed
net investment income of $30,661 and $21,300,
respectively) $ 50,753,584 $ 61,149,328
============ ============
</TABLE>
See notes to financial statements
14
<PAGE> 17
FINANCIAL STATEMENTS - continued
Financial Highlights
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Eight Months Year Ended August
Year Ended April 30, Ended 31,
------------------------- April 30, -----------------
1997 1996 1995 1994 1993 1992*
-----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Class A
<CAPTION>
-----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value - beginning of
period $ 7.53 $ 7.45 $ 7.47 $ 7.72 $ 7.43 $ 7.31
------- ------- ------- -------- -------
Income from investment
operations# -
Net investment incomesec. $ 0.29 $ 0.30 $ 0.28 $ 0.19 $ 0.31 $ 0.15
Net realized and unrealized
gain (loss) on investments (0.03) 0.08 (0.02) (0.22) 0.30 0.12
------- ------- ------- -------- -------
Total from investment
operations $ 0.26 $ 0.38 $ 0.26 $ (0.03) $ 0.61 $ 0.27
------- ------- ------- -------- -------
Less distributions declared to
shareholders -
From net investment
income++++++ $ (0.29) $ (0.30) $ (0.28) $ (0.19) $ (0.31) $(0.15)
From net realized gain on
investments -- -- -- -- (0.01) --
In excess of net investment
income++++ -- -- (0.00) (0.00) -- --
In excess of net realized gain
on investments -- -- -- (0.03) -- --
------- ------- ------- -------- -------
Total distributions
declared to shareholders $ (0.29) $ (0.30) $ (0.28) $ (0.22) $ (0.32) $(0.15)
------- ------- ------- -------- -------
Net asset value - end of period $ 7.50 $ 7.53 $ 7.45 $ 7.47 $ 7.72 $ 7.43
------- ------- ------- -------- ------- -------
Total return++ 3.51% 5.11% 3.55% (0.59)%+ 8.47% 8.26%+
Ratios (to average net assets)/Supplemental data(sec.):
Expenses## 0.95% 0.95% 0.95% 0.89%+ 0.68% 0.55%+
Net investment income 3.86% 4.00% 3.74% 3.72%+ 4.04% 4.25%+
Portfolio turnover 78% 43% 50% 48% 69% 8%
Net assets at end of period
(000 omitted) $40,953 $50,387 $64,329 $ 83,367 $87,192 $21,312
* 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, are based on average
shares outstanding.
## For fiscal years ending after September 1, 1995, the Fund's expenses are
calculated without reduction for fees paid indirectly.
++ Total returns for Class A shares do not include the applicable sales charge. If
the charge had been included, the results would have been lower.
++++ For the year ended April 30, 1995, and the eight months ended April 30, 1994, the
per share distributions in excess of net investment income were $0.002 and
$0.002, respectively.
++++++ For the period ended August 31, 1992, the per share distributions from net
investment income includes a per share distribution from paid-in capital of
$0.0007.
(sec.) The investment advisor voluntarily agreed to maintain the expenses of the fund at
not more than 0.95% of average daily net assets. To the extent actual expenses
exceeded the limitation, the net investment income per share and the ratios would
have been:
Net investment income $ 0.29 $ 0.30 $ 0.28 $ 0.18 $ 0.28 $ 0.13
Ratios (to average net assets):
Expenses 1.02% 0.99% 0.95% 1.12%+ 1.16% 1.16%+
Net investment income 3.79% 3.96% 3.74% 3.49%+ 3.57% 3.64%+
</TABLE>
See notes to financial statements
15
<PAGE> 18
FINANCIAL STATEMENTS - continued
Financial Highlights - continued
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended April 30, 1997 1996 1995 1994**
-----------------------------------------------------------------------------------
Class
B
-----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value - beginning of period $ 7.52 $ 7.44 $ 7.46 $ 7.75
------ ------ ------ ------
Income from investment operations# -
Net investment incomesec. $ 0.23 $ 0.25 $ 0.21 $ 0.14
Net realized and unrealized gain (loss)
on investments (0.03) 0.07 (0.02) (0.26)
------ ------ ------ ------
Total from investment operations $ 0.20 $ 0.32 $ 0.19 $ (0.12)
------ ------ ------ ------
Less distributions declared to
shareholders -
From net investment income $(0.23) $(0.24) $(0.21) $ (0.13)
In excess of net investment income++++ -- -- (0.00) (0.01)
In excess of net realized gain on
investments -- -- -- (0.03)
------ ------ ------ ------
Total distributions declared to
shareholders $(0.23) $(0.24) $(0.21) $ (0.17)
------ ------ ------ ------
Net asset value - end of period $ 7.49 $ 7.52 $ 7.44 $ 7.46
------ ------ ------ ------
Total return 2.71% 4.34% 2.67% (2.37)%
Ratios (to average net assets)/Supplemental data(sec.):
Expenses## 1.73% 1.70% 1.80% 1.74%+
Net investment income 3.08% 3.25% 2.88% 2.79%+
Portfolio turnover 78% 43% 50% 48%
Net assets at end of period (000 omitted) $6,503 $7,749 $7,792 $ 7,415
** For the period from the commencement of offering of Class B shares, September 7,
1993, to April 30, 1994.
+ Annualized.
# Per share data for the periods subsequent to April 30, 1994, are based on average
shares outstanding.
## For fiscal years ending after September 1, 1995, the Fund's expenses are
calculated without reduction for fees paid indirectly.
++++ For the year ended April 30, 1995, the per share distribution in excess of net
investment income was $0.001.
