<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 1, 2000
1933 ACT FILE NO.
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
FORM N-14
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
MFS SERIES TRUST IX
(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, ESQ.
MASSACHUSETTS FINANCIAL SERVICES COMPANY
500 BOYLSTON STREET
BOSTON, MASSACHUSETTS 02116
(NAME AND ADDRESS OF AGENT FOR SERVICE)
----------------
With copies to:
JEREMIAH J. BRESNAHAN, ESQ.
BINGHAM DANA LLP
150 FEDERAL STREET,
BOSTON, MASSACHUSETTS 02110
----------------
APPROXIMATE DATE OF PROPOSED PUBLIC OFFERING:
As soon as practicable after the effective date of the registration statement.
NO FILING FEE IS REQUIRED BECAUSE AN INDEFINITE NUMBER OF SHARES HAVE PREVIOUSLY
BEEN REGISTERED PURSUANT TO RULE 24F-2 UNDER THE INVESTMENT COMPANY ACT OF 1940.
PURSUANT TO RULE 429, THIS REGISTRATION STATEMENT RELATES TO SHARES PREVIOUSLY
REGISTERED ON FORM N-1A (FILE NO. 2-50409).
IT IS PROPOSED THAT THIS FILING WILL BECOME EFFECTIVE ON
MARCH 31, 2000 PURSUANT TO RULE 488.
================================================================================
<PAGE>
PROXY INFORMATION
The enclosed proxy statement discusses important issues affecting your
investment in the MFS Intermediate Income Fund. To make voting faster and more
convenient for you, we're offering the options of voting on the internet, by
fax, or by telephone instead of completing and mailing the enclosed proxy
card. All three methods are generally available 24 hours a day. If you vote
via the internet or by telephone, your vote will be confirmed and posted
immediately. If you choose to vote via the internet, by fax, or by phone, do
not mail the proxy card.
However you choose to vote, it is important that you vote to save the expense
of additional solicitations.
WAYS TO VOTE:
TO VOTE ON THE INTERNET
1. Read the proxy statement.
2. Go to WWW.PROXYVOTE.COM or the "Proxy voting"
link on WWW.MFS.COM.
3. Enter the 12-digit control number on
your proxy card.
4. Follow the instructions on the site.
TO VOTE BY FAX
1. Read the proxy statement.
2. Complete and sign the proxy card.
3. Fax the completed proxy card
toll-free to 1-800-733-1885.
TO VOTE BY TELEPHONE
1. Read the proxy statement.
2. Call toll-free 1-800-690-6903.
3. Enter the 12-digit control number
on your proxy card.
4. Follow the recorded instructions.
YOUR VOTE IS IMPORTANT TO US, PLEASE VOTE NOW.
QUESTIONS:
Shareholder Communications Corporation (SCC), a professional proxy
solicitation firm, has been selected to assist shareholders in the voting
process. If we have not received your proxy card as the date of the meeting
approaches, SCC may call you to remind you to exercise your right to vote.
If you have any questions, please call SCC toll-free at 1-800-645-4519 any
business day between 9 a.m. and 11 p.m. Eastern time.
<PAGE>
PROXY INFORMATION
The enclosed proxy statement discusses important issues affecting your
investment in the MFS Intermediate Income Fund. To make voting faster and more
convenient for you, we're offering the options of voting on the internet or by
telephone instead of completing and mailing the enclosed card. Either method
is generally available 24 hours a day, and your vote will be confirmed and
posted immediately. If you choose to vote via the internet or by phone, do not
mail the proxy card.
However you choose to vote, it is important that you vote to save the expense
of additional solicitations.
WAYS TO VOTE:
TO VOTE ON THE INTERNET
1. Read the proxy statement.
2. Go to WWW.PROXYVOTE.COM or the "Proxy voting"
link on WWW.MFS.COM.
3. Enter the 12-digit control number on
your proxy card.
4. Follow the instructions on the site.
TO VOTE BY TELEPHONE
1. Read the proxy statement.
2. Call toll-free 1-800-690-6903.
3. Enter the 12-digit control number
on your proxy card.
4. Follow the recorded instructions.
YOUR VOTE IS IMPORTANT TO US, PLEASE VOTE NOW.
QUESTIONS:
Shareholder Communications Corporation (SCC), a professional proxy
solicitation firm, has been selected to assist shareholders in the voting
process. If we have not received your proxy card as the date of the meeting
approaches, SCC may call you to remind you to exercise your right to vote.
If you have any questions, please call SCC toll-free at 1-800-645-4519 any
business day between 9 a.m. and 11 p.m. Eastern time.
<PAGE>
CONTENTS OF REGISTRATION STATEMENT
Facing Page
A Message from the Chairman
Notice of Shareholder Meeting
Combined Prospectus/Proxy Statement
Form of Proxy Card
Statement of Additional Information
Other Information
Signature Page
Exhibits
<PAGE>
MFS INTERMEDIATE INCOME FUND
MARCH 31, 2000
Dear Shareholder:
I am writing to ask for your vote on an important matter that will affect
your investment in MFS Intermediate Income Fund (the "Intermediate Income
Fund"). While you are, of course, welcome to join us at the Intermediate
Income Fund's meeting, most shareholders cast their vote by filling out and
signing the enclosed proxy card or by voting by telephone or over the
internet.
You may be aware that MFS offers a wide array of funds designed to meet
the investment needs of investors. MFS offers a fund which is very similar to
the Intermediate Income Fund called MFS Limited Maturity Fund (the "Limited
Maturity Fund"). The Limited Maturity Fund seeks as high a level of current
income as is believed to be consistent with prudent investment risk. Its
secondary objective is to protect shareholders' capital. In addition to having
a similar investment objective the Limited Maturity Fund has lower operating
expenses and is approximately twice as large as the Intermediate Income Fund.
After careful consideration, the Intermediate Income Fund's Trustees have
unanimously agreed that a tax free reorganization of the Intermediate Income
Fund into the Limited Maturity Fund will offer you a similar investment
objective and strategy with lower operating expenses. For this reason, your
Trustees recommend that you vote FOR the proposed transaction, by signing and
returning the enclosed proxy card or by following the instructions on the
proxy card to vote via telephone or over the internet. This proposed
reorganization is detailed in the enclosed Prospectus/Proxy Statement. For
your convenience, a summary of the transaction in question and answer format
is included in the beginning of the Prospectus/Proxy Statement. I suggest you
read both thoroughly before voting.
YOUR VOTE MAKES A DIFFERENCE
No matter what size your investment may be, your vote is critical. I urge
you to review the enclosed materials and to complete, sign and return the
enclosed proxy ballot to us immediately. Your prompt response will help avoid
the need for additional mailings at the Intermediate Income Fund's expense.
For your convenience, we have provided a postage-paid envelope.
If you have any questions or need additional information, please contact
your investment professional or call your Customer Service Representative at
1-800-225-2606, Monday through Friday between 8:00 A.M. and 8:00 P.M. Eastern
Time. I thank you for your prompt vote on this matter.
Sincerely,
/s/ Jeffrey L. Shames
Jeffrey L. Shames
Chairman and President
<PAGE>
MFS INTERMEDIATE INCOME FUND
A SERIES OF MFS SERIES TRUST II
500 BOYLSTON STREET, BOSTON, MASSACHUSETTS 02116
NOTICE OF A SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD MAY 18, 2000
A Special Meeting of Shareholders of MFS Intermediate Income Fund, a series of
MFS Series Trust II, a Massachusetts business trust, will be held at the
offices of the Fund, 500 Boylston Street, 24th Floor, Boston, Massachusetts,
on Thursday, May 18, 2000, at 10 a.m. for the following purposes:
ITEM 1. To consider and act upon a proposal to approve an Agreement and
Plan of Reorganization (the "Agreement") between MFS Series Trust
II, a Massachusetts business trust, on behalf of MFS Intermediate
Income Fund, a series of MFS Series Trust II (the "Intermediate
Income Fund"), and MFS Series Trust IX, on behalf of MFS Limited
Maturity Fund (the "Limited Maturity Fund"), providing for the
transfer of all of the assets of the Intermediate Income Fund to
the Limited Maturity Fund in exchange solely for shares of
beneficial interest of the Limited Maturity Fund and the
assumption by the Limited Maturity Fund of the stated liabilities
of the Intermediate Income Fund, the distribution of the Limited
Maturity Fund shares to the shareholders of the Intermediate
Income Fund in liquidation of the Intermediate Income Fund and the
termination of the Intermediate Income Fund.
ITEM 2. To transact such other business as may properly come before the
meeting and any adjournments thereof.
YOUR TRUSTEES UNANIMOUSLY RECOMMEND THAT YOU
VOTE IN FAVOR OF ITEM 1.
Only shareholders of record on March 24, 2000 will be entitled to vote at the
Meeting.
By order of the Board of Trustees,
Stephen E. Cavan, Secretary
March 31, 2000
YOUR VOTE IS IMPORTANT. WE WOULD APPRECIATE YOUR PROMPTLY VOTING,
SIGNING AND RETURNING THE ENCLOSED PROXY, WHICH WILL HELP IN AVOIDING THE
ADDITIONAL EXPENSE OF A SECOND SOLICITATION. THE ENCLOSED ADDRESSED ENVELOPE
REQUIRES NO POSTAGE AND IS INTENDED FOR YOUR CONVENIENCE.
<PAGE>
PROSPECTUS/PROXY STATEMENT
MARCH 31, 2000
ACQUISITION OF THE ASSETS OF
MFS INTERMEDIATE INCOME FUND
A SERIES OF MFS TRUST II
500 BOYLSTON STREET
BOSTON, MASSACHUSETTS 02116
(617) 954-5000
BY AND IN EXCHANGE FOR SHARES OF
MFS LIMITED MATURITY FUND
A SERIES OF MFS TRUST IX
500 BOYLSTON STREET
BOSTON, MASSACHUSETTS 02116
(617) 954-5000
* * * * *
This document will give you the information you need to vote on the proposed
reorganization. Much of the information is required under rules of the
Securities and Exchange Commission (the "SEC"); some is technical. If there is
anything you don't understand, please contact us at our toll-free number,
1-800-225-2606, or call your financial advisor.
This Prospectus/Proxy Statement relates to the proposed reorganization of
MFS Intermediate Income Fund (the "Intermediate Income Fund") into MFS Limited
Maturity Fund (the "Limited Maturity Fund"). As a result of the proposed
transaction, each Class A, Class B and Class I shareholder of the Intermediate
Income Fund will receive a number of full and fractional Class A, Class B and
Class I shares, respectively, of the Limited Maturity Fund equal in value at
the date of the exchange to the total value of the shareholder's Intermediate
Income Fund shares. Like the Intermediate Income Fund, the Limited Maturity
Fund is in the family of funds managed by Massachusetts Financial Services
Company ("MFS") and is a registered open-end management investment company
(mutual fund). The Limited Maturity Fund and the Intermediate Income Fund are
collectively referred to herein as the "Funds," and each is referred to
individually as a "Fund."
This Prospectus/Proxy Statement explains concisely what you should know
before voting on the proposed reorganization or investing in the Limited
Maturity Fund. Please read it and keep it for future reference. This
Prospectus/Proxy Statement is accompanied by (i) the Prospectus, dated
September 1, 1999, of the Limited Maturity Fund (the "Limited Maturity Fund
Prospectus") and (ii) the Report of Independent Accountants and financial
statements included in the Limited Maturity Fund's Annual Report to
Shareholders for the fiscal year ended April 30, 1999. The Limited Maturity
Fund Prospectus and the Limited Maturity Fund's Annual Report are incorporated
into this Prospectus/Proxy Statement by reference.
The following documents have been filed with the Securities and Exchange
Commission and are also incorporated into this Prospectus/Proxy Statement by
reference:
(i) the Prospectus, dated April 1, 1999, of the Intermediate Income
Fund;
(ii) the Statement of Additional Information of the Intermediate
Income Fund, dated April 1, 1999;
(iii) the Statement of Additional Information of the Limited Maturity
Fund, dated September 1, 1999 as amended September 22, 1999;
(iv) the Report of Independent Accountants and financial statements
included in the Intermediate Income Fund's Annual Report to Shareholders
for the fiscal year ended November 30, 1999;
(v) the Limited Maturity Fund's Semiannual Report to Shareholders for
the six month period ended October 31, 1999.
(vi) a Statement of Additional Information, dated March 31, 2000,
relating to the proposed reorganization.
For a Free Copy of Any of the Above, Please Contact Us at our Toll-Free
Number (1-800-225-2606).
Proxy materials, registration statements and other information filed by
the Funds can be inspected and copied at the Public Reference Room maintained
by the Securities and Exchange Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549. Copies of such material can also be obtained from the
Public Reference Branch, Office of Consumer Affairs and Information Services,
Securities and Exchange Commission, Washington, D.C. 20549 at prescribed
rates. You may also access reports and other information about the Funds on
the Commission's Internet site at http://www.sec.gov.
The securities offered by the accompanying Prospectus/Proxy Statement 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
such Prospectus/Proxy Statement. Any representation to the contrary is a
criminal offense.
* * * * *
TABLE OF CONTENTS
PAGE
Synopsis ................................................................ 3
Risk Factors ............................................................ 11
General ................................................................. 13
Proposal Regarding Approval or Disapproval of Reorganization and
Related Agreement and Plan of Reorganization .......................... 14
Background and Reasons for the Proposed Reorganization .................. 15
Information about the Reorganization .................................... 16
Voting Information ...................................................... 20
Agreement and Plan of Reorganization .................................... A-1
Enclosures
Prospectus of the MFS Limited Maturity Fund, dated September 1, 1999
Annual Report of the MFS Limited Maturity Fund, dated April 30, 1999
<PAGE>
SYNOPSIS
The responses to the questions that follow provide an overview of key
points typically of concern to shareholders considering a proposed
reorganization between funds. These responses are qualified in their entirety
by the remainder of the Prospectus/Proxy Statement, which contains additional
information and further details regarding the proposed reorganization.
1. WHAT IS BEING PROPOSED?
The Trustees of the Funds are recommending that shareholders of the
Intermediate Income Fund approve the reorganization of the Intermediate Income
Fund into the Limited Maturity Fund. If approved by shareholders, all of the
assets of the Intermediate Income Fund will be transferred to the Limited
Maturity Fund in exchange for shares of the Limited Maturity Fund with a value
equal to those assets net of liabilities and for the assumption by the Limited
Maturity Fund of all of the stated liabilities of the Intermediate Income
Fund. Immediately following the transfer, the Limited Maturity Fund shares
received by the Intermediate Income Fund will be distributed to its
shareholders, pro rata.
2. WHAT WILL HAPPEN TO MY SHARES OF THE INTERMEDIATE INCOME FUND AS A RESULT
OF THE REORGANIZATION?
Your shares of the Intermediate Income Fund will, in effect, be exchanged
on a tax-free basis for shares of the Limited Maturity Fund with an equal
total net asset value.
3. WHY ARE THE TRUSTEES PROPOSING THIS REORGANIZATION?
As discussed in more detail below, the two Funds are similar in investment
strategy and policy. The Trustees believe that combining the two similar Funds
should result in lower expenses for fund shareholders without changing in any
significant way the essential investment profile of the Funds. The Trustees
also believe that the Limited Maturity Fund provides shareholders with the
opportunity to invest in a fund with an investment objective substantially
similar to that of the Intermediate Income Fund but with less expense,
volatility and risk. In addition, the Limited Maturity Fund has grown in size
in recent years while the Intermediate Income Fund has diminished in size.
Therefore, the reorganization gives you the opportunity to become shareholders
in a larger and growing fund.
4. WHAT ARE THE BENEFITS OF MERGING INTERMEDIATE INCOME FUND INTO THE LIMITED
MATURITY FUND?
The Limited Maturity Fund is more widely recognized in the mutual fund
marketplace than your Fund, which has made it harder for your Fund to raise
assets and reduce expenses. Your trustees believe this reorganization will
allow you to continue investing for a high level of current income at a lower
expense and with less volatility.
The Limited Maturity Fund's asset base after the reorganization is
projected to be $316 million. This is significantly larger than Intermediate
Income Fund's pre-reorganization asset base of $111 million and should result
in economies of scale leading to lower operating expenses than are incurred by
your fund. Following the reorganization, annual expense ratios are projected
to be 0.80% for Class A shareholders, down from 0.92% (after waivers), 1.62%
down from 1.92% (after waivers) for Class B shareholders and 0.65% down from
0.92% (after waivers) for Class I shareholders. Expected lower expenses should
help keep more of your money invested, which often helps bolster an
investment's total return over time.
5. HOW DO THE INVESTMENT GOALS, POLICIES AND RESTRICTIONS OF THE TWO FUNDS
COMPARE?
The investment goals and policies of the two funds are similar. Each is an
income oriented fund investing primarily in foreign and domestic corporate
bonds, mortgage-backed and asset-backed securities and U.S. government and
agency securities. The Intermediate Income Fund seeks to preserve capital and
provide high current income. The Limited Maturity Fund seeks to provide as
high a level of current income as is believed to be consistent with prudent
investment risk. Protection of shareholders' capital is its secondary
objective.
Both Funds seek their objectives by investing, under normal market
conditions, at least 65% of their assets in corporate bonds of U.S. and
foreign issuers, mortgage-backed and asset-backed securities and U.S.
government securities, which are debt securities issued or guaranteed by the
U.S. government, by certain of its agencies, or by various instrumentalities
established or sponsored by the U.S. government. In addition to these
categories of investments the Intermediate Income Fund also invests in foreign
government securities to meet this 65% requirement.
The Intermediate Income Fund has broader flexibility than the Limited
Maturity Fund. It can invest up to 10% of its total assets in securities rated
below investment grade (i.e., "junk bonds") and may invest in non-dollar
denominated foreign securities. The Intermediate Income Fund can also invest
in a wider variety of derivatives. In addition, the Limited Maturity Fund is a
diversified fund, whereas the Intermediate Income Fund is a non-diversified
fund. This means that the Intermediate Income Fund can concentrate its assets
in a small number of issuers. Because of these differences, approximately 8%
of the Intermediate Income Fund's portfolio investments are not permitted
under the Limited Maturity Fund's investment restrictions. These securities
will be liquidated prior to the completion of the reorganization and may cause
the Intermediate Income Fund to incur additional brokerage or tax costs.
Currently both Funds have an average portfolio quality rating of AA-,
which is an investment-grade rating. The Limited Maturity Fund invests in
securities with remaining maturities of 5 years or less, while the
Intermediate Income Fund invests in securities with remaining maturities of 10
years or less. The Intermediate Income Fund's current average portfolio
maturity is approximately 3.0 years as compared to approximately 1.8 years for
the Limited Maturity Fund. Fixed income securities with shorter maturities are
generally less volatile and provide lower returns than fixed income securities
with longer maturities. While the Limited Maturity Fund's investment strategy
is more conservative, management believes that the shorter average maturity
allows it more flexibility to react to market changes while still achieving a
high level of current income.
In addition to the Funds' principal investment strategies referred to
above, the Funds may engage in a number of other investment techniques and
practices. The table below summarizes both the principal and non-principal
investment techniques and practices which the Funds can employ. The risks
associated with the principal investment techniques and practices of the
Limited Maturity Fund are described below. Both principal and non-principal
investment techniques and practices are described, together with their risks,
in each Fund's Statement of Additional Information.
<TABLE>
INVESTMENT TECHNIQUES/PRACTICES
<CAPTION>
SYMBOLS x PERMITTED -- NOT PERMITTED
- - ------------------------------------------------------------------------------------------------------------------------
LIMITED INTERMEDIATE
MATURITY FUND INCOME FUND
------------- -----------
<S> <C> <C>
Debt Securities
Asset-Backed Securities
Collateralized Mortgage Obligations and Multiclass
Pass-Through Securities ................................................... x x
Corporate Asset-Backed Securities ........................................... x x
Mortgage Pass-Through Securities ............................................ x x
Stripped Mortgage-Backed Securities ......................................... x x
Corporate Securities .......................................................... x x
Loans and Other Direct Indebtedness ........................................... -- x
Lower Rated Bonds ............................................................. -- x
Municipal Bonds ............................................................... -- --
Speculative Bonds ............................................................. x x
U.S. Government Securities .................................................... x x
Variable and Floating Rate Obligations ........................................ x x
Zero Coupon Bonds, Deferred Interest Bonds and PIK Bonds ...................... x x
Equity Securities ............................................................... -- --
Foreign Securities Exposure
Brady Bonds ................................................................... x x
Depositary Receipts ........................................................... -- --
Dollar-Denominated Foreign Debt Securities .................................... x x
Emerging Markets .............................................................. x x
Foreign Securities ............................................................ -- x
Forward Contracts ............................................................... -- x
Futures Contracts ............................................................... x x
Indexed Securities/Structured Products .......................................... x x
Inverse Floating Rate Obligations ............................................... -- x
Investment in Other Investment Companies
Open-End Funds ................................................................ x x
Closed-End Funds .............................................................. x x
Lending of Portfolio Securities ................................................. x x
Leveraging Transactions
Bank Borrowings ............................................................... --* --*
Mortgage "Dollar-Roll" Transactions ........................................... --* --*
Reverse Repurchase Agreements ................................................. --* --*
Options
Options on Foreign Currencies ................................................. -- x
Options on Futures Contracts .................................................. x x
Options on Securities ......................................................... x x
Options on Stock Indices ...................................................... -- x
Reset Options ................................................................. -- x
"Yield Curve" Options ......................................................... -- x
Repurchase Agreements ........................................................... x x
Restricted Securities ........................................................... x x
Short Sales ..................................................................... --* --*
Short Sales Against the Box ..................................................... -- --
Short Term Instruments .......................................................... x x
Swaps and Related Derivative Instruments ........................................ x x
Temporary Borrowings ............................................................ x x
Temporary Defensive Positions ................................................... x x
Warrants ........................................................................ -- --
"When-Issued" Securities ........................................................ x x
- - ------------
*May only be changed with shareholder approval.
</TABLE>
<PAGE>
6. HOW DO THE MANAGEMENT FEES AND OTHER EXPENSES OF THE TWO FUNDS COMPARE, AND
WHAT ARE THEY ESTIMATED TO BE FOLLOWING THE REORGANIZATION?
As shown in the Annual Fund Operating Expense table below, in each Fund's
most recent fiscal year the Limited Maturity Fund paid a management fee that
is and, after giving effect to the reorganization will remain, 27% lower on a
per share basis than that of the Intermediate Income Fund. Also as shown in
the table, the Limited Maturity Fund's "other expenses" were 32% lower on a
per share basis than those of the Intermediate Income Fund in each Fund's last
fiscal year. The pro forma post-reorganization total operating expenses of the
Limited Maturity Fund are also lower than those of the Intermediate Income
Fund on a per share basis.
The sales charges are the same for both Funds, except that the Limited
Maturity Fund charges a lower initial sales charge for purchases of Class A
shares. However, no initial sales charge will be charged to shareholders in
connection with the reorganization of the Funds. In addition, the maximum
amounts payable under the distribution plans, adopted pursuant to Rule 12b-1
under the Investment Company Act of 1940, are the same for both Funds.
However, as indicated in the tables below, MFS is currently waiving or
reducing some of these expenses for the Funds.
The following tables summarize the maximum fees and expenses you may pay
when investing in the Funds, expenses that each of the Funds incurred in the
12 months ending October 31, 1999 and estimated expenses that MFS expects the
combined Fund to incur in the first year following the reorganization.
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C CLASS I
SHARES SHARES SHARES SHARES
------- ------- ------- -------
<S> <C> <C> <C> <C>
Fees (fees paid directly from your investment)
Maximum Sales Charge (Load) Imposed on
Purchases (as a percentage of offering price)
Intermediate Income Fund ............................ 4.75% None* N/A None
Limited Maturity Fund ............................... 2.50%+ None* None* None
Maximum Deferred Sales Charge (Load) (as a
percentage of the original purchase price or
redemption proceeds, whichever is lower)
Intermediate Income Fund ............................ None** 4.00%*** N/A None
Limited Maturity Fund ............................... None** 4.00%*** 1.00% None
- - ----------
* Higher 12b-1 fees borne by Class B and Class C shares may cause long-term Class B and Class C
shareholders to pay more than the total sales charges paid by class A shareholders.
** A deferred sales charge of up to 1.00% is assessed on certain redemptions of Class A shares that
were purchased without an initial sales charge as part of an investment of $1 million or more.
*** 4.0% in the first year, declining to 1.0% in the sixth year, and eliminated thereafter.
+ No sales charge would be paid on shares of the Limited Maturity Fund issued in connection with this
proposed reorganization.
</TABLE>
<PAGE>
<TABLE>
ANNUAL FUND OPERATING EXPENSES
(EXPENSES THAT ARE DEDUCTED FROM FUND ASSETS)
<CAPTION>
FEE WAIVER
AND/OR
MANAGEMENT DISTRIBUTION OTHER TOTAL ANNUAL FUND EXPENSE NET
FEES (12B-1) FEES EXPENSES OPERATING EXPENSES REIMBURSEMENT EXPENSES
---------- ------------ -------- ------------------ ------------- --------
<S> <C> <C> <C> <C> <C> <C>
INTERMEDIATE INCOME FUND
Class A ...... 0.70% 0.25% 0.37% 1.32% -0.40% 0.92%
Class B ...... 0.70% 1.00% 0.37% 2.07% -0.15% 1.92%
Class I ...... 0.70% 0.00% 0.37% 1.07% -0.15% 0.92%
LIMITED MATURITY FUND
Class A ...... 0.40% 0.15% 0.32% 0.87% 0.00% 0.87%
Class B ...... 0.40% 0.93% 0.32% 1.65% 0.00% 1.65%
Class C ...... 0.40% 1.00% 0.32% 1.72% 0.00% 1.72%
Class I ...... 0.40% 0.00% 0.32% 0.72% 0.00% 0.72%
LIMITED MATURITY FUND
(PRO FORMA COMBINED)
Class A ...... 0.40% 0.15% 0.25% 0.80% 0.00% 0.80%
Class B ...... 0.40% 0.97% 0.25% 1.62% 0.00% 1.62%
Class C ...... 0.40% 1.00% 0.25% 1.65% 0.00% 1.65%
Class I ...... 0.40% 0.00% 0.25% 0.65% 0.00% 0.65%
</TABLE>
The tables are provided to help you understand the expenses of investing in the
Funds and your share of the operating expenses that each Fund incurs and that
MFS expects the Limited Maturity Fund to incur in the first year following the
reorganization. The expenses shown in the table do not reflect the application
of credits related to expense offset arrangements that reduce certain Fund
expenses.
<PAGE>
EXAMPLES
These examples translate the expense percentages shown in the preceding
table into dollar amounts. By doing this, you can more easily compare the cost
of investing in the Funds. The expense figures for "1 Year" use "Net Expenses"
while the 3, 5 and 10 Year expense figures are based on "Total Annual Fund
Operating Expenses." The examples make certain assumptions. They assume that
you invest $10,000 in a Fund for the time periods shown and then, except as
shown for Class B and Class C shares, redeem all your shares at the end of
these periods. They also assume a 5% return on your investment each year and
that a Fund's operating expenses remain the same. The examples are
hypothetical; your actual costs and returns may be higher or lower.
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
INTERMEDIATE INCOME FUND
Class A ................................................ $564 $836 $1,128 $1,956
Class B+ ............................................... $595 $934 $1,300 $2,196*
Class B+ (no redemption) ............................... $195 $634 $1,100 $2,196*
Class I ................................................ $ 94 $325 $ 576 $1,292
LIMITED MATURITY FUND
Class A ................................................ $337 $521 $ 720 $1,296
Class B ................................................ $568 $820 $1,097 $1,746*
Class B (no redemption) ................................ $168 $520 $ 897 $1,746*
Class C ................................................ $275 $542 $ 933 $2,030
Class C (no redemption) ................................ $175 $542 $ 933 $2,030
Class I ................................................ $ 74 $230 $ 401 $ 894
LIMITED MATURITY FUND
(PRO FORMA COMBINED)
Class A ................................................ $330 $499 $ 683 $1,215
Class B ................................................ $565 $811 $1,081 $1,702*
Class B (no redemption) ................................ $165 $511 $ 881 $1,702*
Class C ................................................ $268 $520 $ 897 $1,955
Class C (no redemption) ................................ $168 $520 $ 897 $1,955
Class I ................................................ $ 66 $208 $ 362 $ 810
* Reflects conversion of Class B shares to Class A shares (which pay lower ongoing expenses)
approximately eight years after purchase.
+ For purposes of determining the contingent deferred sales charge ("CDSC") applicable to Class B
Reorganization Shares, such shares will be treated as having been acquired as of the dates the
corresponding Class B shares of the Intermediate Income Fund were originally acquired. See
"Information about the Reorganization - Description of the Reorganization Shares."
</TABLE>
<PAGE>
7. HOW HAS THE LIMITED MATURITY FUND PERFORMED?
Although past performance does not necessarily guarantee future results,
the Limited Maturity Fund has been a steady performer over the years. As of
October 31, 1999, the Fund's Class A shares have posted average annual total
returns (at net asset value) of 3.13% over the past year, 4.59% over the past
three years, 5.80% over the past five years and 5.51% for the life of the
Fund.** As of October 31, 1999, the Fund's Class B shares have posted average
annual total returns of 2.49% over the past year, 3.73% over the past three
years, 4.95% over the past five years and 4.81% for the life of the Fund. As
of October 31, 1999, the Fund's Class I shares have posted an average annual
total return of 3.29% over the past year, 4.64% over the past three years,
5.84% over the past five years and 5.54% for the life of the Fund. The yield
for Limited Maturity Fund shares for the 30-day period ended October 31, 1999
was 5.05% for Class A shares, 4.38% for Class B shares, 4.35% for Class C
shares and 5.33% for Class I shares. Set forth below is total return
information for the Class A shares of the two Funds for the one year periods
ending on the dates stated:
- - ------------
**"Life of the Fund" refers to the period from commencement of the Fund's
investment operations on February 26, 1992 with the offering of Class A
shares through October 31, 1999. Class B shares were first offered on
September 7, 1993, and Class I shares on January 2, 1997. Class B and Class
I share performance includes the performance of the Fund's Class A shares
for periods prior to the offering of Class B and Class I shares. This
blended performance has not been adjusted to take into account differences
in Class specific operating expenses. Because operating expenses of Class B
shares are higher than those of Class A shares, this blended Class B share
performance is higher than Class B share performance would have been had
Class B shares been offered for the entire period. Conversely, because
operating expenses of Class I shares are lower than Class A shares, this
blended Class I share performance is lower than Class I share performance
would have been had Class I shares been offered the entire period.
<TABLE>
AVERAGE ANNUAL TOTAL RETURN (TOTAL INVESTMENT RETURN AT NAV)
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Limited Maturity Fund ........................... 2.94% 5.12% 5.37% 4.89% 11.64%
Intermediate Income Fund ........................ (0.91)% 5.63% 5.95% 4.89% 16.41%
</TABLE>
Of course the Funds' past performance is not an indication of future
performance.
To review the Limited Maturity Fund in more detail, please refer to the
Limited Maturity Fund's prospectus and most recent annual report, both of
which are enclosed.
8. WHAT ARE THE DIFFERENCES IN PORTFOLIO TURNOVER RATES OF THE TWO FUNDS?
Portfolio turnover is a measure of how frequently a fund trades portfolio
securities. Frequent trading of portfolio securities increases transaction
costs, which could detract from a Fund's performance. During its last fiscal
year the Intermediate Income Fund had a portfolio turnover rate of 154% and
the Limited Maturity Fund's portfolio turnover rate was 278%. The high
turnover rate for each of the Funds is due to the short average duration of
each fund's portfolio (3.0 years for the Intermediate Income Fund and 1.8
years for the Limited Maturity Fund). In addition, the Limited Maturity Fund's
portfolio turnover rate during its last fiscal year was also adversely
impacted by Fund investors engaged in market timing activity.
While each Fund's short duration increases its portfolio turnover rate, it
allows the Fund to react more quickly to market changes and has not resulted
in capital gain distributions for either Fund.
9. WHO MANAGES THE LIMITED MATURITY FUND?
James J. Calmas, a Vice President of MFS, manages the Limited Maturity
Fund and is a co-manager of the Intermediate Income Fund with Stephen C.
Bryant, a Senior Vice President of MFS. Mr. Calmas has been employed as a
portfolio manager by MFS since 1988 and has managed the Limited Maturity Fund
since January 1, 1998 and the Intermediate Income Fund since January 15, 1999.
10. HOW DO I VOTE?
Shareholders can vote in any of the following ways:
o by proxy: by completing, signing and returning the enclosed proxy card using
the postage-paid envelope provided; or
o by telephone: by calling the toll-free number listed on your proxy card,
entering the twelve digit control number on your proxy card and following the
recorded instructions; or
o by internet: by going to www.proxyvote.com or clicking on the "Proxy voting"
link on www.mfs.com, entering the 12 digit control number on your proxy card
and following the instructions on the site.
If you prefer to vote in person, you are cordially invited to attend a
meeting of shareholders of your fund, which will be held at 10 a.m. on
Thursday, May 18, 2000 at our 500 Boylston Street headquarters in Boston,
Massachusetts. If you vote now, you will help avoid further solicitations at
your Fund's expense.
11. HOW WILL THE REORGANIZATION HAPPEN?
If the reorganization is approved, your Intermediate Income Fund shares
will be converted to Limited Maturity Fund shares, using the Funds' net asset
value share prices, excluding sales charges, as of the close of trading on May
19, 2000. This conversion will not affect the total dollar value of your
investment.
12. WILL THE REORGANIZATION HAVE TAX CONSEQUENCES?
Although any taxable dividends and capital gains will be paid prior to the
reorganization, the reorganization itself is a non-taxable event and does not
need to be reported on your 2000 tax return.
13. WILL MY DIVIDEND BE AFFECTED BY THE REORGANIZATION?
After the reorganization you will continue to receive distributions of any
net investment income once a month and any net realized capital gains at least
once a year. Except as described below, your distributions will continue to be
either reinvested or paid in cash, according to the option you selected with
the Intermediate Income Fund. Of course, the amount of these distributions
will reflect the investment performance of the Limited Maturity Fund.
The Limited Maturity Fund will not permit any Intermediate Income Fund
shareholder holding certificates for Intermediate Income Fund shares at the
time of the reorganization to receive cash dividends or other distributions,
receive certificates for shares issued in the reorganization (referred to as
"Reorganization Shares"), exchange Reorganization Shares for shares of other
investment companies managed by MFS, or pledge or redeem Reorganization Shares
until such certificates for Intermediate Income Fund shares have been
surrendered, or, in the case of lost certificates, until an adequate surety
bond has been posted.
If a shareholder is not for that reason permitted to receive cash
dividends or other distributions on Reorganization Shares, the Limited
Maturity Fund will pay all such dividends and distributions in additional
shares, notwithstanding any election the shareholder may have made previously
to receive dividends and distributions on Intermediate Income Fund shares in
cash.
14. DO THE PROCEDURES FOR PURCHASING, REDEEMING AND EXCHANGING SHARES OF THE
TWO FUNDS DIFFER?
No. The procedures for purchasing and redeeming shares of each Fund, and
for exchanging shares of each Fund for shares of other MFS funds, are
identical.
Both Funds currently offer Class A, B and I shares. In addition, the
Limited Maturity Fund also offers Class C shares. Shares of both Funds may be
purchased through investment dealers that have sales agreements with MFS Fund
Distributors, Inc. ("MFD") at prices based on net asset value, plus varying
sales charges, depending on the class and number of shares purchased. Class I
shares are only available to certain institutional investors. Reinvestment of
distributions by the Funds are made at net asset value for all classes of
shares.
Shares of each Fund may be redeemed any day the New York Stock Exchange is
open at their net asset value next determined after receipt by the Fund of a
properly completed redemption request either directly by a Fund or through an
investment dealer.
Shares of both Funds may be exchanged for shares of the same class of
certain other MFS funds.
15. HOW WILL I BE NOTIFIED OF THE OUTCOME OF THE REORGANIZATION?
If the proposed reorganization is approved by shareholders, you will
receive confirmation after the reorganization is completed, indicating your
new account number, the number of shares you are receiving and the procedures
for surrendering your certificates if you have any. If the reorganization is
not approved, shareholders will be notified, and the results of the meeting
will be provided in the next annual report of the Intermediate Income Fund.
16. WILL THE NUMBER OF SHARES I OWN CHANGE?
Yes, but the total value of the shares of the Limited Maturity Fund you
receive will equal the total value of the shares of the Intermediate Income
Fund that you hold at the time of the reorganization. Even though the net
asset value per share of each Fund is different, the total value of a
shareholder's holdings will not change as a result of the reorganization.
RISK FACTORS
WHAT ARE THE PRINCIPAL RISK FACTORS ASSOCIATED WITH AN INVESTMENT IN THE
LIMITED MATURITY FUND, AND HOW DO THEY COMPARE WITH THOSE FOR THE INTERMEDIATE
INCOME FUND?
Because the Funds share similar goals and policies, the risks of an
investment in the Limited Maturity Fund are similar to the risks of an
investment in the Intermediate Income Fund. A more detailed description of
certain risks associated with an investment in the Limited Maturity Fund is
contained in the Limited Maturity Fund Prospectus.
Although the two Funds' investment policies and risks are similar they are
not identical. The Limited Maturity Fund's investment policies are more
restrictive than those of the Intermediate Income Fund. Although both can
invest in foreign issuers, the Limited Maturity Fund is limited to investing
in U.S. dollar denominated securities of foreign issuers while the
Intermediate Income Fund may invest in securities denominated in other
currencies. The Intermediate Income Fund can also invest in a wider variety of
derivatives. In addition, the Intermediate Income Fund is a non-diversified
mutual fund, meaning that it can concentrate its assets in a small number of
issuers, and may also invest up to 10% of its assets in non-investment grade
securities (commonly referred to as "junk bonds"). Because the Intermediate
Income Fund is concentrated and invests in junk bonds, foreign denominated
securities and additional types of derivatives that have additional risks, the
Trustees and MFS believe that as a general matter, the Intermediate Income
Fund may involve more risk than a diversified fund that is not permitted to
invest in these instruments such as the Limited Maturity Fund. However, junk
bonds will generally have higher yields, and the diversification that they and
the currency exposure provide may reduce overall risk at times when the dollar
weakens or the investment grade securities markets are declining. Thus,
although the Limited Maturity Fund's overall portfolio risk may generally be
lower and its return less volatile, its yield and total return may also be
lower.
o Interest Rate Risk: When interest rates rise, the prices of fixed income
securities in the Funds' portfolios will generally fall. Conversely, when
interest rates fall, the prices of fixed income securities in the Funds'
portfolios will generally rise.
o Maturity Risk: As mentioned above, the Limited Maturity Fund invests in and
generally focuses on securities with remaining maturities of 5 years or less
whereas the Intermediate Income Fund generally focuses on securities with
remaining maturities of 10 years or less. Fixed income securities with
shorter maturities will be less volatile but generally provide lower returns
than fixed income securities with longer maturities. The average maturity of
the Funds' fixed income investments will affect the volatility of the Funds'
share price.
o Allocation Risk: Like the Intermediate Income Fund, the Limited Maturity Fund
will allocate its investments among various segments of the fixed income
markets based upon judgments made by MFS as the Fund's investment adviser.
The Fund could miss attractive investment opportunities by underweighting
markets where there are significant returns, and could lose value by
overweighting markets where there are significant declines.
o Credit Risk: Credit risk is the risk that the issuer of a fixed income
security will not be able to pay principal and interest when due. Rating
agencies assign credit ratings to certain fixed income securities to indicate
their credit risk. The price of a fixed income security will generally fall
if the issuer defaults on its obligation to pay principal or interest, the
rating agencies downgrade the issuer's credit rating or other news affects
the market's perception of the issuer's credit risk.
o Liquidity Risk: The fixed income securities purchased by the Funds may be
traded in the over-the-counter market rather than on an organized exchange
and are subject to liquidity risk. This means that they may be harder to
purchase or sell at a fair price. The inability to purchase or sell these
fixed income securities at a fair price could have a negative impact on the
Funds' performance.
o Mortgage and Asset-Backed Securities:
|> Maturity Risk:
Mortgage-Backed Securities: A mortgage-backed security will mature
when all the mortgages in the pool mature or are prepaid. Therefore,
mortgage- backed securities do not have a fixed maturity, and their
expected maturities may vary when interest rates rise or fall.
When interest rates fall, homeowners are more likely to prepay their
mortgage loans. An increased rate of prepayments on the Funds'
mortgage-backed securities will result in an unforeseen loss of interest
income to the Funds as the Funds may be required to reinvest assets at a
lower interest rate. Because prepayments increase when interest rates
fall, the price of mortgage- backed securities does not increase as much
as other fixed income securities when interest rates fall.
When interest rates rise, homeowners are less likely to prepay their
mortgage loans. A decreased rate of prepayments lengthens the expected
maturity of a mortgage-backed security. Therefore, the prices of
mortgage- backed securities may decrease more than prices of other fixed
income securities when interest rates rise.
Collateralized Mortgage Obligations: The Funds may invest in
mortgage- backed securities called collateralized mortgage obligations
(CMOs). CMOs are issued in separate classes with different stated
maturities. As the mortgage pool experiences prepayments, the pool pays
off investors in classes with shorter maturities first. By investing in
CMOs, the Fund may manage the prepayment risk of mortgage-backed
securities. However, prepayments may cause the actual maturity of a CMO
to be substantially shorter than its stated maturity.
Asset-Backed Securities: Asset-backed securities have prepayment
risks similar to mortgage-backed securities.
|> Credit Risk: As with any fixed income security, mortgage-backed and
asset-backed securities are subject to the risk that the issuer will
default on principal and interest payments. It may be difficult to
enforce rights against the assets underlying mortgage-backed and
asset-backed securities in the case of default. The U.S. government or
its agencies may guarantee the payment of principal and interest on some
mortgage-backed securities. Mortgage- backed securities and asset-backed
securities issued by private lending institutions or other financial
intermediaries may be supported by insurance or other forms of
guarantees.
o Foreign Markets Risk: While the Limited Maturity Fund does not invest in
foreign denominated securities and therefore does not have the currency risk
that the Intermediate Income Fund has, it may invest in U.S. dollar
denominated foreign debt securities. Investments in securities of foreign
issuers involve risks relating to political, social and economic developments
abroad, as well as risks resulting from the differences between the
regulations to which U.S. and foreign issuers and markets are subject:
These risks may include the seizure by the government of company assets,
excessive taxation, withholding taxes on dividends and interest, limitations
on the use or transfer of portfolio assets, and political or social
instability.
Enforcing legal rights may be difficult, costly and slow in foreign
countries, and there may be special problems enforcing claims against foreign
governments.
Foreign companies may not be subject to accounting standards or
governmental supervision comparable to U.S. companies, and there may be less
public information about their operations.
Foreign markets may be less liquid and more volatile than U.S. markets.
o Active or Frequent Trading Risk: Like the Intermediate Income Fund, the
Limited Maturity Fund has engaged and may engage in active and frequent
trading to achieve its principal investment strategies. This may result in
the realization and distribution to shareholders of higher capital gains as
compared to a fund with less active trading policies, which would increase
your tax liability. Frequent trading also increases transaction costs, which
could detract from the Fund's performance.
o Diversification Risk: Unlike the Intermediate Income Fund, the Limited
Maturity Fund is a diversified Fund meaning that it cannot concentrate as
high a percentage of its assets in a small number of issuers as the
Intermediate Income Fund has the ability to do. This decreases the Fund's
volatility but may also reduce its potential for higher yields and total
return.
As with any mutual fund, you could lose money on your investment in the
Limited Maturity Fund.
An investment in the Limited Maturity Fund is not a bank deposit and is
not insured or guaranteed by the Federal Deposit Insurance Corporation or any
other government agency.
Other investments. In addition to the Limited Maturity Fund's main
investment strategies of investing in corporate bonds of foreign and domestic
corporations, mortgage-backed and asset-backed securities and U.S. government
securities, each with limited maturities (i.e., remaining maturities of five
years or less), the Fund may also buy and sell other types of investments, as
indicated by the chart comparing the investment techniques of the Limited
Maturity Fund with those of the Intermediate Income Fund (see "Synopsis,
question 5" above). The risks associated with the principal investment
techniques and practices used by the Limited Maturity Fund are summarized
above. The non-principal investment techniques which the Limited Maturity Fund
is permitted to engage in are described, together with their risks, in the
Limited Maturity Fund's Statement of Additional Information.
GENERAL
This Prospectus/Proxy Statement is furnished in connection with the
proposed reorganization of the Intermediate Income Fund into the Limited
Maturity Fund and the solicitation of proxies by and on behalf of the Trustees
of the Intermediate Income Fund for use at the Meeting of Shareholders. The
Meeting is to be held on Thursday, May 18, 2000 at 10 a.m. at 500 Boylston
Street, 24th floor, Boston, Massachusetts. The Notice of the Meeting, the
combined Prospectus/Proxy Statement and the enclosed form of proxy are being
mailed to shareholders on or about April 1, 2000.
Any shareholder giving a proxy has the power to revoke it by mail
(addressed to the Intermediate Income Fund's Secretary at the principal office
of the Intermediate Income Fund, 500 Boylston Street, Boston, Massachusetts
02116) or in person at the Meeting, by executing a superseding proxy, or by
submitting a notice of revocation to the Intermediate Income Fund. All
properly executed proxies received in time for the Meeting will be voted as
specified in the proxy, or, if no specification is made, FOR the proposal (set
forth in Proposal 1 of the Notice of Meeting) to implement the reorganization
of the Intermediate Income Fund by the transfer of all of its assets to the
Limited Maturity Fund in exchange for the Reorganization Shares and the
assumption by the Limited Maturity Fund of all of the stated liabilities of the
Intermediate Income Fund.
As of December 31, 1999, there were 13,357,449 shares of beneficial
interest of the Intermediate Income Fund outstanding. Only shareholders of
record on March 24, 2000 will be entitled to notice of and to vote at the
Meeting. Each share is entitled to one vote, with fractional shares voting
proportionally.
The Trustees of the Intermediate Income Fund know of no matters other than
those set forth herein to be brought before the Meeting. If, however, any
other matters properly come before the Meeting, it is the Trusts' intention
that proxies will be voted on such matters in accordance with the judgment of
the persons named in the enclosed form of proxy.
PROPOSAL REGARDING APPROVAL OR DISAPPROVAL OF REORGANIZATION
TRANSACTION AND RELATED AGREEMENT AND PLAN OF REORGANIZATION
The shareholders of the Intermediate Income Fund are being asked to
approve or disapprove a reorganization between the Intermediate Income Fund
and the Limited Maturity Fund pursuant to an Agreement and Plan of
Reorganization between the Funds, dated as of February 17, 2000 (the
"Agreement"), a copy of which is attached to this Prospectus/Proxy Statement
as Exhibit A.
The reorganization is structured as a transfer of all of the assets of the
Intermediate Income Fund to the Limited Maturity Fund in exchange for the
assumption by the Limited Maturity Fund of all of the stated liabilities of
the Intermediate Income Fund and for that number of the Class A, Class B and
Class I Reorganization Shares, equal in total net asset value to the net value
of assets transferred to the Limited Maturity Fund, all as more fully
described below under "Information about the Reorganization."
After receipt of the Reorganization Shares, the Intermediate Income Fund
will distribute the Class A Reorganization Shares to its Class A shareholders,
the Class B Reorganization Shares to its Class B shareholders and the Class I
Reorganization Shares to its Class I shareholders, in proportion to their
existing shareholdings in complete liquidation of the Intermediate Income
Fund, and the legal existence of the Intermediate Income Fund as a separate
series of MFS Series Trust II, a Massachusetts business trust, under
Massachusetts law will be terminated. Each shareholder of the Intermediate
Income Fund will receive a number of full and fractional Class A, Class B, or
Class I Reorganization Shares equal in value at the date of the exchange to
the aggregate value of the shareholder's Intermediate Income Fund shares of
the same class.
Prior to the date of the transfer (the "Exchange Date"), the Intermediate
Income Fund will declare and pay a distribution to shareholders which,
together with all previous distributions, will have the effect of distributing
to shareholders all of its investment company taxable income (computed without
regard to the deduction for dividends paid) and net realized gains, if any,
through the Exchange Date.
The Trustees of the Intermediate Income Fund have voted unanimously to
approve the proposed transaction and to recommend that shareholders also
approve the transaction. The transactions contemplated by the Agreement will
be consummated only if approved by the affirmative vote of the holders of the
lesser of (a) 67% or more of the voting securities present at the Meeting or
represented by proxy if the holders of more than 50% of the outstanding voting
securities are present or represented by proxy or (b) more than 50% of the
outstanding voting securities of the Intermediate Income Fund. The
reorganization does not require the approval of the shareholders of the
Limited Maturity Fund.
In the event that this proposal is not approved by the shareholders of the
Intermediate Income Fund, you will continue to own your Intermediate Income
Fund shares and the Intermediate Income Fund will continue to be managed as a
separate fund in accordance with its current investment objectives and
policies, and the Trustees may consider such alternatives as may be in the
best interests of its shareholders.
BACKGROUND AND REASONS FOR THE PROPOSED REORGANIZATION
The Board of Trustees of each Fund, including all Trustees who are not
"interested persons" of the Funds, have determined that the reorganization
would be in the best interests of each Fund's shareholders, and that the
interests of existing shareholders of each of the Funds would not be diluted
as a result of effecting the reorganization. The Trustees have unanimously
approved the proposed reorganization and have recommended its approval by
shareholders. The Limited Maturity Fund and the Intermediate Income Fund have
separate Boards of Trustees.
The proposal is the result of a review by the Funds' investment manager,
Massachusetts Financial Services Company ("MFS"), of the investment strategies
and position of MFS' fixed income funds. As discussed above, while not
identical, the Limited Maturity Fund and the Intermediate Income Fund have
similar investment policies, each investing a significant portion of their
assets in foreign and domestic corporate bonds, mortgage-backed and asset-
backed securities and U.S. government and agency securities.
In light of the similarity of the Funds, MFS advised the Board of Trustees
of each Fund that combining the Funds would be in the best interests of
shareholders of both Funds. The Board of Trustees of the Intermediate Income
Fund believes that the proposed reorganization will be advantageous to the
Fund's shareholders for several reasons and considered the following matters,
among others, in unanimously approving the proposal:
1. The combined Fund offers economies of scale that are expected to lead
to lower expenses than either of the existing Funds (see "Synopsis,
question 6" for a discussion of expenses);
2. Because the Limited Maturity Fund does not invest in junk bonds or
foreign denominated securities it has a lower risk profile and is less
volatile than the Intermediate Income Fund. The Trustees noted that
because of this higher risk profile the Intermediate Income Fund has
the potential for higher yields and total return than the Limited
Maturity Fund. However, despite this potential, the Trustees noted that
the two Funds' performance has been fairly comparable over recent years
and that the Limited Maturity Fund's performance exceeded that of the
Intermediate Income Fund for the most recent calendar year (see
"Synopsis, question 7" for a discussion of performance). However, in
1997 and 1998 the Intermediate Income Fund's performance was modestly
better than that of the Limited Maturity Fund. While past performance
cannot predict future results, the Trustees believe that the Limited
Maturity Fund can achieve its objective of high current income with
less volatility than the Intermediate Income Fund;
3. The increase in assets will allow the combined Fund greater
diversification and therefore may contribute to further reducing the
Limited Maturity Fund's volatility;
4. The Reorganization is intended to qualify as a tax-free reorganization
for federal income tax purposes, pursuant to which no gain or loss will
be recognized by the Intermediate Income Fund or its shareholders for
federal income tax purposes as a result of transactions included in the
reorganization; and
5. The Board also took into consideration that absent the reorganization,
the Limited Maturity Fund will continue to compete for investor funds
with the Intermediate Income Fund and that it appeared unlikely that
the Intermediate Income Fund would experience a material growth in
assets in the future. The reorganization should allow for more
concentrated selling efforts to the benefit of both the Intermediate
Income Fund and the Limited Maturity Fund shareholders and avoid the
inefficiencies associated with the operation and distribution of two
similar funds through the same sales channels.
The Board of Trustees of the Limited Maturity Fund considered that the
reorganization presents an excellent opportunity for the Limited Maturity Fund
to acquire investment assets without the need to pay brokerage commissions or
other transaction costs that are normally associated with the purchase of
securities. The Trustees also considered the expenses that the Limited
Maturity Fund would incur as a result of the reorganization were reasonable in
relation to the benefits the Limited Maturity Fund would realize as a result
of the transaction. The Trustees believe that the Limited Maturity Fund
shareholders will also benefit from improved diversification and lower
expenses (see "Synopsis, question 6" for a discussion of expenses) as a result
of the reorganization.
The Boards of Trustees of both Funds also considered that MFS and the
Funds' distributor, MFD, will benefit from the reorganization. For example,
MFS might realize timesavings from a consolidated portfolio management effort
and from the need to prepare fewer reports and regulatory filings as well as
prospectus disclosure for one fund instead of two. The Trustees believe,
however, that these savings will not amount to a significant economic benefit
to MFS and in any event, will not offset the management fee revenue loss
resulting to MFS from the reorganization.
Based on their review and MFS' advice, the Board of Trustees of each Fund
have unanimously approved the proposal.
Exchange without recognition of gain or loss for federal income tax
purposes. If an Intermediate Income Fund shareholder were to redeem his or her
shares to invest in another fund, like the Limited Maturity Fund, gain or loss
would be recognized by that shareholder for federal income tax purposes. Also,
if the Intermediate Income Fund were liquidated or were reorganized in a taxable
reorganization, the transaction would likely result in a taxable event for its
shareholders. By contrast, the proposed reorganization will permit the
Intermediate Income Fund's shareholders to exchange their investment for an
investment in the Limited Maturity Fund without recognition of gain or loss for
federal income tax purposes. After the reorganization, shareholders will be free
to redeem any or all of the Limited Maturity Fund shares at net asset value at
any time, at which point a taxable gain or loss would be recognized.
INFORMATION ABOUT THE REORGANIZATION
Agreement and Plan of Reorganization. The proposed reorganization will be
governed by an Agreement and Plan of Reorganization. The Agreement provides that
the Limited Maturity Fund will acquire all of the assets of the Intermediate
Income Fund in exchange for the assumption by the Limited Maturity Fund of all
of the stated liabilities of the Intermediate Income Fund and for the issuance
of Class A, Class B and Class I Reorganization Shares equal in value to the
value of the transferred assets net of assumed liabilities. The shares will be
issued on the next full business day (the "Exchange Date") following the time as
of which the Funds' shares are valued for determining net asset value for the
reorganization (4:00 p.m. Boston time on May 19, 2000 or such other date as may
be agreed upon by the parties). The following discussion of the Agreement is
qualified in its entirety by the full text of the Agreement, which is attached
as Exhibit A to this Prospectus/Proxy Statement.
The Intermediate Income Fund will sell all of its assets to the Limited
Maturity Fund, and in exchange, the Limited Maturity Fund will assume all of
the stated liabilities of the Intermediate Income Fund and deliver to the
Intermediate Income Fund (i) a number of full and fractional Class A
Reorganization Shares having an aggregate net asset value equal to the value
of assets of the Intermediate Income Fund attributable to its Class A shares,
less the value of the liabilities of the Intermediate Income Fund assumed by
the Limited Maturity Fund attributable to such Class A shares; (ii) a number
of full and fractional Class B Reorganization Shares having a net asset value
equal to the value of assets of the Intermediate Income Fund attributable to
its Class B shares, less the value of the liabilities of the Intermediate
Income Fund assumed by the Limited Maturity Fund attributable to such Class B
shares, and (iii) a number of full and fractional Class I Reorganization
Shares having a net asset value equal to the value of assets of the
Intermediate Income Fund attributable to its Class I shares, less the value of
the liabilities of the Intermediate Income Fund assumed by the Limited
Maturity Fund attributable to such Class I Shares.
Immediately following the Exchange Date, the Intermediate Income Fund will
distribute pro rata to its shareholders of record as of the close of business
on the Exchange Date the full and fractional Reorganization Shares received by
the Intermediate Income Fund, with Class A Reorganization Shares being
distributed to holders of Class A shares of the Intermediate Income Fund,
Class B Reorganization Shares being distributed to holders of Class B shares
of the Intermediate Income Fund and Class I Reorganization Shares being
distributed to holders of Class I shares of the Intermediate Income Fund. As a
result of the proposed transaction, each holder of Class A, Class B and Class
I shares of the Intermediate Income Fund will receive a number of Class A,
Class B and Class I Reorganization Shares equal in aggregate value at the
Exchange Date to the value of the Class A, Class B and Class I shares,
respectively, of the Intermediate Income Fund held by the shareholder. This
distribution will be accomplished by the establishment of accounts on the
share records of the Limited Maturity Fund in the name of such Intermediate
Income Fund shareholders, each account representing the respective number of
full and fractional Class A, Class B and Class I Reorganization Shares due
such shareholder. New certificates for Reorganization Shares will be issued
only upon written request.
The Trustees of each Fund have determined that the interests of each
Fund's shareholders will not be diluted as a result of the transactions
contemplated by the reorganization and that the proposed reorganization is in
the best interests of each Fund.
The consummation of the reorganization is subject to the conditions set
forth in the Agreement. The Agreement may be terminated and the reorganization
abandoned at any time, before or after approval by the shareholders, prior to
the Exchange Date by mutual consent of the Limited Maturity Fund and the
Intermediate Income Fund or, if any condition set forth in the Agreement has
not been fulfilled and has not been waived by the party entitled to its
benefits, by such party.
The fees and expenses for the transaction are estimated to be $80,000.
Each Fund shall bear its own fees and expenses, including legal and accounting
expenses, portfolio transfer taxes (if any) or other similar expenses incurred
in connection with the consummation of the transactions contemplated by the
Agreement.
Description of the Reorganization Shares. Reorganization Shares will be
issued to the Intermediate Income Fund's shareholders in accordance with the
procedure under the Agreement as described above. The Reorganization Shares
are Class A, Class B and Class I shares of the Limited Maturity Fund.
Investors purchasing Class A shares pay a sales charge at the time of
purchase, but Intermediate Income Fund shareholders receiving Class A
Reorganization Shares in the reorganization will not pay a sales charge on
such shares. Class A shares of the Limited Maturity Fund generally are not
subject to redemption fees, but such shares are subject to a Rule 12b-1 fee at
the annual rate of up to 0.35% of the Fund's average daily net assets
attributable to Class A shares although payment of 0.10% of the Class A
service fee and the 0.10% per annum Class A distribution fee is currently not
being imposed. Class B shares of the Limited Maturity Fund are sold without a
sales charge, but are subject to a CDSC of up to 4% if redeemed within six
years of purchase. For purposes of determining the CDSC payable on redemption
of Class B Reorganization Shares received by holders of Class B shares of the
Intermediate Income Fund, such shares will be treated as having been acquired
as of the dates such shareholders originally acquired their Class B shares of
the Intermediate Income Fund. Class B shares are also subject to a Rule 12b-1
fee at the annual rate of up to 1.00% of the Fund's average daily net assets
attributable to Class B shares. Class B shares will automatically convert to
Class A shares, based on relative net asset value, approximately eight years
after purchase. Class I shares, which are only available to certain
institutional investors, have no sales charges or Rule 12b-1 fees.