(sec.) The investment advisor voluntarily agreed to maintain the expenses of the fund at
not more than 1.80% of average daily net assets. To the extent actual expenses
exceeded the limitation, the net investment income per share and the ratios would
have been:
</TABLE>
<TABLE>
<S> <C> <C> <C> <C>
Net investment income $ 0.23 $ 0.25 $ 0.21 $ 0.12
Ratios (to average net assets):
1.80% 1.74% 1.80% 2.05%+
Expenses
3.01% 3.21% 2.88% 2.48%+
Net investment income
</TABLE>
See notes to financial statements
16
<PAGE> 19
FINANCIAL STATEMENTS - continued
Financial Highlights - continued
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended April 30, 1997 1996 1995***
<S> <C> <C> <C>
-----------------------------------------------------------------------------------
<CAPTION>
Class C
-----------------------------------------------------------------------------------
<S> <C> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value - beginning of period $ 7.53 $ 7.45 $ 7.45
------ ------ ------
Income from investment operations#-
Net investment incomesec. $ 0.23 $ 0.23 $ 0.21
Net realized and unrealized gain (loss) on
investments (0.03) 0.08 (0.02)
------ ------ ------
Total from investment operations $ 0.20 $ 0.31 $ 0.19
------ ------ ------
Less distributions declared to shareholders -
From net investment income $ (0.23) $ (0.23) $ (0.19)
In excess of net investment income++++ -- -- (0.00)
------ ------ ------
Total distributions declared to shareholders $ (0.23) $ (0.23) $ (0.19)
------ ------ ------
Net asset value - end of period $ 7.50 $ 7.53 $ 7.45
------ ------ ------
Total return 2.64% 4.23% 2.53%+
Ratios (to average net assets)/Supplemental data(sec.):
Expenses## 1.80% 1.80% 1.79%+
Net investment income 3.03% 3.16% 2.77%+
Portfolio turnover 78% 43% 50%
Net assets at end of period (000 omitted) $ 3,297 $ 3,013 $ 1,934
*** For the period from the commencement of offering of Class C shares, July 1, 1994,
to April 30, 1995.
+ Annualized.
# Per share data for the periods subsequent to April 30, 1994, 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.
++++ For the period ended April 30, 1995, the per share distribution in excess of net
investment income
was $0.001.
(sec.) The investment advisor voluntarily agreed to maintain the expenses of the fund at
not more than 1.80% of average daily net assets. To the extent actual expenses
exceeded the limitation, the net investment income per share and the ratios would
have been:
Net investment income $ 0.22 $ 0.23 $ 0.21
Ratios (to average net assets):
Expenses 1.87% 1.84% 1.79%+
Net investment income 2.96% 3.12% 2.77%+
</TABLE>
See notes to financial statements
17
<PAGE> 20
NOTES TO FINANCIAL STATEMENTS
(1) Business and Organization
MFS Municipal 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. 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 Fund
operations.
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.
18
<PAGE> 21
NOTES TO FINANCIAL STATEMENTS - continued
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. During the year ended April 30, 1997, $3,314 was reclassified to
accumulated undistributed net investment income from paid-in capital due to
permanent differences between book and tax accounting. This change had no effect
on the net assets or net asset value per share.
At April 30, 1997, the Fund, for federal income tax purposes, had a capital loss
carryforward of $873,818, which may be applied against any net taxable realized
gains in each succeeding year until the earlier of its utilization or expiration
on April 30, 2003, ($798,921), April 30, 2004, ($32,070) and April 30, 2005,
($42,827).
19
<PAGE> 22
NOTES TO FINANCIAL STATEMENTS - continued
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 distribution and service fees. All shareholders bear the common
expenses of the Fund pro rata based on settled shares outstanding of each class,
without distinction between share classes. Dividends are declared separately for
each class. No class has preferential dividend rights; differences in per share
dividend rates are generally due to differences in separate class expenses.
(3) Transactions with Affiliates
Investment Adviser - The Fund has an investment advisory agreement with
Massachusetts Financial Services Company (MFS) to provide overall investment
advisory and administrative services, and general office facilities. The
management fee is computed daily and paid monthly at an annual rate of 0.40% of
the Fund's 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 in turn will 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 to MFS in prior years. At April 30,
1997, the aggregate unreimbursed expenses owed to MFS by the Fund amounted to
$191,917, including $37,574 incurred in the current period.
The Fund pays no compensation directly to its Trustees who are officers of the
investment adviser, or to officers of the Fund, all of whom receive remuneration
for their services to the Fund from MFS. Certain officers and Trustees of the
Fund are officers or directors of MFS, MFS Fund Distributors, Inc. (MFD), and
MFS Service Center, Inc. (MFSC). The Fund has an unfunded defined benefit plan
for all its independent Trustees and Mr. Bailey. Included in Trustees'
compensation is a net periodic pension expense of $2,890 for the year ended
April 30, 1997.
Administrator - Effective March 1, 1997, the Fund has an administrative services
agreement with MFS to provide the Fund with certain financial, legal,
compliance, shareholder communications, and other administrative services. As a
partial reimbursement for the cost of providing these services, each Fund pays
MFS an administrative fee up to 0.015% per annum of each Fund's
20
<PAGE> 23
NOTES TO FINANCIAL STATEMENTS - continued
average daily net assets, provided that the administrative fee is not assessed
on Fund assets that exceed $3 billion.
Distributor - MFD, a wholly owned subsidiary of MFS, as distributor, received
$5,862 for the year ended April 30, 1997, as its portion of the sales charge on
sales of Class A shares of the Fund. The Trustees have adopted a distribution
plan for Class A, Class B, and Class C shares pursuant to Rule 12b-1 of the
Investment Company Act of 1940 as follows:
The Fund's distribution plan provides that the Fund will pay MFD up to 0.35% per
annum of its average daily net assets attributable to Class A shares in order
that MFD may pay expenses on behalf of the Fund related to the distribution and
servicing of its shares. These expenses include a service fee to each securities
dealer that enters into a sales agreement with MFD of up to 0.25% per annum
(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 $15,260 for the year ended April 30, 1997.
Payment of the 0.10% per annum Class A distribution fee will commence on such
date as the Trustees of the Trust may determine. Fees incurred under the
distribution plan during the year ended April 30, 1997, were 0.15%, of the
average daily net assets attributable to Class A shares on an annualized basis.
The Fund's distribution plan provides that the Fund will pay MFD a distribution
fee of 0.75% per annum, and a service fee of up to 0.25% per annum, of the
Fund's average daily net assets attributable to Class B and Class C shares. The
service fee is currently being reduced to 0.17% 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 $1,781 and $56 for Class B and Class C
shares, respectively, for the year ended April 30, 1997.
21
<PAGE> 24
NOTES TO FINANCIAL STATEMENTS - continued
Fees incurred under the distribution plan during the year ended April 30, 1997,
were 0.93% and 1.00% of the Fund's average daily net assets attributable to
Class B and Class C shares, respectively, on an annualized basis.
Purchases over $1 million of Class A shares are subject to a contingent deferred
sales charge in the event of a shareholder redemption within 12 months following
such purchase. A contingent deferred sales charge is imposed on shareholder
redemptions of Class B shares in the event of a shareholder redemption within
six years of purchase. A contingent deferred sales charge is imposed on
shareholder redemptions of Class C shares in the event of a shareholder
redemption within 12 months of purchases made on or after April 1, 1996. MFD
receives all contingent deferred sales charges. Contingent deferred sales
charges imposed during the year ended April 30, 1997, were $121, $35,651, and
$1,032, for Class A, Class B, and Class C shares, respectively.
Shareholder Servicing Agent - MFSC, a wholly owned subsidiary of MFS, earns a
fee for its services as shareholder servicing agent. The fee is calculated as a
percentage of the Fund's average daily net assets at an effective annual rate of
0.13%. Prior to January 1, 1997, the fee was calculated as a percentage of the
average daily net assets of each class of shares at an effective annual rate of
up to 0.15%, up to 0.22%, and up to 0.15% attributable to Class A, Class B, and
Class C shares, respectively.
(4) Portfolio Securities
Purchases and sales of investments, other than U.S. government securities,
purchased option transactions, and short-term obligations, aggregated
$42,228,840 and $44,976,564, 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:
<TABLE>
<S> <C>
Aggregate cost $51,062,807
----------
Gross unrealized appreciation $ 330,910
Gross unrealized depreciation (44,076)
-----------
Net unrealized appreciation $ 286,834
----------
</TABLE>
22
<PAGE> 25
NOTES TO FINANCIAL STATEMENTS - continued
(5) Shares of Beneficial Interest
The Fund's Declaration of Trust permits the Trustees to issue an unlimited
number of full and fractional shares of beneficial interest (without par value).
Transactions in Fund shares were as follows:
Class A Shares
<TABLE>
<CAPTION>
Year Ended April 30, 1997 Year Ended April 30, 1996
--------------------------- ---------------------------
Shares Amount Shares Amount
-----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Shares sold 1,574,476 $ 11,862,568 1,999,874 $ 15,164,604
Shares issued to shareholders in
reinvestment of distributions 160,862 1,211,040 206,976 1,568,611
Shares reacquired (2,966,712) (22,348,637) (4,146,143) (31,416,230)
-------- ---------- -------- ----------
Net decrease (1,231,374) $ (9,275,029) (1,939,293) $(14,683,015)
-------- ---------- -------- ----------
</TABLE>
Class B Shares
<TABLE>
<CAPTION>
Year Ended April 30, 1997 Year Ended April 30, 1996
--------------------------- ---------------------------
Shares Amount Shares Amount
-----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Shares sold 222,124 $ 1,670,226 395,418 $ 2,988,803
Shares issued to shareholders in
reinvestment of distributions 15,642 117,619 19,614 148,492
Shares reacquired (399,994) (3,007,251) (431,218) (3,263,193)
-------- ---------- -------- ----------
Net decrease (162,228) $ (1,219,406) (16,186) $ (125,898)
-------- ---------- -------- ----------
</TABLE>
Class C Shares
<TABLE>
<CAPTION>
Year Ended April 30, 1997 Year Ended April 30, 1996
--------------------------- ---------------------------
Shares Amount Shares Amount
-----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Shares sold 199,462 $ 1,502,376 483,511 $ 3,668,819
Shares issued to shareholders in
reinvestment of distributions 12,406 93,436 8,781 66,593
Shares reacquired (172,386) (1,298,757) (351,660) (2,661,064)
-------- ---------- -------- ----------
Net increase 39,482 $ 297,055 140,632 $ 1,074,348
-------- ---------- -------- ----------
</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 $400 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,
1997 was $560.
23
<PAGE> 26
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 (one of the
series constituting MFS Series Trust IX) as of April 30, 1997, the related
statement of operations for the year then ended, the statement of changes in net
assets for the years ended April 30, 1997 and 1996, and the financial highlights
for each of the years in the six-year period ended April 30, 1997. 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, 1997, by correspondence with the custodian and brokers; where replies
were not received from brokers, we performed other auditing procedures. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of MFS Municipal
Limited Maturity Fund at April 30, 1997, the results of its operations, the
changes in its net assets, and its financial highlights for the respective
stated periods in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Boston, Massachusetts
May 30, 1997
---------------------------------------------------------------------
This report is prepared for the general information of shareholders. It is
authorized for distribution to prospective investors only when preceded or
accompanied by a current prospectus.
24
<PAGE> 27
MFS(R) MUNICIPAL LIMITED MATURITY FUND
TRUSTEES
A. Keith Brodkin* - Chairman and President
Richard B. Bailey* - Private Investor; Former Chairman and Director (until
1991), Massachusetts Financial Services Company; Director, Cambridge Bancorp;
Director, Cambridge Trust Company
Peter G. Harwood - Private Investor
J. Atwood Ives - Chairman and Chief Executive Officer, Eastern Enterprises
Lawrence T. Perera - Partner, Hemenway & Barnes
William J. Poorvu - Adjunct Professor, Harvard University Graduate School of
Business Administration
Charles W. Schmidt - Private Investor
Arnold D. Scott* - Senior Executive Vice President, Director and Secretary,
Massachusetts Financial Services Company
Jeffrey L. Shames* - President and Director, Massachusetts Financial Services
Company
Elaine R. Smith - Independent Consultant
David B. Stone - Chairman, North American Management Corp. (investment
advisers)
INVESTMENT ADVISER
Massachusetts Financial Services Company
500 Boylston Street
Boston, MA 02116-3741
DISTRIBUTOR
MFS Fund Distributors, Inc.