Each of the Reorganization Shares will be fully paid and nonassessable
when issued, will be transferable without restriction, and will have no
preemptive or conversion rights, except that Class B Reorganization Shares
will have the conversion rights specified above. The Amended and Restated
Declaration of Trust (the "Declaration of Trust") of MFS Series Trust IX, of
which the Limited Maturity Fund is a series, permits the Fund to divide its
shares, without shareholder approval, into two or more classes of shares
having such preferences and special or relative rights and privileges as the
Trustees may determine. The Limited Maturity Fund's shares are currently
divided into four classes -- Class A, Class B, Class C and Class I shares.
Because the Intermediate Income Fund does not have Class C shares, no Class C
shares of the Limited Maturity Fund will be issued as a result of this
transaction.
Under Massachusetts law, shareholders could, under certain circumstances,
be held personally liable for the obligations of the Limited Maturity Fund.
However, the Declaration of Trust disclaims shareholder liability for acts or
obligations of the Limited Maturity Fund and requires that notice of such
disclaimer be given in each agreement, obligation, or instrument entered into
or executed by the Limited Maturity Fund or its Trustees. The Declaration of
Trust provides for indemnification out of Fund property for all loss and
expense of any shareholder held personally liable for the obligations of the
Limited Maturity Fund. Thus, the risk of a shareholder incurring financial
loss on account of shareholder liability is limited to circumstances in which
the Limited Maturity Fund would be unable to meet its obligations. The
likelihood of such circumstances is remote. The shareholders of the
Intermediate Income Fund are currently subject to this same risk of
shareholder liability.
Federal Income Tax Consequences. As a condition to each Fund's obligation
to consummate the reorganization, the Intermediate Income Fund and the Limited
Maturity Fund will receive an opinion from Bingham Dana LLP, counsel to the
Funds (which opinion would be based on certain factual representations and
subject to certain qualifications), substantially to the effect that, on the
basis of the existing provisions of the Internal Revenue Code as now in effect
(the "Code"), and the regulations, rulings, and interpretations thereof in
force as of the date of the opinion, for federal income tax purposes:
(a) The acquisition by the Limited Maturity Fund of all of the assets
of the Intermediate Income Fund, solely in exchange for Reorganization
Shares and the assumption by the Limited Maturity Fund of the stated
liabilities of the Intermediate Income Fund as set forth in the Statement
of Assets and Liabilities, followed by the distribution by the
Intermediate Income Fund of the Reorganization Shares in complete
liquidation to the shareholders of the Intermediate Income Fund in
exchange for their Intermediate Income Fund shares of beneficial interest
and the termination of the Intermediate Income Fund pursuant to this
Agreement, will constitute a reorganization within the meaning of Section
368(a) of the Code, and the Intermediate Income Fund and the Limited
Maturity Fund will each be a "party to a reorganization" within the
meaning of Section 368(b) of the Code;
(b) No gain or loss will be recognized by the Intermediate Income Fund
upon the transfer of all of its assets to the Limited Maturity Fund solely
in exchange for Reorganization Shares and the assumption by the Limited
Maturity Fund of the stated liabilities of the Intermediate Income Fund as
set forth in the Statement of Assets and Liabilities or upon the
distribution to the Intermediate Income Fund shareholders of such
Reorganization Shares pursuant to the Agreement;
(c) No gain or loss will be recognized by the Limited Maturity Fund
upon the receipt of the assets of the Intermediate Income Fund solely in
exchange for Reorganization Shares and the assumption by the Limited
Maturity Fund of the stated liabilities of the Intermediate Income Fund as
set forth in the Statement of Assets and Liabilities;
(d) The basis of the assets of the Intermediate Income Fund acquired
by the Limited Maturity Fund will be, in each instance, the same as the
basis of those assets in the hands of the Intermediate Income Fund
immediately prior to the transfer;
(e) The holding period of the assets of the Intermediate Income Fund
in the hands of the Limited Maturity Fund will include, in each instance,
the holding period of such assets in the hands of the Intermediate Income
Fund;
(f) The shareholders of the Intermediate Income Fund will not
recognize gain or loss upon the exchange of all of their Intermediate
Income Fund shares of beneficial interest solely for Reorganization Shares
as part of the transaction;
(g) The basis of the Reorganization Shares to be received by each
Intermediate Income Fund shareholder will be, in the aggregate, the same
as the basis, in the aggregate, of the Intermediate Income Fund shares of
beneficial interest surrendered by such shareholder in exchange therefor;
and
(h) The holding period of the Reorganization Shares to be received by
each Intermediate Income Fund shareholder will include, in each instance,
the holding period of the Intermediate Income Fund shares of beneficial
interest surrendered by such shareholder in exchange therefor, provided
the Intermediate Income Fund shares were held by such shareholder as
capital assets on the date of the exchange.
Additional Tax Considerations. As of November 30, 1999, the Intermediate
Income Fund had capital loss carryovers of approximately $9,259,081 which
expire as follows: November 30, 2002 -- $4,226,362; November 30, 2005 --
$1,473,779; November 30, 2006 -- $1,217,310; and November 30, 2007 --
$2,341,630. Capital loss carryovers are used to reduce the amount of realized
capital gains that a Fund is required to distribute to its shareholders in
order to avoid paying taxes on undistributed capital gain.
If the reorganization occurs, the Limited Maturity Fund will be able to
use the Intermediate Income Fund's capital loss carryovers to offset future
realized capital gains, subject to limitations that may, in certain
circumstances, result in the expiration of a portion of these carryovers
before they can be used.
Capitalization. The following table shows the capitalization of the Funds
as of October 31, 1999, and on a pro forma combined basis, giving effect to
the proposed acquisition of assets at net asset value as of that date:
<TABLE>
<CAPTION>
LIMITED INTERMEDIATE PRO FORMA
(UNAUDITED) MATURITY FUND INCOME FUND COMBINED
- - ----------- ------------- ------------ --------
<S> <C> <C> <C>
Net assets (000's omitted)
Class A .................................................... $125,188,899 $46,874,639 $172,063,538
Class B .................................................... 53,601,625 64,067,502 117,669,127
Class C .................................................... 24,621,846 N/A 24,621,846
Class I .................................................... 1,650,047 13,185 1,663,232
Shares outstanding (000's omitted)
Class A .................................................... 18,521,966 5,961,104 25,456,084*
Class B .................................................... 7,958,531 8,120,995 17,464,095*
Class C .................................................... 3,645,129 N/A 3,645,129
Class I .................................................... 244,719 1,673 246,675*
Net asset value per share
Class A .................................................... $6.76 $7.86 $6.76
Class B .................................................... 6.74 7.89 6.74
Class C .................................................... 6.75 N/A 6.75
Class I .................................................... 6.74 7.88 6.74
- - ----------
* If the Reorganization had taken place on October 31, 1999, the Intermediate Income Fund would have received 6,934,118,
9,505,564 and 1,956 Class A, B and I shares, respectively, of the Limited Maturity Fund, which would be available for
distribution to its shareholders. No assurances can be given as to the number of Reorganization Shares the MFS
Intermediate Income Fund will receive on the Closing Date. The foregoing is merely an example of what the Intermediate
Income Fund would have received and distributed had the reorganization been consummated on October 31, 1999, and should
not be relied upon to reflect the amount that will actually be received on or after the Closing Date.
</TABLE>
Unaudited pro forma combined financial statements of the Funds as of
October 31, 1999 and for the twelve month period then ended are included in
the Statement of Additional Information relating to the proposed
reorganization. Because the Agreement provides that the Limited Maturity Fund
will be the surviving Fund following the reorganization and because the
Limited Maturity Fund's investment objectives and policies will remain
unchanged, the pro forma combined financial statements reflect the transfer of
the assets and liabilities of the Intermediate Income Fund to the Limited
Maturity Fund as contemplated by
the Agreement.
THE TRUSTEES OF THE INTERMEDIATE INCOME FUND, INCLUDING THE INDEPENDENT
TRUSTEES, UNANIMOUSLY RECOMMEND APPROVAL OF THE AGREEMENT.
VOTING INFORMATION
The Limited Maturity Fund will not permit any Intermediate Income Fund
Shareholder holding certificates for Intermediate Income Fund shares at the
time of the reorganization to receive cash dividends or other distributions,
receive certificates for shares issued in the merger ("Reorganization
Shares"), exchange Reorganization Shares for shares of other investment
companies managed by MFS, or pledge or redeem Reorganization Shares until such
certificates for Intermediate Income Fund shares have been surrendered, or, in
the case of lost certificates, an adequate surety bond has been posted.
Required Vote. Proxies are being solicited from the Intermediate Income
Fund's shareholders by its Trustees for the Special Meeting of Shareholders to
be held on Thursday, May 18, 2000 at 10:00 a.m. (the "Meeting"), at 500 Boylston
St., 24th floor, Boston, Massachusetts, or at such later time made necessary by
adjournment. Unless revoked, all valid proxies will be voted in accordance with
the specification thereon or, in the absence of specifications, FOR approval of
the Agreement and Plan of Reorganization. The transactions contemplated by the
Agreement and Plan of Reorganization will be consummated only if approved by the
affirmative vote of a "majority of the outstanding voting securities" of the
Intermediate Income Fund entitled to vote. Under the Investment Company Act of
1940, as amended, the vote of a "majority of the outstanding voting securities"
means the affirmative vote of the lesser of (a) 67% or more of the voting
securities present at the Meeting or represented by proxy if the holders of more
than 50% of the outstanding voting securities are present or represented by
proxy or (b) more than 50% of the outstanding voting securities.
Record Date, Quorum and Method of Tabulation. Shareholders of record of the
Intermediate Income Fund at the close of business on March 24, 2000 (the "record
date") will be entitled to vote at the Meeting or any adjournment thereof. The
holders of a majority of the shares of the Intermediate Income Fund outstanding
at the close of business on the record date present in person or represented by
proxy will constitute a quorum for the Meeting. Shareholders are entitled to one
vote for each share held, with fractional shares voting proportionally.
Votes cast by proxy or in person at the meeting will be counted by persons
appointed by the Intermediate Income Fund as the vote tabulator for the Meeting.
The vote tabulator will count the total number of votes cast "for" approval of
the proposal for purposes of determining whether sufficient affirmative votes
have been cast. The vote tabulator will count shares represented by proxies that
are marked with an abstention or that reflect "broker non-votes" (i.e., shares
held by brokers or nominees as to which (i) instructions have not been received
from the beneficial owners or the persons entitled to vote and (ii) the broker
or nominee does not have the discretionary voting power on a particular matter)
as shares that are present and entitled to vote on the matter for purposes of
determining the presence of a quorum. Thus, abstentions and broker non-votes
have the effect of a negative vote on the proposal.
As of January 31, 2000, the officers and Trustees of the Intermediate
Income Fund as a group beneficially owned less than 1% of the outstanding
shares of the Intermediate Income Fund. To the best of the knowledge of the
Intermediate Income Fund, the following shareholders owned of record or
beneficially 5% or more of the following classes of the Intermediate Income
Fund's outstanding shares:
<TABLE>
<CAPTION>
CLASS SHAREHOLDER NAME AND ADDRESS PERCENTAGE OWNED
- - ----- ---------------------------- ----------------
<S> <C> <C>
B MLPF&S for the sole benefit of 5.39%
its customers
Attn: Fund Administration 974N1
4800 Deer Lake Dr. E FL 3
Jacksonville, FL 32246-6484
</TABLE>
The votes of the shareholders of the Limited Maturity Fund are not being
solicited, because their approval or consent is not necessary for this
transaction. As of January 31, 2000, the officers and Trustees of the Limited
Maturity Fund as a group beneficially owned less than 1% of the outstanding
shares of the Limited Maturity Fund. To the best of the knowledge of the
Limited Maturity Fund, the following shareholders owned of record or
beneficially 5% or more of the outstanding shares of the Limited Maturity
Fund:
<TABLE>
<CAPTION>
CLASS SHAREHOLDER NAME AND ADDRESS PERCENTAGE OWNED
- - ----- ---------------------------- ----------------
<S> <C> <C>
B MLPF&S for the sole benefit of 11.48%
its customers
Attn: Fund Administration 97CE8
4800 Deer Lake Dr. East 3rd FL
Jacksonville, FL 32246-6484
C MLPF&S for the sole benefit of 7.68%
its customers
Attn: Fund Administration 97JT7
4800 Deer Lake Dr. 3rd FL
Jacksonville, FL 32246-6484
I TRS MFS DEF Contribution Plan 99.99%
c/o Mark Leary
Mass Financial Services
500 Boylston Street
Boston, MA 02116-3740
</TABLE>
Solicitation of Proxies. In addition to soliciting proxies by mail, the
Trustees and employees of MFS, MFS Fund Distributors Inc. and MFS Service
Center, Inc. may solicit proxies in person or by telephone. In addition, the
Intermediate Income Fund has retained at its own expense Shareholder
Communications Corporation to aid in the solicitation of instructions for
nominee and registered accounts for a fee of $5,000, plus reasonable out-of-
pocket expenses for mailing and phone costs. The Intermediate Income Fund may
also arrange to have votes recorded by telephone. The telephonic voting
procedure is designed to authenticate shareholders' identities, to allow
shareholders to authorize the voting of their shares in accordance with their
instructions and to confirm that their instructions have been properly
recorded. Shareholders may be called at the phone number MFS has in its
records for their accounts, and would be asked for their Social Security
numbers or other identifying information. The shareholders would then be given
an opportunity to authorize their proxies to vote their shares in accordance
with their instructions. To ensure that the shareholders' instructions have
been recorded correctly, they will also receive a confirmation of their
instructions in the mail. A toll-free number will be available in the event
the information in the confirmation is incorrect.
Depending on how you own your shares you may also be able to vote by
signing and faxing the completed proxy card toll-free to the fax number
included on your proxy card.
Shareholders have the opportunity to vote via the Internet by utilizing a
program provided through ADP Investor Communication Services ("ADP"). The
giving of such a proxy will not affect your right to vote in person should you
decide to attend the Meeting. To vote via the Internet, you will need the 12-
digit "control" number that appears with your proxy materials. To vote via the
Internet, please access ADP on the World Wide Web at www.proxyvote.com, or
click on the "proxy voting" link on the MFS website at www.mfs.com. The
Internet voting procedures are designed to authenticate shareholder
identities, to allow shareholders to give their voting instructions, and to
confirm that shareholders' instructions have been recorded properly.
Shareholders voting via the Internet should understand that there may be costs
associated with electronic access, such as usage charges from Internet access
providers and telephone companies, that must be borne by the shareholders.
Persons holding shares as nominees will upon request be reimbursed for
their reasonable expenses in soliciting instructions from their principals.
Revocation of Proxies. Proxies, including proxies given by telephone,
facsimile or via the internet may be revoked at any time before they are
voted, by a written revocation received by the Secretary of the Intermediate
Income Fund, by properly executing a later-dated proxy or by attending the
Meeting and voting in person.
Shareholder Proposals. The Intermediate Income Fund does not hold annual
shareholder meetings. If the reorganization is not approved, any shareholder
who wishes to submit a proposal to be considered by the Fund's shareholders at
the next meeting of shareholders should send the proposal to Intermediate
Income Fund, c/o Stephen E. Cavan, Secretary, at 500 Boylston Street, 24th
Floor, Boston, Massachusetts 02116, so as to be received within a reasonable
time before the Board of Trustees of Intermediate Income Fund makes the
solicitation relating to such meeting. Shareholder proposals that are
submitted in a timely manner will not necessarily be included in the
Intermediate Income Fund's proxy materials. Including shareholder proposals in
proxy materials is subject to limitations under federal securities laws.
Adjournment. If sufficent votes in favor of the proposal are not received
by the time scheduled for the Meeting, the persons named as proxies may
propose adjournments of the Meeting for a period or periods of not more than
60 days in the aggregate to permit further solicitation of proxies. Any
adjournment will require the affirmative vote of a majority of the votes cast
on the question in person or by proxy at the session of the Meeting to be
adjourned. The persons named as proxies will vote in favor of such adjournment
those proxies which they are entitled to vote in favor of the proposal. They
will vote against any such adjournment those proxies required to be voted
against the proposal. The Intermediate Income Fund pays the costs of any
additional solicitation and of any adjourned session.
MISCELLANEOUS
INDEPENDENT ACCOUNTANTS
The audited financial statements of Intermediate Income Fund and Limited
Maturity Fund for the fiscal periods ended November 30, 1999 and April 30,
1999, respectively, included in the Statements of Additional Information, have
been audited by Deloitte & Touche LLP, independent accountants, whose reports
thereon are included in the respective Statements of Additional Information
and in the Annual Reports to Shareholders for the fiscal years ended November
30, 1999 and April 30, 1999, respectively. The financial statements audited by
Deloitte & Touche LLP have been incorporated by reference in reliance on their
reports given on their authority as experts in auditing and accounting. The
unaudited financial statements of Limited Maturity Fund for the six months
ended October 31, 1999 are included in the Statement of Additional
Information.
AVAILABLE INFORMATION
The Intermediate Income Fund and the Limited Maturity Fund are each subject
to the informational requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, and in accordance with these laws, they each
file reports, proxy material and other information with the Commission. Such
reports, proxy material and other information can be inspected and copied at the
Public Reference Room maintained by the Commission at 450 Fifth Street, N.W.,
Washington D.C. 20549 and 7 World Trade Center, New York, NY 10048. Copies of
such material can also be obtained from the Public Reference Branch, Office of
Consumer Affairs and Information Services, Securities and Exchange Commission,
Washington D.C. 20549, at prescribed rates, or at the Commission's website
(http://www.sec.gov).
OTHER BUSINESS
Management of Intermediate Income Fund knows of no business other than the
matters specified above which will be presented at the Meeting. Because
matters not known at the time of the solicitation may come before the Meeting,
the proxy as solicited confers discretionary authority with respect to such
matters as properly come before the Meeting, including any adjournment or
adjournments thereof, and it is the intention of the persons named as
attorneys-in-fact in the proxy to vote this proxy in accordance with their
judgment on such matters.
NOTICE TO BANKS, BROKER-DEALERS AND VOTING TRUSTEES AND THEIR NOMINEES
Please advise the Intermediate Income Fund, in care of MFS Service Center,
Inc., 2 Avenue de Lafayette, Boston, MA 02111-1738, whether other persons are
beneficial owners of shares for which proxies are being solicited and, if so,
the number of copies of the Proxy Statement you wish to receive in order to
supply copies to the beneficial owners of the shares.
IT IS IMPORTANT THAT PROXIES BE RETURNED PROMPTLY.
March 31, 2000
MFS INTERMEDIATE INCOME FUND, a series of
MFS SERIES TRUST II
500 Boylston Street
Boston, MA 02116
<PAGE>
EXHIBIT A
AGREEMENT AND PLAN OF REORGANIZATION
THIS AGREEMENT AND PLAN OF REORGANIZATION (the "Agreement") is made this
17th day of February, 2000, by and between the MFS Series Trust II, a
Massachusetts business trust ("Trust II"), on behalf of MFS Intermediate
Income Fund, a series thereof (the "Intermediate Income Fund"), and MFS Series
Trust IX, a Massachusetts business trust ("Trust IX"), on behalf of MFS
Limited Maturity Fund, a series thereof (the "Limited Maturity Fund"), each
with its principal place of business at 500 Boylston Street, Boston,
Massachusetts 02116.
This Agreement is intended to be and is adopted as a plan of
reorganization and liquidation within the meaning of Section 368(a) of the
United States Internal Revenue Code of 1986, as amended (the "Code"). The
reorganization will consist of (i) the transfer of all of the assets of the
Intermediate Income Fund to the Limited Maturity Fund in exchange solely for
the assumption by the Limited Maturity Fund of the stated liabilities of the
Intermediate Income Fund and the issuance to the Intermediate Income Fund of
shares of beneficial interest of the Limited Maturity Fund (the
"Reorganization Shares"), (ii) the distribution, promptly after the Closing
Date hereinafter referred to, of the Reorganization Shares to the shareholders
of the Intermediate Income Fund in liquidation of the Intermediate Income Fund
as provided herein, and (iii) the termination of the Intermediate Income Fund,
all upon the terms and conditions hereinafter set forth in this Agreement.
All representations, warranties, covenants and obligations of the Limited
Maturity Fund and the Intermediate Income Fund contained herein shall be
deemed to be representations, warranties, covenants and obligations of Trust
IX and Trust II, respectively, acting on behalf of the Limited Maturity Fund
and the Intermediate Income Fund, respectively, and all rights and benefits
created hereunder in favor of the Limited Maturity Fund and the Intermediate
Income Fund shall inure to Trust IX and Trust II, respectively, and shall be
enforceable by Trust IX and Trust II, respectively, acting on behalf of the
Limited Maturity Fund and the Intermediate Income Fund, respectively.
In consideration of the premises of the covenants and agreements
hereinafter set forth, the parties hereto covenant and agree as follows:
1. TRANSFER OF ASSETS OF THE INTERMEDIATE INCOME FUND IN EXCHANGE FOR THE
REORGANIZATION SHARES AND LIQUIDATION OF THE INTERMEDIATE INCOME FUND
1.1 The Intermediate Income Fund will transfer its assets (consisting,
without limitation, of portfolio securities and instruments, dividend and
interest receivables, cash and other assets) as set forth in the statement of
assets and liabilities as of the Valuation Date (as defined in paragraph 1.4
hereof) delivered by Trust II to Trust IX pursuant to paragraph 7.2 hereof
(the "Statement of Assets and Liabilities") to the Limited Maturity Fund, free
and clear of all liens and encumbrances, except as otherwise provided herein,
in exchange for (a) the assumption by the Limited Maturity Fund of all of the
stated liabilities of the Intermediate Income Fund as set forth in the
Statement of Assets and Liabilities and (b) the issuance and delivery by the
Limited Maturity Fund to the Intermediate Income Fund, for distribution in
accordance with paragraph 1.4 hereof pro rata to the Intermediate Income Fund
shareholders as of the close of business on the Valuation Date, of a number of
the Reorganization Shares having an aggregate net asset value equal to the
value of the assets, less such liabilities (herein referred to as the "net
value of the assets"), of the Intermediate Income Fund so transferred,
assigned and delivered, all determined as provided in paragraph 2 and as of a
date and time as specified therein. Such transactions shall take place at the
closing provided for in paragraph 3.1 hereof (the "Closing"). All computations
for the Intermediate Income Fund shall be provided by State Street Bank and
Trust Company (the "Custodian"), as custodian and pricing agent for the
Intermediate Income Fund, and all computations for the Limited Maturity Fund
shall be provided by the Custodian, as custodian and pricing agent for the
Limited Maturity Fund. The determinations of the Custodian shall be conclusive
and binding on all parties in interest.
1.2 The Intermediate Income Fund has provided the Limited Maturity Fund
with a list of the current securities holdings of the Intermediate Income Fund
as of the date of execution of this Agreement. The Intermediate Income Fund
reserves the right to sell any of these securities (except to the extent sales
may be limited by representations made in connection with issuance of the tax
opinion described in paragraph 8.6 hereof) but will not, without the prior
approval of the Limited Maturity Fund, acquire any additional securities other
than securities of the type in which the Limited Maturity Fund is permitted to
invest.
1.3 Except to the extent that another party has agreed to bear certain
expenses in connection with the transactions contemplated by this Agreement,
Trust IX and Trust II shall each bear its own expenses in connection with the
transactions contemplated by this Agreement.
1.4 On or as soon after the closing date established in paragraph 3.1
hereof (the "Closing Date") as is conveniently practicable (the "Liquidation
Date"), the Intermediate Income Fund will liquidate and distribute pro rata to
shareholders of record ("Intermediate Income Fund shareholders"), determined
as of the close of business on the last business day preceding the Closing
Date (the "Valuation Date"), the Reorganization Shares received by the
Intermediate Income Fund pursuant to paragraph 1.1 in actual or constructive
exchange for the shares of the Intermediate Income Fund held by the
Intermediate Income Fund shareholders. Such liquidation and distribution will
be accomplished by the transfer of the Reorganization Shares then credited to
the account of the Intermediate Income Fund on the books of the Limited
Maturity Fund, to open accounts on the share records of the Limited Maturity
Fund in the names of the Intermediate Income Fund shareholders and
representing the respective pro rata number of the Reorganization Shares due
such shareholders. The Limited Maturity Fund will not issue share certificates
representing the Reorganization Shares in connection with such exchange,
except in connection with pledges and assignments and in certain other limited
circumstances.
1.5 Intermediate Income Fund shareholders holding certificates
representing their ownership of shares of beneficial interest of the
Intermediate Income Fund shall surrender such certificates or deliver an
affidavit with respect to lost certificates, in such form and accompanied by
such surety bonds as the Intermediate Income Fund may require (collectively,
an "Affidavit"), to the Intermediate Income Fund prior to the Closing Date.
Any Intermediate Income Fund certificate which remains outstanding on the
Closing Date shall be deemed to be cancelled, shall no longer evidence
ownership of shares of beneficial interest of the Intermediate Income Fund and
shall not evidence ownership of the Reorganization Shares. Unless and until
any such certificate shall be so surrendered or an Affidavit relating thereto
shall be delivered, dividends and other distributions payable by the Limited
Maturity Fund subsequent to the Closing Date with respect to the
Reorganization Shares allocable to the holders of such certificate(s) shall be
paid to the holder of such certificate(s), but such shareholder may not redeem
or transfer the Reorganization Shares received in the Reorganization.
1.6 Any transfer taxes payable upon issuance of the Reorganization Shares
in a name other than the registered holder of the Reorganization Shares on the
books of the Intermediate Income Fund as of that time shall, as a condition of
such issuance and transfer, be paid by the person to whom such Reorganization
Shares are to be issued and transferred.
1.7 The Intermediate Income Fund Series shall be terminated promptly
following the Liquidation Date.
2. VALUATION
2.1 The net asset value of the Reorganization Shares and the net value of
the assets of the Intermediate Income Fund to be transferred shall in each
case be determined as of the close of business on the Valuation Date. The net
asset value of the Reorganization Shares shall be computed by the Custodian in
the manner set forth in Trust IX's Amended and Restated Declaration of Trust
("Trust IX's Declaration of Trust") or By-laws and the Limited Maturity Fund's
then current prospectus and statement of additional information and shall be
computed to not less than two decimal places. The net value of the assets of
the Intermediate Income Fund to be transferred shall be computed by the
Custodian by calculating the value of the assets transferred by the
Intermediate Income Fund and by subtracting therefrom the amount of the
liabilities assigned and transferred to the Limited Maturity Fund, said assets
and liabilities to be valued in the manner set forth in Trust II's Amended and
Restated Declaration of Trust ("Trust II's Declaration of Trust") or By-laws
and the Intermediate Income Fund's then current prospectus and statement of
additional information.
2.2 The number of Reorganization Shares to be issued (including fractional
shares, if any) in exchange for the Intermediate Income Fund's assets shall be
determined by dividing the net value of the Intermediate Income Fund assets by
the net asset value per Reorganization Share, both as determined in accordance
with paragraph 2.1.
2.3 All computations of value shall be made by the Custodian in accordance
with its regular practice as pricing agent for the Limited Maturity Fund and
the Intermediate Income Fund, as applicable.
3. CLOSING AND CLOSING DATE
3.1 The Closing Date shall be as soon as practicable after the
reorganization described above is approved by shareholders of the Intermediate
Income Fund, but in no event later than July 31, 2000. The Closing shall be
held at 10:00 a.m., Boston time, at the offices of the Limited Maturity Fund,
500 Boylston Street, Boston, Massachusetts 02116, or at such other time and/or
place as the parties may agree.
3.2 Portfolio securities shall be delivered by the Intermediate Income
Fund to the Custodian for the account of the Limited Maturity Fund on the
Closing Date, duly endorsed in proper form for transfer, in such condition as
to constitute good delivery thereof in accordance with the custom of brokers,
and shall be accompanied by all necessary federal and state stock transfer
stamps or a check for the appropriate purchase price thereof. The cash
delivered shall be in the form of currency, certified or official bank check
in Boston funds or federal fund wire, payable to the order of "State Street
Bank and Trust Company, Custodian for the MFS Limited Maturity Fund" or in the
name of any successor organization.
3.3 In the event that on the proposed Valuation Date (a) the New York
Stock Exchange shall be closed to trading or trading thereon shall be
restricted, or (b) trading or the reporting of trading on said Exchange or
elsewhere shall be disrupted so that accurate appraisal of the net value of
the assets of the Limited Maturity Fund or the Intermediate Income Fund is
impracticable, the Closing Date shall be postponed until the first business
day after the day when trading shall have been fully resumed and reporting
shall have been restored; provided that if trading shall not be fully resumed
and reporting restored on or before July 31, 2000, this Agreement may be
terminated by the Limited Maturity Fund or the Intermediate Income Fund upon
the giving of written notice to the other party.
3.4 The Intermediate Income Fund shall deliver at the Closing a list of
the names, addresses, federal taxpayer identification numbers and backup
withholding and nonresident alien withholding status of the Intermediate
Income Fund shareholders and the number of outstanding shares of beneficial
interest of the Intermediate Income Fund owned by each such shareholder, all
as of the close of business on the Valuation Date (the "Shareholder List").
The Limited Maturity Fund shall issue and deliver to the Intermediate Income
Fund a confirmation evidencing the Reorganization Shares to be credited on the
Liquidation Date, or provide evidence satisfactory to the Intermediate Income
Fund that such Reorganization Shares have been credited to the Intermediate
Income Fund's account on the books of the Limited Maturity Fund. At the
Closing each party shall deliver to the other such bills of sale, checks,
assignments, stock certificates, receipts or other documents as such other
party or its counsel may reasonably request.
4. REPRESENTATIONS AND WARRANTIES
4.1 Trust II and the Intermediate Income Fund represent and warrant to
Trust IX and the Limited Maturity Fund as follows:
(a) Trust II is a business trust duly organized, validly existing and
in good standing under the laws of The Commonwealth of Massachusetts and
has the power to own all of its properties and assets and, subject to
approval by the shareholders of the Intermediate Income Fund, to carry out
the Agreement. Neither Trust II nor the Intermediate Income Fund is
required to qualify to do business in any other jurisdiction. The
Agreement has been duly authorized by Trust II, subject to the approval of
the shareholders of the Intermediate Income Fund. Trust II has all
necessary federal, state and local authorizations to own all of the
properties and assets of Trust II and to carry on its business as now
being conducted;
(b) Trust II is a duly registered investment company classified as a
management company of the open-end type and its registration with the
Securities and Exchange Commission (the "Commission") as an investment
company under the Investment Company Act of 1940, as amended (the "1940
Act"), is in full force and effect;
(c) Trust II is not, and the execution, delivery and performance of
this Agreement by Trust II will not result, in violation of any provision
of the Declaration of Trust or By-Laws of Trust II or of any agreement,
indenture, instrument, contract, lease or other undertaking to which Trust
II is a party or by which Trust II or the Intermediate Income Fund is
bound;
(d) Trust II has no material contracts or other commitments (other
than this Agreement) which will not be terminated without liability to the
Intermediate Income Fund at or prior to the Closing Date;
(e) Except as otherwise disclosed in writing to and accepted by the
Limited Maturity Fund, no litigation or administrative proceeding or
investigation of or before any court or governmental body is currently
pending or threatened as to the Intermediate Income Fund or any of its
properties or assets. Trust II knows of no facts which might form the
basis for the institution of such proceedings, and Trust II is not a party
to or subject to the provisions of any order, decree or judgment of any
court or governmental body which materially and adversely affects its
business or its ability to consummate the transactions herein
contemplated;
(f) The statement of assets and liabilities, including the schedule of
portfolio investments, of the Intermediate Income Fund as of November 30,
1999 and the related statement of operations for the year ended November
30, 1999, and the statement of changes in net assets for the years ended
November 30, 1999 and November 30, 1998 (copies of which have been
furnished to the Limited Maturity Fund) have been audited by Deloitte &
Touche LLP, independent accountants, and present fairly in all material
respects the financial position of the Intermediate Income Fund as of
November 30, 1999 and the results of its operations and changes in net
assets for the respective stated periods in accordance with generally
accepted accounting principles consistently applied, and there are no
known actual or contingent liabilities of the Intermediate Income Fund as
of the respective dates thereof not disclosed therein;
(g) Since November 30, 1999, there has not been any material adverse
change in the Intermediate Income Fund's financial condition, assets,
liabilities or business other than changes occurring in the ordinary
course of business, or any incurrence by the Intermediate Income Fund of
indebtedness maturing more than one year from the date such indebtedness
was incurred, except as otherwise disclosed to and accepted by the Limited
Maturity Fund. For the purposes of this subparagraph (g), a decline in net
asset value per share of beneficial interest of the Intermediate Income
Fund as a result of losses upon the disposition of investments or from
changes in the value of investments held by the Intermediate Income Fund,
or a distribution or a payment of dividends shall not constitute a
material adverse change;
(h) At the date hereof and at the Closing Date, all federal, state and
other tax returns and reports, including information returns and payee
statements, of the Intermediate Income Fund required by law to have been
filed or furnished by such dates shall have been filed or furnished, and
all federal, state and other taxes, interest and penalties shall have been
paid so far as due, and to the best of the Intermediate Income Fund's
knowledge no such return is currently under audit and no assessment has
been asserted with respect to such returns or reports;
(i) The Intermediate Income Fund has elected to be treated as a
regulated investment company for federal tax purposes, has qualified as
such for each taxable year of its operation and will qualify as such as of
the Closing Date;
(j) The authorized capital of Trust II consists of an unlimited number
of shares of beneficial interest, no par value, divided into four series
and, with respect to the Intermediate Income Fund, into three classes at
the date hereof. All issued and outstanding shares of beneficial interest
attributable to the Intermediate Income Fund are, and at the Closing Date
will be, duly and validly issued and outstanding, fully paid and
nonassessable. All of the issued and outstanding shares of beneficial
interest attributable to the Intermediate Income Fund will, at the time of
Closing, be held by the persons and in the amounts set forth in the
Shareholder List. Trust II does not have outstanding any options, warrants
or other rights to subscribe for or purchase any shares of beneficial
interest attributable to the Intermediate Income Fund, nor is there
outstanding any security convertible into any shares of beneficial
interest attributable to the Intermediate Income Fund;
(k) Except as previously disclosed to the Limited Maturity Fund, at
the Closing Date Trust II will have good and marketable title to the
assets attributable to the Intermediate Income Fund to be transferred to
the Limited Maturity Fund pursuant to paragraph 1.1, and full right, power
and authority to sell, assign, transfer and deliver such assets hereunder,
and upon delivery and payment for such assets, the Limited Maturity Fund
will acquire good and marketable title thereto subject to no restrictions
on the full transfer thereof, including such restrictions as might arise
under the Securities Act of 1933, as amended (the "1933 Act");
(l) The execution, delivery and performance of this Agreement have
been duly authorized by all necessary action on the part of Trust II (with
the exception of the approval of this Agreement by Intermediate Income
Fund shareholders holding at least a majority of the outstanding voting
securities (as defined by the 1940 Act) of the Intermediate Income Fund),
and this Agreement constitutes a valid and binding obligation of Trust II
enforceable in accordance with its terms, subject to the approval of the
Intermediate Income Fund shareholders;
(m) The information to be furnished by the Intermediate Income Fund
for use in applications for orders, registration statements, proxy
materials and other documents which may be necessary in connection with
the transactions contemplated hereby shall be accurate and complete and
shall comply fully with federal securities and other laws and regulations
thereunder applicable thereto;
(n) The proxy statement of the Intermediate Income Fund (the "Proxy
Statement") to be included in the Registration Statement referred to in
paragraph 5.7 (other than written information furnished by the Limited
Maturity Fund for inclusion therein, as covered by the Limited Maturity
Fund's warranty in paragraph 4.2(n)), on the effective date of the
Registration Statement, on the date of the meeting of the Intermediate
Income Fund shareholders and on the Closing Date, will not contain any
untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements therein,
in light of the circumstances under which such statements were made, not
misleading;
(o) No consent, approval, authorization or order of any court or
governmental authority is required for the consummation by the Trust II
and the Intermediate Income Fund of the transactions contemplated by this
Agreement, except such as have been obtained under the 1933 Act, the
Securities Exchange Act of 1934, as amended (the "1934 Act") and the 1940
Act, and such as may be required under state securities laws;
(p) All of the issued and outstanding shares of beneficial interest of
Trust II attributable to the Intermediate Income Fund have been offered
for sale and sold in conformity with all applicable federal and state
securities laws, except as may have been previously disclosed in writing
to the Limited Maturity Fund; and
(q) The current prospectus and statement of additional information of
the Intermediate Income Fund, each dated April 1, 1999 as supplemented and
updated from time to time (the "Intermediate Income Fund Prospectus"),
will conform in all material respects to the applicable requirements of
the 1933 Act and the 1940 Act and the rules and regulations of the
Commission thereunder on the date of the Proxy Statement, on the date of
the meeting of Intermediate Income Fund shareholders and on the Closing
Date and will not on such dates include any untrue statement of a material
fact or omit to state any material fact required to be stated therein or
necessary to make the statements therein, in light of the circumstances
under which they were made, not misleading.
4.2 Trust IX and the Limited Maturity Fund represent and warrant to Trust
II and the Intermediate Income Fund as follows:
(a) Trust IX is a business trust duly organized, validly existing and
in good standing under the laws of The Commonwealth of Massachusetts and
has the power to own all of its properties and assets and to carry out the
Agreement. Neither Trust IX nor the Limited Maturity Fund is required to
qualify to do business in any other jurisdiction. The Agreement has been
duly authorized by Trust IX. Trust IX has all necessary federal, state and
local authorization to own all of its properties and assets and to carry
on its business as now being conducted;
(b) Trust IX is a duly registered investment company classified as a
management company of the open-end type and its registration with the
Commission as an investment company under the 1940 Act is in full force
and effect;
(c) The current prospectus and statement of additional information of
the Limited Maturity Fund, dated September 1, 1999 and September 1, 1999
as amended September 22, 1999, respectively, as supplemented and updated
from time to time (the "Limited Maturity Fund Prospectus"), and the
Registration Statement referred to in paragraph 5.7 (other than written
information furnished by the Intermediate Income Fund for inclusion
therein as covered by the Intermediate Income Fund's warranty in paragraph
4.1(m)) will conform in all material respects to the applicable
requirements of the 1933 Act and the 1940 Act and the rules and
regulations of the Commission thereunder on the date of the Proxy
Statement, on the date of the meeting of the Intermediate Income Fund
shareholders and on the Closing Date and will not on such dates include
any untrue statement of a material fact or omit to state any material fact
required to be stated therein or necessary to make the statements therein,
in light of the circumstances under which they were made, not misleading;
(d) At the Closing Date, Trust IX, will have good and marketable title
to the assets of the Limited Maturity Fund;
(e) Trust IX is not, and the execution, delivery and performance of
this Agreement will not result, in violation of any provisions of its
Declaration of Trust or By-Laws or of any agreement, indenture,
instrument, contract, lease or other undertaking to which Trust IX is a
party or by which Trust IX or the Limited Maturity Fund is bound;
(f) No material litigation or administrative proceeding or
investigation of or before any court or governmental body is currently
pending or threatened against Trust IX or any of its properties or assets,
except as previously disclosed in writing to the Intermediate Income Fund.
Trust IX knows of no facts which might form the basis for the institution
of such proceedings, and Trust IX is not a party to or subject to the
provisions of any order, decree or judgment of any court or governmental
body which materially and adversely affects its business or its ability to
consummate the transaction herein contemplated;
(g) The statements of assets and liabilities, including the schedule
of portfolio investments, of the Limited Maturity Fund as of April 30,
1999, and the related statement of operations for the year then ended, and
the statement of changes in net assets for the years ended April 30, 1999
and April 30, 1998 (copies of which have been furnished to the
Intermediate Income Fund) have been audited by Deloitte & Touche LLP,
independent auditors, and present fairly in all material respects the
financial position of the Limited Maturity Fund as of April 30, 1999 and
the results of its operations and changes in net assets for the respective
stated periods in accordance with generally accepted accounting principles
consistently applied and there are no known actual or contingent
liabilities of the Limited Maturity Fund as of the respective dates
thereof not disclosed therein;
(h) Since April 30, 1999, there has not been any material adverse
change in the Limited Maturity Fund's financial condition, assets,
liabilities or business other than changes occurring in the ordinary
course of business or any incurrence by the Limited Maturity Fund of
indebtedness maturing more than one year from the date such indebtedness
was incurred except as otherwise disclosed to the Intermediate Income
Fund. For the purposes of this subparagraph (h), a decline in net asset
value per share of beneficial interest of the Limited Maturity Fund
resulting from losses upon the disposition of investments or from changes
in the value of investments held by the Limited Maturity Fund, or a
distribution or a payment of dividends, shall not constitute a material
adverse change;
(i) The Limited Maturity Fund has elected to be treated as a regulated
investment company for federal tax purposes, has qualified as such for
each taxable year of its operation, and will qualify as such as of the
Closing Date;
(j) At the date hereof and at the Closing Date, all federal, state and
other tax returns and reports, including information returns and payee
statements, of the Limited Maturity Fund required by law to have been
filed or furnished by such dates shall have been filed or furnished, and
all federal, state and other taxes, interest and penalties shall have been
paid so far as due, or provision shall have been made for the payment
thereof, and to the best of the Limited Maturity Fund's knowledge no such
return is currently under audit and no assessment has been asserted with
respect to such returns or reports;
(k) The authorized capital of Trust IX consists of an unlimited number
of shares of beneficial interest, no par value, divided into eight series
and, with respect to the Limited Maturity Fund, into four classes, at the
date hereof. All issued and outstanding shares of beneficial interest
attributable to the Limited Maturity Fund are, and at the Closing Date
will be, duly and validly issued and outstanding, fully paid and
nonassessable by Trust IX. Trust IX does not have outstanding any options,
warrants or other rights to subscribe for or purchase any shares of
beneficial interest attributable to the Limited Maturity Fund, nor is
there outstanding any security convertible into any shares of beneficial
interest attributable to the Limited Maturity Fund;
(l) The execution, delivery and performance of this Agreement have
been duly authorized by all necessary action on the part of Trust IX, and
this Agreement constitutes a valid and binding obligation of Trust IX
enforceable in accordance with its terms;
(m) The Reorganization Shares to be issued and delivered to Trust II
pursuant to the terms of this Agreement will have been duly authorized at
the Closing Date, and when so issued and delivered, will be duly and
validly issued Limited Maturity Fund shares and will be fully paid and
nonassessable by Trust IX;
(n) The information to be furnished by the Limited Maturity Fund for
use in applications for orders, registration statements, proxy materials
and other documents which may be necessary in connection with the
transactions contemplated hereby shall be accurate and complete and shall
comply fully with federal securities and other laws and regulations
applicable thereto;
(o) Trust IX agrees to use all reasonable efforts to obtain the
approvals and authorizations required by the 1933 Act, the 1940 Act and
such of the state Blue Sky or securities laws as it may deem appropriate
in order to continue its operations and the operations of the Limited
Maturity Fund after the Closing Date;
(p) All of Trust IX's issued and outstanding shares of beneficial
interest attributable to the Limited Maturity Fund have been offered for
sale and sold in conformity with all applicable federal and state
securities laws, except as may have been previously disclosed in writing
to the Intermediate Income Fund; and
(q) No consent, approval, authorization or order of any court or
governmental authority is required for the consummation by Trust IX of the
transactions contemplated by the Agreement, except such as have been
obtained under the 1933 Act, the 1934 Act and the 1940 Act, and such as
may be required under state securities laws.
5. COVENANTS
5.1 The Intermediate Income Fund and the Limited Maturity Fund each will
operate its business in the ordinary course between the date hereof and the
Closing Date, it being understood that such ordinary course of business will
include the declaration and payment of customary dividends and distributions.
5.2 Trust II will call a meeting of shareholders of the Intermediate
Income Fund (the "Meeting") to consider and act upon this Agreement and to
take all other action necessary to obtain approval of the transactions
contemplated herein.
5.3 Trust II covenants that the Reorganization Shares to be issued
hereunder are not being acquired for the purpose of making any distribution
thereof other than in accordance with the terms of this Agreement.
5.4 Trust II will provide such information as Trust IX reasonably requests
concerning the ownership of the Intermediate Income Fund's shares of
beneficial interest, including the information specified in paragraph 3.4.
5.5 Subject to the provisions of this Agreement, Trust II and Trust IX
each will take, or cause to be taken, all action, and do or cause to be done
all things, reasonably necessary, proper or advisable to consummate and make
effective the transactions contemplated by this Agreement.
5.6 Trust II shall furnish to Trust IX on the Closing Date the Statement
of Assets and Liabilities of the Intermediate Income Fund as of the Valuation
Date, which statement shall be prepared in accordance with generally accepted
accounting principles consistently applied and shall be certified by Trust
II's Treasurer or Assistant Treasurer. As promptly as practicable, but in any
case within 60 days after the Closing Date, Trust II or its designee shall
furnish to Trust IX, in such form as is reasonably satisfactory to Trust IX, a
statement of the earnings and profits of the Intermediate Income Fund for
federal income tax purposes, and of any capital loss carryovers and other
items that the Limited Maturity Fund will succeed to and take into account as
a result of Section 381 of the Code.
5.7 Trust IX will prepare and file with the Securities and Exchange
Commission a Registration Statement on Form N-14 (the "Registration
Statement"), in compliance with the 1933 Act and the 1940 Act, in connection
with the issuance of the Reorganization Shares as contemplated herein.
5.8 Trust IX will prepare a Proxy Statement, to be included in the
Registration Statement in compliance with the 1933 Act, the 1934 Act and the
1940 Act and the rules and regulations thereunder (collectively, the "Acts")
in connection with the Meeting of the Intermediate Income Fund shareholders to
consider approval of this Agreement.
Trust II agrees to provide Trust IX with information applicable to Trust
II and Intermediate Income Fund required under the Acts for inclusion in the
Proxy Statement.
6. CONDITIONS PRECEDENT TO OBLIGATIONS OF TRUST II
The obligations of Trust II to consummate the transactions provided for
herein shall be, at its election, subject to the performance by Trust IX of
all the obligations to be performed by it hereunder on or before the Closing
Date, and, in addition thereto, the following further conditions:
6.1 All representations and warranties of Trust IX and the Limited
Maturity Fund contained in this Agreement shall be true and correct in all
material respects as of the date hereof and, except as they may be affected by
the transactions contemplated by this Agreement, as of the Closing Date with
the same force and effect as if made on and as of the Closing Date;
6.2 Trust IX shall have delivered to Trust II a certificate executed in
its name by its President, Vice President, Secretary or its Assistant
Secretary and its Treasurer or Assistant Treasurer, in form satisfactory to
Trust II and dated as of the Closing Date, to the effect that the
representations and warranties of Trust IX and the Limited Maturity Fund made
in this Agreement are true and correct at and as of the Closing Date, except
as they may be affected by the transactions contemplated by this Agreement,
and as to such other matters as Trust II shall reasonably request; and
6.3 Trust II shall have received on the Closing Date a favorable opinion
from James R. Bordewick, Jr., Associate General Counsel and Senior Vice
President of Massachusetts Financial Services Company ("MFS"), Trust IX's
investment adviser, dated as of the Closing Date, in a form satisfactory to
Trust II, to the effect that:
(a) Trust IX is a business trust duly organized and validly existing
under the laws of The Commonwealth of Massachusetts and has power to own
all of its properties and assets and to carry on its business as currently
conducted, as described in the Registration Statement; (b) the Agreement
has been duly authorized, executed and delivered by Trust IX and, assuming
that the Limited Maturity Fund Prospectus contained in the Registration
Statement, the Registration Statement, and Proxy Statement comply with the
1933 Act, the 1934 Act and the 1940 Act and the rules and regulations
thereunder, and assuming the due authorization, execution and delivery of
the Agreement by Trust II, is a valid and binding obligation of Trust IX
enforceable against Trust IX in accordance with its terms, except as the
same may be limited by bankruptcy, insolvency, reorganization or other
similar laws affecting the enforcement of creditors' rights generally and
other equitable principles; (c) the Reorganization Shares to be issued to
the Intermediate Income Fund shareholders as provided by this Agreement
are duly authorized and upon such delivery will be validly issued and
outstanding and fully paid and nonassessable by Trust IX, and no
shareholder of the Limited Maturity Fund has any preemptive right to
subscription or purchase in respect thereof pursuant to any federal or
Massachusetts law or the Declaration of Trust or By-laws of Trust IX; (d)
the execution and delivery of the Agreement did not, and the consummation
of the transactions contemplated hereby will not, violate Trust IX's
Declaration of Trust or By-Laws, or any material provision of any
agreement (known to such counsel) to which Trust IX is a party or by which
it or the Limited Maturity Fund is bound; (e) to the knowledge of such
counsel, no consent, approval, authorization or order of any court or
governmental authority is required for the consummation by Trust IX of the
transactions contemplated herein, except such as have been obtained under
the 1933 Act, the 1934 Act and the 1940 Act, and such as may be required
under state securities laws; (f) the descriptions in the Registration
Statement of statutes, legal and governmental proceedings and contracts
and other documents, if any, only insofar as they relate to Trust IX and
the Limited Maturity Fund, are accurate in all material respects; (g) such
counsel does not know of any legal or governmental proceedings existing on
or before the date of mailing of the Proxy Statement or the Closing Date,
only insofar as they relate to Trust IX or the Limited Maturity Fund,
required to be described in the Registration Statement which are not
described as required; (h) to the knowledge of such counsel, Trust IX is a
duly registered investment company and its registration with the
Securities and Exchange Commission as an investment company under the 1940
Act is in full force and effect; and (i) to the best knowledge of such
counsel, no litigation or administrative proceeding or investigation of or
before any court or governmental body currently is pending or threatened
as to Trust IX or the Limited Maturity Fund or any of Trust IX's
properties or assets, and Trust IX is not a party to or subject to the
provisions of any order, decree or judgment of any court or governmental
body, which materially and adversely affects its business or its ability
to consummate the transactions contemplated hereby. Such opinion shall
also state that while such counsel has not verified, and is not passing
upon and does not assume any responsibility for the accuracy, completeness
or fairness of the statements contained in the Registration Statement, he
generally reviewed and discussed certain of such statements with certain
officers of Trust IX and that in the course of such review and discussion
no facts came to the attention of such counsel which led him to believe
that, on the effective date of the Registration Statement or on the date
of the Intermediate Income Fund shareholders' meeting and only insofar as
such statements relate to Trust IX and the Limited Maturity Fund, the
Registration Statement contained any statement which, in the light of the
circumstances under which it was made, was false or misleading with
respect to any material fact or which omitted to state any material fact
required to be stated therein or necessary to make the statements therein
not false or misleading. Such opinion may state that such counsel does not
express any opinion or belief as to the financial statements or other
financial or statistical data, or as to the information relating to Trust
II or the Intermediate Income Fund, contained in the Proxy Statement or
Registration Statement. Such opinion may also state that such opinion is
solely for the benefit of Trust II, its Board of Trustees and its officers
and of the Intermediate Income Fund. Such opinion shall also include such
other matters incidental to the transaction contemplated hereby as Trust
II may reasonably request.
7. CONDITIONS PRECEDENT TO OBLIGATIONS OF THE TRUST IX
The obligations of Trust IX to complete the transactions provided for
herein shall be, at its election, subject to the performance by Trust II of
all the obligations to be performed by it hereunder on or before the Closing
Date and, in addition thereto, the following conditions:
7.1 All representations and warranties of Trust II and the Intermediate
Income Fund contained in this Agreement shall be true and correct in all
material respects as of the date hereof and, except as they may be affected by
the transactions contemplated by this Agreement, as of the Closing Date with
the same force and effect as if made on and as of the Closing Date;
7.2 Trust II shall have delivered to Trust IX the Statement of Assets and
Liabilities, together with a list of the Intermediate Income Fund's portfolio
securities showing the federal income tax bases and holding periods of such
securities, as of the Closing Date, certified by the Treasurer or Assistant
Treasurer of Trust II;
7.3 Trust II shall have delivered to Trust IX on the Closing Date a
certificate executed in its name by its President, Vice President, Secretary
or its Assistant Secretary and its Treasurer or Assistant Treasurer, in form
and substance satisfactory to Trust IX and dated as of the Closing Date, to
the effect that the representations and warranties of Trust II in this
Agreement are true and correct at and as of the Closing Date, except as they
may be affected by the transactions contemplated by this Agreement, and as to
such other matters as Trust IX shall reasonably request;
7.4 Trust IX shall have received on the Closing Date a favorable opinion
from James R. Bordewick, Jr., Associate General Counsel and Senior Vice
President of MFS, Trust II's investment adviser, dated as of the Closing Date,
in a form satisfactory to Trust IX to the effect that:
(a) Trust II is a business trust duly organized and validly existing under
the laws of The Commonwealth of Massachusetts and has power to own all of
its properties and assets and to carry on its business as currently
conducted; (b) the Agreement has been duly authorized, executed and
delivered by Trust II and, assuming that the Limited Maturity Fund
Prospectus, the Registration Statement and the Proxy Statement comply with
the 1933 Act, the 1934 Act and the 1940 Act and the rules and regulations
thereunder, and assuming due authorization, execution and delivery of the
Agreement by Trust IX, is a valid and binding obligation of Trust II
enforceable against Trust II and the Intermediate Income Fund in
accordance with its terms, except as the same may be limited by
bankruptcy, insolvency, reorganization or other similar laws affecting the
enforcement of creditors' rights generally and other equitable principles;
(c) the execution and delivery of the Agreement did not, and the
consummation of the transactions contemplated hereby will not, violate
Trust II's Declaration of Trust or By-Laws, or any material provision of
any agreement (known to such counsel) to which Trust II is a party or by
which it or the Intermediate Income Fund is bound; (d) to the knowledge of
such counsel, no consent, approval, authorization or order of any court or
governmental authority is required for the consummation by Trust II of the
transactions contemplated herein, except such as have been obtained under
the 1933 Act, the 1934 Act and the 1940 Act, and such as may be required
under state securities laws; (e) the descriptions in the Proxy Statement
of statutes, legal and governmental proceedings and contracts and other
documents, if any, only insofar as they relate to Trust II and the
Intermediate Income Fund, are accurate in all material respects; (f) such
counsel does not know of any legal or governmental proceedings existing on
or before the date of mailing the Proxy Statement or the Closing Date,
only insofar as they relate to Trust II or the Intermediate Income Fund,
required to be described in the Proxy Statement which are not described as
required; (g) to the knowledge of such counsel, Trust II is a duly
registered investment company and its registration with the Securities and
Exchange Commission as an investment company under the 1940 Act is in full
force and effect and (h) to the best knowledge of such counsel, no
litigation or administrative proceeding or investigation of or before any
court or governmental body is currently pending or threatened as to Trust
II or any of its properties or assets and Trust II is not a party to or
subject to the provisions of any order, decree or judgment of any court or
governmental body, which materially and adversely affects its business or
its ability to consummate the transactions contemplated hereby. Such
opinion shall also state that while such counsel has not verified, and is
not passing upon and does not assume any responsibility for the accuracy,
completeness or fairness of the statements contained in the Proxy
Statement, he generally reviewed and discussed certain of such statements
with certain officers of Trust II and that in the course of such review
and discussion no facts came to the attention of such counsel which led
him to believe that, on the effective date of the Registration Statement
or on the date of the Intermediate Income Fund shareholders' meeting and
only insofar as such statements relate to Trust II or the Intermediate
Income Fund, the Proxy Statement contained any statement which, in the
light of the circumstances under which it was made, was false or
misleading with respect to any material fact or which omitted to state any
material fact required to be stated therein or necessary to make the
statements therein not false or misleading. Such opinion may state that
such counsel does not express any opinion or belief as to the financial
statements or other financial or statistical data, or as to the
information relating to Trust IX and the Limited Maturity Fund, contained
in the Proxy Statement or Registration Statement. Such opinion may also
state that such opinion is solely for the benefit of Trust IX, its Board
of Trustees and its officers and of the Limited Maturity Fund. Such
opinion shall also include such other matters incident to the transaction
contemplated hereby as Trust IX may reasonably request.
7.5 Any shares of the Intermediate Income Fund issued in order to provide
the initial capital of the Intermediate Income Fund as required by Section
14(a) of the 1940 Act and outstanding as of the date of this Agreement shall
have been redeemed and the proceeds of such redemption reduced by the amount
of any unamortized organizational expenses allocated to the Intermediate
Income Fund prior to the Valuation Date.
8. FURTHER CONDITIONS PRECEDENT TO OBLIGATIONS OF THE MFS SERIES TRUST IX AND
THE MFS SERIES TRUST II
The obligations of Trust II hereunder are, at the option of Trust IX, and
the obligations of Trust IX hereunder are, at the option of Trust II, each
subject to the further conditions that on or before the Closing Date:
8.1 The Agreement and the transactions contemplated herein shall have been
approved by the requisite vote of the holders of the outstanding shares of
beneficial interest of the Intermediate Income Fund in accordance with the
provisions of Trust II's Declaration of Trust and By-Laws, and certified
copies of the resolutions evidencing such approval shall have been delivered
to Trust IX;
8.2 On the Closing Date no action, suit or other proceeding shall be
pending before any court or governmental agency in which it is sought to
restrain or prohibit, or obtain damages or other relief in connection with,
this Agreement or the transactions contemplated herein;
8.3 All consents of other parties and all other consents, orders and
permits of federal, state and local regulatory authorities (including those of
the Commission and of state Blue Sky and securities authorities, including
"no- action" positions of such federal or state authorities) deemed necessary
by Trust IX or Trust II to permit consummation, in all material respects, of
the transactions contemplated hereby shall have been obtained, except where
failure to obtain any such consent, order or permit would not involve a risk
of a material adverse effect on the assets or properties of the Limited
Maturity Fund or the Intermediate Income Fund, provided that either Trust IX
or Trust II may waive any such conditions for itself or for the Limited
Maturity Fund or the Intermediate Income Fund, respectively;
8.4 The Registration Statement shall have become effective under the 1933
Act and no stop orders suspending the effectiveness thereof shall have been
issued and, to the best knowledge of the parties hereto, no investigation or
proceeding for that purpose shall have been instituted or be pending,
threatened or contemplated under the 1933 Act;
8.5 The Intermediate Income Fund shall have distributed to its
shareholders all of the excess of (i) its investment income excludable from
gross income under Section 103(a) of the Code over (ii) its deductions
disallowed under Sections 265 and 171(a)(2) of the Code, for its taxable year
ending on the Closing Date and all of its net capital gain as such term is
used in Section 852(b)(3)(C) of the Code, after reduction by any capital loss
carryforward, for its taxable year ending on the Closing Date;
8.6 The parties shall have received an opinion of Bingham Dana LLP,
satisfactory to Trust II and Trust IX, substantially to the effect that for
federal income tax purposes:
(a) The acquisition by the Limited Maturity Fund of all of the assets
of the Intermediate Income Fund, solely in exchange for Reorganization
Shares and the assumption by the Limited Maturity Fund of the stated
liabilities of the Intermediate Income Fund as set forth in the Statement
of Assets and Liabilities, followed by the distribution by the
Intermediate Income Fund of the Reorganization Shares in complete
liquidation to the shareholders of the Intermediate Income Fund in
exchange for their Intermediate Income Fund shares of beneficial interest
and the termination of the Intermediate Income Fund pursuant to this
Agreement, will constitute a reorganization within the meaning of Section
368(a) of the Code, and the Intermediate Income Fund and the Limited
Maturity Fund will each be "a party to a reorganization" within the
meaning of Section 368(b) of the Code;
(b) No gain or loss will be recognized by the Intermediate Income Fund
upon the transfer of all of its assets to the Limited Maturity Fund solely
in exchange for Reorganization Shares and the assumption by the Limited
Maturity Fund of the stated liabilities of the Intermediate Income Fund as
set forth in the Statement of Assets and Liabilities or upon the
distribution to the Intermediate Income Fund shareholders of such
Reorganization Shares pursuant to the Agreement;
(c) No gain or loss will be recognized by the Limited Maturity Fund
upon the receipt of the assets of the Intermediate Income Fund solely in
exchange for Reorganization Shares and the assumption by the Limited
Maturity Fund of the stated liabilities of the Intermediate Income Fund as
set forth in the Statement of Assets and Liabilities;
(d) The basis of the assets of the Intermediate Income Fund acquired
by the Limited Maturity Fund will be, in each instance, the same as the
basis of those assets in the hands of the Intermediate Income Fund
immediately prior to the transfer;
(e) The holding period of the assets of the Intermediate Income Fund
in the hands of the Limited Maturity Fund will include, in each instance,
the holding period of such assets in the hands of the Intermediate Income
Fund;
(f) The shareholders of the Intermediate Income Fund will not
recognize gain or loss upon the exchange of all of their Intermediate
Income Fund shares of beneficial interest solely for Reorganization Shares
as part of the transaction;
(g) The basis of the Reorganization Shares to be received by each
Intermediate Income Fund shareholder will be, in the aggregate, the same
as the basis, in the aggregate, of the Intermediate Income Fund shares of
beneficial interest surrendered by such shareholder in exchange therefor;
and
(h) The holding period of the Reorganization Shares to be received by
each Intermediate Income Fund shareholder will include, in each instance,
the holding period of the Intermediate Income Fund shares of beneficial
interest surrendered by such shareholder in exchange therefor, provided
the Intermediate Income Fund shares were held by such shareholder as
capital assets on the date of the exchange.