500 Boylston Street
Boston, MA 02116-3741
PORTFOLIO MANAGER
Robert A. Dennis*
TREASURER
W. Thomas London*
ASSISTANT TREASURER
James O. Yost*
SECRETARY
Stephen E. Cavan*
ASSISTANT SECRETARY
James R. Bordewick, Jr.*
CUSTODIAN
State Street Bank and Trust Company
*Affiliated with the Investment Adviser
AUDITORS
Deloitte & Touche LLP
INVESTOR INFORMATION
For MFS stock and bond market outlooks, call toll free: 1-800-637-4458
anytime from a touch-tone telephone.
For information on MFS mutual funds, call your financial adviser or, for an
information kit, call toll free: 1-800-637-2929 any business day from 9 a.m. to
5 p.m. Eastern time (or leave a message anytime).
INVESTOR SERVICE
MFS Service Center, Inc.
P.O. Box 2281
Boston, MA 02107-9906
For general information, call toll free: 1-800-225-2606 any business day from 8
a.m. to 8 p.m. Eastern time.
For service to speech- or hearing-impaired, call toll free: 1-800-637-6576 any
business day from 9 a.m. to 5 p.m. Eastern time. (To use this service, your
phone must be equipped with a Telecommunications Device for the Deaf.)
For share prices, account balances, and exchanges, call toll free:
1-800-MFS-TALK (1-800-637-8255) anytime from a touch-tone telephone.
WORLD WIDE WEB
www.mfs.com
For the third year in a row, MFS earned a #1 ranking in the
[LOGO] DALBAR, Inc. Broker/Dealer Survey, Main Office Operations
Service Quality Category. The firm achieved a 3.48 overall
score on a scale of 1 to 4 in the 1996 survey. A total of
110 firms responded, offering input on the quality of
service they received from 29 mutual fund companies nationwide. The survey
contained questions about service quality in 15 categories, including "knowledge
of phone service contacts," "accuracy of transaction processing," and "overall
ease of doing business with the firm."
25
<PAGE> 28
<TABLE>
<CAPTION>
<S> <C> <C>
MFS(R) MUNICIPAL LIMITED LOGO
MATURITY FUND ----------------------
500 Boylston Street BULK RATE
Boston, MA 02116-3741 U.S. POSTAGE
LOGO PAID
MFS
----------------------
</TABLE>
(C)1997 MFS Fund Distributors, Inc., 500 Boylston Street, Boston, MA 02116-3741
MML-2 6/97 9M 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, 1997:
Financial Highlights
FINANCIAL STATEMENTS INCLUDED IN PART B:
At April 30, 1997:
Portfolio of Investments*
Statement of Assets and Liabilities*
For the two years ended April 30, 1997:
Statement of Changes in Net Assets*
For the year ended April 30, 1997:
Statement of Operations*
- - ----------------------------------
* Incorporated herein by reference to the Fund's Annual Report to
Shareholders dated April 30, 1997, filed with the SEC on July 1, 1997.
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 five years ended April 30, 1997:
Financial Highlights
FINANCIAL STATEMENTS INCLUDED IN PART B:
At April 30, 1997:
Portfolio of Investments*
Statement of Assets and Liabilities*
For the two years ended April 30, 1997:
Statement of Changes in Net Assets*
For the year ended April 30, 1997:
Statement of Operations*
* Incorporated herein by reference to the Fund's Annual Report to
Shareholders dated April 30, 1997, filed with the SEC on July 10, 1997.
<PAGE>
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 three years
ended April 30, 1997:
Financial Highlights
FINANCIAL STATEMENTS INCLUDED IN PART B:
At April 30, 1997:
Portfolio of Investments*
Statement of Assets and Liabilities*
For the two years ended April 30, 1997:
Statement of Changes in Net Assets*
For the year ended April 30, 1997:
Statement of Operations*
* Incorporated herein by reference to the Fund's Annual Report to
Shareholders dated April 30, 1997, filed with the SEC on July 1, 1997.
(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. (6)
(c) Amendment to the Declaration of Trust -
Redesignation of Class P shares as Class I
shares dated December 18, 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. (5)
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, and
the Mutual Fund Agreement between MFD and a
bank or NASD affiliate, as amended on April
11, 1997. (7)
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) Amendment to Shareholder Servicing Agent
Agreement, dated January 1, 1997 to amend fee
schedule; filed herewith.
(c) Exchange Privilege Agreement dated September
1, 1993, as amended and restated through and
including January 1, 1997. (8)
(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) Third Amendment dated February 14, 1997 to
Loan Agreement dated February 21, 1995 by and
among the Banks named therein and The First
National Bank of Boston. (11)
(f) Dividend Disbursing Agency Agreement among
MFS Funds and State Street Bank and Trust
Company, dated February 1, 1986. (3)
(g) Master Administrative Services Agreement
dated March 1, 1997. (9)
10 Consent and Opinion of Counsel previously
filed with Registrant's Rule 24f-2 Notice for
fiscal year ended April 30, 1997 on June 27,
1997.
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 Master Distribution Plan pursuant to Rule
12b-1 under the Investment Company Act of
1940, effective January 1, 1997. (10)
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. (5)
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 Post-Effective Amendment No. 32
filed with the SEC via EDGAR on August 28, 1995.
(5) 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.
(6) Incorporated by reference to Registrant's Post-Effective Amendment No. 33
filed with the SEC via EDGAR on August 27, 1996.
(7) Incorporated by reference to MFS Series Trust III (File Nos. 2-60491 and
811-2794) Post-Effective Amendment No. 24 filed with the SEC via EDGAR on
May 29, 1997.
(8) Incorporated by reference to MFS Series Trust VIII (File Nos. 33-37972 and
811-5262) Post-Effective Amendment No. 13 filed with the SEC via EDGAR on
February 27, 1997.
(9) Incorporated by reference to MFS/Sun Life Series Trust (File Nos. 2-83616
and 811-3732) Post-Effective Amendment No. 19 filed with the SEC via EDGAR
on March 18, 1997.