Trust IX and Trust II each agree to make and provide representations with
respect to the Limited Maturity Fund and the Intermediate Income Fund,
respectively, which are reasonably necessary to enable legal counsel to
deliver an opinion substantially as set forth in this paragraph 8.6.
Notwithstanding anything herein to the contrary, Trust IX and Trust II may not
waive in any material respect the conditions set forth in this paragraph 8.6.
9. BROKERAGE FEES AND EXPENSES; CONTINGENT DEFERRED SALES CHARGES;
CERTAIN TAX MATTERS; CERTAIN RECORDS
9.1 Trust IX and the Trust II each represents and warrants to the other
that there are no brokers or finders entitled to receive any payments from
either party to this Agreement in connection with the transactions provided
for herein.
9.2 The Limited Maturity Fund and the Intermediate Income Fund will each
be liable for its own expenses incurred in connection with entering into and
carrying out the provisions of this Agreement whether or not the
Reorganization is consummated.
9.3 Reorganization Shares issued in connection with the transactions
contemplated herein will not be subject to any initial sales charge; however,
if any Intermediate Income Fund shares are at the Closing Date subject to a
contingent deferred sales charge ("CDSC"), the Limited Maturity Fund CDSC
schedule and the methodology of aging such shares as set forth in the Limited
Maturity Fund Prospectus will apply to the Reorganization Shares issued in
respect of such Intermediate Income Fund shares and the Reorganization Shares
received by Intermediate Income Fund shareholders pursuant to paragraph 1.4
hereof will, for purposes of calculating the CDSC, if applicable, and
determining when the Limited Maturity Fund Class B Shares will convert to
Class A shares of the Limited Maturity Fund, be treated as if purchased on the
original date of purchase of the Intermediate Income Fund shares.
9.4 Trust II agrees that it or its designee shall, on behalf of the
Intermediate Income Fund, file or furnish all federal, state and other tax
returns, forms and reports, including information returns and payee
statements, if applicable, of the Intermediate Income Fund required by law to
be filed or furnished by such dates as required by law to be filed or
furnished, and shall provide such other federal and state tax information to
shareholders of the Intermediate Income Fund as has been customarily provided
by the Intermediate Income Fund, all with respect to the fiscal period
commencing December 1, 1999 and ending on the Closing Date.
9.5 Trust II agrees that it or its designee shall, on behalf of the
Intermediate Income Fund, deliver to Trust IX on the Closing Date or as soon
thereafter as possible: (i) Intermediate Income Fund shareholder statements
and tax forms (i.e. Forms 1099) for the year ended December 31, 1998, the year
ended December 31, 1999 and the period commencing January 1, 2000 through the
Closing Date (all on microfilm or microfiche, if available); (ii) detailed
records indicating the status of all certificates representing ownership of
the Intermediate Income Fund shares issued since inception of the Intermediate
Income Fund (e.g., indicating whether the certificates are outstanding or
cancelled); and (iii) for each Intermediate Income Fund shareholder as of the
Valuation Date, a record indicating the dollar amount of such shareholder's
Intermediate Income Fund share holdings as of such Date representing that
portion of such holdings subject to a CDSC as of such Date and that portion of
such holdings not subject to a CDSC as of such Date, together with such other
information with respect thereto as Trust IX may reasonably request.
10. ENTIRE AGREEMENT
Trust IX and Trust II agree that neither party has made any
representation, warranty or covenant not set forth herein or referred to in
paragraph 4 hereof or required in connection with paragraph 8.6 hereof and
that this Agreement constitutes the entire agreement between the parties.
11. TERMINATION
11.1 This Agreement may be terminated by the mutual agreement of Trust IX
and Trust II. In addition, either party may at its option terminate this
Agreement at or prior to the Closing Date because of:
(a) a material breach by the other of any representation, warranty or
agreement contained herein to be performed at or prior to the Closing
Date; or
(b) a condition herein expressed to be precedent to the obligations of
the terminating party which has not been met and which reasonably appears
will not or cannot be met.
11.2 In the event of any such termination, there shall be no liability for
damages on the part of either Trust IX or Trust II, or their respective
trustees or officers, to the other party or its trustees or officers, but each
shall bear the expenses incurred by it incidental to the preparation and
carrying out of this Agreement.
12. AMENDMENTS
This Agreement may be amended, modified or supplemented in such manner as
may be mutually agreed upon in writing by the authorized officers of Trust II
and Trust IX; provided, however, that following the meeting called by Trust II
pursuant to paragraph 5.2 of this Agreement, no such amendment may have the
effect of changing the provisions for determining the number of Reorganization
Shares to be issued to the Intermediate Income Fund shareholders under this
Agreement to the detriment of such shareholders without their further
approval; and provided further that nothing contained in this Article 12 shall
be construed to prohibit the parties from amending this Agreement to change
the Closing Date or the Valuation Date.
13. NOTICES
Any notice, report, statement or demand required or permitted by any
provisions of this Agreement shall be in writing and shall be given by prepaid
telegraph, telecopy or certified mail addressed to Trust IX or Trust II (as
applicable), 500 Boylston Street, Boston, Massachusetts 02116, Attention:
Stephen E. Cavan, General Counsel and Senior Vice President.
14. MISCELLANEOUS
14.1 The article and paragraph headings contained in this Agreement are
for reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement.
14.2 This Agreement may be executed in any number of counterparts, each of
which shall be deemed an original.
14.3 This Agreement shall be governed by and construed in accordance with
the laws of The Commonwealth of Massachusetts.
14.4 This Agreement shall bind and inure to the benefit of the parties
hereto and their respective successors and assigns, but no assignment or
transfer hereof or of any rights or obligations hereunder shall be made by any
party without the written consent of the other party. Nothing herein expressed
or implied is intended or shall be construed to confer upon or give any
person, firm or corporation, other than the parties hereto and their
respective successors and assigns, any rights or remedies under or by reason
of this Agreement.
14.5 A copy of the Trust IX Declaration of Trust is on file with the
Secretary of State of The Commonwealth of Massachusetts. Trust II acknowledges
that the obligations of or arising out of this instrument are not binding upon
any of Trust IX's trustees, officers, employees, agents or shareholders
individually, but are binding solely upon the assets and property of Trust IX
in accordance with its proportionate interest hereunder. Trust II further
acknowledges that the assets and liabilities of each series of Trust IX are
separate and distinct and that the obligations of or arising out of this
instrument are binding solely upon the assets or property of the series on
whose behalf Trust IX has executed this instrument.
14.6 A copy of the Trust II Declaration of Trust is on file with the
Secretary of State of The Commonwealth of Massachusetts. Trust IX acknowledges
that the obligations of or arising out of this instrument are not binding upon
any of Trust II's trustees, officers, employees, agents or shareholders
individually, but are binding solely upon the assets and property of Trust II
in accordance with its proportionate interest hereunder. Trust IX further
acknowledges that the assets and liabilities of each series of Trust II are
separate and distinct and that the obligations of or arising out of this
instrument are binding solely upon the assets or property of the series on
whose behalf Trust II has executed this instrument.
14.7 Notwithstanding Article 12 of the Agreement, but subject to the first
proviso contained therein, either party to this Agreement, with the consent of
its President, Vice President, Secretary or its Assistant Secretary, may waive
any condition or covenant to which the other party is subject or may modify
such condition or covenant in a manner deemed appropriate by any such officer.
IN WITNESS WHEREOF, each of the parties hereto has caused this Agreement to be
executed by its Chairman, President or a Trustee and attested by its Secretary
or Assistant Secretary.
Attest: MFS SERIES TRUST II, on its behalf and on
behalf of MFS INTERMEDIATE INCOME FUND,
one of its series
/s/ James R. Bordewick, Jr. BY: /s/ Jeffrey L. Shames
- - -------------------------------- --------------------------------
James R. Bordewick, Jr. Jeffrey L. Shames
Assistant Secretary President
Attest: MFS SERIES TRUST IX, on its behalf and on
behalf of MFS LIMITED MATURITY FUND, one
of its series
/s/ James R. Bordewick, Jr. BY: /s/ Arnold D. Scott
- - -------------------------------- --------------------------------
James R. Bordewick, Jr. Arnold D. Scott
Assistant Secretary Trustee
<PAGE>
[FORM OF PROXY BALLOT]
MFS INTERMEDIATE INCOME FUND, A SERIES OF MFS SERIES TRUST II
PROXY BALLOT
PROXY FOR A MEETING OF SHAREHOLDERS, MAY 18, 2000
THIS PROXY IS SOLICITED ON BEHALF OF THE TRUSTEES OF THE FUND.
The undersigned hereby appoints James R. Bordewick, Jr., Stephen E. Cavan,
W. Thomas London, Arnold D. Scott and Jeffrey L. Shames, and each of them
separately, proxies, with power of substitution, and hereby authorizes them to
represent and to vote, as designated below, at the Meeting of Shareholders of
MFS Intermediate Income Fund, a series of the MFS Series Trust II on Thursday,
May 18, 2000 at 10:00 a.m., Boston time, and at any adjournments thereof, all
of the shares of the Fund which the undersigned would be entitled to vote if
personally present.
THIS PROXY WHEN PROPERLY EXECUTED WILL BE VOTED IN THE MANNER DIRECTED HEREIN
BY THE UNDERSIGNED SHAREHOLDER. IF NO DIRECTION IS MADE, THIS PROXY WILL BE
VOTED FOR PROPOSAL 1. IN THEIR DISCRETION, THE PROXIES ARE AUTHORIZED TO VOTE
UPON SUCH OTHER MATTERS AS MAY PROPERLY COME BEFORE THE MEETING. THE TRUSTEES
RECOMMEND A VOTE FOR THE PROPOSAL ON THE REVERSE SIDE.
OPTIONS FOR SUBMITTING PROXY
1. Return the attached proxy card using the enclosed envelope.
2. Vote via the internet at www.mfs.com or www.proxyvote.com.
3. Vote via the telephone at 1-800-690-6903.
4. Fax this executed proxy card to 1-800-733-1885.
To vote via the internet or telephone, you must have the Control Number listed
near your name.
PLEASE VOTE AND SIGN ON OTHER SIDE AND RETURN PROMPTLY IN ENCLOSED ENVELOPE.
NOTE: Please sign exactly as name appears on this card. All joint owners
should sign. When signing as executor, administrator, attorney, trustee or
guardian or as custodian for a minor, please give full title as such. If a
corporation, please sign in full corporate name and indicate the signer's
office. If a partner, sign in the partnership name.
PLEASE FOLD AT PERFORATION BEFORE DETACHING
MFS INTERMEDIATE INCOME FUND
CHANGE OF ADDRESS NOTIFICATION. Please use this form to inform us of any
change in address or telephone number or to provide us with your comments.
Detach this form from the Proxy Ballot and return it with your executed Proxy
in the enclosed envelope.
HAS YOUR ADDRESS CHANGED? DO YOU HAVE ANY COMMENTS?
Telephone
Please mark your choice [x] in blue or black ink.
THE TRUSTEES UNANIMOUSLY RECOMMEND A VOTE FOR THE PROPOSAL LISTED BELOW.
Dear Shareholder:
YOUR VOTE IS IMPORTANT. Please help us to eliminate the expense of follow-up
mailings by executing and returning this Proxy as soon as possible. A
postage-paid business reply envelope is enclosed for your convenience.
Thank you!
Please fold at perforation before detaching.
PROPOSAL: For Against Abstain
1. Approval of the Agreement and Plan [ ] [ ] [ ]
of Reorganization providing for the transfer of all of the assets of MFS
Intermediate Income Fund, a series of MFS Series Trust II to MFS Limited
Maturity Fund, a series of the MFS Series Trust IX in exchange for shares of
beneficial interest of the MFS Limited Maturity Fund and the assumption by the
MFS Limited Maturity Fund of the stated liabilities of the MFS Intermediate
Income Fund, and the distribution of such shares to the shareholders of the MFS
Intermediate Income Fund in liquidation of the MFS Intermediate Income Fund and
the termination of the MFS Intermediate Income Fund.
Please be sure to sign and date this Proxy. Date _________________
Shareholder sign here Co-owner sign here
<PAGE>
FORM N-14
PART B
MFS SERIES TRUST IX
ON BEHALF OF
MFS LIMITED MATURITY FUND
STATEMENT OF ADDITIONAL INFORMATION
MARCH 31, 2000
This Statement of Additional Information contains material that may be of
interest to investors but that is not included in the Prospectus/Proxy
Statement (the "Prospectus") of MFS Limited Maturity Fund (the "Limited
Maturity Fund") dated March 31, 2000 relating to the sale of all or
substantially all of the assets of MFS Intermediate Income Fund (the
"Intermediate Income Fund") to the Limited Maturity Fund. The Limited Maturity
Fund's Statement of Additional Information dated September 1, 1999 as amended
September 22, 1999, and the Intermediate Income Fund's Statement of Additional
Information dated April 1, 1999, have been filed with the Securities and
Exchange Commission and are incorporated herein by reference. This Statement
is not a Prospectus and is authorized for distribution only when it
accompanies or follows delivery of the Prospectus.
This Statement should be read in conjunction with the Prospectus. Investors
may obtain a free copy of the Prospectus or either or both of the Statements of
Additional Information by writing MFS Service Center, Inc., 2 Avenue de
Lafayette, Boston, MA 02111 or by calling 1-800-225-2606.
INDEPENDENT ACCOUNTANTS AND FINANCIAL STATEMENTS
Deloitte & Touche LLP are the independent accountants for the Limited
Maturity Fund and the Intermediate Income Fund, providing audit services, tax
return review and other tax consulting services and assistance and
consultation in connection with the review of various Securities and Exchange
Commission filings for the Limited Maturity Fund and the Intermediate Income
Fund. The following documents are incorporated by reference into this
Statement of Additional Information: (1) the Report of Independent Accountants
and financial statements included in the Limited Maturity Fund's Annual Report
for the fiscal year ended April 30, 1999, filed electronically on June 18,
1999 (File No. 811-02464); (ii) the Report of Independent Accountants and
financial statements included in the Intermediate Income Fund's Annual Report
for the fiscal year ended November 30, 1999, filed electronically on January
27, 2000 (File No. 811-04775); and (iii) the unaudited financial statements
included in the Limited Maturity Fund's Semiannual Report for the six month
period ended October 31, 1999, filed electronically on December 28, 1999 (File
No. 811-02464). The audited financial statements for the Limited Maturity Fund
and the Intermediate Income Fund incorporated by reference into the
Prospectus/Proxy Statement and this Statement of Additional Information have
been so included and incorporated in reliance upon the reports of Deloitte &
Touche LLP, given on their authority as experts in auditing and accounting.
<PAGE>
TABLE OF CONTENTS
Unaudited Pro Forma Combined Financial Statements of the
Limited Maturity Fund and the Intermediate Income Fund ................. B-4
<PAGE>
MFS LIMITED MATURITY FUND
AND
MFS INTERMEDIATE INCOME FUND
PRO FORMA COMBINED FINANCIAL STATEMENTS
(UNAUDITED)
The accompanying unaudited pro forma combined statements of investment
portfolios and assets and liabilities assumes that the exchange described in
the next paragraph occurred as of October 31, 1999, and the unaudited pro
forma combined statement of operations for the twelve months ended October 31,
1999 presents the results of operations of MFS Limited Maturity Fund (the
"Limited Maturity Fund") as if the combination with MFS Intermediate Income
Fund (the "Intermediate Income Fund") had been consummated at November 1,
1998. The pro forma results of operations are not necessarily indicative of
future operations or the actual results that would have occurred had the
combination been consummated at November 1, 1998. The historical statements
have been derived from the Limited Maturity Fund's books and records utilized
in calculating daily net asset value at October 31, 1999, and for the twelve
month period then ended.
The pro forma statements give effect to the proposed transfer of all of
the assets of the Intermediate Income Fund to the Limited Maturity Fund in
exchange for the assumption by the Limited Maturity Fund of the stated
liabilities of the Intermediate Income Fund and for a number of the Limited
Maturity Fund's shares equal in value to the value of the net assets of the
Intermediate Income Fund transferred to the Limited Maturity Fund. Under
generally accepted accounting principles, the historical cost of investment
securities will be carried forward to the surviving entity and the results of
operations of the Limited Maturity Fund for pre-combination periods will not
be restated. The pro forma statement of operations does not reflect the
expenses of either Fund in carrying out its obligations under the Agreement
and Plan of Reorganization.
The unaudited pro forma combined statements should be read in conjunction
with the separate financial statements of the Limited Maturity Fund and the
Intermediate Income Fund incorporated by reference in this statement of
additional information.
<PAGE>
<TABLE>
PORTFOLIO OF INVESTMENTS AND PRO FORMA COMBINED
PORTFOLIO OF INVESTMENTS (UNAUDITED)
OCTOBER 31, 1999
<CAPTION>
BONDS
LIMITED MATURITY FUND INTERMEDIATE INCOME FUND PRO FORMA COMBINED
----------------------------- -------------------------------- -------------------------------
PRINCIPAL PRINCIPAL PRINCIPAL
AMOUNT AMOUNT AMOUNT
ISSUER (000 OMITTED) VALUE (000 OMITTED) VALUE (000 OMITTED) VALUE
- - -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
U.S. BONDS
AIRLINES
Delta Airlines, Inc., 6.65s, 2004 . $ 1,151 $ 1,115,181 $ 661 $ 640,430 $ 1,812 $ 1,755,611
------------ ------------ ------------
APPAREL AND TEXTILES
Jones Apparel Group, Inc.,
6.25s, 2001 ..................... $ 1,280 $ 1,255,654 $ 0 $ 0 $ 1,280 $ 1,255,654
------------ ------------ ------------
AUTOMOTIVE
DaimlerChrysler NA Holding
Corp., 6.63s, 2001 .............. $ 2,653 $ 2,656,979 $ 1,447 $ 1,449,170 $ 4,100 $ 4,106,149
Ford Capital BV, 9.875s, 2002 ..... 1,800 1,927,152 0 0 1,800 1,927,152
Ford Motor Credit Co.,
6.446s, 2002 .................... 3,000 3,016,110 750 754,028 3,750 3,770,138
Ford Motor Credit Co.,
5.75s, 2004 ..................... 0 0 1,750 1,676,150 1,750 1,676,150
------------ ------------ ------------
$ 7,600,241 $ 3,879,348 $ 11,479,589
------------ ------------ ------------
BANKS AND CREDIT COMPANIES
Fleet Boston Corp., 9.9s, 2001 .... $ 2,017 $ 2,116,458 $ 1,127 $ 1,182,573 $ 3,144 $ 3,299,031
Great Western Financial Corp.,
6.375s, 2000 .................... 2,366 2,364,817 1,664 1,663,168 4,030 4,027,985
GS Escrow Corp., 6.75s, 2001 ...... 1,903 1,853,855 0 0 1,903 1,853,855
Providian National Bank,
6.75s, 2002 ..................... 2,563 2,509,895 1,587 1,554,117 4,150 4,064,012
------------ ------------ ------------
$ 8,845,025 $ 4,399,858 $ 13,244,883
------------ ------------ ------------
CONGLOMERATES
General Electric Capital Corp.,
6.52s, 2002 ..................... $ 2,127 $ 2,119,343 $ 1,167 $ 1,162,799 $ 3,294 $ 3,282,142
------------ ------------ ------------
CONSUMER GOODS AND SERVICES
Hilfiger (Tommy) USA,
Inc., 6.5s, 2003 ................ $ 2,283 $ 2,187,160 $ 0 $ 0 $ 2,283 $ 2,187,160
------------ ------------ ------------
CONTAINERS
Owens-Illinois, Inc., 11s, 2003 ... $ 4,058 $ 4,200,030 $ 0 $ 0 $ 4,058 $ 4,200,030
------------ ------------ ------------
CORPORATE ASSET BACKED
Aames Mortgage Trust,
6.75s, 2021 ..................... $ 3,889 $ 3,857,402 $ 0 $ 0 $ 3,889 $ 3,857,402
American Express Credit
Account Trust, 5.6s, 2006 ....... 1,000 957,180 620 593,452 1,620 1,550,632
Americredit Automobile
Receivables Trust,
5.78s, 2003 ..................... 2,050 2,019,891 0 0 2,050 2,019,891
Amresco Residential
Securities Mortgage
Loan, 5.94s, 2015 ............... 4,039 3,996,717 2,750 2,721,211 6,789 6,717,928
Banamex Credit Card
Merchant Voucher, 6.25s, 2003# .. 6,663 6,589,934 0 0 6,663 6,589,934
BankBoston Home Equity
Loan Trust, 5.89s, 2013 ......... 1,894 1,862,113 1,331 1,308,591 3,225 3,170,704
Carco Auto Loan Master Trust,
5.65s, 2003 ..................... 0 0 2,000 1,985,313 2,000 1,985,313
Case Equipment Receivables
Trust, 5.285s, 2002 ............. 0 0 1,317 1,310,000 1,317 1,310,000
Chase Credit Card Master
Trust, 5.666s, 2004 ............. 2,815 2,817,618 0 0 2,815 2,817,618
Citibank Credit Card
Master Trust I, 5.5s, 2006 ...... 1,993 1,898,950 0 0 1,993 1,898,950
Commonwealth Edison
Transition Funding
Trust, 5.29s, 2003 .............. $ 1,894 $ 1,865,552 $ 1,331 $ 1,311,008 $ 3,225 $ 3,176,560
Discover Card Master Trust
I, 5.85s, 2006 .................. 0 0 2,100 2,031,078 2,100 2,031,078
First Chicago Master Trust
II,
5.686s, 2003 .................... 3,106 3,111,808 0 0 3,106 3,111,808
Fleet Credit Card Master
Trust,
5.63s, 2007 ..................... 2,505 2,505,000 1,375 1,375,000 3,880 3,880,000
Ford Credit Auto Owner
Trust,
5.31s, 2001 ..................... 806 803,962 543 541,800 1,349 1,345,762
Ford Credit Auto Owner
Trust, 6.2s, 2002 ............... 2,402 2,398,997 600 599,250 3,002 2,998,247
GE Capital Mortgage
Services, Inc., 6.035s, 2020 .... 2,035 1,963,139 2,400 2,315,250 4,435 4,278,389
Green Tree Financial
Corp., 6.91s, 2028 .............. 0 0 2,305 2,301,381 2,305 2,301,381
Green Tree Financial
Corp., 6.04s, 2029 .............. 3,407 3,389,774 0 0 3,407 3,389,774
Green Tree Financial
Corp., 6.39s, 2029 .............. 1,387 1,386,827 912 911,743 2,299 2,298,570
MBNA Master Credit Card
Trust II, 5.25s, 2006 ........... 2,374 2,256,772 0 0 2,374 2,256,772
Merrill Lynch Mortgage
Investors, Inc., 5.65s, 2030 .... 1,802 1,713,038 1,248 1,186,227 3,050 2,899,265
Partners First Credit Card
Master Trust, 5.506s, 2027 ...... 3,400 3,395,750 1,650 1,647,938 5,050 5,043,688
Peco Energy Transition
Trust, 5.48s, 2003 .............. 0 0 1,067 1,059,717 1,067 1,059,717
Pemex Finance Ltd.,
5.72s, 2003# .................... 1,010 965,924 2,700 2,582,172 3,710 3,548,096
Premier Auto Trust, 5.88s, 2001 ... 0 0 1,470 1,464,943 1,470 1,464,943
Providian Home Equity Loan
Trust, 5.7s, 2025 ............... 887 885,158 528 527,328 1,415 1,412,486
SLM Student Loan Trust,
5.389s, 2004 .................... 0 0 930 925,965 930 925,965
SLM Student Loan Trust,
5.574s, 2009 .................... 1,470 1,445,194 0 0 1,470 1,445,194
------------ ------------ ------------
$ 52,086,700 $ 28,699,367 $ 80,786,067
------------ ------------ ------------
FINANCIAL INSTITUTIONS
Aristar, Inc., 7.375s, 2004 ........ $ 1,860 1,871,049 $ 1,264 $ 1,271,508## $ 3,124 $ 3,142,557
Countrywide Home Loan, Inc.,
6.85s, 2004 ..................... 2,506 2,481,466 1,457 1,442,736 3,963 3,924,202
General Motors Acceptance
Corp., 7s, 2002 ................. 0 0 1,898 1,908,306 1,898 1,908,306
Lehman Brothers Holdings,
Inc., 6.375s, 2001 .............. 2,185 2,176,959 1,373 1,367,947 3,558 3,544,906
Merrill Lynch & Co.,
6.06s, 2001 ..................... 2,520 2,498,227 1,665 1,650,615 4,185 4,148,842
------------ ------------ ------------
$ 9,027,701 $ 7,641,112 $ 16,668,813
------------ ------------ ------------
FOOD AND BEVERAGE PRODUCTS
Seagram (Joseph E) & Sons,
Inc., 5.79s, 2001 ............... $ 2,470 $ 2,430,628 $ 1,513 $ 1,488,883 $ 3,983 $ 3,919,511
Whitman Corp., 6s, 2004 ........... 2,385 2,278,391 1,477 1,410,978 3,862 3,689,369
------------ ------------ ------------
$ 4,709,019 $ 2,899,861 $ 7,608,880
------------ ------------ ------------
FOREST AND PAPER PRODUCTS
Georgia-Pacific Corp.,
9.95s, 2002 ..................... $ 2,293 $ 2,448,374 $ 0 $ 0 $ 2,293 $ 2,448,374
------------ ------------ ------------
INSURANCE
Conseco, Inc., 6.4s, 2001 ......... $ 1,963 $ 1,897,033 $ 1,253 $ 1,210,893 $ 3,216 $ 3,107,926
------------ ------------ ------------
MEDIA
Time Warner Pass-Through Asset
Trust, 6.1s, 2001# .............. $ 2,103 $ 2,072,359 $ 1,000 $ 985,430 $ 3,103 $ 3,057,789
------------ ------------ ------------
OILS
Occidental Petroleum
Corp., 10.125s, 2001 ............ $ 2,607 $ 2,756,277 $ 1,360 $ 1,437,873 $ 3,967 $ 4,194,150
------------ ------------ ------------
RAILROADS
Union Pacific Corp.,
6.34s, 2003 ..................... $ 2,100 $ 2,040,969 $ 1,250 $ 1,214,862 $ 3,350 $ 3,255,831
------------ ------------ ------------
SUPERMARKETS
Safeway, Inc., 5.875s, 2001 ...... $ 2,430 $ 2,382,007 $ 0 $ 0 $ 2,430 $ 2,382,007
------------ ------------ ------------
TELECOMMUNICATIONS AND CABLE
Comcast Corp., 9.125s, 2006 ...... $ 2,666 $ 2,820,308 $ 1,591 $ 1,683,087 $ 4,257 $ 4,503,395
Cox Communications, Inc.,
7s, 2001 ........................ 2,025 2,028,625 1,107 1,108,982 3,132 3,137,607
Sprint Capital Corp.,
5.875s, 2004 .................... 881 842,034 0 0 881 842,034
Sprint Spectrum LP, 11s, 2006 ..... 2,046 2,297,044 2,000 2,245,400 4,046 4,542,444
Telecomunicaiones De Puerto Rico,
6.15s, 2002# .................... 2,598 2,553,626 1,596 1,568,740 4,194 4,122,366
United States West
Communications, Inc.,
7.2s, 2004# ..................... 500 503,850 0 0 500 503,850
------------ ------------ ------------
$ 11,045,487 $ 6,606,209 $ 17,651,696
------------ ------------ ------------
TOBACCO
RJ Reynolds Tobacco
Holdings,
7.375s, 2003# ................... $ 2,145 $ 2,105,961 $ 0 $ 0 $ 2,145 $ 2,105,961
------------ ------------ ------------
TRANSPORTATION
Hertz Corp., 6.5s, 2000 ........... $ 2,736 $ 2,739,666 $ 0 $ 0 $ 2,736 $ 2,739,666
------------ ------------ ------------
U.S. FEDERAL AGENCIES
Agency for International
Development (Israel),
6.625s, 2003 .................... $ 0 $ $ 3,000 $ 3,005,430 $ 3,000 $ 3,005,430
Federal Home Loan Mortgage
Corp., 5.83s, 2013 .............. 2,015 2,002,365 1,390 1,380,942 3,405 3,383,307
Federal National Mortgage
Assn., 6.75s, 2003 .............. 2,087 2,077,583 1,428 1,421,958 3,515 3,499,541
Federal National Mortgage
Assn., 7s, 2009 ................. 5,170 5,161,883 0 0 5,170 5,161,883
Federal National Mortgage
Assn., 6.13s, 2011 .............. 0 0 979 950,453 979 950,453
Federal National Mortgage
Assn., 6s, 2013 ................. 0 0 807 776,632 807 776,632
Federal National Mortgage
Assn., 6s, 2014 ................. 5,783 5,562,139 0 0 5,783 5,562,139
Government National Mortgage
Assn., 7s, 2008 - 2012 .......... 0 0 5,004 5,021,047 5,004 5,021,047
Government National Mortgage
Assn., 7.5s, 2007 - 2027 ........ 4,711 4,788,807 3,118 3,129,281 7,829 7,918,088
Government National Mortgage
Assn., 8.5s, 2001 - 2009 ........ 0 0 3,159 3,279,698 3,159 3,279,698
Government National Mortgage Assn.,
9.25s, 2001 ..................... 0 0 561 579,202 561 579,202
Government National Mortgage Assn.,
12.5s, 2011 ..................... 244 278,590 0 0 244 278,590
------------ ------------ ------------
$ 19,871,367 $ 19,544,643 $ 39,416,010
------------ ------------ ------------
U.S. TREASURY OBLIGATIONS
U.S. Treasury Notes, 5s, 2001 ..... $ 900 $ 891,981 $ 0 $ 0 $ 900 $ 891,981
U.S. Treasury Notes, 5.375s, 2001 . 165 164,253 0 0 165 164,253
U.S. Treasury Notes, 5.75s, 2001 .. 1,325 1,323,754 0 0 1,325 1,323,754
U.S. Treasury Notes, 6.25s, 2001 .. 765 771,097 0 0 765 771,097
U.S. Treasury Notes, 6.5s, 2001## . 900 910,404 0 0 900 910,404
U.S. Treasury Notes, 6s, 2004 ..... 1,176 1,178,752 0 0 1,176 1,178,752
U.S. Treasury Notes, 7.875s, 2004 . 1,350 1,454,625 0 0 1,350 1,454,625
------------ ------------ ------------
$ 6,694,866 $ 0 $ 6,694,866
------------ ------------ ------------
UTILITIES - ELECTRIC
Boston Edison Co., 6.8s, 2000 ..... $ 3,175 $ 3,178,270 $ 2,215 $ 2,217,282 $ 5,390 $ 5,395,552
California Infrastructure,
6.17s, 2003 ............ 2,855 2,848,748 1,000 997,810## 3,855 3,846,558
Edison Mission Energy
Funding Corp., 6.77s, 2003# .... 1,817 1,769,324 0 0 1,817 1,769,324
Entergy Mississippi, Inc.,
6.2s, 2004 ...................... 0 0 1,500 1,435,710 1,500 1,435,710
Gulf States Utilities Co.,
8.21s, 2002 ..................... 1,528 1,567,208 0 0 1,528 1,567,208
Midamerican Funding LLC,
5.85s, 2001# .................... 3,039 3,007,011 1,964 1,943,327 5,003 4,950,338
Narragansett Electric Co.,
7.83s, 2002 ..................... 500 513,705 279 286,647 779 800,352
Salton Sea Funding Corp.,
6.69s, 2000 ..................... 370 370,488 0 0 370 370,488
Salton Sea Funding Corp.,
7.02s, 2000 ..................... 390 390,652 0 0 390 390,652
------------ ------------ ------------
$ 13,645,406 $ 6,880,776 $ 20,526,182
------------ ------------ ------------
UTILITIES - GAS
CMS Panhandle Holding Co.,
6.125s, 2004 .................... $ 1,820 $ 1,738,664 $ 1,161 $ 1,109,115 $ 2,981 $ 2,847,779
Columbia Gas Systems,
Inc., 6.39s, 2000 ............... 2,127 2,116,174 1,417 1,409,788 3,544 3,525,962
Duke Capital Corp.,
7.25s, 2004 ..................... 848 853,436 501 504,211 1,349 1,357,647
------------ ------------ ------------
$ 4,708,274 $ 3,023,114 $ 7,731,388
------------ ------------ ------------
TOTAL U.S. BONDS ....... $167,554,100 $ 90,226,575 $257,780,675
------------ ------------ ------------
FOREIGN BONDS
ARGENTINA
Republic of Argentina, 0s, 2001 ... $ 941 $ 832,785 $ 516 $ 456,660 $ 1,457 $ 1,289,445
Republic of Argentina,
11.786s, 2005 ................... 0 0 400 360,500 400 360,500
------------ ------------ ------------
$ 832,785 $ 817,160 $ 1,649,945
------------ ------------ ------------
AUSTRALIA
Commonwealth of Australia,
7.5s, 2005* ..................... $ 0 $ 0 AUD 3,558 $ 2,381,649 AUD 3,558 $ 2,381,649
Westpac Banking, 9.125s, 2001
(Banks and Credit Cos.) ......... 1,175 1,222,470 0 0 1,175 1,222,470
------------ ------------ ------------
$ 1,222,470 $ 2,381,649 $ 3,604,119
------------ ------------ ------------
CHILE
Empresa Electric Guacolda
S.A., 7.6s, 2001
(Utilities - Electric)# ......... $ 1,520 $ 1,488,962 $ 0 $ 0 $ 1,520 $ 1,488,962
------------- ------------- -------------
CHINA
Hero Asian BVI Co. Ltd.,
9.11s, 2001 (Utilities)# ........ $ 1,033 $ 1,005,938 $ 0 $ 0 $ 1,033 $ 1,005,938
------------ ------------ ------------
DENMARK
Kingdom of Denmark, 7s, 2007* ..... $ 0 $ 0 DKK 2,447 $ 379,742 DKK 2,447 $ 379,742
------------- ------------- -------------
FRANCE
Republic of France, 4s, 2009* ..... $ $ 0 EUR 435 $ 413,263 EUR 435 $ 413,263
------------ ------------ ------------
GERMANY
Bayerische Landesbank
Girozent, 5.625s, 2001
(Banks and Credit
Cos.)## ......................... $ 0 $ 0 $ 465 $ 460,518 $ 465 $ 460,518
Federal Republic of
Germany, 4.5s, 2009* ............ 0 0 EUR 2,318 2,324,040 EUR 2,318 2,324,040
KFW International Finance, Inc.,
9.4s, 2004 (Agency) ............. 1,068 1,177,961 592 652,952 1,660 1,830,913
Landesbank Baden Wurttemberg,
7.875s, 2004 (Banks and
Credit Cos.) .................... 3,445 3,585,212 1,500 1,561,050 4,945 5,146,262
------------ ------------ ------------
$ 4,763,173 $ 4,998,560 $ 9,761,733
------------ ------------ ------------
GREECE
Hellenic Republic, 8.01s, 2003* ... $ 0 $ 0 GRD 300,000 $ 992,222 GRD 300,000 $ 992,222
Hellenic Republic, 8.7s, 2005 ..... 0 0 72,000 243,527 72,000 243,527
Hellenic Republic, 6s, 2006 ....... 0 0 250,000 749,147 250,000 749,147
Hellenic Republic, 5.75s, 2008* ... 0 0 EUR 151 158,538 EUR 151 158,538
------------ ------------ ------------
$ 0 $ 2,143,434 $ 2,143,434
------------ ------------ ------------
ICELAND
Republic of Iceland,
6.125s, 2004 .................... $ 0 $ 0 $ 635 $ 614,445 $ 635 $ 614,445
------------ ------------ ------------
ISRAEL
Israel Electric Corp.,
8.25s, 2009 (Utilities -
Electric)# ...................... $ 0 $ 0 $ 1,000 $ 1,003,950 $ 1,000 $ 1,003,950
------------ ------------ ------------
MEXICO
Petroleos Mexicanos,
9.5s, 2027 (Oils) ............... $ 0 $ 0 $ 110 $ 95,700 $ 110 $ 95,700
------------ ------------ ------------
NEW ZEALAND
Government of New Zealand,
8s, 2006* ....................... $ 0 $ 0 NZD 1,100 $ 586,563 NZD 1,100 $ 586,563
------------ ------------ ------------
NORWAY
Union Bank Norway,
7.35s, 2049 (Banks and
Credit Cos.)# ................... $ 3,339 $ 3,265,208 $ 1,500 $ 1,466,850 $ 4,839 $ 4,732,058
------------ ------------ ------------
PANAMA
Republic of Panama,
4.25s, 2014 ..................... $ 0 $ 0 $ 230 $ 171,350 $ 230 $ 171,350
------------ ------------ ------------
PERU
Republic of Peru, 4.5s, 2017 ...... $ 0 $ 0 $ 420 $ 260,400 $ 420 $ 260,400
------------ ------------ ------------
PHILIPPINES
Republic of Philippines,
9.875s, 2019 .................... $ 0 $ 0 $ 290 $ 280,575 $ 290 $ 280,575
------------ ------------ ------------
SOUTH KOREA
Export-Import Bank Korea,
7.1s, 2007 (Banks and
Credit Cos.) .................... $ 900 $ 887,760 $ 530 $ 522,792 $ 1,430 $ 1,410,552
------------ ------------ ------------
SPAIN
Kingdom of Spain,
9.125s, 2000 .................... $ 2,000 $ 2,043,160 $ 2,400 $ 2,451,792 $ 4,400 $ 4,494,952
------------ ------------ ------------
SUPRA-NATIONAL
Corporacion Andina de
Fomento, 7.1s, 2003
(Banks and Credit Cos.) ......... $ 3,800 $ 3,723,240 $ 0 $ 0 $ 3,800 $ 3,723,240
------------ ------------ ------------
SWEDEN
AB Spintab, 6.8s, 2049
(Banks & Credit Cos.)# .......... $ 1,620 $ 1,574,526 $ 950 $ 923,333 $ 2,570 $ 2,497,859
------------ ------------ ------------
UNITED KINGDOM
United Kingdom Treasury,
6.5s, 2003* ..................... $ 0 $ 0 GBP 662 $ 1,101,604 GBP 662 $ 1,101,604
United Kingdom Treasury,
6.75s, 2004 ..................... 0 0 566 956,732 566 956,732
------------ ------------ ------------
$ 0 $ 2,058,336 $ 2,058,336
------------ ------------ ------------
TOTAL FOREIGN BONDS ............. $ 20,807,222 $ 21,569,894 $ 42,377,116
------------ ------------ ------------
TOTAL BONDS (IDENTIFIED COST,
$191,747,074, $114,124,477 AND
$305,871,551, RESPECTIVELY) ... $188,361,322 $111,796,469 $300,157,791
------------ ------------ ------------
<PAGE>
PORTFOLIO OF INVESTMENTS AND PRO FORMA COMBINED
PORTFOLIO OF INVESTMENTS (UNAUDITED) (CONTINUED)
OCTOBER 31, 1999
REPURCHASE AGREEMENT
LIMITED MATURITY FUND INTERMEDIATE INCOME FUND PRO FORMA COMBINED
----------------------------- -------------------------------- -------------------------------
PRINCIPAL PRINCIPAL PRINCIPAL
AMOUNT AMOUNT AMOUNT
ISSUER (000 OMITTED) VALUE (000 OMITTED) VALUE (000 OMITTED) VALUE
- - -----------------------------------------------------------------------------------------------------------------------------------
Goldman Sachs, dated
10/29/99, due 11/01/99,
total to be received
$22,179,570, $584,252
and $22,763,822,
respectively (secured by
various U.S. Treasury
and Federal Agency
obligations in a jointly
traded account),
AT COST ......................... $22,170 $ 22,170,000 $ 584 $ 584,000 $ 22,754 $ 22,754,000
------------ ------------ ------------
TOTAL INVESTMENTS
(IDENTIFIED COST,
$213,917,074,
$114,708,477 AND
$328,625,551,
RESPECTIVELY) ................. $210,531,322 $112,380,469 $322,911,791
------------ ------------ ------------
CALL OPTION WRITTEN
PRINCIPAL AMOUNT PRINCIPAL AMOUNT PRINCIPAL AMOUNT
ISSUER/EXPIRATION MONTH/ OF CONTRACTS OF CONTRACTS OF CONTRACTS
STRIKE PRICE (000 OMITTED) (000 OMITTED) (000 OMITTED)
- - -----------------------------------------------------------------------------------------------------------------------------------
Austalian Dollars/
November/0.64 (PREMIUMS
RECEIVED, $0, $24,176
AND $24,176,
RESPECTIVELY)* .................. $ 0 $ 0 $ 2,691 $ (32,668) $ 2,691 $ (32,668)
------------ ------------ ------------
PUT OPTION WRITTEN
Euro/January/1.1
(PREMIUMS RECEIVED, $0,
$54,294 AND $54,294,
RESPECTIVELY)* .................. $ 0 $ 0 $ 3,523 $ (21,666) $ 3,523 $ (21,666)
------------ ------------ ------------
OTHER ASSETS, LESS LIABILITIES $ (5,468,905) $ (1,370,809) $ (6,839,714)
------------ ------------ ------------
NET ASSETS ................. $205,062,417 $110,955,326 $316,017,743
============ ============ ============
* Foreign denominated security to be disposed of prior to reorganization.
# SEC Rule 144A restriction.
## Security segregated as collateral for an open futures contract.
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 GBP = British Pounds
DKK = Danish Krone GRD = Greek Drachma
EUR = Euro NZD = New Zealand Dollars
NOTES:
The Pro Forma Combined Portfolio of Investments reflects the proposed acquisition of the net assets of the MFS Intermediate Income
Fund by the MFS Limited Maturity Fund as though such acquisition had become effective October 31, 1999, and includes the portfolio
securities of both entities as at that date.
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 value. Futures contracts, options and
options on futures contracts listed on commodities exchanges are reported at market value using closing settlement prices.
Over-the-counter options are valued by brokers. Over-the-counter currency options are valued through the use of a pricing model
which takes into account foreign currency exchange spot and forward rates, 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 the
Trustees.
</TABLE>
<PAGE>
<TABLE>
PRO FORMA COMBINED STATEMENT OF ASSETS AND LIABILITIES (UNAUDITED)
OCTOBER 31, 1999
LIMITED INTERMEDIATE PRO FORMA
MATURITY FUND INCOME FUND COMBINED
------------- ----------- --------
<S> <C> <C> <C>
ASSETS:
Investments:
Identified cost ........................ $191,747,074 $114,124,477 $305,871,551
Unrealized depreciation ................ (3,385,752) (2,328,008) (5,713,760)
Repurchase agreement, at value ......... 22,170,000 584,000 22,754,000
------------ ------------ ------------
Total investments, at value .......... $210,531,322 $112,380,469 $322,911,791
Cash ..................................... 41,303 42,470 83,773
Receivable for daily variation margin
on open futures
contracts .............................. -- 101,563 101,563
Net receivable for forward foreign
currency exchange contracts to
purchase ............................... -- 46,217 46,217
Net receivable for forward foreign
currency exchange contracts to sell .... -- 72,318 72,318
Receivable for Fund shares sold .......... 1,103,825 19,343 1,123,168
Receivable for investments sold .......... 3,306,556 -- 3,306,556
Interest receivable ...................... 2,609,939 1,480,509 4,090,448
Other assets ............................. 2,282 1,850 4,132
------------ ------------ ------------
Total assets ......................... $217,595,227 $114,144,739 $331,739,966
------------ ------------ ------------
LIABILITIES:
Distributions payable .................... $ 228,193 $ -- $ 228,193
Payable for Fund shares reacquired ....... 829,292 122,501 951,793
Payable for investments purchased ........ 11,284,094 2,822,000 14,106,094
Net payable for forward foreign
currency exchange contracts closed or
subject to master netting agreements ... -- 4,688 4,688
Payable for daily variation margin on
open futures contracts ................. 28,000 -- 28,000
Written options outstanding, at value
(premiums received, $0, $78,470, and
$78,470), respectively ................. -- 54,334 54,334
Payable to affiliates --
Management fee ......................... 6,737 5,006 11,743
Shareholder servicing agent fee ........ 1,684 912 2,596
Distribution and service fee ........... 11,850 5,260 17,110
Administrative fee ..................... 253 137 390
Accrued expenses and other liabilities ... 142,707 174,575 317,282
------------ ------------ ------------
Total liabilities .................... $ 12,532,810 $ 3,189,413 $ 15,722,223
------------ ------------ ------------
NET ASSETS ................................. $205,062,417 $110,955,326 $316,017,743
============ ============ ============
NET ASSETS CONSIST OF:
Paid-in capital .......................... $220,292,497 $122,831,881 $343,124,378
Unrealized depreciation on investments
and translation of assets and
liabilities in foreign currencies ...... (3,374,224) (2,192,539) (5,566,763)
Accumulated net realized loss on
investments and
foreign currency transactions .......... (11,648,829) (9,673,240) (21,322,069)
Accumulated distributions in excess of
net investment income .................. (207,027) (10,776) (217,803)
------------ ------------ ------------
Total ................................ $205,062,417 $110,955,326 $316,017,743
------------ ------------ ------------
SHARES OF BENEFICIAL INTEREST OUTSTANDING:
Class A .................................. 18,521,966 5,961,104 25,456,084
Class B .................................. 7,958,531 8,120,995 17,464,095
Class C .................................. 3,645,129 -- 3,645,129
Class I .................................. 244,719 1,673 246,675
------------ ------------ ------------
Total shares of beneficial interest
outstanding ........................ 30,370,345 14,083,772 46,811,983
============ ============ ============
NET ASSETS:
Class A .................................. $125,188,899 $ 46,874,639 $172,063,538
Class B .................................. 53,601,625 64,067,502 117,669,127
Class C .................................. 24,621,846 -- 24,621,846
Class I .................................. 1,650,047 13,185 1,663,232
------------ ------------ ------------
Total net assets ..................... $205,062,417 $110,955,326 $316,017,743
============ ============ ============
</TABLE>
<PAGE>
<TABLE>
PRO FORMA COMBINED STATEMENT OF ASSETS AND LIABILITIES (UNAUDITED) (CONTINUED)
OCTOBER 31, 1999
<CAPTION>
LIMITED INTERMEDIATE PRO FORMA
MATURITY FUND INCOME FUND COMBINED
----------------- -------------------- ----------------
<S> <C> <C> <C>
CLASS A SHARES:
Net asset value per share
(net assets / shares of beneficial
interest outstanding) ................. $6.76 $7.86 $6.76
===== ===== =====
Offering price per share
(100 / 97.5 of net asset value per
share) ................................ $6.93 $-- $6.93
===== ===== =====
Offering price per share
(100 / 95.25 of net asset value per
share) ................................ $-- $8.25 $--
===== ===== =====
CLASS B SHARES:
Net asset value and offering price per
share
(net assets / shares of beneficial
interest outstanding) ................. $6.74 $7.89 $6.74
===== ===== =====
CLASS C SHARES:
Net asset value and offering price per
share
(net assets / shares of beneficial
interest outstanding) ................. $6.75 $-- $6.75
===== ===== =====
CLASS I SHARES:
Net asset value, offering price and
redemption price per share
(net assets / shares of beneficial
interest outstanding) ................. $6.74 $7.88 $6.74
===== ===== =====
</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 certain redemptions of
Class A, Class B and Class C shares.
NOTES:
The Pro Forma Combined Portfolio of Investments reflects the proposed
acquisition of the net assets of the Intermediate Income Fund by the Limited
Maturity Fund as though such acquisition had become effective October 31,
1999, and reflects the accounts of both entities as at the date.
The above statement reflects neither any adjustment with respect to additional
distributions that may be made prior to the Reorganization nor any anticipated
expense to be incurred in connection with the Reorganization.
The Pro Forma combined shares of each class' shares of beneficial interest
outstanding represent those shares that would have been outstanding on October
31, 1999, had the acquisition taken place on such date. In exchange for the
net assets of the Intermediate Income Fund each class of shares of the Limited
Maturity Fund would have been issued based upon the per-share net asset value
as follows:
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS I
------- ------- -------
<S> <C> <C> <C>
Net assets - MFS Intermediate Income Fund . $46,874,639 $64,067,502 $13,185
Shares - MFS Limited Maturity Fund ........ 6,934,118 9,505,564 1,956
Net asset value - MFS Limited Maturity Fund $ 6.76 $ 6.74 $ 6.74
</TABLE>
<PAGE>
<TABLE>
PRO FORMA COMBINED STATEMENT OF OPERATIONS (UNAUDITED)
FOR THE TWELVE MONTHS ENDED OCTOBER 31, 1999
<CAPTION>
LIMITED INTERMEDIATE PRO FORMA PRO FORMA
MATURITY FUND INCOME FUND ADJUSTMENTS COMBINED
------------- ----------- ----------- --------
<S> <C> <C> <C>
NET INVESTMENT INCOME:
Interest income .................. $13,554,602 $ 8,380,510 -- $ 21,935,112
----------- --------- ------------
Expenses --
Management fee ..................... $ 802,850 $ 868,096 $(374,849)(A) $ 1,296,097
Trustees' compensation ............. 19,069 34,889 (31,758)(B) 22,200
Shareholder servicing agent
fee .............................. 210,906 130,027 -- 340,933
Distribution and service fee
(Class A) ........................ 185,883 113,675 (45,470)(C) 254,088
Distribution and service fee
(Class B) ........................ 477,894 778,128 -- 1,256,022
Distribution and service fee
(Class C) ........................ 236,632 0 -- 236,632
Administrative fee ................. 25,528 15,189 -- 40,717
Custodian fee ...................... 90,653 58,541 (41,124)(B) 108,070
Printing ........................... 33,338 37,519 (30,857)(B) 40,000
Postage ............................ 29,172 27,920 (27,092)(B) 30,000
Auditing fees ...................... 30,540 42,526 (43,066)(B) 30,000
Legal fees ......................... 5,890 4,695 (6,085)(B) 4,500
Miscellaneous ...................... 191,033 106,321 (8,454)(D) 288,900
----------- ----------- --------- ------------
Total expenses ................... $ 2,339,388 $ 2,217,526 $(608,755) $ 3,948,159
Fees paid indirectly ............... (35,575) (17,900) -- (53,475)
Reduction of expenses by
investment adviser and
distributor ...................... -- (303,557) 303,557 (E) --
----------- ----------- --------- ------------
Net expenses ..................... $ 2,303,813 $ 1,896,069 $(305,198) $ 3,894,684
----------- ----------- --------- ------------
Net investment income .......... $11,250,789 $ 6,484,441 $ 305,198 $ 18,040,428
----------- ----------- --------- ------------
REALIZED AND UNREALIZED GAIN
(LOSS) ON INVESTMENTS:
Realized gain (loss) (identified
cost basis) --
Investment transactions ............ $(3,912,845) $(1,551,659) -- $ (5,464,504)
Written option transactions ........ -- 202,791 -- 202,791
Foreign currency transactions ...... -- (702,861) -- (702,861)
Futures contracts .................. 43,029 (404,367) -- (361,338)
----------- ----------- --------- ------------
Net realized loss on
investments .................... $(3,869,816) $(2,456,096) $ -- $ (6,325,912)
----------- ----------- --------- ------------
Change in unrealized appreciation
(depreciation) --
Investments ........................ $(1,751,017) $(4,620,915) -- $ (6,371,932)
Written options .................... -- 24,136 -- 24,136
Futures contracts .................. 11,528 1,229 -- 12,757
Translation of assets and
liabilities in foreign
currencies ....................... -- (20,345) -- (20,345)
----------- ----------- --------- ------------
Net unrealized loss on
investments .................... $(1,739,489) $(4,615,895) $ -- $ (6,355,384)
----------- ----------- --------- ------------
Net realized and unrealized
loss on investments .......... $(5,609,305) $(7,071,991) $ -- $(12,681,296)
----------- ----------- --------- ------------
Increase in net assets
from operations ............ $ 5,641,484 $ (587,550) $ 305,198 $ 5,359,132
=========== =========== ========= ============
</TABLE>
<PAGE>
PRO FORMA COMBINED STATEMENT OF OPERATIONS (UNAUDITED) (CONTINUED)
FOR THE TWELVE MONTHS ENDED OCTOBER 31, 1999
PRO FORMA ADJUSTMENTS:
(A) The investment advisory fee is 0.40% of the Fund's average daily net assets
for the Limited Maturity Fund. The investment advisory fee is 0.32% of the
Fund's average daily net assets and 5.65% of investment income for the
Intermediate Income Fund. MFS has agreed to reduce its management fee to the
lesser of 0.55% of the Fund's average daily net assets of the Intermediate
Income Fund or the amount calculated in accordance with the prior sentence.
The Intermediate Income Fund assets would have been charged at the rate
applicable to the Limited Maturity Fund.
(B) Expenditure reduced as the result of the elimination of duplicative
functions.
(C) The Class A service fees are 0.15% and 0.25% of average net assets for the
Limited Maturity Fund and the Intermediate Income Fund, respectively. MFS
has voluntarily agreed to waive its right to receive the 0.25% per annum
Class A service fee on the Intermediate Income Fund. The Intermediate Income
Fund assets would have been charged at the rate applicable to the Limited
Maturity Fund.
(D) Expenditure reduced as the result of the elimination of duplicative
functions. Reflects legal and accounting reorganization related costs.
(E) Reduction of expense was the result of a waiver of management fee and Class
A service fee on the Intermediate Income Fund. Waiver no longer in effect
after merger.
NOTES:
The Pro Forma Combined Statement of Operations reflects the proposed
acquisition of the assets of the Intermediate Income Fund by the Limited
Maturity Fund as though such acquisition had become effective October 31,
1999, and reflects the accounts of both entities for the twelve months ended
October 31, 1999.
<PAGE>
MFS LIMITED MATURITY FUND
FORM N-14
PART C
OTHER INFORMATION
ITEM 15. INDEMNIFICATION
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, as amended.
ITEM 16. EXHIBITS
1(a). Amended and Restated Declaration of Trust dated February 17, 1995.(2)
1(b). Amendment to the Declaration of Trust - Designation of Class P
Shares dated June 20, 1996. (4)
1(c). Amendment to the Declaration of Trust - Redesignation of Class P
shares as Class I shares dated December 18, 1996. (6)
2. Amended and Restated By-Laws, dated December 21, 1994. (2)
3. Not Applicable.
4. Agreement and Plan of Reorganization; filed herewith as Exhibit A to
the Limited Maturity Fund Prospectus set forth as Part A to the Registration
Statement on Form N-14.
5. Form of Share Certificate for Classes of Shares. (3)
6. Investment Advisory Agreement dated January 8, 1992 by and between MFS
Fixed Income Trust on behalf of MFS Limited Maturity Fund. (2)
7(a). Amended and Restated Distribution Agreement for MFS Series Trust IX
dated
January 1, 1995. (2)
7(b). Dealer Agreement between MFS Fund Distributors, Inc. ("MFD"), and a
dealer, and the Mutual Fund Agreement between MFD and a bank effective
November 29, 1999. (12)
8(a). Retirement Plan for Non-Interested Person Trustees, as amended and
restated
February 17, 1999. (9)
8(b). Trustee Fees Deferral Plan for MFS Red Board Funds, dated April 21,
1999. (12)
9(a). Custodian Contract between Registrant on behalf of MFS Municipal
Limited Maturity Fund and State Street Bank and Trust Company dated April 25,
1988. (2)
9(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. (2)
9(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. (2)
9(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. (2)
10(a). Master Distribution Plan pursuant to Rule 12b-1 under the
Investment Company Act of 1940, effective January 1, 1997, as amended and
restated November 17, 1999. (12)
10(b). Plan pursuant to Rule 18f-3(d) under the Investment Company Act of
1940, as amended and restated May 27, 1998. (7)
11. Opinion of James R. Bordewick, Jr., to MFS Series Trust IX, as to
the legality of securities being issued, including consent; filed herewith.
12. Form of Opinion of Bingham Dana LLP as to Tax Matters, including
consent; filed herewith.
13(a). Shareholder Servicing Agreement between Registrant and
Massachusetts Financial Service Center dated December 2, 1985. (2)
13(b). Amendment to Shareholder Servicing Agent Agreement, dated April 1,
1999 to amend fee schedule. (11)
13(c). Exchange Privilege Agreement dated July 30, 1997. (5)
13(d). Dividend Disbursing Agency Agreement among MFS Funds and State
Street Bank and Trust Company, dated February 1, 1986. (1)
13(e). Master Administrative Services Agreement dated March 1, 1997, as
amended and restated April 1, 1999. (10)
14(a). Consent of Deloitte & Touche LLP, independent accountants to MFS
Intermediate Income Fund; filed herewith.
14(b). Consent of Deloitte & Touche LLP, independent accountants to MFS
Limited Maturity Fund; filed herewith.
15. Not Applicable.
16. Power of Attorney, dated September 21, 1994. (2).
17 (a). MFS Limited Maturity Fund Prospectus dated September 1, 1999;
filed herewith.
(b). MFS Limited Maturity Fund Statement of Additional Information
dated September 1, 1999 as amended September 22, 1999; filed herewith.
(c). MFS Limited Maturity Fund's Annual Report to Shareholders for the
fiscal year ended April 30, 1999; filed herewith.
(d). MFS Limited Maturity Fund's Semiannual Report to Shareholders for
the six month period ended October 31, 1999; filed herewith.
(e). MFS Intermediate Income Fund Prospectus dated April 1, 1999; filed
herewith.
(f). MFS Intermediate Income Fund Statement of Additional Information
dated April 1, 1999; filed herewith.
(g). MFS Intermediate Income Fund's Annual Report to Shareholders for
the fiscal year ended November 30, 1999; filed herewith.
- - --------------------
(1) 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.
(2) Incorporated by reference to Registrant's Post-Effective Amendment No. 32
filed with the SEC via EDGAR on August 28, 1995.
(3) 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 27, 1996.
(4) Incorporated by reference to Registrant's Post-Effective Amendment No. 33
filed with the SEC via EDGAR on August 27, 1996.