(10) Incorporated by reference to MFS Series Trust IV (File Nos. 2-54607 and
811-2594) Post-Effective Amendment No. 30 filed with the SEC via EDGAR on
December 27, 1996.
(11) Incorporated by reference to MFS Series Trust I (File Nos. 33-7638 and
811-4777) Post-Effective Amendment No. 28 filed with the SEC via EDGAR
on June 26, 1997.
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 - 45,859
(without par value) Class B shares - 13,575
Class C shares - 1,049
Class I shares - 5
(as of July 31, 1997)
FOR MFS LIMITED MATURITY FUND
(1) (2)
TITLE OF CLASS NUMBER OF RECORD HOLDERS
-------------- ------------------------
Shares of Beneficial Interest Class A shares - 3,983
(without par value) Class B shares - 1,996
Class C shares - 796
Class I shares - 2
(as of July 31, 1997)
FOR MFS MUNICIPAL LIMITED MATURITY FUND
(1) (2)
TITLE OF CLASS NUMBER OF RECORD HOLDERS
-------------- ------------------------
Shares of Beneficial Interest Class A shares - 1,225
(without par value) Class B shares - 174
Class C shares - 90
(as of July 31, 1997)
ITEM 27. INDEMNIFICATION
The Trustees and officers of the Trust and the personnel of
the Trust's investment adviser and principal underwriter are insured under an
errors and omissions liability insurance policy. The Trust and its officers are
also insured under the fidelity bond required by Rule 17g-1 under the Investment
Company Act of 1940, as amended.
Reference is hereby made to (a) Article V of the Trust's
Declaration of Trust and (b) Section 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, The MFS Series
Trust (which has one series: MFS Aggressive Small Cap Equity Fund), MFS Series
Trust I (which has thirteen series: MFS Managed Sectors Fund, MFS Cash Reserve
Fund, MFS World Asset Allocation Fund, MFS Aggressive Growth Fund, MFS Research
Growth and Income Fund, MFS Core Growth Fund, MFS Equity Income Fund, MFS
Special Opportunities Fund, MFS Convertible Securities Fund, MFS Blue Chip Fund,
MFS New Discovery Fund, MFS Science and Technology Fund and MFS Research
International Fund), MFS Series Trust II (which has 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 MFS Funds is 500 Boylston Street, Boston, Massachusetts 02116.
MFS also serves as investment adviser of the following
no-load, open-end Funds: MFS Institutional Trust ("MFSIT") (which has seven
series), MFS Variable Insurance Trust ("MVI") (which has twelve series) and MFS
Union Standard Trust ("UST"). The principal business address of each of the
aforementioned funds is 500 Boylston Street, Boston, Massachusetts 02116.
In addition, MFS serves as investment adviser to the following
closed-end funds: MFS Municipal Income Trust, MFS Multimarket Income Trust, MFS
Government Markets Income Trust, MFS Intermediate Income Trust, MFS Charter
Income Trust and MFS Special Value Trust (the "MFS Closed-End Funds"). The
principal business address of each of the MFS Closed-End Funds is 500 Boylston
Street, Boston, Massachusetts 02116.
Lastly, MFS serves as investment adviser to MFS/Sun Life
Series Trust ("MFS/SL"), Money Market Variable Account, High Yield Variable
Account, Capital Appreciation Variable Account, Government Securities Variable
Account, World Governments Variable Account, Total Return Variable Account and
Managed Sectors Variable Account. The principal business address of each of the
aforementioned funds is One Sun Life Executive Park, Wellesley Hills,
Massachusetts 02181.
MFS International Ltd. ("MIL"), a limited liability company
organized under the laws of Bermuda and a subsidiary of MFS, whose principal
business address is Cedar House, 41 Cedar Avenue, Hamilton HM12 Bermuda, serves
as investment adviser to and distributor for MFS American Funds (which has six
portfolios: MFS American Funds-U.S. Equity Fund, MFS American Funds-U.S.
Emerging Growth Fund, MFS American Funds-U.S. High Yield Bond Fund, MFS American
Funds - U.S. Dollar Reserve Fund, MFS American Funds-Charter Income Fund and MFS
American Funds-U.S. Research Fund) (the "MIL Funds"). The MIL Funds are
organized in Luxembourg and qualify as an undertaking for collective investments
in transferable securities (UCITS). The principal business address of the MIL
Funds is 47, Boulevard Royal, L-2449 Luxembourg.
MIL also serves as investment adviser to and distributor for
MFS Meridian U.S. Government Bond Fund, MFS Meridian Charter Income Fund, MFS
Meridian Global Government Fund, MFS Meridian U.S. Emerging Growth Fund, MFS
Meridian Global Equity Fund, MFS Meridian Limited Maturity Fund, MFS Meridian
World Growth Fund, MFS Meridian Money Market Fund, MFS Meridian World Total
Return Fund, MFS Meridian U.S. Equity Fund, MFS Meridian Research Fund, MFS
Meridian U.S. High Yield Fund and MFS Emerging Markets Debt Fund (collectively
the "MFS Meridian Funds"). Each of the MFS Meridian Funds is organized as an
exempt company under the laws of the Cayman Islands. The principal business
address of each of the MFS Meridian Funds is P.O. Box 309, Grand Cayman, Cayman
Islands, British West Indies.
MFS International (U.K.) Ltd. ("MIL-UK"), a private limited
company registered with the Registrar of Companies for England and Wales whose
current address is 4 John Carpenter Street, London, England ED4Y 0NH, is
involved primarily in marketing and investment research activities with respect
to private clients and the MIL Funds and the MFS Meridian Funds.
MFS Fund Distributors, Inc. ("MFD"), a wholly owned subsidiary
of MFS, serves as distributor for the MFS Funds, MVI, UST and MFSIT.
Clarendon Insurance Agency, Inc. ("CIAI"), a wholly owned
subsidiary of MFS, serves as distributor for certain life insurance and annuity
contracts issued by Sun Life Assurance Company of Canada (U.S.).
MFS Service Center, Inc. ("MFSC"), a wholly owned subsidiary
of MFS, serves as shareholder servicing agent to the MFS Funds, the MFS
Closed-End Funds, MFSIT, MVI and UST.
MFS Institutional Advisors, Inc. ("MFSI"), a wholly owned
subsidiary of MFS, provides investment advice to substantial private clients.
MFS Retirement Services, Inc. ("RSI"), a wholly owned
subsidiary of MFS, markets MFS products to retirement plans and provides
administrative and record keeping services for retirement plans.
MFS
The Directors of MFS are A. Keith Brodkin, Jeffrey L. Shames,
Arnold D. Scott, Donald A. Stewart and John D. McNeil. Mr. Brodkin is the
Chairman, Mr. Shames is the President, Mr. Scott is a Senior Executive Vice
President and Secretary, Bruce C. Avery, William S. Harris, William W. Scott,
Jr., Patricia A. Zlotin, John W. Ballen, Thomas J. Cashman, Jr., Joseph W. Dello
Russo and Kevin R. Parke are Executive Vice Presidents, Stephen E. Cavan is a
Senior Vice President, General Counsel and an Assistant Secretary, Robert T.
Burns is a Senior Vice President, Associate General Counsel and an Assistant
Secretary of MFS, and Thomas B. Hastings is a Vice President and Treasurer of
MFS.
<PAGE>
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, Ellen
M. Moynihan and Mark E. Bradley, Vice Presidents of MFS, are the Assistant
Treasurers, James R. Bordewick, Jr., Senior Vice President and Associate General
Counsel of MFS, is the Assistant Secretary.
MFS SERIES TRUST II
A. Keith Brodkin is the Chairman and President, Leslie J.
Nanberg, Senior Vice President of MFS, is a Vice President, Stephen E. Cavan is
the Secretary, W. Thomas London is the Treasurer, James O. Yost, Ellen M.
Moynihan and Mark E. Bradley are the Assistant Treasurers, and James R.
Bordewick, Jr., is the Assistant Secretary.
MFS GOVERNMENT MARKETS INCOME TRUST
MFS INTERMEDIATE INCOME TRUST
A. Keith Brodkin is the Chairman and President, Leslie J.
Nanberg, Senior Vice President of MFS, is a Vice President, Stephen E. Cavan is
the Secretary, W. Thomas London is the Treasurer, James O. Yost, Ellen M.
Moynihan and Mark E. Bradley are the Assistant Treasurers, and James R.
Bordewick, Jr., is the Assistant Secretary.
MFS SERIES TRUST III
A. Keith Brodkin is the Chairman and President, James T.
Swanson, Robert J. Manning, Cynthia M. Brown and Joan S. Batchelder, Senior Vice
Presidents of MFS, and Bernard Scozzafava, Vice President of MFS, are Vice
Presidents, Sheila Burns-Magnan, Assistant Vice President of MFS, and Daniel E.
McManus, Vice President of MFS, are Assistant Vice Presidents, Stephen E. Cavan
is the Secretary, W. Thomas London is the Treasurer, James O. Yost, Ellen M.
Moynihan and Mark E. Bradley are the Assistant Treasurers, and James R.
Bordewick, Jr., is the Assistant Secretary.
MFS SERIES TRUST IV
MFS SERIES TRUST IX
A. Keith Brodkin is the Chairman and President, Robert A.
Dennis and Geoffrey L. Kurinsky, Senior Vice Presidents of MFS, are Vice
Presidents, Stephen E. Cavan is the Secretary, W. Thomas London is the
Treasurer, James O. Yost, Ellen M. Moynihan and Mark E. Bradley are the
Assistant Treasurers and James R. Bordewick, Jr., is the Assistant Secretary.
MFS SERIES TRUST VII
A. Keith Brodkin is the Chairman and President, Leslie J.
Nanberg and Stephen C. Bryant, Senior Vice Presidents of MFS, are Vice
Presidents, Stephen E. Cavan is the Secretary, W. Thomas London is the
Treasurer, James O. Yost, Ellen M. Moynihan and Mark E. Bradley are the
Assistant Treasurers and James R. Bordewick, Jr., is the Assistant Secretary.
MFS SERIES TRUST VIII
A. Keith Brodkin is the Chairman and President, Jeffrey L.
Shames, Leslie J. Nanberg, Patricia A. Zlotin, James T. Swanson and John D.
Laupheimer, Jr., Vice President of MFS, are Vice Presidents, Stephen E. Cavan is
the Secretary, W. Thomas London is the Treasurer, James O. Yost, Ellen M.
Moynihan and Mark E. Bradley are the Assistant Treasurers and James R.
Bordewick, Jr., is the Assistant Secretary.
MFS MUNICIPAL SERIES TRUST
A. Keith Brodkin is the Chairman and President, Cynthia M.
Brown and Robert A. Dennis are Vice Presidents, David B. Smith, Geoffrey L.
Schechter and David R. King, Vice Presidents of MFS, are Vice Presidents, Daniel
E. McManus, Vice President of MFS, is an Assistant Vice President, Stephen E.
Cavan is the Secretary, W. Thomas London is the Treasurer, James O. Yost, Ellen
M. Moynihan and Mark E. Bradley are the Assistant Treasurers and James R.
Bordewick, Jr., is the Assistant Secretary.
MFS VARIABLE INSURANCE TRUST
MFS UNION STANDARD TRUST
MFS INSTITUTIONAL TRUST
A. Keith Brodkin is the Chairman and President, Stephen E.
Cavan is the Secretary, W. Thomas London is the Treasurer, James O. Yost 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, Ellen M. Moynihan
and Mark E. Bradley are the Assistant Treasurers and James R. Bordewick, Jr., is
the Assistant Secretary.
MFS MULTIMARKET INCOME TRUST
MFS CHARTER INCOME TRUST
A. Keith Brodkin is the Chairman and President, Leslie J.
Nanberg and James T. Swanson are Vice Presidents, Stephen E. Cavan is the
Secretary, W. Thomas London is the Treasurer, James O. Yost, Ellen M. Moynihan
and Mark E. Bradley are the Assistant Treasurers and James R. Bordewick, Jr., is
the Assistant Secretary.