(5) Incorporated by reference to Massachusetts Investors Growth Stock Fund
(File Nos. 2-14677 and 811-859) Post-Effective Amendment No. 64 filed
with the SEC via EDGAR on October 29, 1997.
(6) Incorporated by reference to Registrant's Post-Effective Amendment No. 34
filed with the SEC via EDGAR on August 27, 1997.
(7) Incorporated by reference to MFS Series Trust II (File Nos. 33-7637 and
811-4775) Post-Effective Amendment No. 27 filed with the SEC via EDGAR on
May 29, 1998.
(8) Incorporated by reference to Registrant's Post-Effective Amendment No. 35
filed with the SEC via EDGAR on August 27, 1998.
(9) Incorporated by reference to MFS Growth Opportunities Fund (File Nos.
2-36431 and 811-2032) Post-Effective Amendment No. 39 filed with the SEC
via EDGAR on February 26, 1999.
(10) Incorporated by reference to MFS Series Trust III (File Nos. 2-60491 and
811-2794) Post-Effective Amendment No. 28 filed with the SEC via EDGAR on
March 31, 1999.
(11) Incorporated by reference to Registrant's Post-Effective Amendment No. 38
filed with the SEC via EDGAR on June 29, 1999.
(12) Incorporated by reference to MFS Series Trust V (File Nos. 2-38613 and
811-2031) Post-Effective Amendment No. 48 filed with the SEC via EDGAR on
November 29, 1999.
ITEM 17. UNDERTAKINGS
(a) The undersigned Registrant agrees that prior to any public reoffering
of the securities registered through the use of a prospectus which is a part
of this Registration Statement by any person or party who is deemed to be an
underwriter within the meaning of Rule 145(c) under the Securities Act, the
reoffering prospectus will contain the information called for by the
applicable registration form for reofferings by persons who may be deemed
underwriters, in addition to the information called for by the other items of
the applicable form.
(b) The undersigned Registrant agrees that every prospectus that is filed
under paragraph (a) above will be filed as a part of an amendment to this
Registration Statement and will not be used until the amendment is effective,
and that, in determining any liability under the 1933 Act, each post-effective
amendment shall be deemed to be a new Registration Statement for the
securities offered therein, and the offering of the securities at that time
shall be deemed to be the initial bona fide offering of them.
(c) The Registrant agrees to file an executed copy of an opinion of
counsel supporting the tax consequences of the proposed reorganization as an
amendment to this Registration Statement within a reasonable time after
receipt of such opinion.
NOTICE
A copy of the Amended and Restated Declaration of Trust, as amended, of
MFS Series Trust IX, is on file with the Secretary of State of The
Commonwealth of Massachusetts, and notice is hereby given that this
Registration Statement has been executed on behalf of the Registrant by an
officer of the Registrant as an officer and not individually, and the
obligations of or arising out of this Registration Statement are not binding
upon any of the Trustees, officers, or shareholders of the Registrant
individually, but are binding only upon the assets and property of the
Registrant.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Boston and The
Commonwealth of Massachusetts on
March 1, 2000.
MFS SERIES TRUST IX on behalf
of one of its Series,
MFS Limited Maturity Fund
By: /s/ James R. Bordewick, Jr.
----------------------------
James R. Bordewick, Jr.
Assistant Secretary
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement on Form N-14 has been signed below by the following
persons in the capacities indicated on March 1, 2000.
SIGNATURE TITLE
--------- -----
JEFFREY L. SHAMES Chairman, President (Principal
- - ------------------------------------ Executive Officer), and Trustee
Jeffrey L. Shames
W. THOMAS LONDON* Treasurer (Principal Financial Officer
- - ----------------------------------- and Principal Accounting Officer)
W. Thomas London
RICHARD B. BAILEY* Trustee
- - -----------------------------------
Richard B. Bailey
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
ELAINE R. SMITH* Trustee
- - -----------------------------------
Elaine R. Smith
DAVID B. STONE* Trustee
- - -----------------------------------
David B. Stone
By: /s/ James R. Bordewick, Jr.
------------------------------
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
Securities and Exchange Commission via
EDGAR on August 28, 1995.
<PAGE>
EXHIBIT INDEX
The following exhibits are filed as a part of this Registration Statement
pursuant to General Instruction G of Form N-14.
EXHIBITS DESCRIPTION PAGE
4. Agreement and Plan of Reorganization; filed herewith as
Exhibit A to the Limited Maturity Fund Prospectus set forth
as Part A to the Registration Statement on Form N-14.
11. Opinion of James R. Bordewick, Jr., to MFS Series Trust IX,
as to the legality of securities being issued, including
consent.
12. Form of Opinion of Bingham Dana LLP as to Tax Matters,
including consent.
14a. Consent of Deloitte & Touche LLP, independent accountants
to MFS Intermediate Income Fund.
14b. Consent of Deloitte & Touche LLP, independent accountants
to MFS Limited Maturity Fund.
17a. MFS Limited Maturity Fund Prospectus dated September 1,
1999.
b. MFS Limited Maturity Fund Statement of Additional
Information dated September 1, 1999 as amended September
22, 1999.
c. MFS Limited Maturity Fund's Annual Report to Shareholders
for the fiscal year ended April 30, 1999.
d. MFS Limited Maturity Fund's Semiannual Report to
Shareholders for the six month period ended October 31,
1999.
e. MFS Intermediate Income Fund Prospectus dated April 1,
1999.
f. MFS Intermediate Income Fund Statement of Additional
Information dated April 1, 1999.
g. MFS Intermediate Income Fund's Annual Report to
Shareholders for the fiscal year ended November 30, 1999.
<PAGE>
EXHIBIT NO. 99.11
OPINION OF JAMES R. BORDEWICK, JR.
EXHIBIT 11
[LOGO]
MASSACHUSETTS FINANCIAL SERVICES COMPANY
500 Boylston Street - Boston, Massachusetts 02116-3741
James R. Bordewick, Jr.
Senior Vice President and Associate General Counsel Phone: (617) 954-5182
Fax: (617) 954-7760
March 1, 2000
MFS Limited Maturity Fund
A series of MFS Series Trust IX
Ladies and Gentlemen:
I have acted as counsel to MFS Limited Maturity Fund (the "Limited Maturity
Fund"), a series of MFS Series Trust IX, a Massachusetts business trust
("Trust IX"), in connection with the Trust's Registration Statement on Form
N-14 to be filed with the Securities and Exchange Commission (the
"Commission") on or about March 1, 2000 (the "Registration Statement"), with
respect to an indefinite number of Shares of Beneficial Interest (no par
value) (the "Shares") of the Limited Maturity Fund to be issued pursuant to an
Agreement and Plan of Reorganization dated February 17, 2000 by and among MFS
Series Trust IX, on behalf of the MFS Limited Maturity Fund, and MFS Series
Trust II, a Massachusetts business trust ("Trust II"), on behalf of the MFS
Intermediate Income Fund (the "Intermediate Income Fund"), a series of MFS
Series Trust II (the "Agreement").
In connection with this opinion, I have examined the following documents:
(a) the Registration Statement;
(b) the Agreement;
(c) a certificate of the Secretary of State of The Commonwealth of
Massachusetts as to the existence of Trust IX;
(d) copies of the MFS Series Trust IX's Declaration of Trust and of
all amendments thereto on file in the office of the Secretary of
State; and
(e) Trust IX's Amended and Restated By-Laws and certain votes of the
Trustees of Trust IX.
In such examination, I have assumed the genuineness of all signatures, the
conformity to the originals of all of the documents reviewed by me as copies,
the authenticity and completeness of all original documents reviewed by me in
original or copy form and the legal competence of each individual executing
any document. I have also assumed, for the purposes of this opinion, that the
Agreement, in substantially the form reviewed by me, is duly executed and
delivered by the parties thereto and that all of the conditions set forth in
"Information About the Reorganization-Agreement and Plan of Reorganization" in
the Registration Statement shall have occurred prior to the issuance and sale
of the Shares.
This opinion is based entirely on my review of the documents listed above. I
have made no other review or investigation of any kind whatsoever, and I have
assumed, without independent inquiry, the accuracy of the information set
forth in such documents.
This opinion is limited solely to the laws of The Commonwealth of
Massachusetts (other than the Massachusetts Uniform Securities Act, as to
which I express no opinion) as applied by courts in such Commonwealth.
I understand that all of the foregoing assumptions and limitations are
acceptable to you.
Based upon and subject to the foregoing, please be advised that it is my
opinion that the Shares, when issued and sold in accordance with the
Registration Statement, the Agreement and Trust IX's Declaration of Trust and
By-laws, will be legally issued, fully paid and non-assessable, except that
shareholders of Trust IX may under certain circumstances be held personally
liable for the Trust's obligations.
A copy of Trust IX's Declaration of Trust is on file with the Secretary of
State of the Commonwealth of Massachusetts. I note specifically that the
obligations of or arising out of the Agreement are not binding upon any of
Trust IX's trustees, officers, employees, agents or shareholders individually,
but are binding solely upon the assets and property of Trust IX in accordance
with its interest under the Agreement. I further note that the assets and
liabilities of each series of Trust IX, such as the MFS Limited Maturity Fund,
are separate and distinct and that the obligations of or arising out of the
Agreement are binding solely upon the assets or property of the MFS Limited
Maturity Fund.
I hereby consent to the filing of this opinion as an exhibit to the
Registration Statement.
Very truly yours,
/s/ James R. Bordewick, Jr.
James R. Bordewick, Jr.
JRB/kmm
<PAGE>
EXHIBIT NO. 99.12
FORM OF OPINION OF BINGHAM DANA LLP
EXHIBIT 12
, 2000
MFS Series Trust II
MFS Series Trust IX
500 Boylston Street
Boston, MA 02116
Ladies and Gentlemen:
This opinion is furnished to you pursuant to paragraph 8.6 of the
Agreement and Plan of Reorganization, dated as of February 17, 2000 (the
"Agreement"), between MFS Series Trust II, a Massachusetts business trust, on
behalf of MFS Intermediate Income Fund ("MII"), a series thereof, and MFS
Series Trust IX, a Massachusetts business trust, on behalf of MFS Limited
Maturity Fund ("MLM"), a series thereof. The Agreement provides for the
acquisition of all of the assets of MII by MLM in exchange for (a) the
assumption of all of the stated liabilities of MII by MLM and (b) the issuance
and delivery by MLM to MII, for distribution (in accordance with paragraph 1.4
of the Agreement) pro rata to MII's shareholders of record in exchange for
their shares of beneficial interest in MII ("MII shares") and in complete
liquidation of MII, of a number of shares of beneficial interest of MLM ("MLM
shares") having an aggregate net asset value equal to the value of the assets,
less the amount of the liabilities MII so transferred to MLM (the
"Reorganization"). All capitalized terms not otherwise defined herein have the
meanings ascribed to them in the Agreement.
In connection with this opinion we have examined and relied upon the
originals or copies, certified or otherwise identified to us to our
satisfaction, of the Agreement, the Registration Statement on Form N-14 filed
with the Securities and Exchange Commission by MFS Series Trust IX on or about
March 1, 2000 in connection with the Reorganization, and related documents
(collectively, the "Documents"). In that examination, we have assumed the
genuineness of all signatures, the authenticity and completeness of all
documents purporting to be originals (whether reviewed by us in original or
copy form) and the conformity to the originals of all documents purporting to
be copies.
As to certain factual matters, we have relied with your consent upon, and
our opinion is limited by, the representations of the various parties set
forth in the Documents, and in certificates of each of MFS Series Trust II and
MFS Series Trust IX dated on or about the date hereof and attached hereto as
Exhibits A and B (the "Certificates"). Our opinion assumes that (i) all
representations set forth in the Documents and in the Certificates will be
true and correct in all material aspects as of the date of the Reorganization
and (ii) the Agreement is implemented in accordance with its terms and
consistent with the representations set out in the Documents and Certificates.
Our opinion is limited solely to the provisions of the federal Internal
Revenue Code as now in effect (the "Code"), and the regulations, rulings, and
interpretations thereof in force as of this date. We assume no obligation to
update our opinion to reflect any changes in law or in the interpretation
thereof that may hereafter occur.
On the basis of and subject to the foregoing, we are of the opinion that:
1. For federal income tax purposes, the Reorganization will constitute
a reorganization under Section 368(a) of the Code, and MLM and MII will
each be a "party to a reorganization" within the meaning of Section 368(b)
of the Code.
2. No gain or loss will be recognized by MII (a) upon the transfer of
all of its assets to MLM solely in exchange for the shares of MLM and the
assumption of the stated liabilities of MII by MLM or (b) upon the
distribution to MII shareholders of such MLM shares pursuant to the
Agreement.
3. No gain or loss will be recognized by MLM upon the receipt of the
assets of MII solely in exchange for shares of MLM and the assumption of
the stated liabilities of MII by MLM.
4. The basis of the assets of MII acquired by MLM will be, in each
instance, the same as the basis of those assets in the hands of MII
immediately prior to the transfer.
5. The holding period of the assets of MII in the hands of MLM will
include, in each instance, the holding period of such assets in the hands
of MII.
6. The shareholders of MII will not recognize gain or loss upon the
exchange of all of their MII shares solely for shares of MLM as part of
the Reorganization.
7. The basis of the MLM shares to be received by each MII shareholder
will be, in the aggregate, the same as the basis, in the aggregate, of the
MII shares surrendered in exchange therefor.
8. The holding period of the MLM shares to be received by the MII
shareholders will include, in each instance, the holding period of the MII
shares surrendered in exchange therefor, provided such MII shares were
held as capital assets on the date of the exchange.
This opinion is being delivered solely to you for your use in connection
with the referenced transaction, and may not be relied upon by any other
person or used for any other purpose.
Very truly yours,
BINGHAM DANA LLP
<PAGE>
EXHIBIT NO. 99.14(a)
INDEPENDENT AUDITORS' CONSENT
EXHIBIT 14(a)
We consent to the inclusion in the Registration Statement on Form N-14 of
MFS Series Trust IX, on behalf of MFS Limited Maturity Fund (one of the series
constituting MFS Series Trust IX), of our report dated January 6, 2000
appearing in the Annual Report to shareholders of MFS Intermediate Income Fund
(a series of MFS Series Trust II) for the year ended November 30, 1999 and to
the incorporation by reference of our reports into the Prospectus/Proxy
Statement which constitutes part of this Registration Statement. We also
consent to the reference to us under the heading "Independent Accountants"
appearing in the Combined Prospectus/Proxy Statement which is included as part
of such Registration Statement.
DELOITTE & TOUCHE LLP
Boston, Massachusetts
March 1, 2000
<PAGE>
EXHIBIT NO. 99.14(b)
INDEPENDENT AUDITORS' CONSENT
EXHIBIT 14(b)
We consent to the inclusion in the Registration Statement on Form N-14 of
MFS Series Trust IX, on behalf of MFS Limited Maturity Fund (one of the series
constituting MFS Series Trust IX), of our report dated June 4, 1999 appearing in
the Annual Report to shareholders of MFS Limited Maturity Fund for the year
ended April 30, 1999 and to the incorporation by reference of our reports into
the Prospectus/Proxy Statement which constitutes part of this Registration
Statement. We also consent to the reference to us under the heading "Independent
Accountants" appearing in the Combined Prospectus/Proxy Statement which is
included as part of such Registration Statement.
DELOITTE & TOUCHE LLP
Boston, Massachusetts
March 1, 2000
<PAGE>
EXHIBIT NO. 99.17(a)
MFS(R) LIMITED MATURITY FUND
Supplement dated September 1, 1999 to the Current Prospectus
This Supplement describes the fund's class I shares, and it supplements certain
information in the fund's Prospectus dated September 1, 1999. The caption
headings used in this Supplement correspond with the caption headings used in
the Prospectus.
You may purchase class I shares only if you are an eligible institutional
investor, as described under the caption "Description of Share Classes" below.
1. RISK RETURN SUMMARY
Performance Table. The "Performance Table" is intended to indicate
some of the risks of investing in the fund by showing changes in the fund's
performance over time. The table is supplemented as follows:
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS AS OF DECEMBER 31, 1998
1 YEAR 5 YEARS LIFE
------ ------- ----
<S> <C> <C> <C>
Class I shares 4.98% 5.39% 5.82%#
Lehman Brothers One-to-Three Year Government/Corporate
Bond Index++* 6.96% 6.00% 6.11%##
Short-term investment grade bond fund+ 6.63% 5.57% 5.69%##
- - -----------------------------
# For the period from the commencement of the fund's investment operations on February 26, 1992.
## For the period February 28, 1992 through December 31, 1998.
+ Source: Lipper Analytical Services, Inc.
++ Source: AIM
* The Lehman Brothers One-to-Three Year Government/Corporate Bond Index is a broad based total
return index consisting of all U.S. government agency, Treasury securities, and all
investment-grade corporate debt securities with maturities of one to three years.
</TABLE>
The fund commenced investment operations on February 26, 1992 with the offering
of class A shares, and subsequently offered class I shares on January 2, 1997.
Class I share performance includes the performance of the fund's class A shares
for periods prior to the offering of class I shares. This blended class I share
performance has been adjusted to take into account the fact that class I shares
have no initial sales charge (load). This blended performance has not been
adjusted to take into account differences in class specific operating expenses.
Because operating expenses of class I shares are lower than those of class A
shares, this blended class I share performance is lower than the performance of
class I shares would have been had class I shares been offered for the entire
period.
2. EXPENSE SUMMARY
EXPENSE TABLe. The "Expense Table" describes the fees and expenses
that you may pay when you buy, redeem and hold shares of the fund. The table
is supplemented as follows:
ANNUAL FUND OPERATING EXPENSES (EXPENSES THAT ARE DEDUCTED FROM FUND
ASSETS):
Management Fees 0.40%
Distribution and Service (12b-1) Fees 0.00%
Other Expenses (1) 0.28%
Total Annual Fund Operating Expenses 0.68%
- - --------------------------
(1) The fund has an expense offset arrangement which reduces the fund's
custodian fee based upon the amount of cash maintained by the fund with its
custodian and dividend disbursing agent. The fund may enter into other
similar arrangements and directed brokerage arrangements, which would also
have the effect of reducing the fund's expenses. "Other Expenses" do not
take into account these expense reductions, and therefore do not represent
the actual expenses of the fund.
3. EXAMPLE OF EXPENSES
These examples are intended to help you compare the cost of investing in
the fund with the cost of investing in other mutual funds.
The examples assume that:
o You invest $10,000 in the fund for the time periods indicated and you redeem
your shares at the end of the time periods;
Your investment has a 5% return each year and dividends and other
distributions are reinvested; and
o The fund's operating expenses remain the same.
The table is supplemented as follows:
SHARE CLASS YEAR 1 YEAR 3 YEAR 5 YEAR 10
----------- ------ ------ ------ -------
Class I shares $69 $218 $379 $847
4. DESCRIPTIONS OF SHARE CLASSES
The "Description of Share Classes" is supplemented as follows:
If you are an eligible institutional investor (as described below), you may
purchase class I shares at net asset value without an initial sales charge or
CDSC upon redemption. Class I shares do not have annual distribution and service
fees, and do not convert to any other class of shares of the fund.
The following eligible institutional investors may purchase class I shares:
o certain retirement plans established for the benefit of employees
of MFS and employees of MFS' affiliates;
o any fund distributed by MFS, if the fund seeks to achieve its
investment objective by investing primarily in shares of the fund
and other MFS funds.
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 in
class I shares.
5. HOW TO PURCHASE, EXCHANGE AND REDEEM SHARES
The discussion of "How to Purchase, Exchange and Redeem Shares" is supplemented
as follows:
You may purchase, redeem and exchange class I shares only through your MFD
representative or by contacting MFSC (see the back cover of the Prospectus for
address and phone number). You may exchange your class I shares for class I
shares of another MFS Fund (if you are eligible to purchase them) and for shares
of the MFS Money Market Fund at net asset value.
<PAGE>
6. FINANCIAL HIGHLIGHTS
The "Financial Highlights" table is intended to help you understand the fund's
financial performance. It is supplemented as follows:
Financial Statements - class I shares
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED PERIOD ENDED
4/30/99 4/30/98 4/30/97*
---------- ---------- ------------
Per share data (for a share outstanding throughout each period):
<S> <C> <C> <C>
Net asset value - beginning of period $ 6.98 $ 7.04 $ 7.08
------- ------- -------
Income from investment operations# -
Net investment income(S) $ 0.43 $ 0.48 $ 0.15
Net realized and unrealized loss on investments (0.14) (0.07) (0.03)
------- ------- -------
Total from investment operations $ 0.29 $ 0.41 $ 0.12
Less distributions declared to shareholders -
From net investment income $ (0.42) $ (0.47) $ (0.15)
In excess of net investment income -- -- (0.01)
------- ------- -------
Total distributions declared to shareholders $ (0.42) $ (0.47) $ (0.16)
------- ------- -------
Net asset value - end of period $ 6.85 $ 6.98 $ 7.04
------- ------- -------
Total return 4.28% 5.98% 1.72%++
Ratios (to average net assets)/Supplemental datass.
Expenses## 0.69% 0.74% 1.17%+
Net investment income 6.21% 6.75% 8.68%+
Portfolio turnover 278% 288% 489%
Net assets at end of period (000,000 omitted) $1,459 $1,466 $1,925
- - ----------------------------------------
* For the period from the inception of class I, January 2, 1997, through April 30, 1997.
+ Annualized.
++ Not annualized.
# Per share data are based on average shares outstanding.
## The fund has an expense offset arrangement which reduces the fund's custodian fee based upon the
amount of cash maintained by the fund with its custodian and dividend disbursing agent. The
Fund's expenses are calculated without reduction for this expense offset arrangement.
(S) Subject to reimbursement by the fund, the investment adviser agreed to maintain expenses of the
fund, exclusive of management and distribution and service fees, at not more than 0.40% of
average daily net assets. To the extent actual expenses were over/under this limitation, the net
investment income per share and the ratios would have been:
Net investment income -- $ 0.49 $ 0.15
------- ------- -------
Ratios (to average net assets):
Expenses## -- 0.72% 1.17%+
Net investment income -- 6.77% 8.68%+
</TABLE>
THE DATE OF THIS SUPPLEMENT IS SEPTEMBER 1, 1999.
<PAGE>
- - ----------------------------
MFS(R) LIMITED MATURITY FUND
- - ----------------------------
SEPTEMBER 1, 1999
PROSPECTUS
CLASS A SHARES
CLASS B SHARES
CLASS C SHARES
- - --------------------------------------------------------------------------------
This Prospectus describes the MFS Limited Maturity Fund. The main 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. Its secondary
objective is to protect shareholders' capital.
THE SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED THE FUND'S SHARES OR
DETERMINED WHETHER THIS PROSPECTUS IS ACCURATE OR COMPLETE. ANYONE WHO TELLS
YOU OTHERWISE IS COMMITTING A CRIME.
<PAGE>
- - -----------------
TABLE OF CONTENTS
- - -----------------
Page
I Risk Return Summary ................................. 1
II Expense Summary ..................................... 6
III Certain Investment Strategies and Risks ............. 8
IV Management of the Fund .............................. 9
V Description of Share Classes ........................ 10
VI How to Purchase, Exchange and Redeem Shares ......... 14
VII Investor Services and Programs ...................... 18
VIII Other Information ................................... 20
IX Financial Highlights ................................ 23
Appendix A -- Investment Techniques and Practices ... A-1
<PAGE>
- - ----------------------
I RISK RETURN SUMMARY
- - ----------------------
o INVESTMENT OBJECTIVE
The fund's main investment objective is to provide as high a level of
current income as is believed to be consistent with prudent investment
risk. Its secondary objective is to protect shareholders' capital. The
fund's objectives may be changed without shareholder approval.
o PRINCIPAL INVESTMENT POLICIES
The fund invests, under normal market conditions, at least 65% of its
total assets in fixed income securities with "limited" maturities
(generally securities with remaining maturities of 5 years or less). These
securities may include:
o corporate bonds, which are bonds or other debt obligations issued by
domestic or foreign (including emerging market) corporations or similar
entities,
o mortgage-backed and asset-backed securities, which represent interests in
a pool of assets such as mortgage loans, car loan receivables, or credit
card receivables, and
o U.S. government securities, which are bonds or other debt obligations
issued by, or whose principal and interest payments are guaranteed or
supported by, the U.S. government or one of its agencies or
instrumentalities (including mortgage-backed securities).
Fixed income securities with limited maturities may include:
o securities with remaining maturities of 5 years or less,
o securities with estimated remaining average lives of 5 years or less, and
o securities with a "duration" of 5 years or less (the fund determines the
duration of a fixed income security by taking the present value of all its
future principal and interest payments and calculating the dollar-weighted
average time until those payments will be received).
The fund only purchases investment grade bonds, which are bonds rated in
the higher rating categories by credit rating agencies or unrated and
considered by MFS to be comparable in quality. The fund's dollar-weighted
average quality is within the three highest rating categories by credit
rating agencies. The fund's investments in securities of foreign issuers
are U.S. dollar denominated.
In selecting fixed income investments for the fund, MFS considers the
views of its large group of fixed income portfolio managers and research
analysts. This group periodically assesses the three-month total return
outlook for various segments of the fixed income markets. This three-month
"horizon" outlook is used by the portfolio manager(s) of MFS' fixed income
oriented funds (including the fund) as a tool in making or adjusting a
fund's asset allocations to various segments of the fixed income markets.
In assessing the credit quality of fixed income securities, MFS does not
rely solely on the credit ratings assigned by credit rating agencies, but
rather performs its own independent credit analysis.
o PRINCIPAL RISKS OF AN INVESTMENT
The principal risks of investing in the fund and the circumstances
reasonably likely to cause the value of your investment in the fund to
decline are described below. The share price of the fund generally changes
daily based on market conditions and other factors. Please note that there
are many circumstances which would cause the value of your investment in
the fund to decline, and which would prevent the fund from achieving its
objective, that are not described here.
The principal risks of investing in the fund are:
o Interest Rate Risk: When interest rates rise, the prices of fixed income
securities in the fund's portfolio will generally fall. Conversely, when
interest rates fall, the prices of fixed income securities in the fund's
portfolio will generally rise.
o Maturity Risk: Fixed income securities with shorter maturities will be
less volatile but generally provide lower returns than fixed income
securities with longer maturities. The average maturity of the fund's
fixed income investments will affect the volatility of the fund's share
price.
o Allocation Risk: The fund will allocate its investments among various
segments of the fixed income markets based upon judgments made by MFS. The
fund could miss attractive investment opportunities by underweighting
markets where there are significant returns, and could lose value by
overweighting markets where there are significant declines.
o Credit Risk: Credit risk is the risk that the issuer of a fixed income
security will not be able to pay principal and interest when due. Rating
agencies assign credit ratings to certain fixed income securities to
indicate their credit risk. The price of a fixed income security will
generally fall if the issuer defaults on its obligation to pay principal
or interest, the rating agencies downgrade the issuer's credit rating or
other news affects the market's perception of the issuer's credit risk.
o Liquidity Risk: The fixed income securities purchased by the fund may be
traded in the over-the-counter market rather than on an organized exchange
and are subject to liquidity risk. This means that they may be harder to
purchase or sell at a fair price. The inability to purchase or sell these
fixed income securities at a fair price could have a negative impact on
the fund's performance.
o Mortgage and Asset-Backed Securities:
> Maturity Risk:
+ Mortgage-Backed Securities: A mortgage-backed security will mature
when all the mortgages in the pool mature or are prepaid. Therefore,
mortgage-backed securities do not have a fixed maturity, and their
expected maturities may vary when interest rates rise or fall.
> When interest rates fall, homeowners are more likely to prepay their
mortgage loans. An increased rate of prepayments on the fund's
mortgage-backed securities will result in an unforeseen loss of
interest income to the fund as the fund may be required to reinvest
assets at a lower interest rate. Because prepayments increase when
interest rates fall, the price of mortgage-backed securities does
not increase as much as other fixed income securities when interest
rates fall.
> When interest rates rise, homeowners are less likely to prepay their
mortgage loans. A decreased rate of prepayments lengthens the
expected maturity of a mortgage-backed security. Therefore, the
prices of mortgage-backed securities may decrease more than prices
of other fixed income securities when interest rates rise.
+ Collateralized Mortgage Obligations: The fund may invest in
mortgage-backed securities called collateralized mortgage obligations
(CMOs). CMOs are issued in separate classes with different stated
maturities. As the mortgage pool experiences prepayments, the pool
pays off investors in classes with shorter maturities first. By
investing in CMOs, the fund may manage the prepayment risk of
mortgage-backed securities. However, prepayments may cause the actual
maturity of a CMO to be substantially shorter than its stated
maturity.
+ Asset-Backed Securities: Asset-backed securities have prepayment risks
similar to mortgage-backed securities.
> Credit Risk: As with any fixed income security, mortgage-backed and
asset- backed securities are subject to the risk that the issuer will
default on principal and interest payments. It may be difficult to
enforce rights against the assets underlying mortgage-backed and
asset-backed securities in the case of default. The U.S. government or
its agencies may guarantee the payment of principal and interest on some
mortgage-backed securities. Mortgage- backed securities and asset-backed
securities issued by private lending institutions or other financial
intermediaries may be supported by insurance or other forms of
guarantees.
o Foreign Markets Risk: Investments in securities of foreign issuers involve
risks relating to political, social and economic developments abroad, as
well as risks resulting from the differences between the regulations to
which U.S. and foreign issuers and markets are subject:
> These risks may include the seizure by the government of company assets,
excessive taxation, withholding taxes on dividends and interest,
limitations on the use or transfer of portfolio assets, and political or
social instability.
> Enforcing legal rights may be difficult, costly and slow in foreign
countries, and there may be special problems enforcing claims against
foreign governments.
> Foreign companies may not be subject to accounting standards or
governmental supervision comparable to U.S. companies, and there may be
less public information about their operations.
> Foreign markets may be less liquid and more volatile than U.S. markets.
o Active or Frequent Trading Risk: The fund has engaged and may engage in
active and frequent trading to achieve its principal investment
strategies. This may result in the realization and distribution to
shareholders of higher capital gains as compared to a fund with less
active trading policies, which would increase your tax liability. Frequent
trading also increases transaction costs, which could detract from the
fund's performance.
o As with any mutual fund, you could lose money on your investment in the
fund.
An investment in the fund is not a bank deposit and is not insured or
guaranteed by the Federal Deposit Insurance Corporation or any other
government agency.
o BAR CHART AND PERFORMANCE TABLE
The bar chart and performance table below are intended to indicate some of
the risks of investing in the fund by showing changes in the fund's
performance over time. The performance table also shows how the fund's
performance over time compares with that of one or more broad measures of
market performance. The chart and table provide past performance
information. The fund's past performance does not necessarily indicate how
the fund will perform in the future. The performance information in the
chart and table is based upon calendar year periods, while the performance
information presented under the caption "Financial Highlights" and in the
fund's shareholder reports is based upon the fund's fiscal year.
Therefore, these performance results differ.
BAR CHART
The bar chart shows changes in the annual total returns of the fund's
class A shares for each complete calendar year since the fund's inception.
The chart and related notes do not take into account any sales charges
(loads) that you may be required to pay upon purchase or redemption of the
fund's shares, but do include the reinvestment of distributions. Any sales
charge will reduce your return. The return of the fund's other classes of
shares will differ from the class A returns shown in the bar chart,
depending upon the expenses of those classes.
1993 6.41%
1994 0.22%
1995 11.64%
1996 4.89%
1997 5.37%
1998 5.12%
The total return for the fund's class A shares for the three month
period ended March 31, 1999 was 0.99%.
During the period shown in the bar chart, the highest quarterly return
was 4.01% (for the calendar quarter ended June 30, 1995) and the lowest
quarterly return was (0.76)% (for the calendar quarter ended March 31,
1994).
PERFORMANCE TABLE
This table shows how the average annual total returns of each class of the
fund compare to a broad measure of market performance and various other
market indicators and assumes the reinvestment of distributions.
AVERAGE ANNUAL TOTAL RETURNS AS OF DECEMBER 31, 1998
..........................................................................
1 Year 5 Years Life
Class A shares 2.49% 4.85% 5.43%*
Class B shares 0.08% 4.17% 5.10%*
Class C shares 2.95% 4.54% 5.19%*
Lehman Brothers One- to Three-Year
Government/Corporate Bond Index++** 6.96% 6.00% 6.11%#
Average short-term investment grade
bond fund+ 6.63% 5.57% 5.69%#
---------
* For the period from the commencement of the fund's investment operations
on February 26, 1992.
# For the period February 28, 1992 through December 31, 1998.
+ Source: Lipper Analytical Services, Inc.
++ Source: AIM
** The Lehman Brothers One- to Three-Year Government/Corporate Bond Index is
a broad based total return index consisting of all U.S. government
agency, Treasury securities, and all investment-grade corporate debt
securities with maturities of one to three years.
Class A share performance takes into account the deduction of the 2.50%
maximum sales charge. Class B share performance takes into account the
deduction of the applicable contingent deferred sales charge (referred to
as a CDSC), which declines over six years from 4% to 0%. Class C share
performance takes into account the deduction of the 1% CDSC.
The fund commenced investment operations on February 26, 1992 with the
offering of class A shares and subsequently offered class B shares on
September 7, 1993, and class C shares on July 1, 1994. Class B and class C
share performance include the performance of the fund's class A shares for
periods prior to the offering of class B and class C shares. This blended
class B and class C share performance has been adjusted to take into
account the CDSC applicable to class B and class C shares, rather than the
initial sales charge (load) applicable to class A shares. This blended
performance has not been adjusted to take into account differences in
class specific operating expenses. Because operating expenses of class B
and C shares are higher than those of class A shares, this blended class B
and C share performance is higher than the performance of class B and C
shares would have been had class B and C shares been offered for the
entire period. If you would like the fund's current yield, contact the MFS
Service Center at the toll free number set forth on the back cover page.
<PAGE>
- - ------------------
II EXPENSE SUMMARY
- - ------------------
o EXPENSE TABLE
This table describes the fees and expenses that you may pay when you buy,
redeem and hold shares of the fund.
SHAREHOLDER FEES (fees paid directly from your investment)
...........................................................................
CLASS A CLASS B CLASS C
Maximum Sales Charge (Load) Imposed on
Purchases (as a percentage of offering price) 2.50% 0.00% 0.00%
Maximum Deferred Sales Charge (Load) (as a
percentage of original purchase price or
redemption proceeds, whichever is less) ..... See Below(1) 4.00% 1.00%
ANNUAL FUND OPERATING EXPENSES (expenses that are deducted from fund assets)
...........................................................................
Management Fees ............................. 0.40% 0.40% 0.40%
Distribution and Service (12b-1) Fees(2) .... 0.15% 0.92% 1.00%
Other Expenses(3) ........................... 0.28% 0.28% 0.28%
----- ----- -----
Total Annual Fund Operating Expenses ........ 0.83% 1.60% 1.68%
--------
(1) An initial sales charge will not be deducted from your purchase if you
buy $1 million or more of class A shares, or if you are investing
through a retirement plan and your class A purchase meets certain
requirements. However, in this case, a contingent deferred sales
charge (referred to as a CDSC) of 1% may be deducted from your
redemption proceeds if you redeem your investment within 12 months.
(2) The fund adopted a distribution plan under Rule 12b-1 that permits it
to pay marketing and other fees to support the sale and distribution
of class A, B and C shares and the services provided to you by your
financial adviser (referred to as distribution and service fees).
(3) The fund has an expense offset arrangement which reduces the fund's
custodian fee based upon the amount of cash maintained by the fund
with its custodian and dividend disbursing agent. The fund may enter
into other similar arrangements and directed brokerage arrangements,
which would also have the effect of reducing the fund's expenses.
"Other Expenses" do not take into account these expense reductions,
and are therefore higher than the actual expenses of the fund.
o EXAMPLE OF EXPENSES
These examples are intended to help you compare the cost of investing in
the fund with the cost of investing in other mutual funds.
The examples assume that:
o You invest $10,000 in the fund for the time periods indicated and you
redeem your shares at the end of the time periods;
o Your investment has a 5% return each year and dividends and other
distributions are reinvested; and
o The fund's operating expenses remain the same.
Although your actual costs may be higher or lower, under these assumptions
your costs would be:
SHARE CLASS YEAR 1 YEAR 3 YEAR 5 YEAR 10
---------------------------------------------------------------------------
Class A shares $333 $508 $ 699 $1,250
Class B shares
Assuming redemption at end of
period $563 $805 $1,071 $1,694
Assuming no redemption $163 $505 $ 871 $1,694
Class C shares
Assuming redemption at end of
period $271 $530 $ 913 $1,987
Assuming no redemption $171 $530 $ 913 $1,987
<PAGE>
- - -------------------------------------------
III CERTAIN INVESTMENT STRATEGIES AND RISKS
- - -------------------------------------------
o FURTHER INFORMATION ON INVESTMENT STRATEGIES AND RISKS
The fund may invest in various types of securities and engage in various
investment techniques and practices which are not the principal focus of
the fund and therefore are not described in this Prospectus. The types of
securities and investment techniques and practices in which the fund may
engage, including the principal investment techniques and practices
described above, are identified in Appendix A to this Prospectus, and are
discussed, together with their risks, in the fund's Statement of
Additional Information (referred to as the SAI), which you may obtain by
contacting MFS Service Center, Inc. (see back cover for address and phone
number).
o TEMPORARY DEFENSIVE POLICIES
In addition, the fund may depart from its principal investment strategies
by temporarily investing for defensive purposes when adverse market,
economic or political conditions exist. While the fund invests
defensively, it may not be able to pursue its investment objective. The
fund's defensive investment position may not be effective in protecting
its value.
<PAGE>
- - -------------------------
IV MANAGEMENT OF THE FUND
- - -------------------------
o INVESTMENT ADVISER
Massachusetts Financial Services Company (referred to as MFS or the
adviser) is the fund's investment adviser. MFS is America's oldest mutual
fund organization. MFS and its predecessor organizations have a history of
money management dating from 1924 and the founding of the first mutual
fund, Massachusetts Investors Trust. Net assets under the management of
the MFS organization were approximately $113.4 billion on behalf of
approximately 4.6 million investor accounts as of July 31, 1999. As of
such date, the MFS organization managed approximately $21.6 billion of
assets in fixed income funds and fixed income portfolios of MFS
Institutional Advisors, Inc. MFS is located at 500 Boylston Street,
Boston, Massachusetts 02116.
MFS provides investment management and related administrative services
and facilities to the fund, including portfolio management and trade
execution. For these services, the fund pays MFS an annual management fee
computed and paid monthly, at the rate of 0.40% of the average daily net
assets of the fund.
o PORTFOLIO MANAGER
The fund's portfolio manager is James J. Calmas, a Vice President of MFS.
Mr. Calmas has been the portfolio manager of the fund since January of
1998 and has been employed as a portfolio manager by MFS since 1988.
o ADMINISTRATOR
MFS provides the fund with certain financial, legal, compliance,
shareholder communications and other administrative services. MFS is
reimbursed by the fund for a portion of the costs it incurs in providing
these services.
o DISTRIBUTOR
MFS Fund Distributors, Inc. (referred to as MFD), a wholly owned
subsidiary of MFS, is the distributor of shares of the fund.
o SHAREHOLDER SERVICING AGENT
MFS Service Center, Inc. (referred to as MFSC), a wholly owned subsidiary
of MFS, performs transfer agency and certain other services for the fund,
for which it receives compensation from the fund.
<PAGE>
- - ------------------------------
V DESCRIPTION OF SHARE CLASSES
- - ------------------------------
The fund offers class A, B and C shares through this prospectus. The fund
also offers an additional class of shares, class I shares, exclusively to
certain institutional investors. Class I shares are made available through
a separate prospectus supplement provided to institutional investors
eligible to purchase them.
o SALES CHARGES
You may be subject to an initial sales charge when you purchase, or a CDSC
when you redeem, class A, B or C shares. These sales charges are described
below. In certain circumstances, these sales charges are waived. These
circumstances are described in the SAI. Special considerations concerning
the calculation of the CDSC that apply to each of these classes of shares
are described below under the heading "Calculation of CDSC."
If you purchase your fund shares through a financial adviser (such as a
broker or bank), the adviser may receive commissions or other concessions
which are paid from various sources, such as from the sales charges and
distribution and service fees, or from MFS or MFD. These commissions and
concessions are described in the SAI.
o CLASS A SHARES
You may purchase class A shares at net asset value plus an initial sales
charge (referred to as the offering price), but in some cases you may
purchase class A shares without an initial sales charge but subject to a
1% CDSC upon redemption within one year. Class A shares have annual
distribution and service fees up to a maximum of 0.35% of net assets
annually.
PURCHASES SUBJECT TO AN INITIAL SALES CHARGE. The amount of the initial
sales charge you pay when you buy class A shares differs depending upon
the amount you invest, as follows:
SALES CHARGE* AS PERCENTAGE OF:
-------------------------------
Offering Net Amount
Amount of Purchase Price Invested
Less than $50,000 2.50 2.56
$50,000 but less than $100,000 2.25 2.30
$100,000 but less than $250,000 2.00 2.04
$250,000 but less than $500,000 1.75 1.78
$500,000 but less than $1,000,000 1.50 1.52
$1,000,000 or more None** None**
------
* Because of rounding in the calculation of offering price, actual
sales charges you pay may be more or less than those calculated
using these percentages.
** A 1% CDSC will apply to such purchases, as discussed below.
PURCHASES SUBJECT TO A CDSC (BUT NOT AN INITIAL SALES CHARGE). You pay no
initial sales charge when you invest $1 million or more in class A shares.
However, a CDSC of 1% will be deducted from your redemption proceeds if
you redeem within 12 months of your purchase.
In addition, purchases made under the following four categories are not
subject to an initial sales charge; however, a CDSC of 1% will be deducted
from redemption proceeds if the redemption is made within 12 months of
purchase:
o Investments in class A shares by certain retirement plans subject to the
Employee Retirement Income Security Act of 1974, as amended (referred to
as ERISA), if, prior to July 1, 1996
> the plan had established an account with MFSC; and
> the sponsoring organization had demonstrated to the satisfaction of MFD
that either;
+ the employer had at least 25 employees; or
+ the total purchases by the retirement plan of class A shares of the
MFS Family of Funds (the MFS Funds) would be in the amount of at least
$250,000 within a reasonable period of time, as determined by MFD in
its sole discretion.
o Investments in class A shares by certain retirement plans subject to
ERISA, if
> the retirement plan and/or sponsoring organization participates in the
MFS Fundamental 401(k) Program or any similar recordkeeping system made
available by MFSC (referred to as the MFS participant recordkeeping
system);
> the plan establishes an account with MFSC on or after July 1, 1996;
> the total purchases by the retirement plan of class A shares of the MFS
Funds will be in the amount of at least $500,000 within a reasonable
period of time, as determined by MFD in its sole discretion; and
> the plan has not redeemed its class B shares in the MFS funds in order
to purchase class A shares under this category.
o Investments in class A shares by certain retirement plans subject to
ERISA, if
> the plan establishes an account with MFSC on or after July 1, 1996; and
> 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 MFSC PRIOR TO THE PURCHASES THAT THE
PLAN HAS A MARKET VALUE OF $500,000 OR MORE INVESTED IN SHARES OF ANY
CLASS OR CLASSES OF THE MFS FUNDS; MFSC HAS NO OBLIGATION INDEPENDENTLY
TO DETERMINE WHETHER SUCH A PLAN QUALIFIES UNDER THIS CATEGORY; AND
o Investments in class A shares by certain retirement plans subject to
ERISA, if
> the plan establishes an account with MFSC on or after July 1, 1997;
> the plan's records are maintained on a pooled basis by MFSC; and
> the sponsoring organization demonstrates to the satisfaction of MFD
that, at the time of purchase, the employer has at least 200 eligible
employees and the plan has aggregate assets of at least $2,000,000.
o CLASS B SHARES
You may purchase class B shares at net asset value without an initial
sales charge, but if you redeem your shares within the first six years you
may be subject to a CDSC (declining from 4.00% during the first year to 0%
after six years). Class B shares have annual distribution and service fees
up to a maximum of 1.00% of net assets annually.
> The CDSC is imposed according to the following schedule:
CONTINGENT DEFERRED
YEAR OF REDEMPTION AFTER PURCHASE SALES CHARGE
---------------------------------------------------------------------------
First 4%
Second 4%
Third 3%
Fourth 3%
Fifth 2%
Sixth 1%
Seventh and following 0%
If you hold class B shares for approximately eight years, they will convert
to class A shares of the fund. All class B shares you purchased through the
reinvestment of dividends and distributions will be held in a separate
sub-account. Each time any class B shares in your account convert to class A
shares, a proportionate number of the class B shares in the sub-account will
also convert to class A shares.
o CLASS C SHARES
You may purchase class C shares at net asset value without an initial
sales charge, but if you redeem your shares within the first year you may
be subject to a CDSC of 1.00%. Class C shares have annual distribution and
service fees up to a maximum of 1.00% of net assets annually. Class C
shares do not convert to any other class of shares of the fund.
o CALCULATION OF CDSC
As discussed above, certain investments in class A, B and C shares will be
subject to a CDSC. Three different aging schedules apply to the
calculation of the CDSC:
o Purchases of class A shares made on any day during a calendar month will
age one month on the last day of the month, and each subsequent month.
o Purchases of class C shares, and purchases of class B shares on or after
January 1, 1993, made on any day during a calendar month will age one year
at the close of business on the last day of that month in the following
calendar year, and each subsequent year.
o Purchases of class B shares prior to January 1, 1993 made on any day
during a calendar year will age one year at the close of business on
December 31 of that year, and each subsequent year.
No CDSC is assessed on the value of your account represented by appreciation
or additional shares acquired through the automatic reinvestment of
dividends or capital gain distributions. Therefore, when you redeem your
shares, only the value of the shares in excess of these amounts (i.e., your
direct investment) is subject to a CDSC.
The CDSC will be applied in a manner that results in the CDSC being
imposed at the lowest possible rate, which means that the CDSC will be
applied against the lesser of your direct investment or the total cost of
your shares. The applicability of a CDSC will not be affected by exchanges
or transfers of registration, except as described in the SAI.
o DISTRIBUTION AND SERVICE FEES
The fund has adopted a plan under Rule 12b-1 that permits it to pay
marketing and other fees to support the sale and distribution of class A,
B and C shares and the services provided to you by your financial adviser.
These annual distribution and service fees may equal up to 0.35% for class
A shares (a 0.10% distribution fee and a 0.25% service fee) and 1.00% for
each of class B and class C shares (a 0.75% distribution fee and a 0.25%
service fee), and are paid out of the assets of these classes. Over time,
these fees will increase the cost of your shares and may cost you more
than paying other types of sales charges. Payment of 0.10% of the class A
service fee and the 0.10% per annum class A distribution fee is currently
not being imposed and will be implemented on such date as the Trustees of
the Trust may determine. 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.
<PAGE>
- - ----------------------------------------------
VI HOW TO PURCHASE, EXCHANGE AND REDEEM SHARES
- - ----------------------------------------------
You may purchase, exchange and redeem class A, B and C shares of the fund
in the manner described below. In addition, you may be eligible to
participate in certain investor services and programs to purchase,
exchange and redeem these classes of shares, which are described in the
next section under the caption "Investor Services and Programs."
o HOW TO PURCHASE SHARES
INITIAL PURCHASE. You can establish an account by having your financial
adviser process your purchase. The minimum initial investment is $1,000.
However, in the following circumstances the minimum initial investment is
only $50 per account:
o if you establish an automatic investment plan;
o if you establish an automatic exchange plan; or
o if you establish an account under either:
> tax-deferred retirement programs (other than IRAs) where investments are
made by means of group remittal statements; or
> employer sponsored investment programs.
The minimum initial investment for IRAs is $250 per account. The maximum
investment in class C shares is $1,000,000 per transaction. Class C shares
are not available for purchase by any retirement plan qualified under
Section 401(a) or 403(b) of the Internal Revenue Code if the plan or its
sponsor subscribes to certain recordkeeping services made available by MFSC,
such as the MFS Fundamental 401(k) Plan.
ADDING TO YOUR ACCOUNT. There are several easy ways you can make
additional investments of at least $50 to your account:
o send a check with the returnable portion of your statement;
o ask your financial adviser to purchase shares on your behalf;
o wire additional investments through your bank (call MFSC first for
instructions); or
o authorize transfers by phone between your bank account and your MFS
account (the maximum purchase amount for this method is $100,000). You
must elect this privilege on your account application if you wish to use
it.
o HOW TO EXCHANGE SHARES
You can exchange your shares for shares of the same class of certain other
MFS funds at net asset value by having your financial adviser process your
exchange request or by contacting MFSC directly. The minimum exchange
amount is generally $1,000 ($50 for exchanges made under the automatic
exchange plan). Shares otherwise subject to a CDSC will not be charged a
CDSC in an exchange. However, when you redeem the shares acquired through
the exchange, the shares you redeem may be subject to a CDSC, depending
upon when you originally purchased the shares you exchanged. For purposes
of computing the CDSC, the length of time you have owned your shares will
be measured from the date of original purchase and will not be affected by
any exchange.
Sales charges may apply to exchanges made from the MFS money market
funds. Certain qualified retirement plans may make exchanges between the
MFS funds and the MFS Fixed Fund, a bank collective investment fund, and
sales charges may also apply to these exchanges. Call MFSC for information
concerning these sales charges.
Exchanges may be subject to certain limitations and are subject to the
MFS funds' policies concerning excessive trading practices, which are
policies designed to protect the funds and their shareholders from the
harmful effect of frequent exchanges. These limitations and policies are
described below under the captions "Right to Reject or Restrict Purchase
and Exchange Orders" and "Excessive Trading Practices." You should read
the prospectus of the MFS fund into which you are exchanging and consider
the differences in objectives, policies and rules before making any
exchange.
o HOW TO REDEEM SHARES
You may redeem your shares either by having your financial adviser process
your redemption or by contacting MFSC directly. The fund sends out your
redemption proceeds within seven days after your request is received in
good order. "Good order" generally means that the stock power, written
request for redemption, letter of instruction or certificate must be
endorsed by the record owner(s) exactly as the shares are registered. In
addition, you need to have your signature guaranteed and/or submit
additional documentation to redeem your shares. See "Signature Guarantee/
Additional Documentation" below, or contact MFSC for details (see back
cover page for address and phone number).
Under unusual circumstances such as when the New York Stock Exchange is
closed, trading on the Exchange is restricted or if there is an emergency,
the fund may suspend redemptions or postpone payment. If you purchased the
shares you are redeeming by check, the fund may delay the payment of the
redemption proceeds until the check has cleared, which may take up to 15
days from the purchase date.
REDEEMING DIRECTLY THROUGH MFSC
o BY TELEPHONE. You can call MFSC to have shares redeemed from your account
and the proceeds wired or mailed (depending on the amount redeemed)
directly to a pre- designated bank account. MFSC will request personal or
other information from you and will generally record the calls. MFSC will
be responsible for losses that result from unauthorized telephone
transactions if it does not follow reasonable procedures designed to
verify your identity. You must elect this privilege on your account
application if you wish to use it.
o BY MAIL. To redeem shares by mail, you can send a letter to MFSC with the
name of your fund, your account number, and the number of shares or dollar
amount to be sold.
REDEEMING THROUGH YOUR FINANCIAL ADVISER. You can call your financial
adviser to process a redemption on your behalf. Your financial adviser
will be responsible for furnishing all necessary documents to MFSC and may
charge you for this service.
SIGNATURE GUARANTEE/ADDITIONAL DOCUMENTATION. In order to protect against
fraud, the fund requires that your signature be guaranteed in order to
redeem your shares. Your signature may be guaranteed by an eligible bank,
broker, dealer, credit union, national securities exchange, registered
securities association, clearing agency, or savings association. MFSC may
require additional documentation for certain types of registrations and
transactions. Signature guarantees and this additional documentation shall
be accepted in accordance with policies established by MFSC, and MFSC may
make certain de minimis exceptions to these requirements.
o OTHER CONSIDERATIONS
RIGHT TO REJECT OR RESTRICT PURCHASE AND EXCHANGE ORDERS. Purchases and
exchanges should be made for investment purposes only. The MFS Funds each
reserve the right to reject or restrict any specific purchase or exchange
request. Because an exchange request involves both a request to redeem
shares of one fund and to purchase shares of another fund, the MFS Funds
consider the underlying redemption and purchase requests conditioned upon
the acceptance of each of these underlying requests. Therefore, in the
event that the MFS Funds reject an exchange request, neither the
redemption nor the purchase side of the exchange will be processed. When a
fund determines that the level of exchanges on any day may be harmful to
its remaining shareholders, the fund may delay the payment of exchange
proceeds for up to seven days to permit cash to be raised through the
orderly liquidation of its portfolio securities to pay the redemption
proceeds. In this case, the purchase side of the exchange will be delayed
until the exchange proceeds are paid by the redeeming fund.
EXCESSIVE TRADING PRACTICES. The MFS Funds do not permit market-timing or
other excessive trading practices. Excessive, short-term (market-timing)
trading practices may disrupt portfolio management strategies and harm
fund performance. As noted above, the MFS Funds reserve the right to
reject or restrict any purchase order (including exchanges) from any
investor. To minimize harm to the MFS Funds and their shareholders, the
MFS Funds will exercise these rights if an investor has a history of
excessive trading or if an investor's trading, in the judgment of the MFS
Funds, has been or may be disruptive to a fund. In making this judgment,
the MFS Funds may consider trading done in multiple accounts under common
ownership or control.
REINSTATEMENT PRIVILEGE. After you have redeemed shares, you have a one-
time right to reinvest the proceeds within 90 days of the redemption at
the current net asset value (without an initial sales charge). If the
redemption involved a CDSC, your account will be credited with the
appropriate amount of the CDSC paid; however, your new shares will be
subject to a CDSC which will be determined from the date you originally
purchased the shares redeemed. This privilege applies to shares of the MFS
money market funds only under certain circumstances.
IN-KIND DISTRIBUTIONS. The MFS funds have reserved the right to pay
redemption proceeds by a distribution in-kind of portfolio securities
(rather than cash). In the event that the fund makes an in-kind
distribution, you could incur the brokerage and transaction charges when
converting the securities to cash. The fund does not expect to make in-
kind distributions, and if it does, the fund will pay, during any 90-day
period, your redemption proceeds in cash up to either $250,000 or 1% of
the fund's net assets, whichever is less.
INVOLUNTARY REDEMPTIONS/SMALL ACCOUNTS. Because it is costly to maintain
small accounts, the MFS funds have generally reserved the right to
automatically redeem shares and close your account when it contains less
than $500 due to your redemptions or exchanges. Before making this
automatic redemption, you will be notified and given 60 days to make
additional investments to avoid having your shares redeemed.
<PAGE>
- - ----------------------------------
VII INVESTOR SERVICES AND PROGRAMS
- - ----------------------------------
As a shareholder of the fund, you have available to you a number of
services and investment programs. Some of these services and programs may
not be available to you if your shares are held in the name of your
financial adviser or if your investment in the fund is made through a
retirement plan.
o DISTRIBUTION OPTIONS
The following distribution options are generally available to all accounts
and you may change your distribution option as often as you desire by
notifying MFSC:
o Dividends and capital gain distributions reinvested in additional shares
(this option will be assigned if no other option is specified);
o Dividends in cash; capital gain distributions reinvested in additional
shares; or
o 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 as
of 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 you have elected to receive dividends and/
or capital gain distributions in cash, and the postal or other delivery
service is unable to deliver checks to your address of record, or you do not
respond to mailings from MFSC with regard to uncashed distribution checks,
your distribution option will automatically be converted to having all
dividends and other distributions reinvested in additional shares. Your
request to change a distribution option must be received by MFSC 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.
o PURCHASE AND REDEMPTION PROGRAMS
For your convenience, the following purchase and redemption programs are
made available to you with respect to class A, B and C shares, without
extra charge:
AUTOMATIC INVESTMENT PLAN. You can make cash investments of $50 or more
through your checking account or savings account on any day of the month.
If you do not specify a date, the investment will automatically occur on
the first business day of the month.
AUTOMATIC EXCHANGE PLAN. If you have an account balance of at least $5,000
in any MFS fund, you may participate in the automatic exchange plan, a
dollar-cost averaging program. This plan permits you to make automatic
monthly or quarterly exchanges from your account in an MFS fund for shares
of the same class of shares of other MFS funds. You may make exchanges of
at least $50 to up to six different funds under this plan. Exchanges will
generally be made at net asset value without any sales charges. If you
exchange shares out of the MFS Money Market Fund or MFS Government Money
Market Fund, or if you exchange class A shares out of the MFS Cash Reserve
Fund, into class A shares of any other MFS fund, you will pay the initial
sales charge if you have not already paid this charge on these shares.
REINVEST WITHOUT A SALES CHARGE. You can reinvest dividend and capital
gain distributions into your account without a sales charge to add to your
investment easily and automatically.
DISTRIBUTION INVESTMENT PROGRAM. You may purchase shares of any MFS fund
without paying an initial sales charge or a CDSC upon redemption by
automatically reinvesting a minimum of $50 of dividend and capital gain
distributions from the same class of another MFS fund.
LETTER OF INTENT (LOI). If you intend to invest $50,000 or more in the MFS
funds (including the MFS Fixed Fund) within 13 months, you may buy class A
shares of the funds at the reduced sales charge as though the total amount
were invested in class A shares in one lump sum. If you intend to invest
$1 million or more under this program, the time period is extended to 36
months. If the intended purchases are not completed within the time
period, shares will automatically be redeemed from a special escrow
account established with a portion of your investment at the time of
purchase to cover the higher sales charge you would have paid had you not
purchased your shares through this program.
RIGHT OF ACCUMULATION. You will qualify for a lower sales charge on your
purchases of class A shares when your new investment in class A shares,
together with the current (offering price) value of all your holdings in
the MFS funds (including the MFS Fixed Fund), reaches a reduced sales
charge level.
SYSTEMATIC WITHDRAWAL PLAN. You may elect to automatically receive (or
designate someone else to receive) regular periodic payments of at least
$100. Each payment under this systematic withdrawal is funded through the
redemption of your fund shares. For class B and C shares, you can receive
up to 10% (15% for certain IRA distributions) of the value of your account
through these payments in any one year (measured at the time you establish
this plan). You will incur no CDSC on class B and C shares redeemed under
this plan. For class A shares, there is no similar percentage limitation;
however, you may incur the CDSC (if applicable) when class A shares are
redeemed under
this plan.
FREE CHECKWRITING. You may redeem your class A or class C shares by
writing checks against your account. Checks must be for at least $500 and
investments made by check must have been in your account for at least 15
days before you can write checks against them. There is no charge for this
service. To authorize your account for checkwriting, contact MFSC (see
back cover page for address and phone number).
Shares in your account equal in value to the amount of the check plus
the applicable CDSC (if any) and any income tax required to be withheld
(if any) are redeemed to cover the amount of the check. If your account
value is not great enough to cover these amounts, your check will be
dishonored.
<PAGE>
- - ----------------------
VIII OTHER INFORMATION
- - ----------------------
o PRICING OF FUND SHARES
The price of each class of the fund's shares is based on its net asset
value. The net asset value of each class of shares is determined at the
close of regular trading each day that the New York Stock Exchange is open
for trading (generally, 4:00 p.m., Eastern time) (referred to as the
valuation time). To determine net asset value, the fund values its assets
at current market values, or at fair value as determined by the Adviser
under the direction of the Board of Trustees that oversees the fund if
current market values are unavailable. Fair value pricing may be used by
the fund when current market values are unavailable or when an event
occurs after the close of the exchange on which the fund's portfolio
securities are principally traded that is likely to have changed the value
of the securities. The use of fair value pricing by the fund may cause the
net asset value of its shares to differ significantly from the net asset
value that would be calculated using current market values.