MFS SPECIAL VALUE TRUST
A. Keith Brodkin is the Chairman and President, Jeffrey L.
Shames and Robert J. Manning are Vice Presidents, Stephen E. Cavan is the
Secretary, W. Thomas London is the Treasurer, James O. Yost, Ellen M. Moynihan
and Mark E. Bradley are the Assistant Treasurers and James R. Bordewick, Jr., is
the Assistant Secretary.
MFS/SUN LIFE SERIES TRUST
John D. McNeil, Chairman and Director of Sun Life Assurance
Company of Canada, is the Chairman, Stephen E. Cavan is the Secretary, W. Thomas
London is the Treasurer, James O. Yost, Ellen M. Moynihan and Mark E. Bradley
are the Assistant Treasurers and James R. Bordewick, Jr., is the Assistant
Secretary.
MONEY MARKET VARIABLE ACCOUNT
HIGH YIELD VARIABLE ACCOUNT
CAPITAL APPRECIATION VARIABLE ACCOUNT
GOVERNMENT SECURITIES VARIABLE ACCOUNT
TOTAL RETURN VARIABLE ACCOUNT
WORLD GOVERNMENTS VARIABLE ACCOUNT
MANAGED SECTORS VARIABLE ACCOUNT
John D. McNeil is the Chairman, Stephen E. Cavan is the
Secretary, and James R. Bordewick, Jr., is the Assistant Secretary.
MIL
A. Keith Brodkin is a Director and the Chairman, Arnold D.
Scott and Jeffrey L. Shames are Directors, Thomas J. Cashman, Jr., an Executive
Vice President of MFS, is a Senior Vice President, Stephen E. Cavan is a
Director, Senior Vice President and the Clerk, James R. Bordewick, Jr. is a
Director, Vice President and an Assistant Clerk, Robert T. Burns is an Assistant
Clerk, Joseph W. Dello Russo, Executive Vice President and Chief Financial
Officer of MFS, is the Treasurer and Thomas B. Hastings is the Assistant
Treasurer.
MIL-UK
A. Keith Brodkin is a Director and the Chairman, Arnold D.
Scott, Jeffrey L. Shames, and James R. Bordewick, Jr., are Directors, Stephen E.
Cavan is a Director and the Secretary, James E. Russell is the Treasurer, and
Robert T. Burns is the Assistant Secretary.
MIL FUNDS
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.
MFS MERIDIAN FUNDS
A. Keith Brodkin is the Chairman, President and a Director,
Richard B. Bailey, John A. Brindle, Richard W. S. Baker, Arnold D. Scott,
Jeffrey L. Shames and William F. Waters are Directors, Stephen E. Cavan is the
Secretary, W. Thomas London is the Treasurer, James R. Bordewick, Jr., is the
Assistant Secretary and James O. Yost is the Assistant Treasurer.
MFD
A. Keith Brodkin is the Chairman and a Director, Arnold D.
Scott and Jeffrey L. Shames are Directors, William W. Scott, Jr., an Executive
Vice President of MFS, is the President, Stephen E. Cavan is the Secretary,
Robert T. Burns is the Assistant Secretary, Joseph W. Dello Russo is the
Treasurer, and Thomas B. Hastings is the Assistant Treasurer.
CIAI
A. Keith Brodkin is the Chairman and a Director, Arnold D.
Scott and Jeffrey L. Shames are Directors, Cynthia Orcott is President, Bruce C.
Avery is the Vice President, Joseph W. Dello Russo is the Treasurer, Thomas B.
Hastings is the Assistant Treasurer, Stephen E. Cavan is the Secretary, and
Robert T. Burns is the Assistant Secretary.
MFSC
A. Keith Brodkin is the Chairman and a Director, Arnold D.
Scott and Jeffrey L. Shames are Directors, Joseph A. Recomendes, a Senior Vice
President of MFS, is Vice Chairman and a Director, Janet A. Clifford is the
Executive Vice President, Joseph W. Dello Russo is the Treasurer, Thomas B.
Hastings is the Assistant Treasurer, Stephen E. Cavan is the Secretary, and
Robert T. Burns is the Assistant Secretary.
MFSI
A. Keith Brodkin is the Chairman and a Director, Jeffrey L.
Shames, and Arnold D. Scott are Directors, Thomas J. Cashman, Jr., is the
President and a Director, Leslie J. Nanberg is a Senior Vice President, a
Managing Director and a Director, George F. Bennett, Carol A. Corley, John A.
Gee, Brianne Grady and Kevin R. Parke (who is an Executive Vice President of
MFS) are Senior Vice Presidents and Managing Directors, Joseph W. Dello Russo is
the Treasurer, Thomas B. Hastings is the Assistant Treasurer and Robert T. Burns
is the Secretary.
RSI
William W. Scott, Jr. and Bruce C. Avery are Directors, Arnold
D. Scott is the Chairman and a Director, Joseph W. Dello Russo is the Treasurer,
Thomas B. Hastings is the Assistant Treasurer, Stephen E. Cavan is the
Secretary, Robert T. Burns is the Assistant Secretary and Sharon A. Brovelli and
Martin E. Beaulieu are Senior Vice Presidents.
In addition, the following persons, Directors or officers of
MFS, have the affiliations indicated:
A. Keith Brodkin Director, Sun Life Assurance Company
of Canada (U.S.), One Sun Life
Executive Park, Wellesley Hills,
Massachusetts
Director, Sun Life Insurance and
Annuity Company of New York, 67
Broad Street, New York, New York
Donald A. Stewart President and a Director, Sun Life
Assurance Company of Canada, Sun
Life Centre, 150 King Street West,
Toronto, Ontario, Canada (Mr.