You will receive the net asset value next calculated, after the
deduction of applicable sales charges and any required tax withholding, if
your order is complete (has all required information) and MFSC receives
your order by:
o the valuation time, if placed directly by you (not through a financial
adviser such as a broker or bank) to MFSC; or
o MFSC's close of business, if placed through a financial adviser, so long
as the financial adviser (or its authorized designee) received your order
by the valuation time.
The fund invests in certain securities which are primarily listed on foreign
exchanges that trade on weekends and other days when the fund does not price
its shares. Therefore, the value of the fund's shares may change on days
when you will not be able to purchase or redeem the fund's shares.
o DISTRIBUTIONS
The fund intends to declare daily as dividends substantially all of its
net income (excluding any realized net capital gains) and to pay these
dividends to shareholders at least monthly. Any realized net capital gains
are distributed at least annually.
o TAX CONSIDERATIONS
The following discussion is very general. You are urged to consult your
tax adviser regarding the effect that an investment in the fund may have
on your particular tax situation.
TAXABILITY OF DISTRIBUTIONS. As long as the fund qualifies for treatment
as a regulated investment company (which it has in the past and intends to
do in the future), it pays no federal income tax on the earnings it
distributes to shareholders.
You will normally have to pay federal income taxes, and any state or local
taxes, on the distributions you receive from the fund, whether you take
the distributions in cash or reinvest them in additional shares.
Distributions designated as capital gain dividends are taxable as long-
term capital gains. Other distributions are generally taxable as ordinary
income. Some dividends paid in January may be taxable as if they had been
paid the previous December.
The Form 1099 that is mailed to you every January details your
distributions and how they are treated for federal tax purposes.
Fund distributions of net capital gains or net short-term gains or net
short-term capital gains by the fund will reduce the fund's net asset
value per share. Therefore, if you buy shares shortly before the record
date of a distribution, you may pay the full price for the shares and then
effectively receive a portion of the purchase price back as a taxable
distribution.
If you are neither a citizen nor a resident of the U.S., the fund will
withhold U.S. federal income tax at the rate of 30% on taxable dividends
and other payments that are subject to such withholding. You may be able
to arrange for a lower withholding rate under an applicable tax treaty if
you supply the appropriate documentation required by the fund. The fund is
also required in certain circumstances to apply backup withholding at the
rate of 31% on taxable dividends and redemption proceeds paid to any
shareholder (including a shareholder who is neither a citizen nor a
resident of the U.S.) who does not furnish to the fund certain information
and certifications or who is otherwise subject to backup withholding.
Backup withholding will not, however, be applied to payments that have
been subject to 30% withholding. Prospective investors should read the
fund's Account Application for additional information regarding backup
withholding of federal income tax.
TAXABILITY OF TRANSACTIONS. When you redeem, sell or exchange shares, it
is generally considered a taxable event for you. Depending on the purchase
price and the sale price of the shares you redeem, sell or exchange, you
may have a gain or a loss on the transaction. You are responsible for any
tax liabilities generated by your transaction.
o UNIQUE NATURE OF FUND
MFS may serve as the investment adviser to other funds which have similar
investment goals and principal investment policies and risks to the fund,
and which may be managed by the fund's portfolio manager(s). While the
fund may have many similarities to these other funds, its investment
performance will differ from their investment performance. This is due to
a number of differences between the funds, including differences in sales
charges, expense ratios and cash flows.
o YEAR 2000 READINESS DISCLOSURE
The fund could be adversely affected if the computer systems used by MFS,
the fund's other service providers or the companies in which the fund
invests do not properly process date-related information from and after
January 1, 2000. MFS recognizes the importance of the Year 2000 issue and,
to address Year 2000 compliance, created a separately funded Year 2000
Program Management Office in 1996 comprised of a specialized staff
reporting directly to MFS senior management. The Office, with the help of
external consultants, is responsible for overall coordination, strategy
formulation, communications and issue resolution with respect to Year 2000
issues. While MFS systems will be tested for Year 2000 readiness before
the turn of the century, there are significant systems interdependencies
in the domestic and foreign markets for securities, the business
environments in which companies held by the fund operate and in MFS' own
business environment. MFS has been working with the fund's other service
providers to identify and respond to potential problems with respect to
Year 2000 readiness and to develop contingency plans. Year 2000 readiness
is also one of the factors considered by MFS in its ongoing assessment of
companies in which the fund invests. There can be no assurance, however,
that these steps will be sufficient to avoid any adverse impact on the
fund.
o PROVISION OF ANNUAL AND SEMIANNUAL REPORTS
To avoid sending duplicate copies of materials to households, only one
copy of the fund's annual and semiannual report will be mailed to
shareholders having the same residential address on the fund's records.
However, any shareholder may contact MFSC (see back cover for address and
phone number) to request that copies of these reports be sent personally
to that shareholder.
<PAGE>
- - -----------------------
IX FINANCIAL HIGHLIGHTS
- - -----------------------
The financial highlights table is intended to help you understand the
fund's financial performance for the past 5 years. Certain information
reflects financial results for a single fund share. The total returns in
the table represent the rate by which an investor would have earned (or
lost) on an investment in the fund (assuming reinvestment of all
distributions). This information has been audited by the fund's
independent auditors, whose report, together with the fund's financial
statements, are included in the fund's Annual Report to shareholders. The
fund's Annual Report is available upon request by contacting MFSC (see
back cover for address and telephone number). These financial statements
are incorporated by reference into the SAI. The fund's independent
auditors are Deloitte & Touche LLP.
<PAGE>
<TABLE>
<CAPTION>
CLASS A SHARES
...............................................................................................................
YEAR ENDED APRIL 30, 1999 1998 1997 1996 1995
---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE DATA (FOR A SHARE OUTSTANDING
THROUGHOUT EACH PERIOD):
Net asset value -- beginning of period $ 6.99 $ 7.04 $ 7.12 $ 7.10 $ 7.14
------- ------- ------- ------- -------
Income from investment operations# --
Net investment income(S) $ 0.43 $ 0.48 $ 0.47 $ 0.48 $ 0.46
Net realized and unrealized gain (loss) on
investments (0.14) (0.07) (0.06) 0.03 (0.04)
------- ------- ------- ------- -------
Total from investment operations $ 0.29 $ 0.41 $ 0.41 $ 0.51 $ 0.42
------- ------- ------- ------- -------
Less distributions declared to shareholders --
From net investment income $ (0.41) $ (0.46) $ (0.47) $ (0.48) $ (0.46)
In excess of net investment income -- -- (0.02) (0.01) --
------- ------- ------- ------- -------
Total distributions declared to
shareholders $ (0.41) $ (0.46) $ (0.49) $ (0.49) $ (0.46)
------- ------- ------- ------- -------
Net asset value -- end of period $ 6.87 $ 6.99 $ 7.04 $ 7.12 $ 7.10
------- ------- ------- ------- -------
Total return(+) 4.26% 5.97% 5.83% 7.50% 6.09%
RATIOS (TO AVERAGE NET ASSETS)/
SUPPLEMENTAL DATA(S):
Expenses## 0.84% 0.89% 0.94% 0.95% 0.95%
Net investment income 6.14% 6.70% 6.57% 6.73% 6.54%
PORTFOLIO TURNOVER 278% 288% 489% 385% 498%
NET ASSETS AT END OF PERIOD
(000 OMITTED) $134,086 $95,342 $91,887 $98,582 $85,773
----------
# Per share data are based on average shares outstanding.
## 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. For fiscal years ending after
September 1, 1995, the fund's expenses are calculated without reduction for this expense offset arrangement.
(+) 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) Subject to reimbursement by the fund, the investment adviser agreed to maintain the expenses of the fund,
exclusive of management, distribution and service fees, at not more than 0.40% of average daily net assets.
To the extent actual expenses were over/ under this limitation, the net investment income per share and the
ratios would have been:
Net investment income -- $ 0.48 $ 0.47 $ 0.48 $ 0.46
RATIOS (TO AVERAGE NET ASSETS):
Expenses## -- 0.87% 0.89% 0.91% 0.97%
Net investment income -- 6.72% 6.62% 6.77% 6.52%
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
CLASS B SHARES
..............................................................................................................
YEAR ENDED APRIL 30, 1999 1998 1997 1996 1995
---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE DATA (FOR A SHARE OUTSTANDING
THROUGHOUT EACH PERIOD):
Net asset value -- beginning of period $ 6.97 $ 7.03 $ 7.11 $ 7.10 $ 7.14
------- ------- ------- ------- -------
Income from investment operations# --
Net investment income(S) $ 0.38 $ 0.41 $ 0.41 $ 0.42 $ 0.41
Net realized and unrealized gain (loss) on
investments (0.14) (0.07) (0.05) 0.03 (0.05)
------- ------- ------- ------- -------
Total from investment operations $ 0.24 $ 0.34 $ 0.36 $ 0.45 $ 0.36
------- ------- ------- ------- -------
Less distributions declared to shareholders --
From net investment income $ (0.36) $ (0.40) $ (0.42) $ (0.42) $ (0.40)
In excess of net investment income -- -- (0.02) (0.02) --
------- ------- ------- ------- -------
Total distributions declared to
shareholders $ (0.36) $ (0.40) $ (0.44) $ (0.44) $ (0.40)
------- ------- ------- ------- -------
Net asset value -- end of period $ 6.85 $ 6.97 $ 7.03 $ 7.11 $ 7.10
------- ------- ------- ------- -------
Total return 3.48% 4.98% 4.99% 6.52% 5.20%
RATIOS (TO AVERAGE NET ASSETS)/
SUPPLEMENTAL DATA(S):
Expenses## 1.61% 1.70% 1.78% 1.75% 1.81%
Net investment income 5.33% 5.80% 5.75% 5.90% 5.73%
PORTFOLIO TURNOVER 278% 288% 489% 385% 498%
NET ASSETS AT END OF PERIOD
(000 OMITTED) $52,883 $39,229 $34,875 $26,464 $17,334
----------
# Per share data are based on average shares outstanding.
## 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. For fiscal years ending after
September 1, 1995, the fund's expenses are calculated without reduction for this expense offset arrangement.
(S) Subject to reimbursement by the fund, the investment adviser agreed to maintain the expenses of the fund,
exclusive of management, distribution and service fees, at not more than 0.40% of average daily net assets.
To the extent actual expenses were over/ under this limitation, the net investment income per share and the
ratios would have been:
Net investment income -- $ 0.41 $ 0.41 $ 0.42 $ 0.41
RATIOS (TO AVERAGE NET ASSETS):
Expenses## -- 1.68% 1.77% 1.77% 1.82%
Net investment income -- 5.82% 5.76% 5.88% 5.72%
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
CLASS C SHARES
...............................................................................................................
YEAR ENDED APRIL 30, PERIOD ENDED
---------------------------------------------- APRIL 30,
1999 1998 1997 1996 1995*
---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE DATA (FOR A SHARE OUTSTANDING
THROUGHOUT EACH PERIOD):
Net asset value -- beginning of period $ 6.99 $ 7.05 $ 7.13 $ 7.11 $ 7.08
------- ------- ------- ------- -------
Income from investment operations# --
Net investment income(S) $ 0.36 $ 0.41 $ 0.41 $ 0.41 $ 0.37
Net realized and unrealized gain (loss)
on investments (0.14) (0.07) (0.06) 0.04 (0.01)
------- ------- ------- ------- -------
Total from investment operations $ 0.22 $ 0.34 $ 0.35 $ 0.45 $ 0.36
------- ------- ------- ------- -------
Less distributions declared to
shareholders --
From net investment income $ (0.35) $ (0.40) $ (0.41) $ (0.41) $ (0.33)
In excess of net investment income -- -- (0.02) (0.02) --
------- ------- ------- ------- -------
Total distributions declared to
shareholders $ (0.35) $ (0.40) $ (0.43) $ (0.43) $ (0.33)
------- ------- ------- ------- -------
Net asset value -- end of period $ 6.86 $ 6.99 $ 7.05 $ 7.13 $ 7.11
------- ------- ------- ------- -------
Total return 3.23% 4.94% 5.08% 6.44% 5.25%++
RATIOS (TO AVERAGE NET ASSETS)/
SUPPLEMENTAL DATA(S):
Expenses## 1.69% 1.74% 1.80% 1.80% 1.85%+
Net investment income 5.19% 5.76% 5.80% 5.76% 6.01%+
PORTFOLIO TURNOVER 278% 288% 489% 385% 498%
NET ASSETS AT END OF PERIOD
(000 OMITTED) $24,228 $20,131 $18,862 $13,842 $ 4,450
----------
* For the period from the inception of Class C, July 1, 1994, through April 30, 1995.
+ Annualized.
++ Not annualized.
# Per share data are based on average shares outstanding.
## 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. For fiscal years ending after
September 1, 1995, the fund's expenses are calculated without reduction for this expense offset arrangement.
(S) Subject to reimbursement by the fund, the investment adviser agreed to maintain expenses of the fund,
exclusive of management and distribution and service fees, at not more than 0.40% of average daily net
assets. To the extent actual expenses were over/ under this limitation, the net investment income per share
and the ratios would have been:
Net investment income -- $ 0.41 $ 0.41 $ 0.41 $ 0.37
RATIOS (TO AVERAGE NET ASSETS):
Expenses## -- 1.72% 1.81% 1.75% 1.88%+
Net investment income -- 5.78% 5.80% 5.81% 5.98%+
</TABLE>
<PAGE>
- - ----------
APPENDIX A
- - ----------
o INVESTMENT TECHNIQUES AND PRACTICES
In pursuing its investment objective, the fund may engage in the following
principal and non-principal investment techniques and practices.
Investment techniques and practices which are the principal focus of the
fund are also described, together with their risks, in the Risk Return
Summary of the Prospectus. Both principal and non-principal investment
techniques and practices are described, together with their risks, in the
SAI.
INVESTMENT TECHNIQUES/PRACTICES
..........................................................................
SYMBOLS x permitted -- not permitted
--------------------------------------------------------------------------
Debt Securities
Asset-Backed Securities
Collateralized Mortgage Obligations and Multiclass
Pass-Through Securities x
Corporate Asset-Backed Securities x
Mortgage Pass-Through Securities x
Stripped Mortgage-Backed Securities x
Corporate Securities x
Loans and Other Direct Indebtedness --
Lower Rated Bonds --
Municipal Bonds --
Speculative Bonds x
U.S. Government Securities x
Variable and Floating Rate Obligations x
Zero Coupon Bonds, Deferred Interest Bonds and PIK Bonds x
Equity Securities --
Foreign Securities Exposure
Brady Bonds x
Depositary Receipts --
Dollar-Denominated Foreign Debt Securities x
Emerging Markets x
Foreign Securities --
Forward Contracts --
Futures Contracts x
Indexed Securities/Structured Products x
Inverse Floating Rate Obligations --
Investment in Other Investment Companies
Open-End Funds x
Closed-End Funds x
Lending of Portfolio Securities x
Leveraging Transactions
Bank Borrowings --*
Mortgage "Dollar-Roll" Transactions --*
Reverse Repurchase Agreements --*
Options
Options on Foreign Currencies --
Options on Futures Contracts x
Options on Securities x
Options on Stock Indices --
Reset Options --
"Yield Curve" Options --
Repurchase Agreements x
Restricted Securities x
Short Sales --*
Short Sales Against the Box --
Short Term Instruments x
Swaps and Related Derivative Instruments x
Temporary Borrowings x
Temporary Defensive Positions x
Warrants --
"When-Issued" Securities x
----------
*May only be changed with shareholder approval
<PAGE>
MFS(R) LIMITED MATURITY FUND
If you want more information about the fund, the following documents are
available free upon request:
ANNUAL/SEMIANNUAL REPORTS. These reports contain information about the fund's
actual investments. Annual reports discuss the effect of recent market
conditions and the fund's investment strategy on the fund's performance during
its last fiscal year.
STATEMENT OF ADDITIONAL INFORMATION (SAI). The SAI, dated September 1, 1999,
provides more detailed information about the fund and is incorporated into
this prospectus by reference.
YOU CAN GET FREE COPIES OF THE ANNUAL/SEMIANNUAL REPORTS, THE SAI AND OTHER
INFORMATION ABOUT THE FUND, AND MAKE INQUIRIES ABOUT THE FUND, BY CONTACTING:
MFS Service Center, Inc.
2 Avenue de Lafayette
Boston, MA 02111-1738
Telephone: 1-800-225-2606
Internet: http://www.mfs.com
Information about the fund (including its prospectus, SAI and shareholder
reports) can be reviewed and copied at the:
Public Reference Room
Securities and Exchange Commission
Washington, D.C., 20549-6009
Information on the operation of the Public Reference Room may be obtained
by calling the Commission at 1-800-SEC-0330. Reports and other information
about the fund are available on the Commission's Internet website at
http:// www.sec.gov, and copies of this information may be obtained, upon
payment of a duplicating fee, by writing the Public Reference Section at
the above address.
The fund's Investment Company Act file number is 811-2464
MLM-1 8/99 149M 36/236/336/836
<PAGE>
EXHIBIT NO. 99.17(b)
- - ----------------------------
MFS(R) LIMITED MATURITY FUND
- - ----------------------------
SEPTEMBER 1, 1999 AS AMENDED SEPTEMBER 22, 1999
[logo] M F S (R) STATEMENT OF ADDITIONAL
INVESTMENT MANAGEMENT INFORMATION
75 YEARS
WE INVENTED THE MUTUAL FUND(R)
A SERIES OF MFS SERIES TRUST IX
500 BOYLSTON STREET, BOSTON, MA 02116
(617) 954-5000
This Statement of Additional Information, as amended or supplemented from time
to time (the "SAI"), sets forth information which may be of interest to
investors but which is not necessarily included in the Fund's Prospectus dated
September 1, 1999. This SAI should be read in conjunction with the Prospectus.
The Fund's financial statements are incorporated into this SAI by reference to
the Fund's most recent Annual Report to shareholders. A copy of the Annual
Report accompanies this SAI. You may obtain a copy of the Fund's Prospectus and
Annual Report without charge by contacting MFS Service Center, Inc. (see back
cover of Part II of this SAI for address and phone number).
This SAI is divided into two Parts -- Part I and Part II. Part I contains
information that is particular to the Fund, while Part II contains information
that generally applies to each of the funds in the MFS Family of Funds (the "MFS
Funds"). Each Part of the SAI has a variety of appendices which can be found at
the end of Part I and Part II, respectively.
THIS SAI IS NOT A PROSPECTUS AND IS AUTHORIZED FOR DISTRIBUTION TO PROSPECTIVE
INVESTORS ONLY IF PRECEDED OR ACCOMPANIED BY A CURRENT PROSPECTUS.
MLM-13 8/99 1M 36/236/336/836
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
PART I
Part I of this SAI contains information that is particular to the Fund.
TABLE OF CONTENTS
Page
I Definitions .................................................... 3
II Management of the Fund ......................................... 3
The Fund ....................................................... 3
Trustees and Officers -- Identification and Background ......... 3
Trustees Compensation .......................................... 3
Affiliated Service Provider Compensation ....................... 3
III Sales Charges and Distribution Plan Payments ................... 3
Sales Charges .................................................. 3
Distribution Plan Payments .................................... 3
IV Portfolio Transactions and Brokerage Commissions ............... 3
V Share Ownership ................................................ 3
VI Performance Information ........................................ 3
VII Investment Techniques, Practices, Risks and Restrictions ....... 3
Investment Techniques, Practices and Risks ..................... 3
Investment Restrictions ........................................ 4
VIII Tax Considerations ............................................. 5
IX Independent Auditors and Financial Statements .................. 5
Appendix A -- Trustees and Officers -- Identification and
Background ................................................... A-1
Appendix B -- Trustee Compensation ............................. B-1
Appendix C -- Affiliated Service Provider Compensation ......... C-1
Appendix D -- Sales Charges and Distribution Plan Payments ..... D-1
Appendix E -- Portfolio Transactions and Brokerage Commissions . E-1
Appendix F -- Share Ownership .................................. F-1
Appendix G -- Performance Information .......................... G-1
<PAGE>
I DEFINITIONS
"Trust" - MFS Series Trust IX, a Massachusetts business trust organized in
1985. 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.
"MFSC" - MFS Service Center, Inc., a Delaware corporation.
"Prospectus" - The Prospectus of the Fund, dated September 1, 1999, as
amended or supplemented from time to time.
II MANAGEMENT OF THE FUND
THE FUND
The Fund is a diversified series of the Trust. The Trust is an open-end
management investment company.
TRUSTEES AND OFFICERS - IDENTIFICATION AND BACKGROUND
The identification and background of the Trustees and officers of the
Trust are set forth in Appendix A of this Part I.
TRUSTEE COMPENSATION
Compensation paid to the non-interested Trustees and to Trustees who are
not officers of the Trust, for certain specified periods, is set forth in
Appendix B of this Part I.
AFFILIATED SERVICE PROVIDER COMPENSATION
Compensation paid by the Fund to its affiliated service providers -- to
MFS, for investment advisory and administrative services, and to MFSC, for
transfer agency services -- for certain specified periods is set forth in
Appendix C to this Part I.
MFS had contractually agreed to bear expenses for the Fund, subject to
reimbursement by the Fund, such that the Fund's "Other Expenses" shall not
exceed more than 0.40% of the average daily net assets of the Fund during
a current fiscal year. The payments made by MFS on behalf of the Fund
under this arrangement are currently subject to reimbursement by the Fund
to MFS, and are being accomplished by the payment of an expense
reimbursement fee by the Fund to MFS. This fee is computed and paid
monthly at a percentage of the Fund's average daily net assets for its
current fiscal year, with a limitation that immediately after such payment
the Fund's "Other Expenses" will not exceed the percentage set forth for
that Fund. The obligation of MFS to bear the Fund's "Other Expenses"
pursuant to this arrangement, and the Fund's obligation to pay the
reimbursement fee to MFS, terminates on the earlier of the date on which
payments made by the series equal the prior payment of such reimbursable
expenses by MFS, or on February 28, 2002.
III SALES CHARGES AND DISTRIBUTION PLAN PAYMENTS
SALES CHARGES
Sales charges paid in connection with the purchase and sale of Fund shares
for certain specified periods are set forth in Appendix D to this Part I,
together with the Fund's schedule of dealer reallowances.
DISTRIBUTION PLAN PAYMENTS
Payments made by the Fund under the Distribution Plan for its most recent
fiscal year end are set forth in Appendix D to this Part I.
IV PORTFOLIO TRANSACTIONS AND BROKERAGE COMMISSIONS
Brokerage commissions paid by the Fund for certain specified periods, and
information concerning purchases by the Fund of securities issued by its
regular broker-dealers for its most recent fiscal year, are set forth in
Appendix E to this Part I.
Broker-dealers may be willing to furnish statistical, research and other
factual information or services ("Research") to the Adviser for no
consideration other than brokerage or underwriting commissions. Securities
may be bought or sold from time to time through such broker-dealers, on
behalf of the Fund. The Trustees (together with the Trustees of certain
other MFS funds) have directed the Adviser to allocate a total of $53,050
of commission business from certain MFS funds (including the Fund) to the
Pershing Division of Donaldson Lufkin & Jenrette as consideration for the
annual renewal of certain publications provided by Lipper Analytical
Securities Corporation (which provides information useful to the Trustees
in reviewing the relationship between the Fund and the Adviser).
V SHARE OWNERSHIP
Information concerning the ownership of Fund shares by Trustees and
officers of the Trust as a group, by investors who control the Fund, if
any, and by investors who own 5% or more of any class of Fund shares, if
any, is set forth in Appendix F to this Part I.
VI PERFORMANCE INFORMATION
Performance information, as quoted by the Fund in sales literature and
marketing materials, is set forth in Appendix G to this Part I.
VII INVESTMENT TECHNIQUES, PRACTICES, RISKS AND RESTRICTIONS
INVESTMENT TECHNIQUES, PRACTICES AND RISKS
The investment objective and principal investment policies of the Fund are
described in the Prospectus. In pursuing its investment objective and
principal investment policies, the Fund may engage in a number of
investment techniques and practices, which involve certain risks. These
investment techniques and practices, which may be changed without
shareholder approval unless indicated otherwise, are identified in
Appendix A to the Prospectus, and are more fully described, together with
their associated risks, in Part II of this SAI. The following percentage
limitation applies to these investment techniques and practices.
o Lending of Portfolio Securities may not exceed 30% of the Fund's net
assets.
INVESTMENT RESTRICTIONS
The Fund has adopted the following restrictions which cannot be changed
without the approval of the holders of a majority of the Fund's shares
(which, as used in this SAI, means the lesser of (i) more than 50% of the
outstanding shares of the Trust or 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 at which holders of more than
50% of the outstanding shares of the Trust or a series or class, as
applicable, are represented in person or by proxy).
Terms used below (such as Options and Futures Contracts) are defined in
Part II of this SAI.
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.
In addition, the Fund has the following non-fundamental policies which
may be changed without shareholder approval.
(1) 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. Repurchase agreements
maturing in more than seven days will be deemed to be illiquid for
purposes of the Fund's limitation on investment in illiquid
securities.
(2) 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.
(3) The Fund may not invest 25% or more of the market value of its total
assets in securities of issuers in any one industry.
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 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.
The investment policies described under "State and Federal Restrictions"
are not fundamental and may be changed without shareholder approval.
Except for investment restriction no. 1 and the Fund's non-fundamental
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.
VIII TAX CONSIDERATIONS
For a discussion of tax considerations, see Part II of this SAI.
IX INDEPENDENT AUDITORS AND FINANCIAL STATEMENTS
Deloitte & Touche LLP are the Fund's independent auditors, providing audit
services, tax services, and assistance and consultation with respect to
the preparation of filings with the Securities and Exchange Commission.
The Portfolio of Investments and the Statement of Assets and Liabilities
at April 30, 1999, the Statement of Operations for the year ended April
30, 1999, the Statement of Changes in Net Assets for the two years ended
April 30, 1999, the Notes to Financial Statements and the Report of the
Independent Auditors, each of which is included in the Annual Report to
Shareholders of the Fund, are incorporated by reference into this SAI in
reliance upon the report of Deloitte & Touche LLP, independent auditors,
given upon their authority as experts in accounting and auditing. A copy
of the Annual Report accompanies this SAI.
<PAGE>
- - -----------------------
PART I - APPENDIX A
- - -----------------------
TRUSTEES AND OFFICERS - IDENTIFICATION AND BACKGROUND
The Trustees and officers of the Trust are listed below, together with
their principal occupations during the past five years. (Their titles may
have varied during that period.)
TRUSTEES
JEFFREY L. SHAMES,* Chairman and President (born 6/2/55)
Massachusetts Financial Services Company, Chairman and Chief Executive
Officer
RICHARD B. BAILEY* (born 9/14/26)
Private Investor; Massachusetts Financial Services Company, former
Chairman and Director (prior to September 30, 1991); Cambridge Bancorp,
Director; Cambridge Trust Company, Director
J. ATWOOD IVES (born 5/1/36)
Eastern Enterprises (diversified services company), Chairman, Trustee 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. (real estate investment
trust), Director; The Baupost Fund (a registered investment company), Vice
Chairman and Trustee
Address: Harvard Business School, Soldiers Field Road, Cambridge,
Massachusetts
CHARLES W. SCHMIDT (born 3/18/28)
Private investor; IT Group, Inc. (diversified environmental services and
consulting), 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
ELAINE R. SMITH (born 4/25/46)
Independent Consultant; Brigham and Women's Hospital, Executive Vice
President and Chief Operating Officer (from August 1990 to September 1992)
Address: Weston, Massachusetts
DAVID B. STONE (born 9/2/27)
North American Management Corp. (investment adviser), Chairman and
Director; Eastern Enterprises (diversified
services company), Trustee
Address: 10 Post Office Square, Suite 300, Boston, Massachusetts
OFFICERS
JOAN S. BATCHELDER,* Vice President (born 4/12/44)
Massachusetts Financial Services Company, Senior Vice President
ROBERT J. MANNING,* Vice President (born 10/20/63)
Massachusetts Financial Services Company, Senior Vice President
BERNARD SCOZZAFAVA,* Vice President (born 1/28/61)
Massachusetts Financial Services Company, Vice President
JAMES T. SWANSON,* Vice President (born 6/12/49)
Massachusetts Financial Services Company, Senior Vice President
STEPHEN E. CAVAN,* Secretary and Clerk (born 11/6/53)
Massachusetts Financial Services Company, Senior Vice President, General
Counsel and Assistant Secretary
JAMES R. BORDEWICK, JR.,* Assistant Secretary (born
3/6/59)
Massachusetts Financial Services Company, Senior Vice President and
Associate General Counsel
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, Senior Vice President
ELLEN 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)
----------------
*" 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
affiliates of MFS or with certain other funds of which MFS or a subsidiary
is the investment adviser or distributor. Messrs. Shames and Scott,
Directors of MFD, and Mr. Cavan, the Secretary of MFD, hold similar
positions with certain other MFS affiliates. Mr. Bailey is a Director of
Sun Life Assurance Company of Canada (U.S.), a subsidiary of Sun Life
Assurance Company of Canada.
<PAGE>
- - -----------------------
PART I - APPENDIX B
- - -----------------------
TRUSTEE COMPENSATION
The Fund pays the compensation of non-interested Trustees and of Trustees
who are not officers of the Trust, who currently receive a fee of $1,000 per
year plus $65 per meeting and $50 per committee meeting attended, together
with such Trustee's out-of-pocket expenses. In addition, the Trust has a
retirement plan for these Trustees as described under the caption
"Management of the Fund -- Trustee Retirement Plan" in Part II. The
Retirement Age under the plan is 73.
<TABLE>
<CAPTION>
TRUSTEE COMPENSATION TABLE
........................................................................................................................
RETIREMENT BENEFIT TOTAL TRUSTEE
TRUSTEE FEES ACCRUED AS PART ESTIMATED CREDITED FEES FROM FUND
TRUSTEE FROM FUND(1) OF FUND EXPENSES(1) YEARS OF SERVICE(2) AND FUND COMPLEX(3)
-------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Richard B. Bailey $1,945 $666 8 $259,430
J. Atwood Ives 2,130 699 17 149,491
Lawrence T. Perera 1,945 699 16 129,371
William J. Poorvu 2,045 718 16 139,006
Charles W. Schmidt 1,915 703 9 129,301
Arnold D. Scott 0 0 N/A 0
Jeffrey L. Shames 0 0 N/A 0
Elaine R. Smith 2,240 658 26 150,511
David B. Stone 2,247 790 9 165,826
----------------
(1) For the fiscal year ended April 30, 1999.
(2) Based upon normal retirement age (73).
(3) Information provided is for calendar year 1998. All Trustees served as Trustees of 31 funds within the MFS Fund
complex (having aggregate net assets at December 31, 1998, of approximately $43.3 billion) except Mr. Bailey, who
served as Trustee of 74 funds within the MFS complex (having aggregate net assets at December 31, 1998 of
approximately $68.2 billion).
ESTIMATED ANNUAL BENEFITS PAYABLE BY FUND UPON RETIREMENT(4)
.......................................................................................................................
<CAPTION>
YEARS OF SERVICE
AVERAGE
TRUSTEE FEES 3 5 7 10 OR MORE
----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
$1,723 $259 $431 $603 $ 862
1,873 281 468 656 937
2,023 303 506 708 1,011
2,172 326 543 760 1,086
2,322 348 580 813 1,161
2,471 371 618 865 1,236
----------------
(4) Other funds in the MFS Fund complex provide similar retirement benefits to the Trustees.
</TABLE>
<PAGE>
- - -----------------------
PART I - APPENDIX C
- - -----------------------
<TABLE>
AFFILIATED SERVICE PROVIDER COMPENSATION
...............................................................................................................................
The Fund paid compensation to its affiliated service providers over the specified periods as follows:
<CAPTION>
PAID TO MFS AMOUNT PAID TO MFS FOR PAID TO MFSC AMOUNT AGGREGATE
FISCAL YEAR FOR ADVISORY WAIVED ADMINISTRATIVE FOR TRANSFER WAIVED AMOUNT PAID TO
ENDED SERVICES BY MFS SERVICES AGENCY SERVICES BY MFSC MFS AND MFSC
-------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
April 30, 1999 $748,001 $0 $23,442 $208,259 $0 $979,702
April 30, 1998 628,100 $0 22,192 195,360 $0 845,652
April 30, 1997 573,843 $0 3,750* 220,610 $0 798,203
--------------------
* From March 1, 1997, the commencement of the Master Administrative Service Agreement.
</TABLE>
<PAGE>
- - ----------------------
PART I - APPENDIX D
- - ----------------------
SALES CHARGES AND DISTRIBUTION PLAN PAYMENTS
<TABLE>
SALES CHARGES
......................................................................................................
The following sales charges were paid during the specified periods:
<CAPTION>
CLASS A INITIAL SALES CHARGES: CDSC PAID TO MFD ON:
RETAINED REALLOWED CLASS A CLASS B CLASS C
FISCAL YEAR END TOTAL BY MFD TO DEALERS SHARES SHARES SHARES
------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
April 30, 1999 $596,562 $69,462 $527,100 $18,710 $108,658 $13,747
April 30, 1998 424,152 45,875 378,277 9,603 92,222 21,936
April 30, 1997 569,152 57,812 511,340 19,436 60,596 13,740
DEALER REALLOWANCES
......................................................................................................
As shown above, MFD pays (or "reallows") a portion of the Class A initial sales charge to dealers. The
dealer reallowance as expressed as a percentage of the Class A shares' offering price is:
<CAPTION>
DEALER REALLOWANCE AS A
AMOUNT OF PURCHASE PERCENT OF OFFERING PRICE
-----------------------------------------------------------------------------------------------------
<S> <C>
Less than $50,000 2.25%
$50,000 but less than $100,000 2.00%
$100,000 but less than $250,000 1.75%
$250,000 but less than $500,000 1.50%
$500,000 but less than $1,000,000 1.25%
$1,000,000 or more None*
----------------
*A CDSC will apply to such purchase.
DISTRIBUTION PLAN PAYMENTS
......................................................................................................
During the fiscal year ended April 30, 1999, the Fund made the following Distribution Plan payments:
<CAPTION>
AMOUNT OF DISTRIBUTION AND SERVICE FEES:
CLASS OF SHARES PAID BY FUND RETAINED BY MFD PAID TO DEALERS
----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Class A Shares $174,249 $ 16,205 $158,044
Class B Shares 425,430 351,261 74,169
Class C Shares 225,422 97 225,325
Distribution plan payments retained by MFD are used to compensate MFD for commissions advanced by MFD to
dealers upon sale of Fund shares.
</TABLE>
<PAGE>
- - -----------------------
PART I - APPENDIX E
- - -----------------------
PORTFOLIO TRANSACTIONS AND BROKERAGE COMMISSIONS
BROKERAGE COMMISSIONS
..........................................................................
The following brokerage commissions were paid by the Fund during the
specified time periods:
BROKERAGE COMMISSIONS
FISCAL YEAR END PAID BY FUND
----------------------------------------------------------------------------
April 30, 1999 $0
April 30, 1998 $0
April 30, 1997 $0
SECURITIES ISSUED BY REGULAR BROKER-DEALERS
..........................................................................
During the fiscal year ended April 30, 1999, the Fund purchased securities
issued by the following regular broker-dealers of the Fund, which had the
following values as of April 30, 1999:
VALUE OF SECURITIES
BROKER-DEALER AS OF APRIL 30, 1999
----------------------------------------------------------------------------
None
<PAGE>
- - -----------------------
PART I - APPENDIX F
- - -----------------------
SHARE OWNERSHIP
OWNERSHIP BY TRUSTEES AND OFFICERS
As of May 31, 1999, the Trustees and officers of the Trust as a group
owned less than 1% of any class of the Fund's shares, not including
212,850 Class I shares of the Fund (which represent approximately 99.99%
of the outstanding Class I shares of the Fund) owned of record by certain
employee benefit plans of MFS of which Messrs. Scott and Shames are
Trustees.
25% OR GREATER OWNERSHIP
The following table identifies those investors who own 25% or more of the
Fund's shares (all share classes taken together) as of May 31, 1999, and
are therefore presumed to control the Fund:
JURISDICTION
OF ORGANIZATION
NAME AND ADDRESS OF INVESTOR (IF A COMPANY) PERCENTAGE OWNERSHIP
----------------------------------------------------------------------------
None
5% OR GREATER OWNERSHIP OF SHARE CLASS
The following table identifies those investors who own 5% or more of any
class of the Fund's shares as of May 31, 1999:
NAME AND ADDRESS OF INVESTOR OWNERSHIP PERCENTAGE
..........................................................................
MLPF&S for the Sole Benefit of its Customers 8.55% of Class A shares
Attn: Fund Administration
4800 Deer Lake Drive E - 3rd Floor
Jacksonville, FL 32246-6484
..........................................................................
MLPF&S for the Sole Benefit of its Customers 13.57% of Class B shares
Attn: Fund Administration
4800 Deer Lake Drive E - 3rd Floor
Jacksonville, FL 32246-6484
..........................................................................
MLPF&S for the Sole Benefit of its Customers 9.56% of Class C shares
Attn: Fund Administration
4800 Deer Lake Drive E - 3rd Floor
Jacksonville, FL 32246-6484
..........................................................................
TRS MFS DEF Contribution Plan 99.99% of Class I shares
c/o Mark Leary
Massachusetts Financial Services
500 Boylston Street
Boston, MA 02116-3740
..........................................................................
<PAGE>
- - -----------------------
PART I - APPENDIX G
- - -----------------------
PERFORMANCE INFORMATION
..........................................................................
All performance quotations are as of April 30, 1999.
<TABLE>
<CAPTION>
AVERAGE ANNUAL
TOTAL RETURNS ACTUAL 30-
-------------------------------------- DAY YIELD 30-DAY YIELD CURRENT
LIFE OF (INCLUDING (WITHOUT ANY DISTRIBUTION
1 YEAR 5 YEAR FUND* WAIVERS) WAIVERS) RATE+
--------------------------------------------------------------------------------------
Class A Shares, with initial sales
<S> <C> <C> <C> <C> <C> <C>
charge (2.50%) 1.65% 5.39% 5.36% N/A 5.34% 5.45%
Class A Shares, at net asset value 4.26% 5.93% 5.73% N/A N/A N/A
Class B Shares, with CDSC (declining
over 6 years from 4% to 0%) (0.45)% 4.71% 5.03% N/A N/A N/A
Class B Shares, at net asset value 3.48% 5.03% 5.03% N/A 4.59% 4.78%
Class C Shares, with CDSC (1% for
first year) 2.25% 5.01% 5.10% N/A N/A N/A
Class C Shares, at net asset value 3.23% 5.01% 5.10% N/A 4.58% 4.76%
Class I Shares, at net asset value 4.28% 5.94% 5.75% N/A 5.60% 5.75%
----------------------
* From the commencement of the fund's investment operations on February 26, 1992.
+ Annualized, based upon the last distribution.
</TABLE>
The Fund commenced investment operations on February 26, 1992 with the
offering of class A shares and subsequently offered class B shares on
September 7, 1993, class C shares on July 1, 1994, and class I shares on
January 2, 1997. Class B and class C share performance include the
performance of the Fund's class A shares for periods prior to the offering
of class B and class C shares. This blended class B and class C share
performance has been adjusted to take into account the CDSC applicable to
class B and class C shares, rather than the initial sales charge (load)
applicable to class A shares. This blended performance has not been
adjusted to take into account differences in class specific operating
expenses. Because operating expenses of class B and C shares are higher
than those of class A shares, this blended class B and C share performance
is higher than the performance of class B and C shares would have been had
class B and C shares been offered for the entire period. If you would like
the Fund's current yield, contact the MFS Service Center at the toll free
number set forth on the back cover page of Part II of this SAI.
Class I share performance includes the performance of the Fund's class A
shares for periods prior to the offering of class I shares. Class I share
performance generally would have been higher than class A share
performance had class I shares been offered for the entire period, because
operating expenses (e.g., distribution and service fees) attributable to
class I shares are lower than those of class A shares. Class I share
performance has been adjusted to take into account the fact that class I
shares have no initial sales charge.
Performance results include any applicable expense subsidies and waivers,
which may cause the results to be more favorable.
<PAGE>
EXHIBIT NO. 99.17(c)
[Logo] M F S(R)
INVESTMENT MANAGEMENT
75 YEARS
WE INVENTED THE MUTUAL FUND(R)
[Graphic Omitted]
MFS(R) LIMITED
MATURITY FUND
ANNUAL REPORT o APRIL 30, 1999
------------------------------------------------------------
DIVERSIFYING YOUR INVESTMENT PORTFOLIO (see page 30)
------------------------------------------------------------
<PAGE>
TABLE OF CONTENTS
Letter from the Chairman .................................................. 1
Management Review and Outlook ............................................. 3
Performance Summary ....................................................... 6
Portfolio of Investments .................................................. 10
Financial Statements ...................................................... 14
Notes to Financial Statements ............................................. 21
Independent Auditors' Report .............................................. 27
MFS' Year 2000 Readiness Disclosure ....................................... 29
Trustees and Officers ..................................................... 33
MFS(R) ORIGINAL RESEARCH(SM)
RESEARCH HAS BEEN CENTRAL TO INVESTMENT MANAGEMENT AT MFS
SINCE 1932, WHEN WE CREATED ONE OF THE FIRST IN-HOUSE
RESEARCH DEPARTMENTS IN THE MUTUAL FUND (SM)
INDUSTRY. ORIGINAL RESEARCH(SM) AT MFS IS MORE ORIGINAL RESEARCH
THAN JUST CRUNCHING NUMBERS AND CREATING
ECONOMIC MODELS: IT'S GETTING TO KNOW MFS
EACH SECURITY AND EACH COMPANY PERSONALLY.
MAKES A DIFFERENCE
- - --------------------------------------------------------------------------------
NOT FDIC INSURED MAY LOSE VALUE NO BANK GUARANTEE
- - --------------------------------------------------------------------------------
<PAGE>
LETTER FROM THE CHAIRMAN
[Photo of Jeffrey L. Shames]
Jeffrey L. Shames
Dear Shareholders,
Over 75 years ago, MFS invented the mutual fund, giving Americans greater
access to the investment markets. Since then, we have been guided by a number
of fundamental principles, including diversification and professional
management backed by MFS(R) Original Research(SM), a process by which we seek
long-term investment opportunities.
We have found that these principles have matched those of our shareholders. In
a recent survey for MFS by Roper Starch Worldwide, Inc., a major consumer
research firm, over 60% of mutual fund shareholders said they are investing
for long-term goals such as retirement. The survey also showed that investors
realize that the extraordinary stock market gains of the past few years cannot
be sustained. These views certainly seem to have guided investors during last
year's market correction. Beginning with the collapse of Asian markets at the
end of 1997 and continuing with the volatility in U.S. markets through
October of 1998, only 7% of mutual fund investors took money out of the stock
market.
We are even more pleased that MFS investors reacted calmly to last year's
market turmoil, indicating their commitment to diversification. As a result,
throughout the late summer and fall of 1998, daily purchases of MFS stock and
bond funds were well ahead of redemptions.
Over the past year or so, however, diversified investment programs have not
financially rewarded investors. A very narrow band of about 25 stocks
representing the largest U.S. growth companies has, until recently, vastly
outperformed the rest of the market. In 1998, for example, the return on the
Standard & Poor's 500 Composite Index (a popular, unmanaged index of common
stock total return performance) increased 28.58%. However, over half of the
stocks in the index returned less than 10%, including 198 stocks that posted
negative returns.
While 1997 and 1998 were good years for large-company growth stocks, 1996 was
dominated by the mid-sized value category. Prices of value stocks do not fully
reflect the companies' underlying values or future prospects. In 1995, the
best-performing sector was small-company growth stocks. We believe this change
of market leadership shows that while diversification may not provide the best
performance in the short run, it should benefit investors over the long term. In
fact, as 1999 progresses, we are seeing signs of renewed strength from a broader
group of industries, including electric utilities and paper products and
chemical companies. We believe our diversified MFS Family of Funds(R), supported
by Original Research, is well positioned to benefit from a broader market.
Most mutual fund investors refrain from trying to predict short-term trends.
Despite the large stock market gains of the past several years, the Roper
Starch survey shows that people do not see performance as the only
reason to invest. These investors also cite a desire to put investment
decisions in the hands of experts, a belief that mutual funds can be less
risky than other investments, and an appreciation of the convenience of mutual
fund investing.
We appreciate the fact that our fund shareholders and their advisers share our
belief that mutual fund investing is not a way to speculate in the markets but
is a way to use the investment markets to help them work toward their long-
term goals. Our goal at MFS is to offer professionally managed investment
products with the potential to sustain returns over a variety of market
cycles.
We thank you for your confidence and welcome any questions or comments you may
have.
Respectfully,
/s/ Jeffrey L. Shames
Jeffrey L. Shames
Chairman and Chief Executive Officer
MFS Investment Management(R)
May 17, 1999
<PAGE>
MANAGEMENT REVIEW AND OUTLOOK
[Photo of James J. Calmas]
James J. Calmas
For the 12 months ended April 30, 1999, Class A shares of the Fund provided a
total return of 4.26%, Class B shares 3.48%, Class C shares 3.23%, and Class I
shares 4.28%. These returns include the reinvestment of distributions but
exclude the effects of any sales charges.
During the same period, the average short-term investment-grade debt fund
tracked by Lipper Analytical Services, Inc., an independent firm that reports
mutual fund performance, returned 5.10%. The Fund's results also compare to a
6.04% return for the Lehman Brothers One- to Three-Year Government/Corporate
Bond Index (the Lehman Index), an unmanaged index 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 Service, Inc.
Q. WHAT FACTORS CONTRIBUTED TO THE FUND'S UNDERPERFORMANCE?
A. Most of the problems came in the fourth quarter of 1998, but the Fund's
relative performance has improved in the past few months. The main problem
was a continuation of the decline in emerging markets. This decline
resulted in massive sales of corporate bonds by institutional investors who
had borrowed to buy emerging market bonds. The Fund had large positions in
corporate bonds. Holdings in some home equity lending companies were among
the hardest hit by the disruptions in the credit market. Those positions
detracted from our overall performance.
Q. WHAT ARE YOU DOING TO HELP IMPROVE PERFORMANCE?
A. Even before the credit market turmoil, we had begun a steady effort to
upgrade the credit quality of the portfolio. Although higher-rated bonds
have somewhat lower yields, their prices should be less volatile when
interest rates rise. We are continuing to upgrade the credit quality of our
portfolio. A year ago, the average credit quality, based on ratings from
either Moody's Investors Service or Standard & Poor's Corporation, was
"A-;'" it is now "A+."
Q. IN UPGRADING FROM "A-" TO "A+," WHAT ISSUERS HAVE YOU SOLD AND WHAT HAVE
YOU BOUGHT?
A. While cutting our home equity exposure, we increased our holdings in energy
and telecommunications. For example, we bought Boston Edison, an electric
utility; Columbia Gas Systems, a natural gas pipeline company; Occidental
Petroleum, an oil company; and Sprint Spectrum, which is Sprint's cellular
phone division. We believe all of these companies are in stronger financial
shape than the home-equity lending companies, and none are as reliant on
the bond markets for financing.
Q. HAVE YOU SOLD ALL OF YOUR CONSUMER FINANCE HOLDINGS?
A. No. We kept some companies that we think have done a better job of
evaluating the credit quality of their borrowers, as well as companies that
don't rely so much on the bond markets to raise capital. For example, we
own Providian National Bank, a leading provider of credit cards.
Q. HOW DOES THE FUND REFLECT YOUR VIEWS ON FIXED-INCOME MARKETS AND
INTEREST RATES?
A. We think the strong economy should help corporate debt. The strength of
industries such as housing, autos, and technology is providing momentum to
the economy and, with inflation in check, we think interest rates should
remain relatively stable. For that reason, the Fund's sensitivity to
interest-rate changes is about the same as that of the Lehman Index. That
means we don't have too many long-maturity bonds whose prices would decline
if interest rates increased, nor do we have too many short-maturity (but
low yielding) bonds. If interest rates do increase, or if there is an
unexpected event such as the emerging market crisis of 1997-98, we believe
the portfolio's increased credit quality should help limit a decline in the
price of the Fund.
/s/ James J. Calmas
James J. Calmas
Portfolio Manager
The opinions expressed in this report are those of the portfolio manager and
are current only through the end of the period of the report as stated on the
cover. The manager's views are subject to change at any time based on market
and other conditions, and no forecasts can be guaranteed.
<PAGE>
- - --------------------------------------------------------------------------------
PORTFOLIO MANAGER'S PROFILE
- - --------------------------------------------------------------------------------
JAMES J. CALMAS IS VICE PRESIDENT OF MFS INVESTMENT MANAGEMENT(R) AND
PORTFOLIO MANAGER OF MFS(R) INTERMEDIATE INCOME FUND, MFS(R) LIMITED
MATURITY FUND, MERIDIAN LIMITED MATURITY FUND, AND MFS(R) LIMITED
MATURITY SERIES (PART OF MFS(R) VARIABLE INSURANCE TRUST(SM)). MR.
CALMAS JOINED MFS IN 1988 AND WAS NAMED ASSISTANT VICE PRESIDENT IN
1991, VICE PRESIDENT IN 1993, AND PORTFOLIO MANAGER IN 1998.
HE IS A GRADUATE OF DARTMOUTH COLLEGE AND HOLDS AN M.B.A. DEGREE FROM
THE AMOS TUCK SCHOOL OF BUSINESS ADMINISTRATION OF DARTMOUTH COLLEGE.
ALL PORTFOLIO MANAGERS AT MFS INVESTMENT MANAGEMENT(R) ARE SUPPORTED BY
AN INVESTMENT STAFF OF OVER 100 PROFESSIONALS UTILIZING MFS(R) ORIGINAL
RESEARCH(SM), A COMPANY-ORIENTED, BOTTOM-UP PROCESS OF SELECTING
SECURITIES.
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. A prospectus containing more information,
including the exchange privilege and all charges and expenses, for any other MFS
product is available from your financial adviser, or by calling MFS at
1-800-225-2606. Please read it carefully before investing or sending money.
<PAGE>
- - --------------------------------------------------------------------------------
FUND FACTS
- - --------------------------------------------------------------------------------
OBJECTIVE: SEEKS AS HIGH A LEVEL OF CURRENT INCOME AS IS BELIEVED
TO BE CONSISTENT WITH PRUDENT INVESTMENT RISK. THE
FUND ALSO SEEKS TO PROTECT SHAREHOLDERS' CAPITAL.
COMMENCEMENT OF
INVESTMENT OPERATIONS: FEBRUARY 26, 1992
CLASS INCEPTION: CLASS A FEBRUARY 26, 1992
CLASS B SEPTEMBER 7, 1993
CLASS C JULY 1, 1994
CLASS I JANUARY 2, 1997
SIZE: $212.7 MILLION NET ASSETS AS OF APRIL 30, 1999
PERFORMANCE SUMMARY
The following information illustrates the historical performance of the Fund's
original share class in comparison to various market indicators. Performance
results include the deduction of the maximum applicable sales charge and
reflect the percentage change in net asset value, including reinvestment of
dividends. 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. (See Notes to Performance Summary for more information.)
It is not possible to invest directly in an index.
GROWTH OF A HYPOTHETICAL $10,000 INVESTMENT
(For the period from February 28, 1992, through April 30, 1999)
Lehman Brothers
One- to
Three-Year
MFS Limited Government/
Maturity Fund Corporate
-- Class A Bond Index
-------------------------------------------------------
2/92 $ 9,750 $10,000
4/95 11,572 11,750
4/97 13,166 13,342
4/99 14,546 15,159
AVERAGE ANNUAL TOTAL RETURNS AS OF APRIL 30, 1999
<TABLE>
<CAPTION>
CLASS A
10 Years/
1 Year 3 Years 5 Years Life*
- - -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Cumulative Total Return +4.26% +16.92% +33.38% +49.18%
- - -----------------------------------------------------------------------------------------------------------
Average Annual Total Return +4.26% + 5.35% + 5.93% + 5.73%
- - -----------------------------------------------------------------------------------------------------------
SEC Results +1.65% + 4.47% + 5.39% + 5.36%
- - -----------------------------------------------------------------------------------------------------------
<CAPTION>
CLASS B
10 Years/
1 Year 3 Years 5 Years Life*
- - -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Cumulative Total Return +3.48% +14.05% +27.81% +42.23%
- - -----------------------------------------------------------------------------------------------------------
Average Annual Total Return +3.48% + 4.48% + 5.03% + 5.03%
- - -----------------------------------------------------------------------------------------------------------
SEC Results -0.45% + 3.59% + 4.71% + 5.03%
- - -----------------------------------------------------------------------------------------------------------
<CAPTION>
CLASS C
10 Years/
1 Year 3 Years 5 Years Life*
- - -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Cumulative Total Return +3.23% +13.85% +27.69% +42.91%
- - -----------------------------------------------------------------------------------------------------------
Average Annual Total Return +3.23% + 4.42% + 5.01% + 5.10%
- - -----------------------------------------------------------------------------------------------------------
SEC Results +2.25% + 4.42% + 5.01% + 5.10%
- - -----------------------------------------------------------------------------------------------------------
<CAPTION>
CLASS I
10 Years/
1 Year 3 Years 5 Years Life*
- - -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Cumulative Total Return +4.28% +17.02% +33.44% +49.38%
- - -----------------------------------------------------------------------------------------------------------
Average Annual Total Return +4.28% + 5.38% + 5.94% + 5.75%
- - -----------------------------------------------------------------------------------------------------------
<CAPTION>
COMPARATIVE INDICES
10 Years/
1 Year 3 Years 5 Years Life*
- - -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Average short-term investment-grade
debt fund** +5.10% + 5.87% + 5.85% + 5.55%
- - -----------------------------------------------------------------------------------------------------------
Lehman Brothers One- to Three-Year
Government/Corporate Bond Index+ +6.04% + 6.45% + 6.42% + 5.97%
- - -----------------------------------------------------------------------------------------------------------
* For the period from the commencement of the Fund's investment operations, February 26, 1992, through April
30, 1999. Index results are from February 28, 1992.
** Source: Lipper Analytical Services, Inc.
+ Source: Standard & Poor's Micropal, Inc.
</TABLE>
<PAGE>
NOTES TO PERFORMANCE SUMMARY
Class A share ("A") SEC results include the maximum 2.50% sales charge. Class
B share ("B") SEC results reflect the applicable contingent deferred sales
charge (CDSC), which declines over six years from 4% to 0%. Class C shares
("C") have no initial sales charge but, like B, have higher annual fees and
expenses than A. C SEC results reflect the 1% CDSC applicable to shares
redeemed within 12 months. Class I shares ("I") have no sales charge or Rule
12b-1 fees and are only available to certain institutional investors.
B and C results include the performance and the operating expenses
(e.g., Rule 12b-1 fees) of A for periods prior to the inception of B and C.
Because operating expenses of B and C are higher than those of A, B and C
performance generally would have been lower than A performance. The A
performance included in the B and C SEC performance has been adjusted to
reflect the CDSC generally applicable to B and C rather than the initial sales
charge generally applicable to A.
I results include the performance and the operating expenses (e.g., Rule 12b-1
fees) of A for periods prior to the inception of I. Because operating expenses
of A are greater than those of I, I performance generally would have been
higher than A performance. The A performance included in the I performance has
been adjusted to reflect the fact that I have no initial
sales charge.
Performance results reflect any applicable expense subsidies and waivers,
without which the results would have been less favorable. Subsidies and
waivers may be rescinded at any time. See the prospectus for details. 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.
PORTFOLIO CONCENTRATION AS OF APRIL 30, 1999
QUALITY RATINGS (U.S. PORTION ONLY)
Source: Standard & Poor's and Moody's
BBB 39.0%
AAA 27.3%
Government's 15.4%
A 14.5%
AA 3.8%
The portfolio is actively managed, and holdings are subject to change.
<PAGE>
PORTFOLIO OF INVESTMENTS -- April 30, 1999
<TABLE>
<CAPTION>
Bonds - 94.6%
- - --------------------------------------------------------------------------------------------------------
PRINCIPAL AMOUNT
ISSUER (000 OMITTED) VALUE
- - --------------------------------------------------------------------------------------------------------
<S> <C> <C>
U.S. Bonds - 84.8%
Apparel and Textiles - 2.2%
Hilfiger (Tommy) USA, Inc., 6.5s, 2003 $ 2,283 $ 2,262,339
Jones Apparel Group, Inc., 6.25s, 2001 2,560 2,524,800
------------
$ 4,787,139
- - --------------------------------------------------------------------------------------------------------
Automotive - 0.9%
Ford Capital BV, 9.875s, 2002 $ 1,800 $ 1,994,544
- - --------------------------------------------------------------------------------------------------------
Banks and Credit Companies - 4.1%
Aristar, Inc., 5.85s, 2004 $ 1,860 $ 1,836,155
Great Western Financial Corp., 6.375s, 2000 2,366 2,384,029
GS Escrow Corp., 6.75s, 2001 1,903 1,904,840
Providian National Bank, 6.75s, 2002 2,563 2,571,509
------------
$ 8,696,533
- - --------------------------------------------------------------------------------------------------------
Containers - 2.0%
Owens-Illinois, Inc., 11s, 2003 $ 4,058 $ 4,230,465
- - --------------------------------------------------------------------------------------------------------
Corporate Asset Backed - 22.1%
Aames Mortgage Trust, 6.75s, 2021 $ 3,889 $ 3,927,890
American Express Credit Account Master Trust, 5.6s, 2006 1,000 995,543
Amresco Residential Securities Mortgage Loan, 5.94s, 2015 4,039 4,038,369
Banamex Credit Card Merchant Voucher, 6.25s, 2003# 7,352 7,340,712
BankBoston Home Equity Loan Trust, 5.89s, 2013 1,894 1,893,038
Citibank Credit Card Master Trust I, 5.5s, 2006 1,993 1,959,358
Discover Card Master Trust I, 5.85s, 2006 3,643 3,630,468
First Chicago Master Trust II, 5.206s, 2003 3,106 3,107,941
Ford Credit Auto Owner Trust, 5.31s, 2001 920 920,285
GE Capital Mortgage Services, Inc., 6.035s, 2020 2,035 2,036,908
Green Tree Financial Corp., 6.04s, 2029 4,106 4,122,670
Green Tree Financial Corp., 6.39s, 2029 1,985 1,996,771
MBNA Master Credit Card Trust II, 5.25s, 2006 2,374 2,322,793
Merrill Lynch Mortgage Investors, Inc., 5.65s, 2030 1,860 1,822,772
Partners First Credit Card Master Trust, 5.026s, 2004 3,400 3,395,750
Pemex Finance Ltd., 5.72s, 2003 1,010 1,016,161
Providian Master Trust, 5.29s, 2004 940 927,160
SLM Student Loan Trust, 5.217s, 2009 1,470 1,449,328
------------
$ 46,903,917
- - --------------------------------------------------------------------------------------------------------
Financial Institutions - 4.8%
AT&T Capital Corp., 6.875s, 2001 $ 2,072 $ 2,106,437
Bear Stearns Co., 6.15s, 2004 1,990 1,959,513
Lehman Brothers Holdings, 6.375s, 2001 2,185 2,194,417
Merrill Lynch & Co., 6.06s, 2001 2,520 2,537,413
Morgan Stanley Dean Witter, 5.625s, 2004 1,519 1,496,671
------------
$ 10,294,451
- - --------------------------------------------------------------------------------------------------------
Food and Beverage Products - 1.1%
Whitman Corp., 6s, 2004 $ 2,385 $ 2,371,882
- - --------------------------------------------------------------------------------------------------------
Forest and Paper Products - 1.2%
Georgia-Pacific Corp., 9.95s, 2002 $ 2,293 $ 2,529,294
- - --------------------------------------------------------------------------------------------------------
Insurance - 1.4%
Conseco, Inc., 7.875s, 2000 $ 972 $ 987,863
Conseco, Inc., 6.4s, 2001 1,963 1,940,524
------------
$ 2,928,387
- - --------------------------------------------------------------------------------------------------------
Medical and Health Technology and Services - 0.8%
Hospital Corp. of America, 0s, 1999 $ 1,628 $ 1,618,395
- - --------------------------------------------------------------------------------------------------------
Oils - 1.3%
Occidental Petroleum Corp., 10.125s, 2001 $ 2,607 $ 2,818,115
- - --------------------------------------------------------------------------------------------------------
Stores - 3.5%
Fingerhut Cos., Inc., 7.375s, 1999 $ 3,000 $ 3,015,720
Rite Aid Corp., 6.7s, 2001 2,100 2,104,704
Safeway, Inc., 5.875s, 2001 2,430 2,430,462
------------
$ 7,550,886
- - --------------------------------------------------------------------------------------------------------
Telecommunications and Cable - 9.0%
Continental Cablevision, Inc., 11s, 2007 $ 6,315 $ 6,684,743
Sprint Capital Corp., 5.875s, 2004 2,454 2,428,331
Sprint Spectrum LP, 11s, 2006 2,046 2,347,315
Time Warner Pass-Through Asset Trust, 6.1s, 2001# 2,103 2,115,765
TKR Cable, Inc., 10.5s, 2007 1,520 1,633,666
WorldCom, Inc., 8.875s, 2006 3,659 3,930,644
------------
$ 19,140,464
- - --------------------------------------------------------------------------------------------------------
Transportation - 5.9%
Amerco Backed Assets, 6.65s, 1999# $ 5,700 $ 5,695,440
Delta Air Lines, 6.65s, 2004 1,904 1,922,202
Hertz Corp., 6.5s, 2000 2,736 2,754,714
Union Pacific Corp., 6.34s, 2003 2,100 2,105,376
------------
$ 12,477,732
- - --------------------------------------------------------------------------------------------------------
U.S. Federal Agencies - 10.6%
Federal Home Loan Mortgage Corp., 5.83s, 2013 $ 2,684 $ 2,678,678
Federal National Mortgage Assn., 6s, 2014 6,000 5,943,720
Federal National Mortgage Assn., 6.75s, 2003 2,105 2,141,970
Federal National Mortgage Assn., 7s, 2012 5,644 5,765,683
Government National Mortgage Assn., 7.5s, 2007 - 2011 5,564 5,750,099
Government National Mortgage Assn., 12.5s, 2011 267 308,737
------------
$ 22,588,887
- - --------------------------------------------------------------------------------------------------------
U.S. Treasury Obligations - 4.0%
U.S. Treasury Notes, 9.125s, 1999 $ 2,074 $ 2,076,592
U.S. Treasury Notes, 5s, 2001 900 898,731
U.S. Treasury Notes, 5.375s, 2001 165 165,825
U.S. Treasury Notes, 6.25s, 2001 765 784,722
U.S. Treasury Notes, 6.5s, 2001 900 926,856
U.S. Treasury Notes, 5.75s, 2002 3,000 3,051,570
U.S. Treasury Notes, 7.25s, 2004 500 542,970
------------
$ 8,447,266
- - --------------------------------------------------------------------------------------------------------
Utilities - Electric - 8.0%
Boston Edison Co., 6.8s, 2000 $ 3,175 $ 3,210,465
California Infrastructure, 6.17s, 2003 2,855 2,880,866
Commonwealth Edison Transition Funding Trust, 5.29s, 2003 1,894 1,886,291
Edison Mission Energy Funding Corp., 6.77s, 2003# 1,984 2,009,006
Gulf States Utilities Co., 8.21s, 2002 2,680 2,750,591
Midamerican Funding LLC, 5.85s, 2001# 3,039 3,040,216
Salton Sea Funding Corp., 6.69s, 2000 535 538,820
Salton Sea Funding Corp., 7.02s, 2000 694 698,632
------------
$ 17,014,887
- - --------------------------------------------------------------------------------------------------------
Utilities - Gas - 1.9%
CMS Panhandle Holding Co., 6.125s, 2004# $ 1,820 $ 1,810,900
Columbia Gas Systems, Inc., 6.39s, 2000 2,127 2,142,804
------------
$ 3,953,704
- - --------------------------------------------------------------------------------------------------------
Total U.S. Bonds $180,346,948
- - --------------------------------------------------------------------------------------------------------
Foreign Bonds - 9.8%
Australia - 0.6%
Westpac Banking, 9.125s, 2001 (Banks and Credit Cos.) $ 1,175 $ 1,247,286
- - --------------------------------------------------------------------------------------------------------
Chile - 0.7%
Empresa Electric Guacolda S.A., 7.6s, 2001 (Utilities - Electric)# $ 1,520 $ 1,448,195
- - --------------------------------------------------------------------------------------------------------
China - 0.6%
Hero Asian BVI Ltd., 9.11s, 2001 (Utilities)# $ 1,264 $ 1,231,628
- - --------------------------------------------------------------------------------------------------------
Colombia - 1.4%
Republic of Colombia, 8.75s, 1999 $ 3,000 $ 3,000,000
- - --------------------------------------------------------------------------------------------------------
Germany - 1.7%
Landesbank Baden Wurttemberg, 7.875s, 2004 (Banks and Credit Cos.) $ 3,445 $ 3,709,231
- - --------------------------------------------------------------------------------------------------------
Norway - 1.6%
Union Bank Norway, 7.35s, 2049 (Banks and Credit Cos.)# $ 3,339 $ 3,382,574
- - --------------------------------------------------------------------------------------------------------
South Korea - 0.4%
Export-Import Bank Korea, 7.1s, 2007 (Banks and Credit Cos.) $ 900 $ 899,883
- - --------------------------------------------------------------------------------------------------------
Spain - 1.0%
Kingdom of Spain, 9.125s, 2000 $ 2,000 $ 2,087,800
- - --------------------------------------------------------------------------------------------------------
Supra-National - 1.8%
Corporacion Andina de Fomento, 7.1s, 2003 (Banks and Credit Cos.) $ 3,800 $ 3,762,760
- - --------------------------------------------------------------------------------------------------------
Total Foreign Bonds $ 20,769,357
- - --------------------------------------------------------------------------------------------------------
Total Bonds (Identified Cost, $202,692,908) $201,116,305
- - --------------------------------------------------------------------------------------------------------
Repurchase Agreement - 5.8%
- - --------------------------------------------------------------------------------------------------------
Goldman Sachs, dated 4/30/99, due 5/03/99, total to
be received $12,409,055 (secured by various U.S.
Treasury and Federal Agency obligations in a
jointly traded account), at cost $12,404 $ 12,404,000
- - --------------------------------------------------------------------------------------------------------
Total Investments (Identified Cost, $215,096,908) $213,520,305
Other Assets, Less Liabilities - (0.4)% (864,855)
- - --------------------------------------------------------------------------------------------------------
Net Assets - 100.0% $212,655,450
- - --------------------------------------------------------------------------------------------------------
# SEC Rule 144A restriction.
See notes to financial statements
</TABLE>
<PAGE>
FINANCIAL STATEMENTS
Statement of Assets and Liabilities
- - --------------------------------------------------------------------------------
APRIL 30, 1999
- - -------------------------------------------------------------------------------
Assets:
Investments, at value (identified cost, $215,096,908) $213,520,305
Cash 542
Receivable for Fund shares sold 5,404,676
Interest receivable 2,765,468
Other assets 2,282
------------
Total assets $221,693,273
------------
Liabilities:
Distributions payable $ 225,120
Payable for Fund shares reacquired 4,263,599
Payable for investments purchased 4,370,199
Payable to affiliates -
Management fee 2,336
Shareholder servicing agent fee 584
Distribution and service fee 65,390
Administrative fee 88
Accrued expenses and other liabilities 110,507
------------
Total liabilities $ 9,037,823
------------
Net assets $212,655,450
============
Net assets consist of:
Paid-in capital $224,521,869
Unrealized depreciation on investments (1,576,603)
Accumulated net realized loss on investments (9,958,157)
Accumulated distributions in excess of net investment income (331,659)
------------
Total $212,655,450
============
Shares of beneficial interest outstanding 30,985,414
==========
Class A shares:
Net asset value per share
(net assets of $134,086,305 / 19,517,658 shares of
beneficial interest outstanding) $6.87
=====
Offering price per share (100 / 97.5 of net asset value
per share) $7.05
=====
Class B shares:
Net asset value and offering price per share
(net assets of $52,882,543 / 7,725,403 shares of
beneficial interest outstanding) $6.85
=====
Class C shares:
Net asset value and offering price per share
(net assets of $24,227,976 / 3,529,487 shares of
beneficial interest outstanding) $6.86
=====
Class I shares:
Net asset value, offering price, and redemption price
per share (net assets of $1,458,626 / 212,866
shares of beneficial interest outstanding) $6.85
=====
On sales of $50,000 or more, the offering price of Class A shares is reduced. A
contingent deferred sales charge may be imposed on redemptions of Class A, Class
B, and Class C shares.
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS -- continued
Statement of Operations
- - --------------------------------------------------------------------------------
YEAR ENDED APRIL 30, 1999
- - --------------------------------------------------------------------------------
Net investment income:
Interest income $12,964,492
-----------
Expenses -
Management fee $ 748,001
Trustees' compensation 20,752
Shareholder servicing agent fee 208,259
Distribution and service fee (Class A) 174,249
Distribution and service fee (Class B) 425,430
Distribution and service fee (Class C) 225,422
Administrative fee 23,442
Custodian fee 88,165
Printing 30,246
Postage 27,003
Auditing fees 30,824
Legal fees 4,760
Miscellaneous 113,598
-----------
Total expenses $ 2,120,151
Fees paid indirectly (44,697)
-----------
Net expenses $ 2,075,454
-----------
Net investment income $10,889,038
-----------
Realized and unrealized gain (loss) on investments:
Realized loss (identified cost basis) on investment
transactions $(2,645,933)
Change in unrealized depreciation on investments (1,382,793)
-----------
Net realized and unrealized loss on investments $(4,028,726)
-----------
Increase in net assets from operations $ 6,860,312
===========
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS -- continued
<TABLE>
<CAPTION>
Statement of Changes in Net Assets
- - ----------------------------------------------------------------------------------------------------------
YEAR ENDED APRIL 30, 1999 1998
- - ----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Increase (decrease) in net assets:
From operations -
Net investment income $ 10,889,038 $ 9,973,384
Net realized loss on investments (2,645,933) (2,372,957)
Net unrealized gain (loss) on invesments (1,382,793) 710,434
------------ ------------
Increase in net assets from operations $ 6,860,312 $ 8,310,861
------------ ------------
Distributions declared to shareholders -
From net investment income (Class A) $ (6,851,802) $ (6,198,763)
From net investment income (Class B) (2,396,262) (2,228,639)
From net investment income (Class C) (1,138,922) (1,187,764)
From net investment income (Class I) (109,991) (130,641)
------------ ------------
Total distributions declared to shareholders $(10,496,977) $ (9,745,807)
------------ ------------
Net increase in net assets from Fund share transactions $ 60,124,700 $ 10,052,470
------------ ------------
Total increase in net assets $ 56,488,035 $ 8,617,524
Net assets:
At beginning of period 156,167,415 147,549,891
------------ ------------
At end of period (including accumulated distributions in
excess of net investment income of $331,659 and $681,671,
respectively) $212,655,450 $156,167,415
============ ============
See notes to financial statements
</TABLE>
<PAGE>
FINANCIAL STATEMENTS -- continued
<TABLE>
<CAPTION>
Financial Highlights
- - -----------------------------------------------------------------------------------------------------------------------------
YEAR ENDED APRIL 30, 1999 1998 1997 1996 1995
- - -----------------------------------------------------------------------------------------------------------------------------
CLASS A
- - -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per share data (for a share outstanding
throughout each period):
Net asset value - beginning of period $ 6.99 $ 7.04 $ 7.12 $ 7.10 $ 7.14
------ ------ ------ ------ ------
Income from investment operations# -
Net investment income(S) $ 0.43 $ 0.48 $ 0.47 $ 0.48 $ 0.46
Net realized and unrealized gain (loss)
on investments (0.14) (0.07) (0.06) 0.03 (0.04)
------ ------ ------ ------ ------
Total from investment operations $ 0.29 $ 0.41 $ 0.41 $ 0.51 $ 0.42
------ ------ ------ ------ ------
Less distributions declared to shareholders -
From net investment income $(0.41) $(0.46) $(0.47) $(0.48) $(0.46)
In excess of net investment income -- -- (0.02) (0.01) --
------ ------ ------ ------ ------
Total distributions declared to
shareholders $(0.41) $(0.46) $(0.49) $(0.49) $(0.46)
------ ------ ------ ------ ------
Net asset value - end of period $ 6.87 $ 6.99 $ 7.04 $ 7.12 $ 7.10
====== ====== ====== ====== ======
Total return(+) 4.26% 5.97% 5.83% 7.50% 6.09%
Ratios (to average net assets)/
Supplemental data(S):
Expenses## 0.84% 0.89% 0.94% 0.95% 0.95%
Net investment income 6.14% 6.70% 6.57% 6.73% 6.54%
Portfolio turnover 278% 288% 489% 385% 498%
Net assets at end of period (000 omitted) $134,086 $95,342 $91,887 $98,582 $85,773
# Per share data are based on average shares outstanding.
## 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. For fiscal years ending after September 1, 1995, the Fund's
expenses are calculated without reduction for this expense offset arrangement.
(+) 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) Subject to reimbursement by the Fund, the investment adviser agreed to maintain expenses of the Fund, exclusive of
management and distribution and service fees, at not more than 0.40% of average daily net assets. To the extent actual
expenses were over/under this limitation, the net investment income per share and the ratios would have been:
Net investment income -- $ 0.48 $ 0.47 $ 0.48 $ 0.46
Ratios (to average net assets):
Expenses## -- 0.87% 0.89% 0.91% 0.97%
Net investment income -- 6.72% 6.62% 6.77% 6.52%
See notes to financial statements
</TABLE>
<PAGE>
FINANCIAL STATEMENTS -- continued
<TABLE>
<CAPTION>
Financial Highlights - continued
- - -----------------------------------------------------------------------------------------------------------------------------
YEAR ENDED APRIL 30, 1999 1998 1997 1996 1995
- - -----------------------------------------------------------------------------------------------------------------------------
CLASS B
- - -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per share data (for a share outstanding
throughout each period):
Net asset value - beginning of period $ 6.97 $ 7.03 $ 7.11 $ 7.10 $ 7.14
------ ------ ------ ------ ------
Income from investment operations# -
Net investment income(S) $ 0.38 $ 0.41 $ 0.41 $ 0.42 $ 0.41
Net realized and unrealized gain (loss)
on investments (0.14) (0.07) (0.05) 0.03 (0.05)
------ ------ ------ ------ ------
Total from investment operations $ 0.24 $ 0.34 $ 0.36 $ 0.45 $ 0.36
------ ------ ------ ------ ------
Less distributions declared to shareholders -
From net investment income $(0.36) $(0.40) $(0.42) $(0.42) $(0.40)
In excess of net investment income -- -- (0.02) (0.02) --
------ ------ ------ ------ ------
Total distributions declared to
shareholders $(0.36) $(0.40) $(0.44) $(0.44) $(0.40)
------ ------ ------ ------ ------
Net asset value - end of period $ 6.85 $ 6.97 $ 7.03 $ 7.11 $ 7.10
====== ====== ====== ====== ======
Total return 3.48% 4.98% 4.99% 6.52% 5.20%
Ratios (to average net assets)/
Supplemental data(S):
Expenses## 1.61% 1.70% 1.78% 1.75% 1.81%
Net investment income 5.33% 5.80% 5.75% 5.90% 5.73%
Portfolio turnover 278% 288% 489% 385% 498%
Net assets at end of period (000 omitted) $52,883 $39,229 $34,875 $26,464 $17,334
# Per share data are based on average shares outstanding.
## 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. For fiscal years ending after September 1, 1995, the Fund's
expenses are calculated without reduction for this expense offset arrangement.
(S) Subject to reimbursement by the Fund, the investment adviser agreed to maintain expenses of the Fund, exclusive of
management and distribution and service fees, at not more than 0.40% of average daily net assets. To the extent actual
expenses were over/under this limitation, the net investment income per share and the ratios would have been:
Net investment income -- $ 0.41 $ 0.41 $ 0.42 $ 0.41
Ratios (to average net assets):
Expenses## -- 1.68% 1.77% 1.77% 1.82%
Net investment income -- 5.82% 5.76% 5.88% 5.72%
See notes to financial statements
</TABLE>
<PAGE>
FINANCIAL STATEMENTS -- continued
<TABLE>
<CAPTION>
Financial Highlights - continued
- - -----------------------------------------------------------------------------------------------------------------------------
YEAR ENDED APRIL 30, PERIOD ENDED
---------------------------------------------------- APRIL 30,
1999 1998 1997 1996 1995*
- - -----------------------------------------------------------------------------------------------------------------------------
CLASS C
- - -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per share data (for a share outstanding
throughout each period):
Net asset value - beginning of period $ 6.99 $ 7.05 $ 7.13 $ 7.11 $ 7.08
------ ------ ------ ------ ------
Income from investment operations# -
Net investment income(S) $ 0.36 $ 0.41 $ 0.41 $ 0.41 $ 0.37
Net realized and unrealized gain (loss) on
investments (0.14) (0.07) (0.06) 0.04 (0.01)
------ ------ ------ ------ ------
Total from investment operations $ 0.22 $ 0.34 $ 0.35 $ 0.45 $ 0.36
------ ------ ------ ------ ------
Less distributions declared to shareholders -
From net investment income $(0.35) $(0.40) $(0.41) $(0.41) $(0.33)
In excess of net investment income -- -- (0.02) (0.02) --
------ ------ ------ ------ ------
Total distributions declared to
shareholders $(0.35) $(0.40) $(0.43) $(0.43) $(0.33)
------ ------ ------ ------ ------
Net asset value - end of period $ 6.86 $ 6.99 $ 7.05 $ 7.13 $ 7.11
====== ====== ====== ====== ======
Total return 3.23% 4.94% 5.08% 6.44% 5.25%++
Ratios (to average net assets)/
Supplemental data(S):
Expenses## 1.69% 1.74% 1.80% 1.80% 1.85%+
Net investment income 5.19% 5.76% 5.80% 5.76% 6.01%+
Portfolio turnover 278% 288% 489% 385% 498%
Net assets at end of period (000 omitted) $24,228 $20,131 $18,862 $13,842 $4,450
* For the period from the inception of Class C, July 1, 1994, through April 30, 1995.
+ Annualized.
++ Not annualized.
# Per share data are based on average shares outstanding.
## 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. For fiscal years ending after September 1, 1995, the Fund's
expenses are calculated without reduction for this expense offset arrangement.
(S) Subject to reimbursement by the Fund, the investment adviser agreed to maintain expenses of the Fund, exclusive of
management and distribution and service fees, at not more than 0.40% of average daily net assets. To the extent actual
expenses were over/under this limitation, the net investment income per share and the ratios would have been:
Net investment income -- $ 0.41 $ 0.41 $ 0.41 $ 0.37
Ratios (to average net assets):
Expenses## -- 1.72% 1.81% 1.75% 1.88%+
Net investment income -- 5.78% 5.80% 5.81% 5.98%+
See notes to financial statements
</TABLE>
<PAGE>
FINANCIAL STATEMENTS -- continued
<TABLE>
<CAPTION>
Financial Highlights - continued
- - -------------------------------------------------------------------------------------------------------------------------
YEAR ENDED APRIL 30, PERIOD ENDED
-------------------------------- APRIL 30,
1999 1998 1997*
- - -------------------------------------------------------------------------------------------------------------------------
CLASS I
- - -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per share data (for a share outstanding
throughout each period):
Net asset value - beginning of period $ 6.98 $ 7.04 $ 7.08
------ ------ ------
Income from investment operations# -
Net investment income(S) $ 0.43 $ 0.48 $ 0.15
Net realized and unrealized loss on investments (0.14) (0.07) (0.03)
------ ------ ------
Total from investment operations $ 0.29 $ 0.41 $ 0.12
------ ------ ------
Less distributions declared to shareholders -
From net investment income $(0.42) $(0.47) $(0.15)
In excess of net investment income -- -- (0.01)
------ ------ ------
Total distributions declared to shareholders $(0.42) $(0.47) $(0.16)
------ ------ ------
Net asset value - end of period $ 6.85 $ 6.98 $ 7.04
====== ====== ======
Total return 4.28% 5.98% 1.72%++
Ratios (to average net assets)/Supplemental data(S):
Expenses## 0.69% 0.74% 1.17%+
Net investment income 6.21% 6.75% 8.68%+
Portfolio turnover 278% 288% 489%
Net assets at end of period (000 omitted) $1,459 $1,466 $1,925
* For the period from the inception of Class I, January 2, 1997, through April 30, 1997.
+ Annualized.
++ Not annualized.
# Per share data are based on average shares outstanding.
## The Fund has an expense offset arrangement which reduces the Fund's custodian fee based upon the amount of cash
maintained by the Fund with its custodian and dividend disbursing agent. The Fund's expenses are calculated without
reduction for this expense offset arrangement.
(S) Subject to reimbursement by the Fund, the investment adviser agreed to maintain expenses of the Fund, exclusive of
management and distribution and service fees, at not more than 0.40% of average daily net assets. To the extent actual
expenses were over/under this limitation, the net investment income per share and the ratios would have been:
Net investment income -- $ 0.49 $ 0.15
Ratios (to average net assets):
Expenses## -- 0.72% 1.17%+
Net investment income -- 6.77% 8.68%+
See notes to financial statements
</TABLE>
<PAGE>
NOTES TO FINANCIAL STATEMENTS
(1) Business and Organization
MFS Limited Maturity Fund (the Fund) is a diversified series of MFS Series
Trust IX (the Trust). The Trust is organized as a Massachusetts business trust
and is registered under the Investment Company Act of 1940, as amended, as an
open-end management investment company.
(2) Significant Accounting Policies
General - The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Investment Valuations - Debt securities (other than short-term obligations
which mature in 60 days or less), including listed issues, are valued on the
basis of valuations furnished by dealers or by a pricing service with
consideration to factors such as institutional-size trading in similar groups
of securities, yield, quality, coupon rate, maturity, type of issue, trading
characteristics, and other market data, without exclusive reliance upon
exchange or over-the-counter prices. Short-term obligations, which mature in
60 days or less, are valued at amortized cost, which approximates market
value. 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 collateral 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 collateral to ensure that its
value, including accrued interest, 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.
Investment Transactions and Income - Investment transactions are recorded on
the trade date. Interest income is recorded on the accrual basis. All discount
is accreted for financial statement and tax reporting purposes as required by
federal income tax regulations. Interest payments received in additional
securities are recorded on the ex-interest date in an amount equal to the
value of the security on such date.
Fees Paid Indirectly - The Fund's custody fee is calculated as a percentage of
the Fund's month end net assets. The fee is reduced according to an
arrangement that measures the value of cash deposited with the custodian by
the Fund. This amount is shown as a reduction of expenses on the Statement of
Operations.
Tax Matters and Distributions - The Fund's policy is to comply with the
provisions of the Internal Revenue Code (the Code) applicable to regulated
investment companies and to distribute to shareholders all of its taxable
income, including any net realized gain on investments. Accordingly, no
provision for federal income or excise tax is provided.
The Fund files a tax return annually using tax accounting methods required
under provisions of the Code, which may differ from generally accepted
accounting principles, the basis on which these financial statements are
prepared. Accordingly, the amount of net investment income and net realized
gain reported on these financial statements may differ from that reported on
the Fund's tax return and, consequently, the character of distributions to
shareholders reported in the financial highlights may differ from that
reported to shareholders on Form 1099-DIV.
Distributions to shareholders are recorded on the ex-dividend date. The Fund
distinguishes between distributions on a tax basis and a financial reporting
basis and requires that only distributions in excess of tax basis earnings and
profits are reported in the financial statements as distributions from paid-in
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 net realized gains.
During the year ended April 30, 1999, $42,049 was reclassified from
accumulated distributions in excess of net investment income to accumulated
net realized loss on investments due to differences between book and tax
accounting for mortgage-back securities. This change had no effect on the net
assets or net asset value per share.
At April 30, 1999, the Fund, for federal income tax purposes, had a capital
loss carryforward of $9,938,324 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), April 30, 2005, ($1,432,459),
April 30, 2006, ($549,779), and April 30, 2007, ($4,336,622).
Multiple Classes of Shares of Beneficial Interest - The Fund offers multiple
classes of shares, which differ in their respective distribution and service
fees. All shareholders bear the common expenses of the Fund based on the value
of 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. Class B shares will
convert to Class A shares approximately eight years after purchase.
(3) Transactions with Affiliates
Investment Adviser - The Fund has an investment advisory agreement with 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.
The Fund pays no compensation directly to its Trustees who are officers of the
investment adviser, or to officers of the Fund, all of whom receive
remuneration for their services to the Fund from MFS. Certain officers and
Trustees of the Fund are officers or directors of MFS, MFS Fund Distributors,
Inc. (MFD), and MFS Service Center, Inc. (MFSC). The Fund has an unfunded
defined benefit plan for all of its independent Trustees and Mr. Bailey.
Included in Trustees' compensation is a net periodic pension expense of $4,096
for the year ended April 30, 1999.
Administrator - The Fund has an administrative services agreement with MFS to
provide the Fund with certain financial, legal, shareholder servicing,
compliance, and other administrative services. As a partial reimbursement for
the cost of providing these services, the Fund pays MFS an administrative fee
at the following annual percentages of the Fund's average daily net assets:
First $1 billion 0.0150%
Next $1 billion 0.0125%
Next $1 billion 0.0100%
In excess of $3 billion 0.0000%
Distributor - MFD, a wholly owned subsidiary of MFS, as distributor, received
$69,462 for the year ended April 30, 1999, 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
paid 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 and 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. MFD retains the service fee for
accounts not attributable to a securities dealer, which amounted to $16,205
for the year ended April 30, 1999. Fees incurred under the distribution plan
during the year ended April 30, 1999, were 0.15% of average daily net assets
attributable to Class A shares on an annualized basis. Payment of the
remaining 0.10% per annum Class A service fee and of the 0.10% per annum Class
A distribution fee will be implemented on such date as the Trustees of the
Trust may determine.
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 consideration for services rendered by the dealer with respect to Class
B and Class C shares. MFD retains the service fee for accounts not
attributable to a securities dealer, which amounted to $2,613 and $97 for
Class B and Class C shares, respectively, for the year ended April 30, 1999.
Fees incurred under the distribution plan during the year ended April 30,
1999, were 0.92% and 1.00% of average daily net assets attributable to Class B
and Class C shares on an annualized basis, respectively. Except in the case of
the 0.25% per annum Class B service fee paid upon the sale of Class B shares
in the first year, the Class B service fee is 0.15% per annum and may increase
to a maximum of 0.25% per annum on such date as the Trustees of the Trust may
determine.
Certain Class A and Class C shares are subject to a contingent deferred sales
charge in the event of a shareholder redemption within 12 months following
purchase. A contingent deferred sales charge is imposed on shareholder
redemptions of Class B shares in the event of a shareholder redemption within
six years of purchase. MFD receives all contingent deferred sales charges.
Contingent deferred sales charges imposed during the year ended April 30,
1999, were $18,710, $108,658, and $13,747 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
0.10. Prior to April 1, 1999, the fee was calculated as a percentage of the
Fund's average daily net assets at an effective annual rate of 0.1125%.
(4) Portfolio Securities
Purchases and sales of investments, other than short-term obligations, were
as follows:
PURCHASES SALES
- - -------------------------------------------------------------------------------
U.S. government securities $377,880,180 $366,863,006
------------ ------------
Investments (non-U.S. government
securities) $180,303,374 $134,564,321
------------ ------------
The cost and unrealized appreciation and depreciation in the value of the
investments owned by the Fund, as computed on a federal income tax basis, are
as follows:
Aggregate cost $215,116,741
------------
Gross unrealized depreciation $ (1,974,758)
Gross unrealized appreciation 378,322
------------
Net unrealized depreciation $ (1,596,436)
============
(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. Transactions in
Fund shares were as follows:
<TABLE>
<CAPTION>
Class A Shares
YEAR ENDED APRIL 30, 1999 YEAR ENDED APRIL 30, 1998
-------------------------------- --------------------------------
SHARES AMOUNT SHARES AMOUNT
- - ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Shares sold 89,884,749 $ 625,609,406 63,435,881 $ 445,921,523
Shares issued to shareholders
in reinvestment of
distributions 718,455 4,986,426 632,833 4,458,800
Shares reacquired (84,729,931) (589,753,636) (63,470,826) (446,086,457)
----------- ------------- ----------- -------------
Net increase 5,873,273 $ 40,842,196 597,888 $ 4,293,866
=========== ============= =========== =============
<CAPTION>
Class B Shares
YEAR ENDED APRIL 30, 1999 YEAR ENDED APRIL 30, 1998
-------------------------------- --------------------------------
SHARES AMOUNT SHARES AMOUNT
- - ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Shares sold 7,595,456 $ 52,632,457 4,477,191 $ 31,495,141
Shares issued to shareholders
in reinvestment of
distributions 247,817 1,712,458 209,931 1,476,294
Shares reacquired (5,746,325) (39,697,324) (4,017,485) (28,243,968)
----------- ------------- ----------- -------------
Net increase 2,096,948 $ 14,647,591 669,637 $ 4,727,467
=========== ============= =========== =============
<CAPTION>
Class C Shares
YEAR ENDED APRIL 30, 1999 YEAR ENDED APRIL 30, 1998
-------------------------------- --------------------------------
SHARES AMOUNT SHARES AMOUNT
- - ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Shares sold 3,684,433 $ 25,649,796 2,081,330 $ 14,705,683
Shares issued to shareholders
in reinvestment of
distributions 109,967 762,710 116,955 825,247
Shares reacquired (3,144,596) (21,810,087) (1,992,536) (14,059,660)
----------- ------------- ----------- -------------
Net increase 649,804 $ 4,602,419 205,749 $ 1,471,270
=========== ============= =========== =============
<CAPTION>
Class I Shares
YEAR ENDED APRIL 30, 1999 YEAR ENDED APRIL 30, 1998
-------------------------------- --------------------------------
SHARES AMOUNT SHARES AMOUNT
- - ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Shares sold 153,379 $ 1,065,556 128,478 $ 910,579
Shares issued to shareholders
in reinvestment of
distributions 15,876 109,990 18,451 130,116
Shares reacquired (166,408) (1,143,052) (210,244) (1,480,828)
----------- ------------- ----------- -------------
Net increase (decrease) 2,847 $ 32,494 (63,315) $ (440,133)
=========== ============= =========== =============
</TABLE>
(6) Line of Credit
The Fund and other affiliated funds participate in a $720 million unsecured line
of credit provided by a syndication of banks under a line of credit agreement.
Borrowings may be made to temporarily finance the repurchase of Fund shares.
Interest is charged to each fund, based on its borrowings, at a rate equal to
the bank's base rate. In addition, a commitment fee, based on the average daily
unused portion of the line of credit, is allocated among the participating funds
at the end of each quarter. The commitment fee allocated to the Fund for the
year ended April 30, 1999, was $1,483. The Fund had no significant borrowings
during the year.
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Trustees of MFS Series Trust IX and Shareholders of MFS Limited
Maturity Fund:
We have audited the accompanying statement of assets and liabilities, including
the portfolio of investments, of MFS Limited Maturity Fund (one of the series
constituting MFS Series Trust IX) as of April 30, 1999, the related statement of
operations for the year then ended, the statement of changes in net assets for
the years ended April 30, 1999 and 1998, and the financial highlights for each
of the years in the five-year period ended April 30, 1999. These financial
statements and financial highlights are the responsibility of the Trust's
management. Our responsibility is to express an opinion on these financial
statements and financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of the securities owned at
April 30, 1999 by correspondence with the custodian and brokers; where replies
were not received from brokers, we performed other auditing procedures. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of MFS Limited Maturity
Fund at April 30, 1999, the results of its operations, the changes in its net
assets, and its financial highlights for the respective stated periods in
conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Boston, Massachusetts
June 4, 1999
<PAGE>
- - --------------------------------------------------------------------------------
FEDERAL TAX INFORMATION
- - --------------------------------------------------------------------------------
IN JANUARY 2000, SHAREHOLDERS WILL BE MAILED A FORM 1099 REPORTING THE
FEDERAL TAX STATUS OF ALL DISTRIBUTIONS PAID DURING THE CALENDAR YEAR
1999.
<PAGE>
<TABLE>
MFS(R) LIMITED MATURITY FUND
<S> <C>
TRUSTEES SECRETARY
Richard B. Bailey* - Private Investor; Stephen E. Cavan*
Former Chairman and Director (until 1991),
MFS Investment Management ASSISTANT SECRETARY
James R. Bordewick, Jr.*
Peter G. Harwood - Private Investor
CUSTODIAN
J. Atwood Ives - Chairman and Chief Executive State Street Bank and Trust Company
Officer, Eastern Enterprises (diversified
services company) AUDITORS
Deloitte & Touche LLP
Lawrence T. Perera - Partner, Hemenway
& Barnes (attorneys) INVESTOR INFORMATION
For MFS stock and bond market outlooks, call
William J. Poorvu - Adjunct Professor, Harvard toll free: 1-800-637-4458 anytime from a
University Graduate School of Business touch-tone telephone.
Administration
For information on MFS mutual funds, call your
Charles W. Schmidt - Private Investor financial adviser or, for an information kit,
call toll free: 1-800-637-2929 any business day
Arnold D. Scott* - Senior Executive from 9 a.m. to 5 p.m. Eastern time (or leave a
Vice President, Director, and Secretary, message anytime).
MFS Investment Management
INVESTOR SERVICE
Jeffrey L. Shames* - Chairman, Chief MFS Service Center, Inc.
Executive Officer, and Director, P.O. Box 2281
MFS Investment Management Boston, MA 02107-9906
Elaine R. Smith - Independent Consultant For general information, call toll free:
1-800-225-2606 any business day from
David B. Stone - Chairman and Director, 8 a.m. to 8 p.m. Eastern time.
North American Management Corp.
(investment advisers) For service to speech- or hearing-impaired,
call toll free: 1-800-637-6576 any business day
INVESTMENT ADVISER from 9 a.m. to 5 p.m. Eastern time. (To use
Massachusetts Financial Services Company this service, your phone must be equipped with
500 Boylston Street a Telecommunications Device for the Deaf.)
Boston, MA 02116-3741
For share prices, account balances, and
DISTRIBUTOR exchanges, call toll free: 1-800-MFS-TALK
MFS Fund Distributors, Inc. (1-800-637-8255) anytime from a touch-tone
500 Boylston Street telephone.
Boston, MA 02116-3741
WORLD WIDE WEB
PORTFOLIO MANAGER www.mfs.com
James J. Calmas*
TREASURER
W. Thomas London*
ASSISTANT TREASURERS
Mark E. Bradley*
Ellen Moynihan*
James O. Yost*
*Affiliated with the Investment Adviser
</TABLE>
<PAGE>
MFS(R) LIMITED MATURITY FUND ------------
BULK RATE
U.S. POSTAGE
[Logo] M F S(R) PAID
INVESTMENT MANAGEMENT MFS
We invented the mutual fund(R) ------------
500 Boylston Street
Boston, MA 02116-3741
(c)1999 MFS Fund Distributors, Inc., 500 Boylston Street, Boston, MA 02116-3741
MLM-2 6/99 15M 36/236/336/836
<PAGE>
EXHIBIT NO. 99.17(d)
[Logo] M F S (R)
INVESTMENT MANAGEMENT
We invented the mutual fund(R)
[Graphic Omitted]
MFS(R) LIMITED
MATURITY FUND
SEMIANNUAL REPORT o OCTOBER 31, 1999
<PAGE>
TABLE OF CONTENTS
Letter from the Chairman .................................................. 1
Management Review and Outlook ............................................. 3
Performance Summary ....................................................... 7
Portfolio of Investments .................................................. 10
Financial Statements ...................................................... 14
Notes to Financial Statements ............................................. 21
MFS' Year 2000 Readiness Disclosure ....................................... 27
Trustees and Officers ..................................................... 29
MFS ORIGINAL RESEARCH(R)
RESEARCH HAS BEEN CENTRAL TO INVESTMENT MANAGEMENT AT MFS
SINCE 1932, WHEN WE CREATED ONE OF THE FIRST IN-HOUSE
RESEARCH DEPARTMENTS IN THE MUTUAL FUND (SM)
INDUSTRY. ORIGINAL RESEARCH(SM) AT MFS IS MORE ORIGINAL RESEARCH
THAN JUST CRUNCHING NUMBERS AND CREATING
ECONOMIC MODELS: IT'S GETTING TO KNOW MFS
EACH SECURITY AND EACH COMPANY PERSONALLY.
MAKES A DIFFERENCE
- - --------------------------------------------------------------------------------
NOT FDIC INSURED MAY LOSE VALUE NO BANK GUARANTEE
- - --------------------------------------------------------------------------------
<PAGE>
LETTER FROM THE CHAIRMAN
[Photo of Jeffrey L. Shames]
Jeffrey L. Shames
Dear Shareholders,
The current investment and economic environment bears little resemblance to last
year's. One year ago, global economies were floundering, and the crisis in Asia
threatened an already weak U.S. economy. Corporate earnings were flat, and
economists used the word "deflation" for the first time in recent memory.
Entering 1999, expectations for corporate earnings growth were lowered
dramatically. In an attempt to foster U.S. growth, the Federal Reserve Board
(the Fed) lowered interest rates.
As a result, this year the U.S. economy is booming and unemployment is low. Many
corporations are focused on improving their profitability, and investors have
been rewarded with positive surprises across a variety of industries. Our
analysts predict that corporate earnings growth for 1999 will average 12% - 15%.
Global economies also are showing signs of strength, and the Asian crisis has
passed. In fact, Japan's economic woes seem to have reached bottom. Although the
process is in its infancy, some Japanese corporations not only are talking about
restructuring and cost cutting, they also are beginning to take action, looking
within to become more competitive and improve returns on equity. While still
lagging the United States, Europe is beginning to restructure and consolidate.
These signs of international growth have contributed to concerns that the U.S.
economy now may be too strong. In June, and again in August, the Fed raised
rates by one-quarter of a percentage point to help ward off the specter of
inflation.
After an unprecedented four years of 20% annual returns in the U.S. equity
market, we fear that many investors have become accustomed to high returns and
have lost sight of the risks they take on to achieve them. In the current market
many investors are taking on additional risk - whether through day trading or
investing in speculative Internet stocks.
Risks are as much a part of the market today as they were one year ago. We
believe the market remains overvalued, with stocks priced 30% above our
analysts' earnings projections. And market narrowness has not abated; the top 25
stocks in the Standard & Poor's 500 Composite Index, a popular, unmanaged index
of common stock total return performance, are still the most overvalued. Such
extreme overvaluation makes the stock market sensitive to interest-rate news and
any negative earnings surprises. The Year 2000 (Y2K) computer problem is another
factor causing investor concern. While we believe corporate America is well
prepared to address any Y2K situations that may arise at year-end, no one can
predict investor behavior. In our opinion, it is investor behavior that has the
greatest potential to create market volatility.
We believe the best way to address Y2K and other market risks is through our
continuing commitment to MFS Original Research(R) and our fundamental investment
tenet of long-term investing. Whether markets are up or down, MFS analysts focus
on analyzing industries and visiting companies to determine the long-term
winners and the prices that will make them attractive opportunities. Because all
companies will not benefit equally from the improving international environment,
bottom-up research remains critical to identifying those that we believe are
successfully restructuring, consolidating, and gaining market share.
Changes in market and economic conditions can't be predicted but should always
be expected. The changes we have seen over the past year only reinforce our
commitment to long-term planning and investing. We believe volatility helps to
create opportunity for long-term investors to buy solid companies at attractive
prices. For this reason, we are continuing to expand our domestic and
international capabilities to ensure that MFS has primary, in-house research on
companies worldwide. We believe that we have built the right investment team,
backed by MFS Original Research, to take advantage of those opportunities for
our shareholders.
We appreciate your confidence and welcome any questions or comments you may
have.
Respectfully,
/s/ Jeffrey L. Shames
Jeffrey L. Shames
Chairman and Chief Executive Officer
MFS Investment Management(R)
November 15, 1999
<PAGE>
MANAGEMENT REVIEW AND OUTLOOK
[Photo of James J. Calmas]
James J. Calmas
For the six months ended October 31, 1999, Class A shares of the Fund provided a
total return of 1.22%, Class B shares 0.83%, Class C shares 0.79%, and Class I
shares 1.30%. These returns include the reinvestment of any distributions but
exclude the effects of any sales charges.
During the same period, the average short-term investment-grade debt fund
tracked by Lipper Analytical Services, Inc., an independent firm that reports
mutual fund performance, returned 1.14%. The Fund's results also compare to a
1.74% return for the Lehman Brothers One- to Three-Year Government/Corporate
Bond Index (the Lehman Index), an unmanaged index 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 Service, Inc.
Q. WHY DID THE FUND SLIGHTLY UNDERPERFORM THE LEHMAN INDEX?
A. Over the period, corporate bonds, which represent a higher proportion of the
Fund's assets than those of the index, did not perform as well as expected.
Their underperformance came mostly during August and September, when there
was a surge of bond issues from corporations. We believe that many companies
at that time were concerned about possible liquidity problems at the end of
this year and were motivated to move early to ensure adequate financing for
the coming year. This oversupply pushed down corporate bond prices and hurt
performance.
Q. WHY DO YOU OWN ASSET-BACKED SECURITIES?
A. Asset-backed securities are credit card receivables, home equity loans, and
auto loans. Nearly one-quarter of the portfolio's assets are invested in
these bonds, which we own because of their high "AAA"-rated quality,
attractive yields, and the diversification they offer the Fund. For some of
these, we are getting yields similar to lower-rated bonds without as much
risk. For example, we own bonds backed by a diversified, packaged, and
credit-enhanced group of car loans issued by Ford Motor which are
"AAA"-rated. These have similar yields to those issued by Ford Motor Co.,
which are only "A"-rated debt.
Q. WHAT IS THE ALLOCATION OF ASSETS TO DIFFERENT TYPES OF BONDS?
A. The breakdown is 42.8% to high-grade corporates, 24.7% to asset-backed
securities, 9.5% to cash, 8.8% to mortgage-backed securities, 8.3% to
Yankees (many of the "AAA"-rated dollar-denominated bonds issued in the
United States by foreign governments and corporations), and 2.0% to emerging
markets. We are holding a relatively large amount of cash in order to handle
any end of year liquidity concerns. We are also holding some floating-rate
securities, notes whose interest rates are tied to a money market index, so
that if interest rates go up, these short-term issues may help provide some
additional return.
Q. CAN YOU COMMENT ON THE CREDIT QUALITY OF THE CORPORATE BONDS IN THE FUND?
A. The prospectus states that bonds must be investment grade, that is "BBB"-
through "AAA"-rated, when we purchase them. We have been upgrading the
overall credit quality during the past 18 months in response to a gradual
rise in default rates over the past several years, with our analysts having
no difficulty finding bonds in the upper range of "A" to "AAA." But if we
identify companies issuing bonds in the lower range whose risks we believe
we will be compensated for, then we may certainly consider those issues.
Q. WHERE DO YOU SEE OPPORTUNITIES FOR THE FUND?
A. We continue to favor bonds issued by telecommunications companies. There's a
lot of consolidation in the industry -- we own bonds issued by Sprint
Spectrum, for example. We need to make sure that any mergers will not hurt
the credit profile of companies that we own. Utilities are another promising
sector because of consolidation. Utilities are also rationalizing their
businesses, that is, making sure that their businesses make sense in terms
of their strengths and the market environment. For example, Boston Edison is
getting out of electricity generation to focus on transmission and
distribution.
Q. LOOKING AHEAD, HOW DO YOU SEE INTEREST RATES AFFECTING THE FUND?
A. The bond markets reacted calmly to the two interest-rate increases so far
this year, and we don't think any future increase should cause a major
sell-off in the bond market. We believe that the additional yield from our
corporate bond holdings may provide some cushion if rates were to rise. We
think inflation has been kept in check; therefore, we have kept the duration
of our bonds (which indicates a portfolio's sensitivity to changes in
interest rates) the same as the Lehman Index. Currently, the duration is
approximately 1.7 years.
/s/ James J. Calmas
James J. Calmas
Portfolio Manager
The opinions expressed in this report are those of the portfolio manager and
are current only through the end of the period of the report as stated on
the cover. The manager's views are subject to change at any time based on
market and other conditions, and no forecasts can be guaranteed.
It is not possible to invest directly in an index.
<PAGE>
- - --------------------------------------------------------------------------------
PORTFOLIO MANAGER'S PROFILE
- - --------------------------------------------------------------------------------
JAMES J. CALMAS IS VICE PRESIDENT OF MFS INVESTMENT MANAGEMENT(R) AND PORTFOLIO
MANAGER OF MFS(R) INTERMEDIATE INCOME FUND, MFS(R) LIMITED MATURITY FUND, AND
MFS(R) LIMITED MATURITY SERIES (PART OF MFS(R) VARIABLE INSURANCE TRUST(SM)).
MR. CALMAS JOINED MFS IN 1988 AND WAS NAMED ASSISTANT VICE PRESIDENT IN 1991,
VICE PRESIDENT IN 1993, AND PORTFOLIO MANAGER IN 1998.
HE IS A GRADUATE OF DARTMOUTH COLLEGE AND HOLDS AN M.B.A. DEGREE FROM THE AMOS
TUCK SCHOOL OF BUSINESS ADMINISTRATION OF DARTMOUTH COLLEGE.
ALL PORTFOLIO MANAGERS AT MFS INVESTMENT MANAGEMENT(R) ARE SUPPORTED BY AN
INVESTMENT STAFF OF OVER 100 PROFESSIONALS UTILIZING MFS ORIGINAL RESEARCH(R), A
COMPANY-ORIENTED, BOTTOM-UP PROCESS OF SELECTING SECURITIES.
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. A prospectus containing more information,
including the exchange privilege and all charges and expenses, for any other
MFS product is available from your financial consultant, or by calling MFS at
1-800-225-2606. Please read it carefully before investing or sending money.
<PAGE>
- - --------------------------------------------------------------------------------
FUND FACTS
- - --------------------------------------------------------------------------------
OBJECTIVE: SEEKS AS HIGH A LEVEL OF CURRENT INCOME AS IS BELIEVED
TO BE CONSISTENT WITH PRUDENT INVESTMENT RISK. THE FUND
ALSO SEEKS TO PROTECT SHAREHOLDERS' CAPITAL.
COMMENCEMENT OF
INVESTMENT OPERATIONS: FEBRUARY 26, 1992
CLASS INCEPTION: CLASS A FEBRUARY 26, 1992
CLASS B SEPTEMBER 7, 1993
CLASS C JULY 1, 1994
CLASS I JANUARY 2, 1997
SIZE: $205.1 MILLION NET ASSETS AS OF OCTOBER 31, 1999
PERFORMANCE SUMMARY
Because mutual funds are designed for investors with long-term goals, we have
provided cumulative results as well as the average annual total returns for the
applicable time periods. Investment results reflect the percentage change in net
asset value, including reinvestment of dividends. (See Notes to Performance
Summary.)
AVERAGE ANNUAL AND CUMULATIVE TOTAL RATES OF RETURN
THROUGH OCTOBER 31, 1999
<TABLE>
<CAPTION>
CLASS A
6 Months 1 Year 3 Years 5 Years Life*
- - -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Cumulative Total Return Excluding Sales
Charge +1.22% +3.13% +14.40% +32.59% +51.02%
- - -------------------------------------------------------------------------------------------------------------
Average Annual Total Return Excluding
Sales Charge -- +3.13% + 4.59% + 5.80% + 5.51%
- - -------------------------------------------------------------------------------------------------------------
Average Annual Total Return Including
Sales Charge -- +0.55% + 3.71% + 5.27% + 5.17%
- - -------------------------------------------------------------------------------------------------------------
<CAPTION>
CLASS B
6 Months 1 Year 3 Years 5 Years Life*
- - -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Cumulative Total Return Excluding Sales
Charge +0.83% +2.49% +11.62% +27.31% +43.39%
- - -------------------------------------------------------------------------------------------------------------
Average Annual Total Return Excluding
Sales Charge -- +2.49% + 3.73% + 4.95% + 4.81%
- - -------------------------------------------------------------------------------------------------------------
Average Annual Total Return Including
Sales Charge -- -1.41% + 2.84% + 4.63% + 4.81%
- - -------------------------------------------------------------------------------------------------------------
<CAPTION>
CLASS C
6 Months 1 Year 3 Years 5 Years Life*
- - -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Cumulative Total Return Excluding Sales
Charge +0.79% +2.26% +11.22% +26.92% +44.01%
- - -------------------------------------------------------------------------------------------------------------
Average Annual Total Return Excluding
Sales Charge -- +2.26% + 3.61% + 4.88% + 4.87%
- - -------------------------------------------------------------------------------------------------------------
Average Annual Total Return Including
Sales Charge -- +1.28% + 3.61% + 4.88% + 4.87%
- - -------------------------------------------------------------------------------------------------------------
<CAPTION>
CLASS I
6 Months 1 Year 3 Years 5 Years Life*
- - -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Cumulative Total Return Excluding Sales
Charge +1.30% +3.29% +14.58% +32.80% +51.25%
- - -------------------------------------------------------------------------------------------------------------
Average Annual Total Return Excluding
Sales Charge -- +3.29% + 4.64% + 5.84% + 5.54%
- - -------------------------------------------------------------------------------------------------------------
* For the period from the commencement of the Fund's investment operations, February 26, 1992, through October 31, 1999.
</TABLE>
NOTES TO PERFORMANCE SUMMARY
Class A Share Performance Including Sales Charge takes into account the
deduction of the maximum 2.50% sales charge. Class B Share Performance Including
Sales Charge takes into account the deduction of the applicable contingent
deferred sales charge (CDSC), which declines over six years from 4% to 0%. Class
C Share Peformance Including Sales Charge takes into account the deduction of
the 1% CDSC applicable to Class C shares redeemed within 12 months. Class I
shares have no sales charge and are only available to certain institutional
investors.
Class B, C, and I share performance include the performance of the Fund's Class
A shares for periods prior to their inception (blended performance). Class B and
C blended performance has been adjusted to take into account the CDSC applicable
to Class B and C shares rather than the initial sales charge (load) applicable
to Class A shares. Class I share blended performance has been adjusted to
account for the fact that Class I shares have no sales charge. These blended
performance figures have not been adjusted to take into account differences in
class-specific operating expenses. Because operating expenses of Class B and C
shares are higher than those of Class A, the blended Class B and C share
performance is higher than it would have been had Class B and C shares been
offered for the entire period. Conversely, because operating expenses of Class I
shares are lower than those of Class A, the blended Class I share performance is
lower than it would have been had Class I shares been offered for the entire
period.
All performance results reflect any applicable expense subsidies and waivers,
without which the results would have been less favorable. Subsidies and waivers
may be rescinded at any time. See the prospectus for details. All results are
historical and assume the reinvestment of 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.
PORTFOLIO CONCENTRATION AS OF OCTOBER 31, 1999
QUALITY RATINGS (U.S. PORTION ONLY)
Source: Standard & Poor's and Moody's
"AAA" 32.8%
"AA" 2.7%
"A" 21.1%
"BBB" 27.1%
"BB" 2.3%
Not Rated 0.3%
Governments 13.7%
The portfolio is actively managed, and current holdings may be different.
<PAGE>
PORTFOLIO OF INVESTMENTS (Unaudited) -- October 31, 1999
Bonds - 91.9%
- - -------------------------------------------------------------------------------
PRINCIPAL AMOUNT
ISSUER (000 OMITTED) VALUE
- - -------------------------------------------------------------------------------
U.S. Bonds - 81.7%
Airlines - 0.5%
Delta Airlines, Inc., 6.65s, 2004 $ 1,151 $ 1,115,181
- - -------------------------------------------------------------------------------
Apparel and Textiles - 0.6%
Jones Apparel Group, Inc., 6.25s, 2001 $ 1,280 $ 1,255,654
- - -------------------------------------------------------------------------------
Automotive - 3.7%
DaimlerChrysler NA Holding Corp., 6.63s, 2001 $ 2,653 $ 2,656,979
Ford Capital BV, 9.875s, 2002 1,800 1,927,152
Ford Motor Credit Co., 6.446s, 2002 3,000 3,016,110
------------
$ 7,600,241
- - -------------------------------------------------------------------------------
Banks and Credit Companies - 4.3%
Fleet Boston Corp., 9.9s, 2001 $ 2,017 $ 2,116,458
Great Western Financial Corp., 6.375s, 2000 2,366 2,364,817
GS Escrow Corp., 6.75s, 2001 1,903 1,853,855
Providian National Bank, 6.75s, 2002 2,563 2,509,895
------------
$ 8,845,025
- - -------------------------------------------------------------------------------
Conglomerates - 1.0%
General Electric Capital Corp., 6.52s, 2002 $ 2,127 $ 2,119,343
- - -------------------------------------------------------------------------------
Consumer Goods and Services - 1.1%
Hilfiger (Tommy) USA, Inc., 6.5s, 2003 $ 2,283 $ 2,187,160
- - -------------------------------------------------------------------------------
Containers - 2.1%
Owens-Illinois, Inc., 11s, 2003 $ 4,058 $ 4,200,030
- - -------------------------------------------------------------------------------
Corporate Asset Backed - 24.5%
Aames Mortgage Trust, 6.75s, 2021 $ 3,889 $ 3,857,402
American Express Credit Account Trust, 5.6s, 2006 1,000 957,180
Americredit Automobile Receivables Trust,
5.78s, 2003 2,050 2,019,891
Amresco Residential Securities Mortgage Loan,
5.94s, 2015 4,039 3,996,717
Banamex Credit Card Merchant Voucher, 6.25s, 2003# 6,663 6,589,934
BankBoston Home Equity Loan Trust, 5.89s, 2013 1,894 1,862,113
Chase Credit Card Master Trust, 5.666s, 2004 2,815 2,817,618
Citibank Credit Card Master Trust I, 5.5s, 2006 1,993 1,898,950
First Chicago Master Trust II, 5.686s, 2003 3,106 3,111,808
Fleet Credit Card Master Trust II, 5.63s, 2007 2,505 2,505,000
Ford Credit Auto Owner Trust, 5.31s, 2001 806 803,962
Ford Credit Auto Owner Trust, 6.2s, 2002 2,402 2,398,997
GE Capital Mortgage Services, Inc., 6.035s, 2020 2,035 1,963,139
Green Tree Financial Corp., 6.04s, 2029 3,407 3,389,774
Green Tree Financial Corp., 6.39s, 2029 1,387 1,386,827
MBNA Master Credit Card Trust II, 5.25s, 2006 2,374 2,256,772
Merrill Lynch Mortgage Investors, Inc., 5.65s, 2030 1,802 1,713,038
Partners First Credit Card Master Trust, 5.506s, 2004 3,400 3,395,750
Pemex Finance Ltd., 5.72s, 2003# 1,010 965,924
Providian Home Equity Loan Trust, 5.7s, 2025 887 885,158
SLM Student Loan Trust, 5.574s, 2009 1,470 1,445,194
------------
$ 50,221,148
- - -------------------------------------------------------------------------------
Entertainment - 1.0%
Time Warner Pass-Through Asset Trust, 6.1s, 2001# $ 2,103 $ 2,072,359
- - -------------------------------------------------------------------------------
Financial Institutions - 4.4%
Aristar, Inc., 7.375s, 2004 $ 1,860 $ 1,871,049
Countrywide Home Loan, Inc., 6.85s, 2004 2,506 2,481,466
Lehman Brothers Holdings, Inc., 6.375s, 2001 2,185 2,176,959
Merrill Lynch & Co., 6.06s, 2001 2,520 2,498,227
------------
$ 9,027,701
- - -------------------------------------------------------------------------------
Food and Beverage Products - 2.3%
Seagram (Joseph E) & Sons, Inc., 5.79s, 2001 $ 2,470 $ 2,430,628
Whitman Corp., 6s, 2004 2,385 2,278,391
------------
$ 4,709,019
- - -------------------------------------------------------------------------------
Forest and Paper Products - 1.2%
Georgia-Pacific Corp., 9.95s, 2002 $ 2,293 $ 2,448,374
- - -------------------------------------------------------------------------------
Insurance - 0.9%
Conseco, Inc., 6.4s, 2001 $ 1,963 $ 1,897,033
- - -------------------------------------------------------------------------------
Oils - 1.4%
Occidental Petroleum Corp., 10.125s, 2001 $ 2,607 $ 2,756,277
- - -------------------------------------------------------------------------------
Railroads - 1.0%
Union Pacific Corp., 6.34s, 2003 $ 2,100 $ 2,040,969
- - -------------------------------------------------------------------------------
Supermarkets - 1.2%
Safeway, Inc., 5.875s, 2001 $ 2,430 $ 2,382,007
- - -------------------------------------------------------------------------------
Telecommunications and Cable - 5.4%
Comcast Corp., 9.125s, 2006 $ 2,666 $ 2,820,308
Cox Communications Inc., 7s, 2001 2,025 2,028,625
Sprint Capital Corp., 5.875s, 2004 881 842,034
Sprint Spectrum LP, 11s, 2006 2,046 2,297,044
Telecomunicaiones De Puerto Rico, 6.15s, 2002# 2,598 2,553,626
United States West Communications Inc.,
7.2s, 2004# 500 503,850
------------
$ 11,045,487
- - -------------------------------------------------------------------------------
Tobacco - 1.0%
RJ Reynolds Tobacco Holdings, 7.375s, 2003# $ 2,145 $ 2,105,961
- - -------------------------------------------------------------------------------
Transportation - 1.3%
Hertz Corp., 6.5s, 2000 $ 2,736 $ 2,739,666
- - -------------------------------------------------------------------------------
U.S. Federal Agencies - 9.7%
Federal Home Loan Mortgage Corp., 5.83s, 2013 $ 2,015 $ 2,002,365
Federal National Mortgage Assn., 6.75s, 2003 2,087 2,077,583
Federal National Mortgage Assn., 7s, 2009 5,170 5,161,883
Federal National Mortgage Assn., 6s, 2014 5,783 5,562,139
Government National Mortgage Assn., 7.5s,
2007 - 2011 4,711 4,788,807
Government National Mortgage Assn., 12.5s, 2011 244 278,590
------------
$ 19,871,367
- - -------------------------------------------------------------------------------
U.S. Treasury Obligations - 3.3%
U.S. Treasury Notes, 5s, 2001 $ 900 $ 891,981
U.S. Treasury Notes, 5.375s, 2001 165 164,253
U.S. Treasury Notes, 5.75s, 2001 1,325 1,323,754
U.S. Treasury Notes, 6.25s, 2001 765 771,097
U.S. Treasury Notes, 6.5s, 2001## 900 910,404
U.S. Treasury Notes, 6s, 2004 1,176 1,178,752
U.S. Treasury Notes, 7.875s, 2004 1,350 1,454,625
------------
$ 6,694,866
- - -------------------------------------------------------------------------------
Utilities - Electric - 8.8%
Boston Edison Co., 6.8s, 2000 $ 3,175 $ 3,178,270
California Infrastructure, 6.17s, 2003 2,855 2,848,748
CMS Panhandle Holding Co., 6.125s, 2004 1,820 1,738,664
Commonwealth Edison Transition Funding Trust,
5.29s, 2003 1,894 1,865,552
Duke Capital Corp., 7.25s, 2004 848 853,436
Edison Mission Energy Funding Corp., 6.77s, 2003# 1,817 1,769,324
Gulf States Utilities Co., 8.21s, 2002 1,528 1,567,208
Midamerican Funding LLC, 5.85s, 2001# 3,039 3,007,011
Narragansett Electric Co., 7.83s, 2002 500 513,705
Salton Sea Funding Corp., 6.69s, 2000 370 370,488
Salton Sea Funding Corp., 7.02s, 2000 390 390,652
------------
$ 18,103,058
- - -------------------------------------------------------------------------------
Utilities - Gas - 1.0%
Columbia Gas Systems, Inc., 6.39s, 2000 $ 2,127 $ 2,116,174
- - -------------------------------------------------------------------------------
Total U.S. Bonds $167,554,100
- - -------------------------------------------------------------------------------
Foreign Bonds - 10.2%
Argentina - 0.4%
Republic of Argentina, 0s, 2001 $ 941 $ 832,785
- - -------------------------------------------------------------------------------
Australia - 0.6%
Westpac Banking, 9.125s, 2001
(Banks and Credit Cos.) $ 1,175 $ 1,222,470
- - -------------------------------------------------------------------------------
Chile - 0.7%
Empresa Electric Guacolda S.A., 7.6s, 2001
(Utilities - Electric)# $ 1,520 $ 1,488,962
- - -------------------------------------------------------------------------------
China - 0.5%
Hero Asian BVI Co. Ltd., 9.11s, 2001 (Utilities)# $ 1,033 $ 1,005,938
- - -------------------------------------------------------------------------------
Germany - 2.3%
KFW International Finance Inc., 9.4s, 2004 $ 1,068 $ 1,177,961
Landesbank Baden Wurttemberg, 7.875s, 2004
(Banks and Credit Cos.) 3,445 3,585,212
------------
$ 4,763,173
- - -------------------------------------------------------------------------------
Norway - 1.6%
Union Bank Norway, 7.35s, 2049
(Banks and Credit Cos.)# $ 3,339 $ 3,265,208
- - -------------------------------------------------------------------------------
South Korea - 0.5%
Export-Import Bank Korea, 7.1s, 2007
(Banks and Credit Cos.) $ 900 $ 887,760
- - -------------------------------------------------------------------------------
Spain - 1.0%
Kingdom of Spain, 9.125s, 2000 $ 2,000 $ 2,043,160
- - -------------------------------------------------------------------------------
Supra-National - 1.8%
Corporacion Andina de Fomento, 7.1s, 2003
(Banks and Credit Cos.) $ 3,800 $ 3,723,240
- - -------------------------------------------------------------------------------
Sweden - 0.8%
AB Spintab, 6.8s, 2049 (Banks and Credit Cos.)# $ 1,620 $ 1,574,526
- - -------------------------------------------------------------------------------
Total Foreign Bonds $ 20,807,222
- - -------------------------------------------------------------------------------
Total Bonds (Identified Cost, $191,747,074) 188,361,322
- - -------------------------------------------------------------------------------
Repurchase Agreement - 10.8%
- - -------------------------------------------------------------------------------
Goldman Sachs, dated 10/29/99, due 11/01/99,
total to be received $22,179,570 (secured by
various U.S. Treasury and Federal Agency
obligations in a jointly traded account), at Cost $ 22,170 $ 22,170,000
- - -------------------------------------------------------------------------------
Total Investments (Identified Cost, $213,917,074) $210,531,322
Other Assets, Less Liabilities - (2.7)% (5,468,905)
- - -------------------------------------------------------------------------------
Net Assets - 100.0% $205,062,417
- - -------------------------------------------------------------------------------
#SEC Rule 144A restriction.