Stewart is also an officer and/or
Director of various subsidiaries and
affiliates of Sun Life)
John D. McNeil Chairman, Sun Life Assurance Company
of Canada, Sun Life Centre, 150 King
Street West, Toronto, Ontario,
Canada (Mr. McNeil is also an
officer and/or Director of various
subsidiaries and affiliates of Sun
Life)
Joseph W. Dello Russo Director of Mutual Fund Operations,
The Boston Company, Exchange Place,
Boston, Massachusetts (until August,
1994)
ITEM 29. DISTRIBUTORS
(a) Reference is hereby made to Item 28 above.
(b) Reference is hereby made to Item 28 above; the principal
business address of each of these persons is 500 Boylston Street, Boston,
Massachusetts 02116.
(c) Not Applicable.
ITEM 30. LOCATION OF ACCOUNTS AND RECORDS
The accounts and records of the Registrant are located, in
whole or in part, at the 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, 1997.
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, 1997.
SIGNATURE TITLE
--------- ---------
A. KEITH BRODKIN* Chairman, President (Principal Executive
- - ------------------- Officer) and Trustee
A. Keith Brodkin
W. THOMAS LONDON* Treasurer (Principal Financial Officer and
- - ------------------- Principal Accounting Officer)
W. Thomas London
RICHARD B. BAILEY* Trustee
- - -------------------
Richard B. Bailey
PETER G. HARWOOD* Trustee
- - -------------------
Peter G. Harwood
J. ATWOOD IVES* Trustee
- - -------------------
J. Atwood Ives
LAWRENCE T. PERERA* Trustee
- - -------------------
Lawrence T. Perera
WILLIAM J. POORVU* Trustee
- - -------------------
William J. Poorvu
CHARLES W. SCHMIDT* Trustee
- - -------------------
Charles W. Schmidt
ARNOLD D. SCOTT* Trustee
- - -------------------
Arnold D. Scott
JEFFREY L. SHAMES* Trustee
- - -------------------
Jeffrey L. Shames
ELAINE R. SMITH* Trustee
- - -------------------
Elaine R. Smith
DAVID B. STONE* Trustee
- - -------------------
David B. Stone
*By: JAMES R. BORDEWICK, JR.
----------------------------
Name: James R. Bordewick, Jr.
as Attorney-in-fact
Executed by James R. Bordewick, Jr., on behalf of
those indicated pursuant to a Power of Attorney
dated September 21, 1994, 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
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION OF EXHIBIT PAGE NO.
- - ---------- ---------------------- ---------
<C> <S> <C>
1 (c) Amendment to the Declaration of Trust - Redesignation of Class
P shares as Class I shares dated December 18, 1996.
9 (b) Amendment to Shareholder Servicing Agent Agreement, dated
January 1, 1997 to amend fee schedule.
11 Consent of Deloitte & Touche LLP.
17 Financial Data Schedules for each class of each series.
</TABLE>
<PAGE>
EXHIBIT NO. 99.1(c)
MFS SERIES TRUST IX
CERTIFICATION OF AMENDMENT
TO THE DECLARATION OF TRUST
REDESIGNATION
OF CLASS P SHARES AS CLASS I SHARES
The 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 (the "Declaration"), acting pursuant to Section 6.10
of the Declaration, do hereby redesignate the shares previously designated as
Class P shares of each series of the Trust as Class I shares.
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 18th day of December, 1996.
A. KEITH BRODKIN CHARLES W. SCHMIDT
- - -------------------------- ---------------------------
A. Keith Brodkin Charles W. Schmidt
76 Farm Road 63 Claypit Hill Road
Sherborn, MA 01770 Wayland, MA 01778
RICHARD B. BAILEY ARNOLD D. SCOTT
- - --------------------------- --------------------------
Richard B. Bailey Arnold D. Scott
63 Atlantic Avenue 20 Rowes Wharf
Boston, MA 02110 Boston, MA 02110
PETER G. HARWOOD
- - -------------------------- ---------------------------
Peter G. Harwood Jeffrey L. Shames
211 Lindsay Pond Road 36 Lake Avenue
Concord, MA 01742 Newton, MA 02159
J. ATWOOD IVES ELAINE R. SMITH
- - -------------------------- ---------------------------
J. Atwood Ives Elaine R. Smith
1 Bennington Road 75 Scotch Pine Road
Lexington, MA 02173 Weston, MA 02193
LAWRENCE T. PERERA DAVID B. STONE
- - -------------------------- ---------------------------
Lawrence T. Perera David B. Stone
18 Marlborough Street 282 Beacon Street
Boston, MA 02116 Boston, MA 02116
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
January 1, 1997
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, is
hereby amended, effective immediately, to read in its entirety as set forth on
Attachment 1 hereto.
Please indicate your acceptance of the foregoing by signing below.
Sincerely,
MFS SERIES TRUST IX
By: W. THOMAS LONDON
---------------------
W. Thomas London
Treasurer
Accepted and Agreed:
MFS SERVICE CENTER, INC.
By: JOSEPH W. DELLO RUSSO
---------------------------
Joseph W. Dello Russo
Treasurer
<PAGE>
ATTACHMENT 1
January 1, 1997
EXHIBIT B TO THE SHAREHOLDER
SERVICING AGENT AGREEMENT BETWEEN
MFS SERVICE CENTER, INC. ("MFSC")
AND MFS SERIES TRUST IX (THE "FUND")
The fees to be paid by the Fund on behalf of its series with respect to all
shares of each series of the Fund to MFSC, for MFSC's services as shareholder
servicing agent, shall be 0.13% of the average daily net assets of the Fund.
<PAGE>
EXHIBIT NO. 99.11
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in this Post-Effective Amendment
No. 34 to Registration Statement No. 2-50409 of MFS Series Trust IX of our
reports each dated May 30, 1997 appearing in the annual reports to shareholders
for the year ended April 30, 1997, of MFS Bond Fund, MFS Limited Maturity Fund
and MFS Municipal Limited Maturity Fund, series of MFS Series Trust IX, and to
the references to us under the headings "Condensed Financial Information" in the
Prospectuses and "Independent Auditors and Financial Statements" in the
Statements of Additional Information, which are part of such Registration
Statement.
DELOITTE & TOUCHE LLP
Deloitte & Touche LLP
Boston, Massachusetts
August 25, 1997
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