##Security segregated as collateral for an open futures contract.
See notes to financial statements.
<PAGE>
FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Statement of Assets and Liabilities (Unaudited)
- - ----------------------------------------------------------------------------------------
OCTOBER 31, 1999
- - ----------------------------------------------------------------------------------------
<S> <C>
Assets:
Investments, at value (identified cost, $191,747,074) $ 188,361,322
Repurchase agreement, at value 22,170,000
-------------
Total investments, at value (identified cost, $213,917,074) $ 210,531,322
Cash 41,303
Receivable for Fund shares sold 1,103,825
Receivable for investments sold 3,306,556
Interest receivable 2,609,939
Other assets 2,282
-------------
Total assets $ 217,595,227
-------------
Liabilities:
Distributions payable $ 228,193
Payable for Fund shares reacquired 829,292
Payable for investments purchased 11,284,094
Payable for daily variation margin on open futures contracts 28,000
Payable to affiliates -
Management fee 6,737
Shareholder servicing agent fee 1,684
Distribution and service fee 11,850
Administrative fee 253
Accrued expenses and other liabilities 142,707
-------------
Total liabilities $ 12,532,810
-------------
Net assets $ 205,062,417
=============
Net assets consist of:
Paid-in capital $ 220,292,497
Unrealized depreciation on investments (3,374,224)
Accumulated net realized loss on investments (11,648,829)
Accumulated distributions in excess of net investment income (207,027)
-------------
Total $ 205,062,417
-------------
Shares of beneficial interest outstanding 30,370,345
=============
Class A shares:
Net asset value per share
(net assets of $125,188,899 / 18,521,966 shares of beneficial
interest outstanding) $6.76
=====
Offering price per share (100 / 97.5 of net asset value per share) $6.93
=====
Class B shares:
Net asset value and offering price per share
(net assets of $53,601,625 / 7,958,531 shares of beneficial interest
outstanding) $6.74
=====
Class C shares:
Net asset value and offering price per share
(net assets of $24,621,846 / 3,645,129 shares of beneficial interest
outstanding) $6.75
=====
Class I shares:
Net asset value, offering price, and redemption price per share
(net assets of $1,650,047 / 244,719 shares of beneficial interest
outstanding) $6.74
=====
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.
</TABLE>
See notes to financial statements.
<PAGE>
FINANCIAL STATEMENTS -- continued
Statement of Operations (Unaudited)
- - --------------------------------------------------------------------------
SIX MONTHS ENDED OCTOBER 31, 1999
- - --------------------------------------------------------------------------
Net investment income:
Interest income $ 6,880,384
-----------
Expenses -
Management fee $ 416,182
Trustees' compensation 12,515
Shareholder servicing agent fee 104,045
Distribution and service fee (Class A) 96,861
Distribution and service fee (Class B) 249,454
Distribution and service fee (Class C) 119,189
Administrative fee 15,606
Custodian fee 46,866
Printing 19,402
Postage 12,546
Auditing fees 16,158
Legal fees 2,021
Miscellaneous 126,263
-----------
Total expenses $ 1,237,108
Fees paid indirectly (11,581)
-----------
Net expenses $ 1,225,527
-----------
Net investment income $ 5,654,857
-----------
Realized and unrealized gain (loss) on investments:
Realized gain (loss) (identified cost basis) -
Investment transactions $(1,733,701)
Futures contracts 43,029
-----------
Net realized loss on investments $(1,690,672)
-----------
Change in unrealized appreciation (depreciation) -
Investments $(1,809,149)
Futures contracts 11,528
-----------
Net unrealized loss on investments $(1,797,621)
-----------
Net realized and unrealized loss on investments $(3,488,293)
-----------
Increase in net assets from operations $ 2,166,564
===========
See notes to financial statements.
<PAGE>
FINANCIAL STATEMENTS -- continued
<TABLE>
<CAPTION>
Statement of Changes in Net Assets
- - ------------------------------------------------------------------------------------------
SIX MONTHS ENDED YEAR ENDED
OCTOBER 31, 1999 APRIL 30, 1999
(UNAUDITED)
- - ------------------------------------------------------------------------------------------
<S> <C> <C>
Increase (decrease) in net assets:
From operations -
Net investment income $ 5,654,857 $ 10,889,038
Net realized loss on investments (1,690,672) (2,645,933)
Net unrealized loss on investments (1,797,621) (1,382,793)
------------- -------------
Increase in net assets from operations $ 2,166,564 $ 6,860,312
------------- -------------
Distributions declared to shareholders -
From net investment income (Class A) $ (3,623,286) $ (6,851,802)
From net investment income (Class B) (1,293,880) (2,396,262)
From net investment income (Class C) (566,172) (1,138,922)
From net investment income (Class I) (46,887) (109,991)
------------- -------------
Total distributions declared to shareholders $ (5,530,225) $ (10,496,977)
------------- -------------
Net increase (decrease) in net assets from Fund share
transactions $ (4,229,372) $ 60,124,700
------------- -------------
Total increase (decrease) in net assets $ (7,593,033) $ 56,488,035
Net assets:
At beginning of period 212,655,450 156,167,415
------------- -------------
At end of period (including accumulated distributions in
excess of net investment income of $207,027 and
$331,659, respectively) $ 205,062,417 $ 212,655,450
============= =============
</TABLE>
See notes to financial statements.
<PAGE>
FINANCIAL STATEMENTS -- continued
<TABLE>
<CAPTION>
Financial Highlights
- - -------------------------------------------------------------------------------------------------------------------------------
YEAR ENDED APRIL 30,
SIX MONTHS ENDED ----------------------------------------------------------------------
OCTOBER 31, 1999 1999 1998 1997 1996 1995
(UNAUDITED)
- - ----------------------------------------------------------------------------------------------------------------------------------
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 $ 6.87 $ 6.99 $ 7.04 $ 7.12 $ 7.10 $ 7.14
------ ------ ------ ------ ------ ------
Income from investment operations# -
Net investment income(S) $ 0.20 $ 0.43 $ 0.48 $ 0.47 $ 0.48 $ 0.46
Net realized and unrealized gain
(loss) on investments (0.12) (0.14) (0.07) (0.06) 0.03 (0.04)
------ ------ ------ ------ ------ ------
Total from investment
operations $ 0.08 $ 0.29 $ 0.41 $ 0.41 $ 0.51 $ 0.42
------ ------ ------ ------ ------ ------
Less distributions declared to
shareholders -
From net investment income $(0.19) $(0.41) $(0.46) $(0.47) $(0.48) $(0.46)
In excess of net investment
income -- -- -- (0.02) (0.01) --
------ ------ ------ ------ ------ ------
Total distributions declared
to shareholders $(0.19) $(0.41) $(0.46) $(0.49) $(0.49) $(0.46)
------ ------ ------ ------ ------ ------
Net asset value - end of period $ 6.76 $ 6.87 $ 6.99 $ 7.04 $ 7.12 $ 7.10
====== ====== ====== ====== ====== ======
Total return(+) 1.22%++ 4.26% 5.97% 5.83% 7.50% 6.09%
Ratios (to average net assets)/
Supplemental data(S):
Expenses## 0.89%+ 0.84% 0.89% 0.94% 0.95% 0.95%
Net investment income 5.75%+ 6.14% 6.70% 6.57% 6.73% 6.54%
Portfolio turnover 35% 278% 288% 489% 385% 498%
Net assets at end of period (000
Omitted) $125,189 $134,086 $95,342 $91,887 $98,582 $85,773
(S) Subject to reimbursement by the Fund, MFS has voluntarily agreed, under a temporary expense reimbursement agreement, to pay
all of the Fund's operating expenses, exclusive of management and distribution and service fees. In consideration, the Fund
pays MFS a fee not greater than 0.40% of average daily net assets. To the extent actual expenses were over/under this
limitation, the net investment income per share and the ratios would have been:
Net investment income -- -- $ 0.48 $ 0.47 $ 0.48 $ 0.46
Ratios (to average net assets):
Expenses## -- -- 0.87% 0.89% 0.91% 0.97%
Net investment income -- -- 6.72% 6.62% 6.77% 6.52%
+ Annualized.
++ Not annualized.
# Per share data are based on average shares outstanding.
## Ratios do not reflect expense reductions from certain expense offset arrangements.
(+) Total returns for Class A shares do not include the applicable sales charge. If the charge had been included, the results
would have been lower.
</TABLE>
See notes to financial statements.
<PAGE>
FINANCIAL STATEMENTS -- continued
<TABLE>
<CAPTION>
Financial Highlights - continued
- - -------------------------------------------------------------------------------------------------------------------------------
YEAR ENDED APRIL 30,
SIX MONTHS ENDED ---------------------------------------------------------------------
OCTOBER 31, 1999 1999 1998 1997 1996 1995
(UNAUDITED)
- - -------------------------------------------------------------------------------------------------------------------------------
CLASS B
- - -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Per share data (for a share outstanding
throughout each period):
Net asset value - beginning of period $ 6.85 $ 6.97 $ 7.03 $ 7.11 $ 7.10 $ 7.14
------ ------ ------ ------ ------ ------
Income from investment operations# -
Net investment income(S) $ 0.17 $ 0.38 $ 0.41 $ 0.41 $ 0.42 $ 0.41
Net realized and unrealized gain
(loss) on investments (0.11) (0.14) (0.07) (0.05) 0.03 (0.05)
------ ------ ------ ------ ------ ------
Total from investment
operations $ 0.06 $ 0.24 $ 0.34 $ 0.36 $ 0.45 $ 0.36
------ ------ ------ ------ ------ ------
Less distributions declared to
shareholders -
From net investment income $(0.17) $(0.36) $(0.40) $(0.42) $(0.42) $(0.40)
In excess of net investment income -- -- -- (0.02) (0.02) --
------ ------ ------ ------ ------ ------
Total distributions declared to
shareholders $(0.17) $(0.36) $(0.40) $(0.44) $(0.44) $(0.40)
------ ------ ------ ------ ------ ------
Net asset value - end of period $ 6.74 $ 6.85 $ 6.97 $ 7.03 $ 7.11 $ 7.10
====== ====== ====== ====== ====== ======
Total return 0.83%++ 3.48% 4.98% 4.99% 6.52% 5.20%
Ratios (to average net assets)/
Supplemental data(S):
Expenses## 1.67%+ 1.61% 1.70% 1.78% 1.75% 1.81%
Net investment income 4.95%+ 5.33% 5.80% 5.75% 5.90% 5.73%
Portfolio turnover 35% 278% 288% 489% 385% 498%
Net assets at end of period
(000 Omitted) $53,602 $52,883 $39,229 $34,875 $26,464 $17,334
(S) Subject to reimbursement by the Fund, MFS has voluntarily agreed, under a temporary expense reimbursement agreement, to pay
all of the Fund's operating expenses, exclusive of management and distribution and service fees. In consideration, the Fund
pays MFS a fee not greater than 0.40% of average daily net assets. To the extent actual expenses were over/under this
limitation, the net investment income per share and the ratios would have been:
Net investment income -- -- $ 0.41 $ 0.41 $ 0.42 $ 0.41
Ratios (to average net assets):
Expenses## -- -- 1.68% 1.77% 1.77% 1.82%
Net investment income -- -- 5.82% 5.76% 5.88% 5.72%
+ Annualized.
++ Not annualized.
# Per share data are based on average shares outstanding.
## Ratios do not reflect expense reductions from certain expense offset arrangements.
</TABLE>
See notes to financial statements.
<PAGE>
FINANCIAL STATEMENTS -- continued
<TABLE>
<CAPTION>
Financial Highlights - continued
- - -----------------------------------------------------------------------------------------------------------------------------
YEAR ENDED APRIL 30, PERIOD ENDED
SIX MONTHS ENDED -------------------------------------------------- APRIL 30,
OCTOBER 31, 1999 1999 1998 1997 1996 1995*
(UNAUDITED)
- - -----------------------------------------------------------------------------------------------------------------------------
CLASS C
- - -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Per share data (for a share outstanding
throughout each period):
Net asset value - beginning of
period $ 6.86 $ 6.99 $ 7.05 $ 7.13 $ 7.11 $ 7.08
------ ------ ------ ------ ------ ------
Income from investment operations# -
Net investment income(S) $ 0.17 $ 0.36 $ 0.41 $ 0.41 $ 0.41 $ 0.37
Net realized and unrealized gain
(loss) on investments (0.12) (0.14) (0.07) (0.06) 0.04 (0.01)
------ ------ ------ ------ ------ ------
Total from investment
operations $ 0.05 $ 0.22 $ 0.34 $ 0.35 $ 0.45 $ 0.36
------ ------ ------ ------ ------ ------
Less distributions declared to
shareholders -
From net investment income $(0.16) $(0.35) $(0.40) $(0.41) $(0.41) $(0.33)
In excess of net investment income -- -- -- (0.02) (0.02) --
------ ------ ------ ------ ------ ------
Total distributions declared
to shareholders $(0.16) $(0.35) $(0.40) $(0.43) $(0.43) $(0.33)
------ ------ ------ ------ ------ ------
Net asset value - end of period $ 6.75 $ 6.86 $ 6.99 $ 7.05 $ 7.13 $ 7.11
====== ====== ====== ====== ====== ======
Total return 0.79%++ 3.23% 4.94% 5.08% 6.44% 5.25%++
Ratios (to average net assets)/
Supplemental data(S):
Expenses## 1.74%+ 1.69% 1.74% 1.80% 1.80% 1.85%+
Net investment income 4.88%+ 5.19% 5.76% 5.80% 5.76% 6.01%+
Portfolio turnover 35% 278% 288% 489% 385% 498%
Net assets at end of period
(000 Omitted) $24,622 $24,228 $20,131 $18,862 $13,842 $4,450
(S) Subject to reimbursement by the Fund, MFS has voluntarily agreed, under a temporary expense reimbursement agreement, to pay
all of the Fund's operating expenses, exclusive of management and distribution and service fees. In consideration, the Fund
pays MFS a fee not greater than 0.40% of average daily net assets. To the extent actual expenses were over/under this
limitation, the net investment income per share and the ratios would have been:
Net investment income -- -- $ 0.41 $ 0.41 $ 0.41 $ 0.37
Ratios (to average net assets):
Expenses## -- -- 1.72% 1.81% 1.75% 1.88%+
Net investment income -- -- 5.78% 5.80% 5.81% 5.98%+
* For the period from the inception of Class C, July 1, 1994, through April 30, 1995.
+ Annualized.
++ Not annualized.
# Per share data are based on average shares outstanding.
## Ratios do not reflect expense reductions from certain expense offset arrangements.
</TABLE>
See notes to financial statements.
<PAGE>
FINANCIAL STATEMENTS -- continued
<TABLE>
<CAPTION>
Financial Highlights - continued
- - -----------------------------------------------------------------------------------------------------------------------------
YEAR ENDED APRIL 30, PERIOD ENDED
SIX MONTHS ENDED ------------------------------ APRIL 30,
OCTOBER 31, 1999 1999 1998 1997*
(UNAUDITED)
- - -----------------------------------------------------------------------------------------------------------------------------
CLASS I
- - -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per share data (for a share outstanding
throughout each period):
Net asset value - beginning of period $ 6.85 $ 6.98 $ 7.04 $ 7.08
------ ------ ------ ------
Income from investment operations# -
Net investment income(S) $ 0.20 $ 0.43 $ 0.48 $ 0.15
Net realized and unrealized loss on investments (0.11) (0.14) (0.07) (0.03)
------ ------ ------ ------
Total from investment operations $ 0.09 $ 0.29 $ 0.41 $ 0.12
------ ------ ------ ------
Less distributions declared to shareholders -
From net investment income $(0.20) $(0.42) $(0.47) $(0.15)
In excess of net investment income -- -- -- (0.01)
------ ------ ------ ------
Total distributions declared to shareholders $(0.20) $(0.42) $(0.47) $(0.16)
------ ------ ------ ------
Net asset value - end of period $ 6.74 $ 6.85 $ 6.98 $ 7.04
====== ====== ====== ======
Total return 1.30%++ 4.28% 5.98% 1.72%++
Ratios (to average net assets)/Supplemental data(S):
Expenses## 0.74%+ 0.69% 0.74% 1.17%+
Net investment income 5.89%+ 6.21% 6.75% 8.68%+
Portfolio turnover 35% 278% 288% 489%
Net assets at end of period (000 Omitted) $1,650 $1,459 $1,466 $1,925
(S) Subject to reimbursement by the Fund, MFS has voluntarily agreed, under a temporary expense reimbursement agreement, to pay
all of the Fund's operating expenses, exclusive of management and distribution and service fees. In consideration, the Fund
pays MFS a fee not greater than 0.40% of average daily net assets. To the extent actual expenses were over/under this
limitation, the net investment income per share and the ratios would have been:
Net investment income -- -- $ 0.49 $ 0.15
Ratios (to average net assets):
Expenses## -- -- 0.72% 1.17%+
Net investment income -- -- 6.77% 8.68%+
* For the period from the inception of Class I, January 2, 1997, through April 30, 1997.
+ Annualized.
++ Not annualized.
# Per share data are based on average shares outstanding.
## Ratios do not reflect expense reductions from certain expense offset arrangements.
</TABLE>
See notes to financial statements.
<PAGE>
NOTES TO FINANCIAL STATEMENTS (Unaudited)
(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 listed on commodities exchanges are reported at market value using
closing settlement prices. Securities for which there are no such quotations or
valuations are valued in good faith by 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 collateral 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 collateral to ensure that its value, including
accrued interest, 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.
Futures Contracts - The Fund may enter into futures contracts for the delayed
delivery of securities or contracts based on financial indices at a fixed price
on a future date. In entering such contracts, the Fund is required to deposit
with the broker 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
contract, and recorded for financial statement purposes as unrealized gains or
losses by the Fund. The Fund's investment in futures contracts is designed to
hedge against anticipated future changes in interest rates. Investment in
interest rate futures for purposes other than hedging may be made to modify the
duration of the portfolio without incurring the additional transaction costs
involved in buying and selling the underlying securities. Should interest rates
move unexpectedly, the Fund may not achieve the anticipated benefits of the
futures contracts and may realize a loss.
Investment Transactions and Income - Investment transactions are recorded on the
trade date. Interest income is recorded on the accrual basis. All discount is
accreted for financial statement and tax reporting purposes as required by
federal income tax regulations. Interest payments received in additional
securities are recorded on the ex-interest date in an amount equal to the value
of the security on such date.
Fees Paid Indirectly - The Fund's custody fee is calculated as a percentage of
the Fund's month end net assets. The fee is reduced according to an arrangement
that measures the value of cash deposited with the custodian by the Fund. This
amount is shown as a reduction of expenses on the Statement of Operations.
Tax Matters and Distributions - The Fund's policy is to comply with the
provisions of the Internal Revenue Code (the Code) applicable to regulated
investment companies and to distribute to shareholders all of its taxable
income, including any net realized gain on investments. Accordingly, no
provision for federal income or excise tax is provided.
Distributions to shareholders are recorded on the ex-dividend date. 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 be reported in the financial statements as distributions from paid-in
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 net realized gains.
At April 30, 1999, the Fund, for federal income tax purposes, had a capital loss
carryforward of $9,938,324 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), April 30, 2005, ($1,432,459), April 30, 2006,
($549,779), and April 30, 2007, ($4,336,622).
Multiple Classes of Shares of Beneficial Interest - The Fund offers multiple
classes of shares, which differ in their respective distribution and service
fees. All shareholders bear the common expenses of the Fund based on the value
of settled shares outstanding of each class, without distinction between share
classes. Dividends are declared separately for each class. Differences in per
share dividend rates are generally due to differences in separate class expense.
Class B shares will convert to Class A shares approximately eight years after
purchase.
(3) Transactions with Affiliates
Investment Adviser - The Fund has an investment advisory agreement with
Massachusetts Financial Services Company 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.
The Fund pays no compensation directly to its Trustees who are officers of the
investment adviser, or to officers of the Fund, all of whom receive remuneration
for their services to the Fund from MFS. Certain officers and Trustees of the
Fund are officers or directors of MFS, MFS Fund Distributors, Inc. (MFD), and
MFS Service Center, Inc. (MFSC). The Fund has an unfunded defined benefit plan
for all of its independent Trustees and Mr. Bailey. Included in Trustees'
compensation is a net periodic pension expense of $4,403 for the six months
ended October 31, 1999.
Administrator - The Fund has an administrative services agreement with MFS to
provide the Fund with certain financial, legal, shareholder servicing,
compliance, and other administrative services. As a partial reimbursement for
the cost of providing these services, the Fund pays MFS an administrative fee at
the following annual percentages of the Fund's average daily net assets:
First $1 billion 0.0150%
Next $1 billion 0.0125%
Next $1 billion 0.0100%
In excess of $3 billion 0.0000%
Distributor - MFD, a wholly owned subsidiary of MFS, as distributor, received
$26,180 for the six months ended October 31, 1999, 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 paid 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 and 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. MFD retains the service fee for accounts not attributable to a
securities dealer, which amounted to $7,972 for the six months ended October 31,
1999. Fees incurred under the distribution plan during the six months ended
October 31, 1999, were 0.15% of average daily net assets attributable to Class A
shares on an annualized basis. Payment of the remaining 0.10% per annum Class A
service fee and of the 0.10% per annum Class A distribution fee will be
implemented on such date as the Trustees of the Trust may determine.
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 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 $1,047 and $24 for Class B and Class C shares, respectively, for the
six months ended October 31, 1999. Fees incurred under the distribution plan
during the six months ended October 31, 1999, were 0.93% and 1.00% of average
daily net assets attributable to Class B and Class C shares, respectively, on an
annual basis. Except in the case of the 0.25% per annum Class B service fee paid
upon the sale of Class B shares in the first year, the Class B service fee is
0.15% per annum and may increase to a maximum of 0.25% per annum on such date as
the Trustees of the Trust may determine.
Certain Class A and Class C shares are subject to a contingent deferred sales
charge in the event of a shareholder redemption within 12 months following
purchase. A contingent deferred sales charge is imposed on shareholder
redemptions of Class B shares in the event of a shareholder redemption within
six years of purchase. MFD receives all contingent deferred sales charges.
Contingent deferred sales charges imposed during the six months ended October
31, 1999, were $21,860, $102,585, and $4,339 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
0.10%.
(4) Portfolio Securities
Purchases and sales of investments, other than short-term obligations, were as
follows:
PURCHASES SALES
- - -------------------------------------------------------------------------------
U.S. government securities $17,783,712 $21,931,160
----------- -----------
Investments (non-U.S. government securities) $49,243,443 $54,344,585
----------- -----------
The cost and unrealized appreciation and depreciation in the value of the
investments owned by the Fund, as computed on a federal income tax basis, are
as follows:
Aggregate cost $213,917,074
------------
Gross unrealized depreciation $ (3,494,851)
Gross unrealized appreciation 109,099
------------
Net unrealized depreciation $ (3,385,752)
============
(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. Transactions in
Fund shares were as follows:
<TABLE>
<CAPTION>
Class A Shares
SIX MONTHS ENDED OCTOBER 31, 1999 YEAR ENDED APRIL 30, 1999
--------------------------------- ------------------------------
SHARES AMOUNT SHARES AMOUNT
- - ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Shares sold 13,332,468 $ 90,899,287 89,884,749 $ 625,609,406
Shares issued to shareholders
in reinvestment of
distributions 413,789 2,806,665 718,455 4,986,426
Shares reacquired (14,741,949) (100,501,689) (84,729,931) (589,753,636)
------------- ------------- ------------- -------------
Net increase (decrease) (995,692) $ (6,795,737) 5,873,273 $ 40,842,196
============= ============= ============= =============
<CAPTION>
Class B Shares
SIX MONTHS ENDED OCTOBER 31, 1999 YEAR ENDED APRIL 30, 1999
--------------------------------- ------------------------------
SHARES AMOUNT SHARES AMOUNT
- - ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Shares sold 2,510,031 $ 16,995,191 7,595,456 $ 52,632,457
Shares issued to shareholders
in reinvestment of
distributions 137,943 932,726 247,817 1,712,458
Shares reacquired (2,414,846) (16,349,446) (5,746,325) (39,697,324)
------------- ------------- ------------- -------------
Net increase 233,128 $ 1,578,471 2,096,948 $ 14,647,591
============= ============= ============= =============
<CAPTION>
Class C Shares
SIX MONTHS ENDED OCTOBER 31, 1999 YEAR ENDED APRIL 30, 1999
--------------------------------- ------------------------------
SHARES AMOUNT SHARES AMOUNT
- - ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Shares sold 1,716,883 $ 11,623,939 3,684,433 $ 25,649,796
Shares issued to shareholders
in reinvestment of
distributions 53,069 359,808 109,967 762,710
Shares reacquired (1,654,310) (11,212,339) (3,144,596) (21,810,087)
------------- ------------- ------------- -------------
Net increase 115,642 $ 771,408 649,804 $ 4,602,419
============= ============= ============= =============
<CAPTION>
Class I Shares
SIX MONTHS ENDED OCTOBER 31, 1999 YEAR ENDED APRIL 30, 1999
--------------------------------- ------------------------------
SHARES AMOUNT SHARES AMOUNT
- - ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Shares sold 36,067 $ 245,192 153,379 $ 1,065,556
Shares issued to shareholders
in reinvestment of
distributions 6,932 46,920 15,876 109,990
Shares reacquired (11,146) (75,626) (166,408) (1,143,052)
------------- ------------- ------------- -------------
Net increase 31,853 $ 216,486 2,847 $ 32,494
============= ============= ============= =============
</TABLE>
(6) Line of Credit
The Fund and other affiliated funds participate in an $820 million unsecured
line of credit provided by a syndication of banks under a line of credit
agreement. Borrowings may be made to temporarily finance the repurchase of Fund
shares. Interest is charged to each fund, based on its borrowings, at a rate
equal to the bank's base rate. In addition, a commitment fee, based on the
average daily unused portion of the line of credit, is allocated among the
participating funds at the end of each quarter. The commitment fee allocated to
the Fund for the six months ended October 31, 1999, was $663. The Fund had no
significant borrowings during the period.
(7) Financial Instruments
The Fund trades financial instruments with off-balance-sheet risk in the normal
course of its investing activities in order to manage exposure to market risks
such as interest rates. These financial instruments include futures contracts.
The notional or contractual amounts of these instruments represent the
investment the Fund has in particular classes of financial instruments and does
not necessarily represent the amounts potentially subject to risk. The
measurement of the risks associated with these instruments is meaningful only
when all related and offsetting transactions are considered.
Futures Contracts
UNREALIZED
DESCRIPTION EXPIRATION CONTRACTS POSITION APPRECIATION
- - --------------------------------------------------------------------------------
U.S. Treasury Notes December 1999 56 Short $11,528
At October 31, 1999, the Fund had sufficient cash and/or securities to cover any
margin requirements under these contracts.
<PAGE>
MFS' YEAR 2000 READINESS DISCLOSURE
MFS Investment Management(R), as an investment adviser and
on behalf of the MFS funds, is committed to the effective
use of technology in managing our portfolio investments,
delivering high-quality service to MFS fund shareholders, [Graphic Omitted]
retirement plan participants, and MFS' institutional
clients, and supporting the financial consultants who sell
our products.
MFS can now say that it is ready for the Year 2000. Our testing has demonstrated
that MFS' computer hardware and software will recognize "00" as the Year 2000
and will not confuse those digits with 1900. All of our critical business
applications and processes have been successfully tested, and we have adopted
companywide policies that will help us maintain our readiness through the
remainder of the year. Any new technology that is brought into the company
before the end of the year will be held to the samestringent standards as our
current technology. We have also developed a vendor readiness survey, contacted
over 700 of our vendors, and established an ongoing process to review responses,
as well as to review readiness statements of new vendors and products.
MFS recognizes that fund shareholders and institutional clients also are
concerned about whether the companies whose securities are held in their
portfolios are addressing Y2K issues. As part of the MFS Original Research(R)
process of evaluating portfolio investments, one of the many relevant factors
that MFS' portfolio managers and research analysts may consider is a company's
Y2K readiness.
Y2K readiness is an enormously complex, worldwide issue. No company or
institution can guarantee that it will be unaffected by the Y2K issue. While MFS
is taking significant steps to protect the integrity of its internal systems,
there can be no assurance that these steps will be sufficient to avoid any
adverse impact on MFS fund shareholders, retirement plan participants, or
institutional clients.
If you have further questions regarding MFS' Year 2000 Readiness Program, please
visit our Web site at www.mfs.com, call our toll-free line, 1-800-637-4406, or
write to the MFS Year 2000 Program Management Office by e-mail at [email protected] or
by letter at 500 Boylston Street, Boston, MA 02116-3741.
<PAGE>
MFS(R) MUNICIPAL LIMITED MATURITY FUND
<TABLE>
<S> <C>
TRUSTEES SECRETARY
Richard B. Bailey - Private Investor; Former Stephen E. Cavan*
Chairman and Director (until 1991), MFS Investment
Management(R) ASSISTANT SECRETARY
James R. Bordewick, Jr.*
J. Atwood Ives+ - Chairman and Chief Executive
Officer, Eastern Enterprises (diversified services CUSTODIAN
company) State Street Bank and Trust Company
Lawrence T. Perera+ - Partner, Hemenway & Barnes INVESTOR INFORMATION
(attorneys) For information on MFS mutual funds, call your
financial consultant or, for an information kit,
William J. Poorvu+ - Adjunct Professor, Harvard call toll free: 1-800-637-2929 any business day
University Graduate School of Business from 9 a.m. to 5 p.m. Eastern time (or leave a
Administration message anytime).
Charles W. Schmidt+ - Private Investor INVESTOR SERVICE
MFS Service Center, Inc.
Arnold D. Scott* - Senior Executive Vice P.O. Box 2281
President, Director, and Secretary, MFS Investment Boston, MA 02107-9906
Management
For general information, call toll free:
Jeffrey L. Shames* - Chairman and Chief Executive 1-800-225-2606 any business day from
Officer, MFS Investment Management 8 a.m. to 8 p.m. Eastern time.
Elaine R. Smith+ - Independent Consultant For service to speech- or hearing-impaired, call
toll free: 1-800-637-6576 any business day from
David B. Stone+ - Chairman, North American 9 a.m. to 5 p.m. Eastern time. (To use this service,
Management Corp. (investment advisers) your phone must be equipped with a
Telecommunications Device for the Deaf.)
INVESTMENT ADVISER
Massachusetts Financial Services Company For share prices, account balances, exchanges, or
500 Boylston Street MFS stock and bond market outlooks, call toll
Boston, MA 02116-3741 free: 1-800-MFS-TALK (1-800-637-8255) anytime from
a touch-tone telephone.
DISTRIBUTOR
MFS Fund Distributors, Inc. WORLD WIDE WEB
500 Boylston Street www.mfs.com
Boston, MA 02116-3741
CHAIRMAN AND PRESIDENT
Jeffrey L. Shames*
PORTFOLIO MANAGER
James J. Calmas*
TREASURER
W. Thomas London*
ASSISTANT TREASURERS
Mark E. Bradley*
Ellen Moynihan*
James O. Yost*
+ Independent Trustee
* MFS Investment Management
</TABLE>
<PAGE>
MFS(R) LIMITED MATURITY FUND ------------
BULK RATE
U.S. POSTAGE
[Logo] M F S(R) PAID
INVESTMENT MANAGEMENT MFS
We invented the mutual fund(R) ------------
500 Boylston Street
Boston, MA 02116-3741
(c)1999 MFS Investment Management(R).
MFS(R) investment products are offered through MFS Fund Distributors, Inc.,
500 Boylston Street, Boston, MA 02116
MLM-3 12/99 16.5M 36/236/336/836
<PAGE>
EXHIBIT NO. 99.17(e)
MFS(R) INTERMEDIATE INCOME FUND
SUPPLEMENT DATED APRIL 1, 1999 TO THE CURRENT PROSPECTUS
This Supplement describes the fund's class I shares, and it supplements certain
information in the fund's Prospectus dated April 1, 1999. The caption headings
used in this Supplement correspond with the caption headings used in the
Prospectus.
You may purchase class I shares only if you are an eligible institutional
investor, as described under the caption "Description of Share Classes" below.
1. RISK RETURN SUMMARY
PERFORMANCE TABLE. The "Performance Table" is intended to indicate some of
the risks of investing in the fund by showing changes in the fund's performance
over time. The table is supplemented as follows:
Average Annual Total Returns as of December 31, 1998
1 YEAR 5 YEARS 10 YEARS
------ ------- --------
Class I shares 5.74% 4.52% 6.03%
J. P. Morgan Non-Dollar Government
Bond Index*+ 18.28% 8.79% 8.76%
Lehman Brothers Intermediate Government
Bond Index**++ 8.49% 6.45% 8.34%
Lehman Brothers Mortgage Index***+++ 6.96% 7.23% 9.13%
- - ----------
* The J. P. Morgan Non-dollar Government Bond Index is a broad based unmanaged
aggregate of actively traded government bonds issued from 12 countries
(excluding the United States) with remaining maturities of at least one
year.
** The Lehman Brothers Intermediate Government Bond Index is a broad based
unmanaged, market-value-weighted index comprised of fixed-rate
investment-grade debt issues of the U.S. government and its agencies with a
remaining maturity of less than 10 years.
*** The Lehman Brothers Mortgage Index is a broad based unmanaged, total return
index made up of all fixed-rate securities backed by pools of the Government
National Mortgage Association (GNMA), the Federal Home Loan Mortgage
Corporation (FHLMC), and the Federal National Mortgage Association (FNMA).
+ Source: Lipper Analytical Services, Inc.
++ Source: DSA/Wiesenberger.
+++ Source: AIM.
The fund commenced investment operations on August 1, 1988 with the offering of
class B shares, and subsequently offered class I shares on January 2, 1997.
Class I share performance includes the performance of the fund's class B shares
for periods prior to the offering of class I shares. This blended class I share
performance has been adjusted to take into account the fact that class I shares
have no CDSC. This blended performance has not been adjusted to take into
account differences in class specific operating expenses. Class I share
performance generally would have been higher than class B share performance had
class I shares been offered for the entire period, because certain operating
expenses (e.g., distribution and service fees) attributable to class B shares
are higher than those of class I shares.
<PAGE>
2. EXPENSE SUMMARY
EXPENSE TABLE. The "Expense Table" describes the fees and expenses that you
may pay when you buy, redeem and hold shares of the fund. The table is
supplemented as follows:
ANNUAL FUND OPERATING EXPENSES
(EXPENSES THAT ARE DEDUCTED FROM FUND ASSETS)
Management Fees.......................................... 0.75%
Distribution and Service (12b-1) Fees.................... 0.00%
Other Expenses(1)........................................ 0.40%
-----
Total Annual Fund Operating Expenses..................... 1.15%
Fee Waiver(2).......................................... (0.20)%
Net Expenses........................................... 0.95%
- - --------------
(1) The fund has an expense offset arrangement which reduces the fund's
custodian fee based upon the amount of cash maintained by the fund with its
custodian and dividend disbursing agent. The fund may enter into other
similar arrangements and directed brokerage arrangements, which would also
have the effect of reducing the fund's expenses. "Other Expenses" do not
take into account these expense reductions, and therefore do not represent
the actual expenses of the fund.
(2) MFS has agreed to reduce its management fee to a maximum of 0.55% per annum
of the average daily net assets of the fund. This contractual fee
arrangement will remain in effect until at least April 1, 2000 absent an
earlier modification approved by the Board of Trustees which oversees the
fund.
EXAMPLE OF EXPENSES. The "Example of Expenses" table is intended to help you
compare the cost of investing in the fund with the cost of investing in other
mutual funds. The table is supplemented as follows:
SHARE CLASS YEAR 1 YEAR 3 YEAR 5 YEAR 10
----------- ------ ------ ------ -------
Class I shares $97 $303 $526 $1,166
3. DESCRIPTION OF SHARE CLASSES
The "Description of Share Classes" is supplemented as follows:
If you are an eligible institutional investor (as described below), you may
purchase class I shares at net asset value without an initial sales charge or
CDSC upon redemption. Class I shares do not have annual distribution and service
fees, and do not convert to any other class of shares of the fund.
The following eligible institutional investors may purchase class I shares:
o certain retirement plans established for the benefit of employees of MFS
and employees of MFS' affiliates; and
o any fund distributed by MFS, if the fund seeks to achieve its investment
objective by investing primarily in shares of the fund and other MFS
funds.
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 in
class I shares.
<PAGE>
4. HOW TO PURCHASE, EXCHANGE AND REDEEM SHARES
The discussion of "How to Purchase, Exchange and Redeem Shares" is supplemented
as follows:
You may purchase, redeem and exchange class I shares only through your MFD
representative or by contacting MFSC (see the back cover of the Prospectus for
address and phone number). You may exchange your class I shares for class I
shares of another MFS Fund (if you are eligible to purchase them) and for shares
of the MFS Money Market Fund at net asset value.
5. FINANCIAL HIGHLIGHTS
The "Financial Highlights" table is intended to help you understand the fund's
financial performance. It is supplemented as follows:
FINANCIAL HIGHLIGHTS - CLASS I SHARES
YEAR ENDED NOVEMBER 30, 1998 1997*
---- -----
Per share data (for a share outstanding throughout
each period):
Net asset value - beginning of period $ 8.41 $ 8.43
------ ------
Income from investment operations # -
Net investment incomess. $ 0.55 $ 0.61
Net realized and unrealized loss
on investments and foreign currency
transactions (0.07) (0.17)
------ ------
Total from investment operations $ 0.48 $ 0.44
------ ------
Less distributions declared to shareholders -
From net investment income $(0.52) $(0.46)
------ ------
From paid-in capital (0.06) --
------ ------
Total distributions declared to
shareholders $(0.58) $(0.46)
------ ------
Net asset value - end of period $ 8.31 $ 8.41
------ ------
Total return 5.97% 5.07%++
Ratios (to average net assets)/Supplemental data:
Expenses## 1.10% 1.03%+
Net investment income 6.36% 6.52%+
Portfolio turnover 173% 226%
Net assets, end of period (000 omitted) $8 $3
- - -----------
* For the period from the inception of class I shares, January 2, 1997 through
November 30, 1997.
+ Annualized
++ Not annualized
# Per share data are based on average shares outstanding.
## The fund has an expense offset arrangement which reduces the fund's
custodian fee based upon the amount of cash maintained by the fund with its
custodian and dividend disbursing agent. The fund's expenses are calculated
without reduction for this expense offset arrangement.
(S) The investment adviser waived a portion of its management fee for certain of
the periods indicated. If the fee had been incurred by the fund, the net
investment income per share and the ratios would have been:
Net investment income $0.55 --
------ ------
Ratios (to average net assets):
Expenses## 1.13% --
Net investment income 6.33% --
THE DATE OF THIS SUPPLEMENT IS APRIL 1, 1999.
<PAGE>
- - -------------------------------
MFS(R) INTERMEDIATE INCOME FUND
- - -------------------------------
APRIL 1, 1999
PROSPECTUS
CLASS A SHARES OF BENEFICIAL INTEREST
CLASS B SHARES OF BENEFICIAL INTEREST
- - --------------------------------------------------------------------------------
This Prospectus describes the MFS Intermediate Income Fund. The investment
objective of the fund is to preserve capital and provide high current income.
THE SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED THE FUND'S SHARES OR
DETERMINED WHETHER THIS PROSPECTUS IS ACCURATE OR COMPLETE. ANYONE WHO TELLS
YOU OTHERWISE IS COMMITTING A CRIME.
<PAGE>
-----------------
TABLE OF CONTENTS
-----------------
Page
I Risk Return Summary ................................... 1
II Expense Summary ....................................... 8
III Certain Investment Strategies and Risks ............... 10
IV Management of the Fund ................................ 11
V Description of Share Classes .......................... 12
VI How to Purchase, Exchange and Redeem Shares ........... 15
VII Investor Services and Programs ........................ 19
VIII Other Information ..................................... 21
IX Financial Highlights .................................. 24
Appendix A -- Investment Techniques and Practices ..... A-1
Appendix B -- Sales Charge Categories Available to
Certain Retirement Plans .............................. B-1
<PAGE>
----------------------
I RISK RETURN SUMMARY
----------------------
o INVESTMENT OBJECTIVE
The fund's investment objective is to preserve capital and provide high
current income. The fund's objective may be changed without shareholder
approval.
o PRINCIPAL INVESTMENT POLICIES
The fund invests, under normal market conditions, at least 65% of its
total assets in fixed income securities with "intermediate" maturities
(generally securities with remaining maturities of 10 years or less).
These securities may include:
o U.S. government securities, which are bonds or other debt obligations
issued by, or whose principal and interest payments are guaranteed or
supported by, the U.S. government or one of its agencies or
instrumentalities (including mortgage-backed securities),
o foreign government securities, which are bonds or other debt obligations
issued by foreign governments, including emerging market governments, as
described above,
o corporate bonds, which are bonds or other debt obligations issued by
domestic or foreign (including emerging market) corporations or other
similar entities,
o mortgage-backed and asset-backed securities, which represent interests
in a pool of assets such as mortgage loans, car loan receivables, or
credit card receivables.
Fixed income securities with intermediate maturities may include:
o securities with remaining maturities of 10 years or less,
o securities with estimated remaining average lives of 10 years or less,
o securities with a "duration" of 10 years or less (the fund determines
the duration of a fixed income security by taking the present value of
all its future principal and interest payments and calculating the
dollar-weighted average time until those payments will be received).
Under normal market conditions, the fund's average weighted portfolio
maturity will be between 3 and 7 years.
In selecting fixed income investments for the fund, MFS considers the
views of its large group of fixed income portfolio managers and research
analysts. This group periodically assesses the three-month total return
outlook for various segments of the fixed income markets. This three-month
"horizon" outlook is used by the portfolio manager(s) of MFS' fixed income
oriented funds (including the fund) as a tool in making or adjusting a
fund's asset allocations to various segments of the fixed income markets.
In assessing the credit quality of fixed income securities, MFS does not
rely solely on the credit ratings assigned by credit rating agencies, but
rather performs its own independent credit analysis.
The fund may invest in derivative securities. Derivatives are securities
whose value may be based on other securities, currencies, interest rates,
or indices. Derivatives include:
o futures and forward contracts,
o options on futures contracts, foreign currencies, securities and bond
indices,
o structured notes and indexed securities, and
o swaps, caps, collars and floors.
The fund is a non-diversified mutual fund. This means that the fund may
invest a relatively high percentage of its assets in a small number of
issuers.
o PRINCIPAL RISKS OF AN INVESTMENT
The principal risks of investing in the fund and the circumstances
reasonably likely to cause the value of your investment in the fund to
decline are described below. As with any non-money market mutual fund, the
share price of the fund will change daily based on market conditions and
other factors. Please note that there are many circumstances which could
cause the value of your investment in the fund to decline, and which could
prevent the fund from achieving its objective, that are not described
here.
The principal risks of investing in the fund are:
o Interest Rate Risk: When interest rates rise, the prices of fixed income
securities in the fund's portfolio will generally fall. Conversely, when
interest rates fall, the prices of fixed income securities in the fund's
portfolio will generally rise.
o Maturity Risk: Interest rate risk will generally affect the price of a
fixed income security more if the security has a longer maturity. Fixed
income securities with intermediate maturities will be less volatile but
generally provide lower returns than fixed income securities with longer
maturities. The average maturity of the fund's fixed income investments
will affect the volatility of the fund's share price.
o Allocation Risk: The fund will allocate its investments among various
segments of the fixed income markets based upon judgments made by MFS.
The fund could miss attractive investment opportunities by
underweighting markets where there are significant returns, and could
lose value by overweighting markets where there are significant
declines.
o Credit Risk: Credit risk is the risk that the issuer of a fixed income
security will not be able to pay principal and interest when due. Rating
agencies assign credit ratings to certain fixed income securities to
indicate their credit risk. The price of a fixed income security will
generally fall if the issuer defaults on its obligation to pay principal
or interest, the rating agencies downgrade the issuer's credit rating or
other news affects the market's perception of the issuer's credit risk.
o Foreign Securities: Investments in foreign securities involve risks
relating to political, social and economic developments abroad, as well
as risks resulting from the differences between the regulations to which
U.S. and foreign issuers and markets are subject:
|> These risks may include the seizure by the government of company
assets, excessive taxation, withholding taxes on dividends and
interest, limitations on the use or transfer of portfolio assets, and
political or social instability.
|> Enforcing legal rights may be difficult, costly and slow in foreign
countries, and there may be special problems enforcing claims against
foreign governments.
|> Foreign companies may not be subject to accounting standards or
governmental supervision comparable to U.S. companies, and there may
be less public information about their operations.
|> Foreign markets may be less liquid and more volatile than U.S.
markets.
|> Foreign securities often trade in currencies other than the U.S.
dollar, and the fund may directly hold foreign currencies and
purchase and sell foreign currencies through forward exchange
contracts. Changes in currency exchange rates will affect the fund's
net asset value, the value of dividends and interest earned, and
gains and losses realized on the sale of securities. An increase in
the strength of the U.S. dollar relative to these other currencies
may cause the value of the fund to decline. Certain foreign
currencies may be particularly volatile, and foreign governments may
intervene in the currency markets, causing a decline in value or
liquidity in the fund's foreign currency holdings. By entering into
forward foreign currency exchange contracts, the fund may be required
to forego the benefits of advantageous changes in exchange rates and,
in the case of forward contracts entered into for the purposes of
increasing return, the fund may sustain losses which will reduce its
gross income. Forward foreign currency exchange contracts involve the
risk that the party with which the fund enters the contract may fail
to perform its obligations to the fund.
o Emerging Markets Risk: Emerging markets are generally defined as
countries in the initial stages of their industrialization cycles with
low per capita income. Investments in emerging markets securities
involve all of the risks of investments in foreign securities, and also
have additional risks:
|> All of the risks of investing in foreign securities are heightened by
investing in emerging markets countries.
|> The markets of emerging markets countries have been more volatile
than the markets of developed countries with more mature economies.
These markets often have provided significantly higher or lower rates
of return than developed markets, and significantly greater risks, to
investors.
o Liquidity Risk: The fixed income securities purchased by the fund may be
traded in the over-the-counter market rather than on an organized
exchange and are subject to liquidity risk. This means that they may be
harder to purchase or sell at a fair price. The inability to purchase or
sell these fixed income securities at a fair price could have a negative
impact on the fund's performance.
o Mortgage and Asset-Backed Securities:
|> Maturity Risk:
+ Mortgage-Backed Securities: A mortgage-backed security will mature
when all the mortgages in the pool mature or are prepaid.
Therefore, mortgage-backed securities do not have a fixed
maturity, and their expected maturities may vary when interest
rates rise or fall.
> When interest rates fall, homeowners are more likely to prepay
their mortgage loans. An increased rate of prepayments on the
fund's mortgage-backed securities will result in an unforeseen
loss of interest income to the fund. Because prepayments
increase when interest rates fall, the price of mortgage-backed
securities does not increase as much as other fixed income
securities when interest rates fall.
> When interest rates rise, homeowners are less likely to prepay
their mortgage loans. A decreased rate of prepayments lengthens
the expected maturity of a mortgage-backed security. Therefore,
the prices of mortgage-backed securities may decrease more than
prices of other fixed income securities when interest rates
rise.
+ Collateralized Mortgage Obligations: The fund may invest in
mortgage-backed securities called collateralized mortgage
obligations (CMOs). CMOs are issued in separate classes with
different stated maturities. As the mortgage pool experiences
prepayments, the pool pays off investors in classes with shorter
maturities first. By investing in CMOs, the fund may manage the
prepayment risk of mortgage-backed securities. However,
prepayments may cause the actual maturity of a CMO to be
substantially shorter than its stated maturity.
+ Asset-Backed Securities: Asset-backed securities have prepayment
risks similar to mortgage-backed securities.
|> Credit Risk: As with any fixed income security, mortgage-backed and
asset- backed securities are subject to the risk that the issuer will
default on principal and interest payments. It may be difficult to
enforce rights against the assets underlying mortgage-backed and
asset-backed securities in the case of default. The U.S. government
or its agencies may guarantee the payment of principal and interest
on some mortgage-backed securities. Mortgage- backed securities and
asset-backed securities issued by private lending institutions or
other financial intermediaries may be supported by insurance or other
forms of guarantees.
o Derivatives Risk:
|> Hedging Risk: When a derivative is used as a hedge against an
opposite position that the fund also holds, any loss generated by the
derivative should be substantially offset by gains on the hedged
investment, and vice versa. While hedging can reduce or eliminate
losses, it can also reduce or eliminate gains.
|> Correlation Risk: When the fund used derivatives to hedge, it takes
the risk that changes in the value of the derivative will not match
those of the asset being hedged. Incomplete correlation can result in
unanticipated losses.
|> Investment Risk: When the fund uses derivatives as an investment
vehicle to gain market exposure, rather than for hedging purposes,
any loss on the derivative investment will not be offset by gains on
another hedged investment. The fund is therefore directly exposed to
the risks of that derivative. Gains or losses from derivative
investments may be substantially greater than the derivative's
original cost.
|> Availability Risk: Derivatives may not be available to the fund upon
acceptable terms. As a result, the fund may be unable to use
derivatives for hedging or other purposes.
|> Credit Risk: When the fund uses derivatives, it is subject to the
risk that the other party to the agreement will not be able to
perform.
o Non-Diversified Status Risk: Because the fund may invest a higher
percentage of its assets in a small number of issuers, the fund is more
susceptible to any single economic, political or regulatory event
affecting those issuers than is a diversified fund.
o As with any mutual fund, you could lose money on your investment in the
fund.
An investment in the fund is not a bank deposit and is not insured or
guaranteed by the Federal Deposit Insurance Corporation or any other
government agency.
o BAR CHART AND PERFORMANCE TABLE
The bar chart and performance table below are intended to indicate some of
the risks of investing in the fund by showing changes in the fund's
performance over time. The performance table also shows how the fund's
performance over time compares with that of a broad measure of market
performance. The chart and table provide past performance information. The
fund's past performance does not necessarily indicate how the fund will
perform in the future. The performance information in the chart and table
is based upon calendar year periods, while the performance information
presented under the caption "Financial Highlights" and in the fund's
shareholder reports is based upon the fund's fiscal year. Therefore, these
performance results differ.
BAR CHART
The bar chart shows changes in the annual total returns of the fund's
class B shares for the last ten calendar years. The chart and related
notes do not take into account any sales charges (loads) that you may be
required to pay upon purchase or redemption of the fund's shares, but do
include the reinvestment of distributions. Any sales charge will reduce
your return. The return of the fund's other classes of shares will differ
from the class B returns shown in the bar chart, depending upon the
expenses of those classes.
1989 7.50%
1990 7.09%
1991 11.82%
1992 2.38%
1993 9.19%
1994 (6.43)%
1995 15.12%
1996 3.81%
1997 4.91%
1998 4.63%
During the period shown in the bar chart, the highest quarterly return
was 5.48% (for the calendar quarter ended September 30, 1991) and the
lowest quarterly return was (4.20)% (for the calendar quarter ended March
31, 1994).
<PAGE>
PERFORMANCE TABLE
This table shows how the average annual total returns of each class of the
fund compares to a broad measure of market performance and various other
market indicators and assumes the reinvestment of distributions.
AVERAGE ANNUAL TOTAL RETURNS AS OF DECEMBER 31, 1998
..........................................................................
1 YEAR 5 YEARS 10 YEARS
Class A shares 0.61% 4.23% 5.92%
Class B shares 0.67% 3.87% 5.85%
J. P. Morgan Non-Dollar Government
Bond Index*+++ 18.28% 8.79% 8.76%
Lehman Brothers Intermediate Government
Bond Index**++ 8.49% 6.45% 8.34%
Lehman Brothers Mortgage Index***+++ 6.96% 7.23% 9.13%
------
* The J. P. Morgan Non-dollar Government Bond Index is a broad based
unmanaged aggregate of actively traded government bonds issued from
12 countries (excluding the United States) with remaining maturities
of at least one year.
** The Lehman Brothers Intermediate Government Bond Index is a broad
based unmanaged, market-value-weighted index comprised of fixed-rate
investment-grade debt issues of the U.S. government and its agencies
with a remaining maturity of less than 10 years.
*** The Lehman Brothers Mortgage Index is a broad based unmanaged, total
return index made up of all fixed-rate securities backed by pools of
the Government National Mortgage Association (GNMA), the Federal
Home Loan Mortgage Corporation (FHLMC), and the Federal National
Mortgage Association (FNMA).
+ Source: Lipper Analytical Services, Inc.
++ Source: CDA/Wiesenberger.
+++ Source: AIM.
Share performance is calculated according to Securities and Exchange
Commission rules. Class A share performance takes into account the
deduction of the 4.75% maximum sales charge. Class B share performance
takes into account the deduction of the applicable contingent deferred
sales charge (referred to as a CDSC), which declines over six years from
4% to 0%.
The fund commenced investment operations on August 1, 1988 with the
offering of class B shares, and subsequently offered class A shares on
September 7, 1993. Class A share performance includes the performance of
the fund's class B shares for periods prior to the offering of class A
shares. This blended class A performance has been adjusted to take into
account the initial sales charge applicable to class A shares, rather than
the CDSC applicable to class B shares. This blended performance has not
been adjusted to take into account differences in class specific operating
expenses. Class A share performance generally would have been higher than
class B share performance had class A shares been offered for the entire
period, because certain operating expenses (e.g., distribution and service
fees) attributable to class B shares are higher than those of class A
shares.
<PAGE>
-------------------
II EXPENSE SUMMARY
-------------------
o EXPENSE TABLE
This table describes the fees and expenses that you may pay when you buy,
redeem and hold shares of the fund.
SHAREHOLDER FEES (fees paid directly from your investment)
..........................................................................
CLASS A CLASS B
Maximum Sales Charge (Load) Imposed on Purchases (as a
percentage of offering price) ......................... 4.75% 0.00%
Maximum Deferred Sales Charge (Load) (as a percentage
of original purchase price or redemption proceeds,
whichever is less) .................................... See Below(1) 4.00%
ANNUAL FUND OPERATING EXPENSES (expenses that are deducted from fund assets)
..........................................................................
Management Fees ....................................... 0.75% 0.75%
Distribution and Service (12b-1) Fees(2) .............. 0.25% 1.00%
Other Expenses(3) ..................................... 0.40% 0.40%
----- -----
Total Annual Fund Operating Expenses .................. 1.40% 2.15%
Fee Waiver and/or Expense Reimbursement(4) ........ (0.45)% (0.20)%
Net Expenses ...................................... 0.95% 1.95%
------
(1) An initial sales charge will not be deducted from your purchase if you
buy $1 million or more of class A shares, or if you are investing
through a retirement plan and your class A purchase meets certain
requirements. However, in this case, a contingent deferred sales charge
(referred to as a CDSC) of 1% may be deducted from your redemption
proceeds if you redeem your investment within 12 months.
(2) The fund adopted a distribution plan under Rule 12b-1 that permits it
to pay marketing and other fees to support the sale and distribution
of class A and B shares and the services provided to you by your
financial adviser (referred to as distribution and service fees).
(3) The fund has an expense offset arrangement which reduces the fund's
custodian fee based upon the amount of cash maintained by the fund
with its custodian and dividend disbursing agent. The fund may enter
into other similar arrangements and directed brokerage arrangements,
which would also have the effect of reducing the fund's expenses.
"Other Expenses" do not take into account these expense reductions,
and are therefore higher than the actual expenses of the fund.
(4) MFS has agreed to reduce its management fee to 0.55% annually of the
average daily net assets of the fund. MFS has also agreed to waive
its right to receive the 0.25% per annum class A service fee. These
contractual fee arrangements will remain in effect until at least
April 1, 2000, absent an earlier modification approved by the Board of
Trustees which oversees the fund.
o EXAMPLE OF EXPENSES
These examples are intended to help you compare the cost of investing in
the fund with the cost of investing in other mutual funds.
The examples assume that:
o You invest $10,000 in the fund for the time periods indicated and you
redeem your shares at the end of the time periods;
o Your investment has a 5% return each year and dividends and other
distributions are reinvested; and
o The fund's operating expenses remain the same.
Although your actual costs may be higher or lower, under these assumptions
your costs would be:
SHARE CLASS YEAR 1 YEAR 3 YEAR 5 YEAR 10
--------------------------------------------------------------------------
Class A shares $567 $763 $ 976 $1,586
Class B shares
Assuming redemption at end of
period $598 $912 $1,252 $2,013
Assuming no redemption $198 $612 $1,052 $2,013
<PAGE>
--------------------------------------------
III CERTAIN INVESTMENT STRATEGIES AND RISKS
--------------------------------------------
The fund may invest in various types of securities and engage in various
investment techniques and practices which are not the principal focus of
the fund and therefore are not described in this Prospectus. The types of
securities and investment techniques and practices in which the fund may
engage, including the principal investment techniques and practices
described above, are identified in Appendix A to this Prospectus, and are
discussed, together with their risks, in the fund's Statement of
Additional Information (referred to as the SAI), which you may obtain by
contacting MFS Service Center, Inc. (see back cover for address and phone
number).
The fund may depart from its principal investment strategies by
temporarily investing for defensive purposes when adverse market, economic
or political conditions exist. While the fund invests defensively, it may
not be able to pursue its investment objective. The fund's defensive
investment position may not be effective in protecting its value.
The fund has and may engage in active and frequent trading to achieve
its principal investment strategies. This may result in the realization
and distribution to shareholders of higher capital gains as compared to a
fund with less active trading policies, which would increase your tax
liability. Frequent trading also increases transaction costs, which could
detract from the fund's performance.
<PAGE>
--------------------------
IV MANAGEMENT OF THE FUND
--------------------------
o INVESTMENT ADVISER
Massachusetts Financial Services Company (referred to as MFS or the
adviser) is the fund's investment adviser. MFS is America's oldest mutual
fund organization. MFS and its predecessor organizations have a history of
money management dating from 1924 and the founding of the first mutual
fund, Massachusetts Investors Trust. Net assets under the management of
the MFS organization were approximately $102.9 billion on behalf of
approximately 3.8 million investor accounts as of January 31, 1999. As of
such date, the MFS organization managed approximately $73.6 billion of net
assets in equity funds and equity portfolios. Approximately $4.7 billion
of the assets managed by MFS are invested in securities of foreign issuers
and foreign denominated securities of U.S. issuers. MFS is located at 500
Boylston Street, Boston, Massachusetts 02116.
MFS provides investment management and related administrative services
and facilities to the fund, for which the fund has contracted to pay MFS
an annual management fee equal to 0.32% of the fund's average daily net
assets plus 5.65% of its daily gross income for its then-current fiscal
year. For fiscal year 1998, this fee was equivalent to 0.75% of the fund's
average daily net assets. MFS has contracted to waive its right to receive
a portion of this fee as described under "Expense Summary".
o PORTFOLIO MANAGER
The fund's portfolio managers are James J. Calmas, a Vice President of
MFS, and Stephen C. Bryant, a Senior Vice President of MFS. Mr. Calmas has
been employed as a portfolio manager by the adviser since 1988 and has
been one of the fund's portfolio managers since January 15, 1999. Mr.
Bryant has been employed as a portfolio manager by the adviser since 1987
and has been one of the fund's portfolio managers since January 1, 1999.
o ADMINISTRATOR
MFS provides the fund with certain financial, legal, compliance,
shareholder communications and other administrative services. MFS is
reimbursed by the fund for a portion of the costs it incurs in providing
these services.
o DISTRIBUTOR
MFS Fund Distributors, Inc. (referred to as MFD), a wholly owned
subsidiary of MFS, is the distributor of shares of the fund.
o SHAREHOLDER SERVICING AGENT
MFS Service Center, Inc. (referred to as MFSC), a wholly owned subsidiary
of MFS, performs transfer agency and certain other services for the fund,
for which it receives compensation from the fund.
<PAGE>
-------------------------------
V DESCRIPTION OF SHARE CLASSES
-------------------------------
The fund offers class A and B shares through this prospectus. The fund
also offers an additional class of shares, class I shares, exclusively to
certain institutional investors. Class I shares are made available through
a separate prospectus supplement provided to institutional investors
eligible to purchase them.
o SALES CHARGES
You may be subject to an initial sales charge when you purchase, or a CDSC
when you redeem, class A or B shares. These sales charges are described
below. In certain circumstances, these sales charges are waived. These
circumstances are described in the SAI. Special considerations concerning
the calculation of the CDSC that apply to each of these classes of shares
are described below under the heading "Calculation of CDSC."
If you purchase your fund shares through a financial adviser (such as a
broker or bank), the adviser may receive commissions or other concessions
which are paid from various sources, such as from the sales charges and
distribution and service fees, or from MFS or MFD. These commissions and
concessions are described in the SAI.
o CLASS A SHARES
You may purchase class A shares at net asset value plus an initial sales
charge (referred to as the offering price), but in some cases you may
purchase class A shares without an initial sales charge but subject to a
1% CDSC upon redemption within one year. Class A shares have annual
distribution and service fees up to a maximum of 0.35% of net assets
annually.
PURCHASES SUBJECT TO AN INITIAL SALES CHARGE. The amount of the initial
sales charge you pay when you buy class A shares differs depending upon
the amount you invest, as follows:
SALES CHARGE* AS PERCENTAGE OF:
-------------------------------
Offering Net Amount
Amount of Purchase Price Invested
Less than $100,000 4.75% 4.99%
$100,000 but less than $250,000 4.00 4.17
$250,000 but less than $500,000 2.95 3.04
$500,000 but less than $1,000,000 2.20 2.25
$1,000,000 or more None** None**
------
* Because of rounding in the calculation of offering price, actual
sales charges you pay may be more or less than those calculated
using these percentages.
** A 1% CDSC will apply to such purchases, as discussed below.
PURCHASES SUBJECT TO A CDSC (BUT NOT AN INITIAL SALES CHARGE). You pay no
initial sales charge when you invest $1 million or more in class A shares.
However, a CDSC of 1% will be deducted from your redemption proceeds if
you redeem within 12 months of your purchase. This pricing structure also
applies to investments in class A shares by certain retirement plans, as
described in Appendix B.
o CLASS B SHARES
You may purchase class B shares at net asset value without an initial
sales charge, but if you redeem your shares within the first six years you
may be subject to a CDSC (declining from 4.00% during the first year to 0%
after six years). Class B shares have annual distribution and service fees
up to a maximum of 1.00% of net assets annually.
The CDSC is imposed according to the following schedule:
CONTINGENT DEFERRED
YEAR OF REDEMPTION AFTER PURCHASE SALES CHARGE
-----------------------------------------------------------------------
First 4%
Second 4%
Third 3%
Fourth 3%
Fifth 2%
Sixth 1%
Seventh and following 0%
If you hold class B shares for approximately eight years, they will
convert to class A shares of the fund. All class B shares you purchased
through the reinvestment of dividends and distributions will be held in a
separate sub-account. Each time any class B shares in your account convert
to class A shares, a proportionate number of the class B shares in the
sub-account will also convert to class A shares.
o CALCULATION OF CDSC
As discussed above, certain investments in class A and B shares will be
subject to a CDSC. Three different aging schedules apply to the
calculation of the CDSC:
o Purchases of class A shares made on any day during a calendar month will
age one month on the last day of the month, and each subsequent month.
o Purchases of class B shares on or after January 1, 1993, made on any day
during a calendar month will age one year at the close of business on
the last day of that month in the following calendar year, and each
subsequent year.
o Purchases of class B shares prior to January 1, 1993 made on any day
during a calendar year will age one year at the close of business on
December 31 of that year, and each subsequent year.
No CDSC is assessed on the value of your account represented by
appreciation or additional shares acquired through the automatic
reinvestment of dividends or capital gain distributions. Therefore, when
you redeem your shares, only the value of the shares in excess of these
amounts (i.e., Your direct investment) is subject to a CDSC.
The CDSC will be applied in a manner that results in the CDSC being
imposed at the lowest possible rate, which means that the CDSC will be
applied against the lesser of your direct investment or the total cost of
your shares. The applicability of a CDSC will not be affected by exchanges
or transfers of registration, except as described in the SAI.
o DISTRIBUTION AND SERVICE FEES
The fund has adopted a plan under Rule 12b-1 that permits it to pay
marketing and other fees to support the sale and distribution of class A
and B shares and the services provided to you by your financial adviser.
These annual distribution and service fees may equal up to 0.35% for class
A shares and 1.00% for class B shares, and are paid out of the assets of
these classes. Over time, these fees will increase the cost of your shares
and may cost you more than paying other types of sales charges. MFS has
agreed to waive its right to receive the class A service fee as described
under "Expense Summary." The 0.10% per annum class A distribution fee is
currently not being imposed and will be paid by the fund when the Trustees
of the fund approve the fee.
<PAGE>
-----------------------------------------------
VI HOW TO PURCHASE, EXCHANGE AND REDEEM SHARES
-----------------------------------------------
You may purchase, exchange and redeem class A and B shares of the fund in
the manner described below. In addition, you may be eligible to
participate in certain investor services and programs to purchase,
exchange and redeem these classes of shares, which are described in the
next section under the caption "Investor Services and Programs."
o HOW TO PURCHASE SHARES
INITIAL PURCHASE. You can establish an account by having your financial
adviser process your purchase. The minimum initial investment is $1,000.
However, in the following circumstances the minimum initial investment is
only $50 per account:
o if you establish an automatic investment plan;
o if you establish an automatic exchange plan; or
o if you establish an account under either:
|> tax-deferred retirement programs (other than IRAs) where investments
are made by means of group remittal statements; or
|> employer sponsored investment programs.
The minimum initial investment for IRAs is $250 per account.
ADDING TO YOUR ACCOUNT. There are several easy ways you can make
additional investments of at least $50 to your account:
o send a check with the returnable portion of your statement;
o ask your financial adviser to purchase shares on your behalf;
o wire additional investments through your bank (call MFSC first for
instructions); or
o authorize transfers by phone between your bank account and your MFS
account (the maximum purchase amount for this method is $100,000). You
must elect this privilege on your account application if you wish to use
it.
o HOW TO EXCHANGE SHARES
You can exchange your shares for shares of the same class of certain other
MFS funds at net asset value by having your financial adviser process your
exchange request or by contacting MFSC directly. The minimum exchange
amount is generally $1,000 ($50 for exchanges made under the automatic
exchange plan). Shares otherwise subject to a CDSC will not be charged a
CDSC in an exchange. However, when you redeem the shares acquired through
the exchange, the shares you redeem may be subject to a CDSC, depending
upon when you originally purchased the shares you exchanged. For purposes
of computing the CDSC, the length of time you have owned your shares will
be measured from the date of original purchase and will not be affected by
any exchange.
Sales charges may apply to exchanges made from the MFS money market
funds. Certain qualified retirement plans may make exchanges between the
MFS funds and the MFS Fixed Fund, a bank collective investment fund, and
sales charges may also apply to these exchanges. Call MFSC for information
concerning these sales charges.
Exchanges are subject to the MFS Funds' market timing policies, which
are policies designed to protect the funds and their shareholders from the
effect of frequent exchanges. These market timing policies are described
below under the caption "Market Timing Policies." You should read the
prospectus of the MFS fund into which you are exchanging and consider the
differences in objectives, policies and rules before making any exchange.
o HOW TO REDEEM SHARES
You may redeem your shares either by having your financial adviser process
your redemption or by contacting MFSC directly. The fund sends out your
redemption proceeds within seven days after your request is received in
good order. "Good order" generally means that the stock power, written
request for redemption, letter of instruction or certificate must be
endorsed by the record owner(s) exactly as the shares are registered. In
addition, you need to have your signature guaranteed and/or submit
additional documentation to redeem your shares. See "Signature Guarantee/
Additional Documentation" below, or contact MFSC for details (see back
cover page for address and phone number).
Under unusual circumstances such as when the New York Stock Exchange is
closed, trading on the Exchange is restricted or if there is an emergency,
the fund may suspend redemptions or postpone payment. If you purchased the
shares you are redeeming by check, the fund may delay the payment of the
redemption proceeds until the check has cleared, which may take up to 15
days from the purchase date.
REDEEMING DIRECTLY THROUGH MFSC.
o BY TELEPHONE. You can call MFSC to have shares redeemed from your
account and the proceeds wired or mailed (depending on the amount
redeemed) directly to a pre- designated bank account. MFSC will request
personal or other information from you and will generally record the
calls. MFSC will be responsible for losses that result from unauthorized
telephone transactions if it does not follow reasonable procedures
designed to verify your identity. You must elect this privilege on your
account application if you wish to use it.
o BY MAIL. To redeem shares by mail, you can send a letter to MFSC with
the name of your fund, your account number, and the number of shares or
dollar amount to be sold.
REDEEMING THROUGH YOUR FINANCIAL ADVISER. You can call your financial
adviser to process a redemption on your behalf. Your financial adviser
will be responsible for furnishing all necessary documents to MFSC and may
charge you for this service.
SIGNATURE GUARANTEE/ADDITIONAL DOCUMENTATION. In order to protect against
fraud, the fund requires that your signature be guaranteed in order to
redeem your shares. Your signature may be guaranteed by an eligible bank,
broker, dealer, credit union, national securities exchange, registered
securities association, clearing agency, or savings association. MFSC may
require additional documentation for certain types of registrations and
transactions. Signature guarantees and this additional documentation shall
be accepted in accordance with policies established by MFSC, and MFSC may
make certain de minimis exceptions to these requirements.
o OTHER CONSIDERATIONS
RIGHT TO REJECT PURCHASE AND EXCHANGE ORDERS. Purchases and exchanges
should be made for investment purposes only. The MFS Funds each reserve
the right to reject or restrict any specific purchase or exchange request.
Because an exchange request involves both a request to redeem shares of
one fund and to purchase shares of another fund, the MFS Funds consider
the underlying redemption and purchase requests conditioned upon the
acceptance of each of these underlying requests. Therefore, in the event
that the MFS Funds reject an exchange request, neither the redemption nor
the purchase side of the exchange will be processed.
MARKET TIMING POLICIES. The MFS Funds are not designed for professional
market timing organizations or other entities using programmed or frequent
exchanges. The MFS Funds define a "market timer" as an individual, or
organization acting on behalf of one or more individuals, if:
o the individual or organization makes during the calendar year either (i)
six or more exchange requests among the MFS Funds or (ii) three or more
exchange requests out of any of the MFS high yield bond funds or MFS
municipal bond funds; and
o any one of such exchange requests represents shares equal in value to $1
million or more.
Accounts under common ownership or control, including accounts
administered by market timers, will be aggregated for purposes of this
definition.
The MFS Funds may impose specific limitations on market timers,
including:
o delaying for up to seven days the purchase side of an exchange request
by market timers;
o rejecting or otherwise restricting purchase or exchange requests by
market timers; and
o permitting exchanges by market timers only into certain MFS funds.
REINSTATEMENT PRIVILEGE. After you have redeemed shares, you have a one-
time right to reinvest the proceeds within 90 days of the redemption at
the current net asset value (without an initial sales charge). If the
redemption involved a CDSC, your account will be credited with the
appropriate amount of the CDSC paid; however, your new shares will be
subject to a CDSC which will be determined from the date you originally
purchased the shares redeemed. This privilege applies to shares of the MFS
money market funds only under certain circumstances.
IN-KIND DISTRIBUTIONS. The MFS funds have reserved the right to pay
redemption proceeds by a distribution in-kind of portfolio securities
(rather than cash). In the event that the fund makes an in-kind
distribution, you could incur the brokerage and transaction charges when
converting the securities to cash. The fund does not expect to make in-
kind distributions, and if it does, the fund will pay, during any 90-day
period, your redemption proceeds in cash up to either $250,000 or 1% of
the fund's net assets, whichever is less.
INVOLUNTARY REDEMPTIONS/SMALL ACCOUNTS. Because it is costly to maintain
small accounts, the MFS funds have generally reserved the right to
automatically redeem shares and close your account when it contains less
than $500 due to your redemptions or exchanges. Before making this
automatic redemption, you will be notified and given 60 days to make
additional investments to avoid having your shares redeemed.
<PAGE>
-----------------------------------
VII INVESTOR SERVICES AND PROGRAMS
-----------------------------------
As a shareholder of the fund, you have available to you a number of
services and investment programs. Some of these services and programs may
not be available to you if your shares are held in the name of your
financial adviser or if your investment in the fund is made through a
retirement plan.
o DISTRIBUTION OPTIONS
The following distribution options are generally available to all accounts
and you may change your distribution option as often as you desire by
notifying MFSC:
o Dividends and capital gain distributions reinvested in additional shares
(this option will be assigned if no other option is specified);
o Dividends in cash; capital gain distributions reinvested in additional
shares; or
o 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
as of 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 you have elected to receive dividends
and/or capital gain distributions in cash, and the postal or other
delivery service is unable to deliver checks to your address of record, or
you do not respond to mailings from MFSC with regard to uncashed
distribution checks, your distribution option will automatically be
converted to having all dividends and other distributions reinvested in
additional shares. Your request to change a distribution option must be
received by MFSC 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.
o PURCHASE AND REDEMPTION PROGRAMS
For your convenience, the following purchase and redemption programs are
made available to you with respect to class A and B shares, without extra
charge:
AUTOMATIC INVESTMENT PLAN. You can make cash investments of $50 or more
through your checking account or savings account on any day of the month.
If you do not specify a date, the investment will automatically occur on
the first business day of the month.
AUTOMATIC EXCHANGE PLAN. If you have an account balance of at least $5,000
in any MFS fund, you may participate in the automatic exchange plan, a
dollar-cost averaging program. This plan permits you to make automatic
monthly or quarterly exchanges from your account in an MFS fund for shares
of the same class of shares of other MFS funds. You may make exchanges of
at least $50 to up to six different funds under this plan. Exchanges will
generally be made at net asset value without any sales charges. If you
exchange shares out of the MFS Money Market Fund or MFS Government Money
Market Fund, or if you exchange class A shares out of the MFS Cash Reserve
Fund, into class A shares of any other MFS fund, you will pay the initial
sales charge if you have not already paid this charge on these shares.
REINVEST WITHOUT A SALES CHARGE. You can reinvest dividend and capital
gain distributions into your account without a sales charge to add to your
investment easily and automatically.
DISTRIBUTION INVESTMENT PROGRAM. You may purchase shares of any MFS fund
without paying an initial sales charge or a CDSC upon redemption by
automatically reinvesting a minimum of $50 of dividend and capital gain
distributions from the same class of another MFS fund.
LETTER OF INTENT (LOI). If you intend to invest $100,000 or more in the
MFS funds (including the MFS Fixed Fund) within 13 months, you may buy
class A shares of the fund alone or in combination with class B and class
C shares of any other MFS funds (or the MFS Fixed Fund) at the reduced
sales charge as though the total amount were invested in class A shares in
one lump sum. If you intend to invest $1 million or more under this
program, the time period is extended to 36 months. If the intended
purchases are not completed within the time period, shares will
automatically be redeemed from a special escrow account established with a
portion of your investment at the time of purchase to cover the higher
sales charge you would have paid had you not purchased your shares through
this program.
RIGHT OF ACCUMULATION. You will qualify for a lower sales charge on your
purchases of class A shares when your new investment in class A shares,
together with the current (offering price) value of all your holdings in
the MFS funds (including the MFS Fixed Fund), reaches a reduced sales
charge level.
SYSTEMATIC WITHDRAWAL PLAN. You may elect to automatically receive (or
designate someone else to receive) regular periodic payments of at least
$100. Each payment under this systematic withdrawal is funded through the
redemption of your fund shares. For class B shares, you can receive up to
10% (15% for certain IRA distributions) of the value of your account
through these payments in any one year (measured at the time you establish
this plan). You will incur no CDSC on class B shares redeemed under this
plan. For class A shares, there is no similar percentage limitation;
however, you may incur the CDSC (if applicable) when class A shares are
redeemed under this plan.
FREE CHECKWRITING. You may redeem your class A shares by writing checks
against your account. Checks must be for at least $500 and investments
made by check must have been in your account for at least 15 days before
you can write checks against them. There is no charge for this service. To
authorize your account for checkwriting, contact MFSC (see back cover page
for address and phone number).
Shares in your account equal in value to the amount of the check plus
the applicable CDSC (if any) and any income tax required to be withheld
(if any) are redeemed to cover the amount of the check. If your account
value is not great enough to cover these amounts, your check will be
dishonored.
<PAGE>
-----------------------
VIII OTHER INFORMATION
-----------------------
o PRICING OF FUND SHARES
The price of each class of the fund's shares is based on its net asset
value. The net asset value of each class of shares is determined at the
close of regular trading each day that the New York Stock Exchange is open
for trading (generally, 4:00 p.m., Eastern time) (referred to as the
valuation time). To determine net asset value, the fund values its assets
at current market values, or at fair value as determined by the Adviser
under the direction of the Board of Trustees that oversees the fund if
current market values are unavailable. Fair value pricing may be used by
the fund when current market values are unavailable or when an event
occurs after the close of the exchange on which the fund's portfolio
securities are principally traded that is likely to have changed the value
of the securities. The use of fair value pricing by the fund may cause the
net asset value of its shares to differ significantly from the net asset
value that would be calculated using current market values.
You will receive the net asset value next calculated, after the
deduction of applicable sales charges and any required tax withholding, if
your order is complete (has all required information) and MFSC receives
your order by:
o the valuation time, if placed directly by you (not through a financial
adviser such as a broker or bank) to MFSC; or
o MFSC's close of business, if placed through a financial adviser, so long
as the financial adviser (or its authorized designee) received your
order by the valuation time.
The fund invests in certain securities which are primarily listed on
foreign exchanges that trade on weekends and other days when the fund does
not price its shares. Therefore, the value of the fund's shares may change
on days when you will not be able to purchase or redeem the fund's shares.
o DISTRIBUTIONS
The fund intends to pay substantially all of its net income (including net
short-term capital gain) to shareholders as dividends at least monthly.
Any long-term capital gains will be distributed at least annually.
o TAX CONSIDERATIONS
The following discussion is very general. You are urged to consult your
tax adviser regarding the effect that an investment in the fund may have
on your particular tax situation.
o TAXABILITY OF DISTRIBUTIONS. As long as the fund qualifies for treatment
as a regulated investment company (which it has in the past and intends to
do in the future), it pays no federal income tax on the earnings it
distributes to shareholders.
You will normally have to pay federal income taxes, and any state or
local taxes, on the distributions you receive from the fund, whether you
take the distributions in cash or reinvest them in additional shares.
Distributions designated as capital gain dividends are taxable as long-
term capital gains. Other distributions are generally taxable as ordinary
income. Some dividends paid in January may be taxable as if they had been
paid the previous December.
The Form 1099 that is mailed to you every January details your
distributions and how they are treated for federal tax purposes.
Fund distributions will reduce the fund's net asset value per share.
Therefore, if you buy shares shortly before the record date of a
distribution, you may pay the full price for the shares and then
effectively receive a portion of the purchase price back as a taxable
distribution.
If you are neither a citizen nor a resident of the U.S., the fund will
withhold U.S. federal income tax at the rate of 30% on taxable dividends
and other payments that are subject to such withholding. You may be able
to arrange for a lower withholding rate under an applicable tax treaty if
you supply the appropriate documentation required by the fund. The fund is
also required in certain circumstances to apply backup withholding at the
rate of 31% on taxable dividends and redemption proceeds paid to any
shareholder (including a shareholder who is neither a citizen nor a
resident of the U.S.) who does not furnish to the fund certain information
and certifications or who is otherwise subject to backup withholding.
Backup withholding will not, however, be applied to payments that have
been subject to 30% withholding. Prospective investors should read the
fund's Account Application for additional information regarding backup
withholding of federal income tax.
TAXABILITY OF TRANSACTIONS. When you redeem, sell or exchange shares, it
is generally considered a taxable event for you. Depending on the purchase
price and the sale price of the shares you redeem, sell or exchange, you
may have a gain or a loss on the transaction. You are responsible for any
tax liabilities generated by your transaction.
o UNIQUE NATURE OF FUND
MFS may serve as the investment adviser to other funds which have similar
investment goals and principal investment policies and risks to the fund,
and which may be managed by the fund's portfolio manager(s). While the
fund may have many similarities to these other funds, its investment
performance will differ from their investment performance. This is due to
a number of differences between the funds, including differences in sales
charges, expense ratios and cash flows.
o YEAR 2000 READINESS DISCLOSURE
The fund could be adversely affected if the computer systems used by MFS,
the fund's other service providers or the companies in which the fund
invests do not properly process date-related information from and after
January 1, 2000 (the "Year 2000 Issue"). MFS recognizes the importance of
the Year 2000 Issue and, to address Year 2000 compliance, created a
separately funded Year 2000 Program Management Office in 1996 comprised of
a specialized staff reporting directly to MFS senior management. The
Office, with the help of external consultants, is responsible for overall
coordination, strategy formulation, communications and issue resolution
with respect to Year 2000 Issues. While MFS systems will be tested for
Year 2000 readiness before the turn of the century, there are significant
systems interdependencies in the domestic and foreign markets for
securities, the business environments in which companies held by the fund
operate and in MFS' own business environment. MFS has been working with
the fund's other service providers to identify and respond to potential
problems with respect to Year 2000 readiness and to develop contingency
plans. Year 2000 readiness is also one of the factors considered by MFS in
its ongoing assessment of companies in which the fund invests. There can
be no assurance, however, that these steps will be sufficient to avoid any
adverse impact on the fund.
o PROVISION OF ANNUAL AND SEMIANNUAL REPORTS
To avoid sending duplicate copies of materials to households, only one
copy of the fund's annual and semiannual report will be mailed to
shareholders having the same residential address on the fund's records.
However, any shareholder may contact MFSC (see back cover for address and
phone number) to request that copies of these reports be sent personally
to that shareholder.
<PAGE>
------------------------
IX FINANCIAL HIGHLIGHTS
------------------------
The financial highlights table is intended to help you understand the
fund's financial performance for the past 5 years, or, if the fund has not
been in operation that long, since the time it commenced investment
operations. Certain information reflects financial results for a single
fund share. The total returns in the table represent the rate by which an
investor would have earned (or lost) on an investment in the fund
(assuming reinvestment of all distributions). This information has been
audited by the fund's independent auditors, whose report, together with
the fund's financial statements, are included in the fund's Annual Report
to shareholders. The fund's Annual Report is available upon request by
contacting MFSC (see back cover for address and telephone number). These
financial statements are incorporated by reference into the SAI. The
fund's independent auditors are Deloitte & Touche LLP.
<PAGE>
CLASS A SHARES
..........................................................................
<TABLE>
<CAPTION>
YEAR ENDED NOVEMBER 30,
-------------------------------------------------------------------------------
1998 1997 1996 1995 1994
-------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per share data (for a share outstanding
throughout each period):
Net asset value -- beginning of period $ 8.39 $ 8.57 $ 8.59 $ 7.96 $ 8.94
------ ------ ------ ------ ------
Income from investment operations# --
Net investment income(S) $ 0.53 $ 0.55 $ 0.55 $ 0.57 $ 0.59
Net realized and unrealized gain (loss)
on investments and foreign currency
transactions (0.05) (0.18) (0.01) 0.61 (0.95)
------ ------ ------ ------ ------
Total from investment operations $ 0.48 $ 0.37 $ 0.54 $ 1.18 $(0.36)
------ ------ ------ ------ ------
Less distributions declared to shareholders--
From net investment income $(0.52) $(0.55) $(0.56) $(0.55) $ --
In excess of net investment income+++ -- -- (0.00) -- --
From paid-in capital (0.06) -- -- -- (0.62)
------ ------ ------ ------ ------
Total distributions declared to
shareholders $(0.58) $(0.55) $(0.56) $(0.55) $(0.62)
------ ------ ------ ------ ------
Net asset value -- end of period $ 8.29 $ 8.39 $ 8.57 $ 8.59 $ 7.96
------ ------ ------ ------ ------
Total return(+) 5.86% 4.59% 6.61% 15.40% (4.27)%
Ratios (to average net assets)/
Supplemental data(S):
Expenses## 1.12% 1.17% 1.17% 1.14% 1.18%
Net investment income 6.33% 6.63% 6.58% 6.81% 7.10%
Portfolio turnover 173% 226% 288% 275% 211%
Net assets at end of period (000 omitted) $44,116 $30,833 $21,291 $12,659 $3,432
------
# Per share data are based on average shares outstanding.
## 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. For fiscal years ending after September 1, 1995, the fund's
expenses are calculated without reduction for this expense offset arrangement.
(+) 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 November 30, 1996, the per share distribution in excess of net investment income was less than $0.01.
(S) The investment adviser waived a portion of its management fee for certain of the periods indicated. If the fee had been
incurred by the fund, the net investment income per share and the ratios would have been:
Net investment income $ 0.52 -- -- -- --
Ratios (to average net assets):
Expenses## 1.15% -- -- -- --
Net investment income 6.30% -- -- -- --
</TABLE>
<PAGE>
CLASS B SHARES
..........................................................................
<TABLE>
<CAPTION>
YEAR ENDED NOVEMBER 30,
-------------------------------------------------------------------------------
1998 1997 1996 1995 1994
-------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per share data (for a share outstanding
throughout each period):
Net asset value -- beginning of period $ 8.40 $ 8.57 $ 8.58 $ 7.96 $ 8.93
------ ------ ------ ------ ------
Income from investment operations# --
Net investment income(S) $ 0.44 $ 0.47 $ 0.46 $ 0.48 $ 0.47
Net realized and unrealized gain (loss)
on investments and foreign currency
transactions (0.04) (0.18) (0.01) 0.61 (0.92)
------ ------ ------ ------ ------
Total from investment operations $ 0.40 $ 0.29 $ 0.45 $ 1.09 $(0.45)
------ ------ ------ ------ ------
Less distributions declared to shareholders--
From net investment income $(0.43) $(0.46) $(0.46) $(0.47) $ --
In excess of net investment income+++ -- -- (0.00) -- --
From paid-in capital (0.05) -- -- -- (0.52)
------ ------ ------ ------ ------
Total distributions declared to
shareholders $(0.48) $(0.46) $(0.46) $(0.47) $(0.52)
------ ------ ------ ------ ------
Net asset value -- end of period $ 8.32 $ 8.40 $ 8.57 $ 8.58 $ 7.96
------ ------ ------ ------ ------
Total return 4.86% 3.57% 5.52% 14.12% (5.24)%
Ratios (to average net assets)/
Supplemental data(S):
Expenses## 2.12% 2.19% 2.24% 2.23% 2.22%
Net investment income 5.30% 5.61% 5.47% 5.79% 5.60%
Portfolio turnover 173% 226% 288% 275% 211%
Net assets at end of period (000 omitted) $89,345 $119,436 $171,148 $232,312 $292,619
------
# Per share data are based on average shares outstanding.
## 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. For fiscal years ending after September 1, 1995, the fund's
expenses are calculated without reduction for this expense offset arrangement.
+++ For the year ended November 30, 1996, the per share distribution in excess of net investment income was less than $0.01.
(S) The investment adviser waived a portion of its management fee for certain of the periods indicated. If the fee had been
incurred by the fund, the net investment income per share and the ratios would have been:
Net investment income $ 0.44 -- -- -- --
Ratios (to average net assets):
Expenses## 2.15% -- -- -- --
Net investment income 5.27% -- -- -- --
</TABLE>
<PAGE>
----------
APPENDIX A
----------
o INVESTMENT TECHNIQUES AND PRACTICES
In pursuing its investment objective, the fund may engage in the following
investment techniques and practices, which are described, together with
their risks, in the SAI. Investment techniques and practices which are the
principal focus of the fund are also described in the Risk Return Summary
of the Prospectus.
INVESTMENT TECHNIQUES/PRACTICES
..........................................................................
SYMBOLS x permitted -- not permitted
--------------------------------------------------------------------------
Debt Securities
Asset-Backed Securities
Collateralized Mortgage Obligations and Multiclass
Pass-Through Securities x
Corporate Asset-Backed Securities x
Mortgage Pass-Through Securities x
Stripped Mortgage-Backed Securities x
Corporate Securities x
Loans and Other Direct Indebtedness x
Lower Rated Bonds x
Municipal Bonds --
Speculative Bonds x
U.S. Government Securities x
Variable and Floating Rate Obligations x
Zero Coupon Bonds, Deferred Interest Bonds and PIK Bonds x
Equity Securities --
Foreign Securities Exposure
Brady Bonds x
Depositary Receipts --
Dollar-Denominated Foreign Debt Securities x
Emerging Markets x
Foreign Securities x
Forward Contracts x
Futures Contracts x
Indexed Securities/Structured Products x
Inverse Floating Rate Obligations x
Investment in Other Investment Companies
Open-End Funds x
Closed-End Funds x
Lending of Portfolio Securities x
Leveraging Transactions
Bank Borrowings --*
Mortgage "Dollar-Roll" Transactions --*
Reverse Repurchase Agreements --*
Options
Options on Foreign Currencies x
Options on Futures Contracts x
Options on Securities x
Options on Stock Indices x
Reset Options x
"Yield Curve" Options x
Repurchase Agreements x
Restricted Securities x
Short Sales --*
Short Sales Against the Box --
Short Term Instruments x
Swaps and Related Derivative Instruments x
Temporary Borrowings x
Temporary Defensive Positions x
Warrants --
"When-Issued" Securities x
------------
* May only be changed with shareholder approval.
<PAGE>
----------
APPENDIX B
----------
o SALES CHARGE CATEGORIES AVAILABLE TO CERTAIN RETIREMENT PLANS
Purchases made under the following four categories are not subject to an
initial sales charge. However, a CDSC of 1% will be deducted from
redemption proceeds if the redemption is made within 12 months of
purchase. The CDSC is based on the value of the shares redeemed (excluding
reinvested dividend and capital gain distributions) or the total cost of
the shares, whichever is less.
o Investments in class A shares by certain retirement plans subject to the
Employee Retirement Income Security Act of 1974, as amended (referred to
as ERISA), if, prior to July 1, 1996
|> the plan had established an account with MFSC; and
|> the sponsoring organization had demonstrated to the satisfaction of
MFD that either;
+ the employer had at least 25 employees; or
+ the total purchases by the retirement plan of class A shares of
the MFS Family of Funds (the MFS Funds) would be in the amount of
at least $250,000 within a reasonable period of time, as
determined by MFD in its sole discretion.
o Investments in class A shares by certain retirement plans subject to
ERISA, if
|> the retirement plan and/or sponsoring organization participates in
the MFS Fundamental 401(k) Program or any similar recordkeeping
system made available by MFSC (referred to as the MFS participant
recordkeeping system);
|> the plan establishes an account with MFSC on or after July 1, 1996;
|> the total purchases by the retirement plan of class A shares of the
MFS Funds will be in the amount of at least $500,000 within a
reasonable period of time, as determined by MFD in its sole
discretion; and
|> the plan has not redeemed its class B shares in the MFS Funds in
order to purchase class A shares under this category.
o Investments in class A shares by certain retirement plans subject to
ERISA, if
|> the plan establishes an account with MFSC on or after July 1, 1996;
and
|> 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 MFSC PRIOR TO THE PURCHASES
THAT THE PLAN HAS A MARKET VALUE OF $500,000 OR MORE INVESTED IN
SHARES OF ANY CLASS OR CLASSES OF THE MFS FUNDS; MFSC HAS NO
OBLIGATION INDEPENDENTLY TO DETERMINE WHETHER SUCH A PLAN QUALIFIES
UNDER THIS CATEGORY; AND
o Investments in class A shares by certain retirement plans subject to
ERISA, if
|> the plan establishes an account with MFSC on or after July 1, 1997;
|> the plan's records are maintained on a pooled basis by MFSC; and
|> 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.
<PAGE>
MFS(R) INTERMEDIATE INCOME FUND
If you want more information about the fund, the following documents are
available free upon request:
ANNUAL/SEMIANNUAL REPORTS. These reports contain information about the
fund's actual investments. Annual reports discuss the effect of recent
market conditions and the fund's investment strategy on the fund's
performance during its last fiscal year.
STATEMENT OF ADDITIONAL INFORMATION (SAI). The SAI, dated April 1, 1999,
provides more detailed information about the fund and is incorporated into
this prospectus by reference.
YOU CAN GET FREE COPIES OF THE ANNUAL/SEMIANNUAL REPORTS, THE SAI AND
OTHER INFORMATION ABOUT THE FUND, AND MAKE INQUIRIES ABOUT THE FUND, BY
CONTACTING:
MFS Service Center, Inc.
500 Boylston Street
Boston, MA 02116-3741
Telephone: 1-800-225-2606
Internet: http://www.mfs.com
Information about the fund (including its prospectus, SAI and shareholder
reports) can be reviewed and copied at the:
Public Reference Room
Securities and Exchange Commission
Washington, D.C., 20549-6009
Information on the operation of the Public Reference Room may be obtained
by calling the Commission at 1-800-SEC-0330. Reports and other information
about the fund are available on the Commission's Internet website at
http://www.sec.gov, and copies of this information may be obtained, upon
payment of a duplicating fee, by writing the Public Reference Section at
the above address.
The fund's Investment Company Act file number is 811-4775.
MII-1 3/99 101M 05/205/805
<PAGE>
EXHIBIT NO. 99.17(f)
- - -------------------------------
MFS(R) INTERMEDIATE INCOME FUND
- - -------------------------------
APRIL 1, 1999
[GRAPHIC OMITTED]
75 YEARS MFS(R)
INVESTMENT MANAGEMENT
WE INVENTED THE MUUAL FUND(R)
STATEMENT OF ADDITIONAL
INFORMATION
A SERIES OF MFS SERIES TRUST II
500 BOYLSTON STREET, BOSTON, MA 02116
(617) 954-5000
This Statement of Additional Information, as amended or supplemented from time
to time (the "SAI"), sets forth information which may be of interest to
investors but which is not necessarily included in the Fund's Prospectus dated
April 1, 1999. This SAI should be read in conjunction with the Prospectus. The
Fund's financial statements are incorporated into this SAI by reference to the
Fund's most recent Annual Report to shareholders. A copy of the Annual Report
accompanies this SAI. You may obtain a copy of the Fund's Prospectus and Annual
Report without charge by contacting MFS Service Center, Inc. (see back cover of
Part II of this SAI for address and phone number).
This SAI is divided into two Parts -- Part I and Part II. Part I contains
information that is particular to the Fund, while Part II contains information
that generally applies to each of the funds in the MFS Family of Funds (the "MFS
Funds"). Each Part of the SAI has a variety of appendices which can be found at
the end of Part I and Part II, respectively.
THIS SAI IS NOT A PROSPECTUS AND IS AUTHORIZED FOR DISTRIBUTION TO PROSPECTIVE
INVESTORS ONLY IF PRECEDED OR ACCOMPANIED BY A CURRENT PROSPECTUS.
MII-13 3/99 650
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
PART I
Part I of this SAI contains information that is particular to the Fund.
- - ---------------------
TABLE OF CONTENTS
- - ---------------------
Page
I Definitions .................................................. 3
II Management of the Fund ....................................... 3
The Fund ..................................................... 3
Trustees and Officers -- Identification and Background ....... 3
Trustees Compensation ........................................ 3
Affiliated Service Provider Compensation ..................... 3
III Sales Charges and Distribution Plan Payments ................. 3
Sales Charges ................................................ 3
Distribution Plan Payments .................................. 3
IV Portfolio Transactions and Brokerage Commissions ............. 3
V Share Ownership .............................................. 3
VI Performance Information ...................................... 3
VII Investment Techniques, Practices, Risks and Restrictions ..... 3
Investment Techniques, Practices and Risks ................... 3
Investment Restrictions ...................................... 3
VIII Tax Considerations ........................................... 5
IX Independent Auditors and Financial Statements ................ 5
Appendix A -- Trustees and Officers -- Identification
and Background ............................................. A-1
Appendix B -- Trustee Compensation ........................... B-1
Appendix C -- Affiliated Service Provider Compensation ....... C-1
Appendix D -- Sales Charges and Distribution Plan Payments ... D-1
Appendix E -- Portfolio Transactions and Brokerage Commissions E-1
Appendix F -- Share Ownership ................................ F-1
Appendix G -- Performance Information ........................ G-1
I DEFINITIONS
"Fund" - MFS Intermediate Income Fund, a non-diversified series of MFS
Series Trust II (the "Trust"), a Massachusetts business trust. Until June
3, 1993, the Fund was known as MFS Lifetime Intermediate Income Fund and
was known as Lifetime Intermediate Income Trust prior to August 3, 1992.
The Fund became a series of the Trust on June 3, 1993.
"MFS" or the "Adviser" - Massachusetts Financial Services Company, a
Delaware corporation.
"MFD" - MFS Fund Distributors, Inc., a Delaware corporation.
"MFSC" - MFS Service Center, Inc., a Delaware corporation.
"Prospectus" - The Prospectus of the Fund, dated April 1, 1999, as amended
or supplemented from time to time.
II MANAGEMENT OF THE FUND
THE FUND
The Fund is a non-diversified series of the Trust. The Trust is an open-
end management investment company.
TRUSTEES AND OFFICERS - IDENTIFICATION AND BACKGROUND
The identification and background of the Trustees and officers of the
Trust are set forth in Appendix A of this Part I.
TRUSTEE COMPENSATION
Compensation paid to the non-interested Trustees and to Trustees who are
not officers of the Trust, for certain specified periods, is set forth in
Appendix B of this Part I.
AFFILIATED SERVICE PROVIDER COMPENSATION
Compensation paid by the Fund to its affiliated service providers -- to
MFS, for investment advisory and administrative services, and to MFSC, for
transfer agency services -- for certain specified periods is set forth in
Appendix C to this Part I.
III SALES CHARGES AND DISTRIBUTION PLAN PAYMENTS
SALES CHARGES
Sales charges paid in connection with the purchase and sale of Fund shares
for certain specified periods are set forth in Appendix D to this Part I,
together with the Fund's schedule of dealer reallowances.
DISTRIBUTION PLAN PAYMENTS
Payments made by the Fund under the Distribution Plan for its most recent
fiscal year end are set forth in Appendix D to this Part I.
IV PORTFOLIO TRANSACTIONS AND BROKERAGE COMMISSIONS
Brokerage commissions paid by the Fund for certain specified periods, and
information concerning purchases by the Fund of securities issued by its
regular broker-dealers for its most recent fiscal year, are set forth in
Appendix E to this Part I.
Broker-dealers may be willing to furnish statistical, research and other
factual information or services ("Research") to the Adviser for no
consideration other than brokerage or underwriting commissions. Securities
may be bought or sold from time to time through such broker-dealers, on
behalf of the Fund. The Trustees (together with the Trustees of certain
other MFS Funds) have directed the Adviser to allocate a total of $53,050
of commission business from certain MFS Funds (including the Fund) to the
Pershing Division of Donaldson Lufkin & Jenrette as consideration for the
annual renewal of certain publications provided by Lipper Analytical
Securities Corporation (which provides information useful to the Trustees
in reviewing the relationship between the Fund and the Adviser).
V SHARE OWNERSHIP
Information concerning the ownership of Fund shares by Trustees and
officers of the Trust as a group, by investors who control the Fund, if
any, and by investors who own 5% or more of any class of Fund shares, if
any, is set forth in Appendix F to this Part I.
VI PERFORMANCE INFORMATION
Performance information, as quoted by the Fund in sales literature and
marketing materials, is set forth in Appendix G to this Part I.
VII INVESTMENT TECHNIQUES, PRACTICES, RISKS AND RESTRICTIONS
INVESTMENT TECHNIQUES, PRACTICES AND RISKS
The investment objective and principal investment policies of the Fund are
described in the Prospectus. In pursuing its investment objective and
principal investment policies, the Fund may engage in a number of
investment techniques and practices, which involve certain risks. These
investment techniques and practices, which may be changed without
shareholder approval unless indicated otherwise, are identified in
Appendix A to the Prospectus, and are more fully described, together with
their associated risks, in Part II of this SAI. The following percentage
limitations apply to these investment techniques and practices.
o Foreign Securities Exposure may not exceed 50% of the Fund's net
assets.
o Emerging Markets Securities may not exceed 20% of the Fund's net
assets.
o Lower Rated Bonds may not exceed 10% of the Fund's net assets.
o Lending of Portfolio Securities may not exceed 30% of the Fund's net
assets.
INVESTMENT RESTRICTIONS
The Fund has adopted the following restrictions which cannot be changed
without the approval of the holders of a majority of the Fund's shares
(which, as used in this SAI, means the lesser of (i) more than 50% of the
outstanding shares of the Trust or 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 at which holders of more than
50% of the outstanding shares of the Trust or a series or class, as
applicable, are represented in person or by proxy).
Terms used below (such as Options and Futures Contracts) are defined in
Part II of this SAI.
The Fund may not:
(1) Borrow money or pledge, mortgage or hypothecate its assets, except
as a temporary measure for extraordinary or emergency purposes or
for a repurchase of its shares or except as contemplated by clause
(8) below, and in no event shall the Fund borrow in excess of 1/3
of its assets (the Fund intends to borrow money only from banks,
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
collateral arrangements with respect to initial and variation
margin are not considered a pledge of assets).
(2) Purchase any security or evidence of interest therein on margin,
except that the Fund may obtain such short-term credit as may be
necessary for the clearance of purchases and sales of securities
and except that the Fund may make deposits on margin in connection
with options, Futures Contracts, Options on Futures Contracts,
Forward Contracts and options on foreign currencies.
(3) 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.
(4) Purchase or sell real estate (including limited partnership
interests but excluding securities secured by real estate or
interests therein), interests in oil, gas or mineral leases,
commodities or commodity contracts (except currencies, currency
options or futures, Forward Contracts or Futures Contracts) in the
ordinary course of the business of Fund (the Fund reserves the
freedom of action to hold and to sell real estate acquired as a
result of the ownership of securities).
(5) Purchase securities of any issuer if such purchase at the time
thereof would cause more than 10% of the voting securities of such
issuer to be held by the Fund.
(6) Issue any senior security (as that term is defined in the 1940
Act), if such issuance is specifically prohibited by the 1940 Act
or the rules and regulations promulgated thereunder (for the
purpose of this restriction, collateral arrangements with respect
to options, Futures Contracts and Options on Futures Contracts.
Forward Contracts and options on foreign currencies and collateral
arrangements with respect to initial and variation margin are not
deemed to be the issuance of a senior security).
(7) Make loans to other persons except through the lending of its
portfolio securities not in excess of 30% of its total assets
(taken at market value) and except through the use of repurchase
agreements, the purchase of commercial paper or the purchase of all
or a portion of an issue of debt securities in accordance with its
investment objective, policies and restrictions.
(8) Make short sales of securities or maintain a short position, unless
at all times when a short position is open it owns an equal amount
of such securities or securities convertible into or exchangeable,
without payment of any further consideration, for securities of the
same issue as, and equal in amount to, the securities sold short
("short sales against the box"), and unless not more than 10% of
the Fund's net assets (taken at market value) is held as collateral
for such sales at any one time (it is the Fund's present intention
to make such sales only for the purpose of deferring realization of
gain or loss for Federal income tax purposes; such sales would not
be made of securities subject to outstanding options).
(9) Invest 25% or more of its total assets in the securities of any one
issuer (other than U.S. Government securities) or industry.
Except with respect to Investment Restriction (1) and nonfundamental
policy (1), these investment restrictions and policies are adhered to at
the time of purchase or utilization of assets; a subsequent change in
circumstances will not be considered to result in a violation of policy.
In addition, the Fund has the following nonfundamental policies which
may be changed without shareholder approval.
As a non-fundamental policy, the Fund will not invest in securities
which are subject to legal or contractual restrictions on resale (other
than repurchase agreements), unless the Board of Trustees of the Fund has
determined that such securities are liquid based upon trading markets for
the specific security, if, as a result thereof, more than 15% of such
Fund's net assets (taken at market value) would be so invested.
The Fund will not invest more than 5% of its total assets in companies
which, including their respective predecessors, have a record of less than
three years' continuous operation.
In order to comply with certain state statutes, the Fund will not, as a
matter of operating policy, pledge, mortgage or hypothecate its portfolio
securities if the percentage of securities so pledged, mortgaged or
hypothecated would exceed 33 1/3%.
The Fund may not purchase or retain in its portfolio any securities
issued by an issuer any of whose officers, directors, trustees or security
holders is an officer or Trustee of the Trust, or is a member, partner,
officer or Director of the Adviser, if after the purchase of the
securities of such issuer by the Fund one or more of such persons owns
beneficially more than 1/2 of 1% of the shares or securities, or both, all
taken at market value, of such issuer, and such persons owning more than
1/2 of 1% of such shares or securities together own beneficially more than
5% of such shares or securities, or both, all taken at market value. The
Fund also may not invest more than 5% of the value of the Fund's net
assets, valued at the lower of cost or market, in warrants. Included
within such amount, but not to exceed 2% of the value of the Fund's net
assets, may be warrants which are not listed on the New York or American
Stock Exchange. Warrants acquired by the Fund in units or attached to
securities may be deemed to be without value.
VIII TAX CONSIDERATIONS
For a discussion of tax considerations, see Part II of this SAI.
IX INDEPENDENT AUDITORS AND FINANCIAL STATEMENTS
Deloitte & Touche LLP are the Fund's independent auditors, providing audit
services, tax services, and assistance and consultation with respect to
the preparation of filings with the Securities and Exchange Commission.
The Portfolio of Investments and the Statement of Assets and Liabilities
at November 30, 1998, the Statement of Operations for the year ended
November 30, 1998, the Statement of Changes in Net Assets for the years
ended November 30, 1997 and November 30, 1998, the Notes to Financial
Statements and the Report of the Independent Auditors, each of which is
included in the Annual Report to Shareholders of the Fund, are
incorporated by reference into this SAI in reliance upon the report of
Deloitte & Touche LLP, independent auditors, given upon their authority as
experts in accounting and auditing. A copy of the Annual Report
accompanies this SAI.
<PAGE>
- - -----------------------
PART I - APPENDIX A
- - -----------------------
TRUSTEES AND OFFICERS - IDENTIFICATION AND BACKGROUND
The Trustees and officers of the Trust are listed below, together with
their principal occupations during the past five years. (Their titles may
have varied during that period.)
TRUSTEES
JEFFREY L. SHAMES,* Chairman and President (born 6/2/55)
Massachusetts Financial Services Company, Chairman and Chief Executive
Officer
RICHARD B. BAILEY* (born 9/14/26)
Private Investor; Massachusetts Financial Services Company, former
Chairman and Director (prior to September 30, 1991); Cambridge Bancorp,
Director; Cambridge Trust Company, Director
MARSHALL N. COHAN (born 11/14/26)
Private Investor
Address: 2524 Bedford Mews Drive, Wellington, Florida
LAWRENCE H. COHN, M.D., (born 3/11/37)
Brigham and Women's Hospital, Chief of Cardiac Surgery;
Harvard Medical School, Professor of Surgery
Address: 75 Francis Street, Boston, Massachusetts
THE HON. SIR J. DAVID GIBBONS, KBE (born 6/15/27)
Edmund Gibbons Limited, Chief Executive Officer;
Colonial Insurance Company Ltd., Director and Chairman
Address: 21 Reid Street, Hamilton, Bermuda
ABBY M. O'NEILL (born 4/27/28)
Private Investor; Rockefeller Financial Services, Inc.
(investment advisers), Director
Address: 30 Rockefeller Plaza, Room 5600, New York,
New York
WALTER E. ROBB, III (born 8/18/26)
Benchmark Advisors, Inc. (corporate financial consultants), President and
Treasurer; Benchmark Consulting Group, Inc. (office services), President;
CitiFunds and CitiSelect Folios (mutual funds), Trustee
Address: 110 Broad Street, Boston, Massachusetts
ARNOLD D. SCOTT* (born 12/16/42)
Massachusetts Financial Services Company, Senior Executive Vice President
and Secretary
J. DALE SHERRATT (born 9/23/38)
Insight Resources, Inc. (acquisition planning specialists),
President; Wellfleet Investments (investor in health care
companies), Managing General Partner (since 1993)
Address: 294 Washington Street, Boston, Massachusetts
WARD SMITH (born 9/13/30)
NACCO Industries (holding company), Chairman (prior to June 1994);
Sundstrand Corporation (diversified mechanical
manufacturer), Director
Address: 36080 Shaker Blvd., Hunting Valley, Ohio
OFFICERS
LESLIE J. NANBERG,* Vice President (born 11/14/45)
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, Senior
Vice President
ELLEN MOYNIHAN,* Assistant Treasurer (born 11/13/57)
Massachusetts Financial Services Company, Vice President (since September
1996); Deloitte & Touche LLP, Senior Manager (prior to September 1996)
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 LLP, Senior Tax Manager (prior to 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
affiliates of MFS or with certain other funds of which MFS or a subsidiary
is the investment adviser or distributor. Messrs. Shames and Scott,
Directors of MFD, and Mr. Cavan, the Secretary of MFD, hold similar
positions with certain other MFS affiliates. Mr. Bailey is a Director of
Sun Life Assurance Company of Canada (U.S.), a subsidiary of Sun Life
Assurance Company of Canada.
<PAGE>
- - -----------------------
PART I - APPENDIX B
- - -----------------------
TRUSTEE COMPENSATION The Fund pays the compensation of non-interested
Trustees and of Trustees who are not officers of the Trust, who currently
receive a fee of $1,250 per year plus $225 per meeting and $225 per
committee meeting attended, together with such Trustee's out-of-pocket
expenses. In addition, the Trust has a retirement plan for these Trustees as
described under the caption "Management of the Fund -- Trustee Retirement
Plan" in Part II. The Retirement Age under the plan is 75.
<TABLE>
<CAPTION>
TRUSTEE COMPENSATION TABLE
.............................................................................................................................
RETIREMENT BENEFIT TOTAL TRUSTEE
TRUSTEE FEES ACCRUED AS PART ESTIMATED CREDITED FEES FROM FUND
TRUSTEE FROM FUND(1) OF FUND EXPENSES(1) YEARS OF SERVICE(2) AND FUND COMPLEX(3)
-----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Richard B. Bailey $3,725 $1,225 10 $259,430
Marshall N. Cohan 4,400 2,125 13 143,259
Dr. Lawrence Cohn 3,853 912 18 153,579
Sir David Gibbons 3,725 1,862 13 130,059
Abby M. O'Neill 3,725 1,050 10 130,059
Walter E. Robb, III 4,753 2,125 13 171,154
Arnold D. Scott 0 0 N/A 0
Jeffrey L. Shames 0 0 N/A 0
J. Dale Sherratt 4,914 1,175 20 157,714
Ward Smith 4,464 1,410 13 146,739
</TABLE>
----------------
(1)For the fiscal year ended November 30, 1998.
(2)Based upon normal retirement age (75).
(3)Information provided is provided for calendar year 1998. All Trustees
served as Trustees of 43 funds within the MFS fund complex (having
aggregate net assets at December 31, 1998, of approximately $24.9
billion) except Mr. Bailey, who served as Trustee of 74 funds within
the MFS complex (having aggregate net assets at December, 31, 1998 of
approximately $68.2 billion).
ESTIMATED ANNUAL BENEFITS PAYABLE BY FUND UPON RETIREMENT(4)
..........................................................................
YEARS OF SERVICE
AVERAGE
TRUSTEE FEES 3 5 7 10 OR MORE
--------------------------------------------------------------------------
$3,352 $503 $ 838 $1,173 $1,676
3,763 564 941 1,317 1,882
4,174 626 1,043 1,461 2,087
4,584 688 1,146 1,604 2,292
4,995 749 1,249 1,748 2,497
5,405 811 1,351 1,892 2,703
----------------
(4)Other funds in the MFS Fund complex provide similar retirement benefits
to the Trustees.
<PAGE>
- - -----------------------
PART I - APPENDIX C
- - -----------------------
AFFILIATED SERVICE PROVIDER COMPENSATION
..........................................................................
The Fund paid compensation to its affiliated service providers over the
specified periods as follows:
<TABLE>
<CAPTION>
PAID TO MFS AMOUNT PAID TO MFS FOR PAID TO MFSC AMOUNT AGGREGATE
FOR ADVISORY WAIVED ADMINISTRATIVE FOR TRANSFER WAIVED AMOUNT PAID TO
FISCAL YEAR ENDED SERVICES BY MFS SERVICES AGENCY SERVICES BY MFSC MFS AND MFSC
-------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
November 30, 1998 $1,011,567 $41,938 $17,989 $158,863 0 $1,188,419
November 30, 1997 $1,274,191 0 $18,349** $231,320 0 $1,523,860
November 30, 1996 $1,615,538 0 N/A $460,981 0 $2,076,519
----------------
**From March 1, 1997, the commencement of the Master Administrative Service Agreement.
</TABLE>
<PAGE>
- - -----------------------
PART I - APPENDIX D
- - -----------------------
SALES CHARGES AND DISTRIBUTION PLAN PAYMENTS
SALES CHARGES
.........................................................................
The following sales charges were paid during the specified periods:
<TABLE>
<CAPTION>
CLASS A INITIAL SALES CHARGES: CDSC PAID TO MFD ON:
RETAINED REALLOWED CLASS A CLASS B
FISCAL YEAR END TOTAL BY MFD TO DEALERS SHARES SHARES
----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
November 30, 1998 $120,492 $23,000 $97,492 $ 111 $ 72,884
November 30, 1997 $ 49,671 $ 9,052 $40,619 $ 9,367 $ 244,072
November 30, 1996 $ 38,810 $ 3,770 $35,040 $ 52 $ 468,472
</TABLE>
DEALER REALLOWANCES
..........................................................................
As shown above, MFD pays (or "reallows") a portion of the Class A initial
sales charge to dealers. The dealer reallowance as expressed as a
percentage of the Class A shares' offering price is:
DEALER REALLOWANCE AS A
AMOUNT OF PURCHASE PERCENT OF OFFERING PRICE
--------------------------------------------------------------------------
Less than $100,000 4.00%
$100,000 but less than $250,000 3.20%
$250,000 but less than $500,000 2.25%
$500,000 but less than $1,000,000 1.70%
$1,000,000 or more None*
----------------
*A CDSC will apply to such purchase.
DISTRIBUTION PLAN PAYMENTS
..........................................................................
During the fiscal year ended November 30, 1998, the Fund made the
following Distribution Plan payments:
AMOUNT OF DISTRIBUTION AND SERVICE FEES:
CLASS OF SHARES PAID BY FUND RETAINED BY MFD PAID TO DEALERS
---------------------------------------------------------------------------
Class A Shares $ 0 $ 0 $ 0
Class B Shares $1,008,996 $798,113 $210,883
Distribution plan payments retained by MFD are used to compensate MFD for
commissions advanced by MFD to dealers upon sale of fund shares.
<PAGE>
- - -----------------------
PART I - APPENDIX E
- - -----------------------
PORTFOLIO TRANSACTIONS AND BROKERAGE COMMISSIONS
BROKERAGE COMMISSIONS
..........................................................................
The following brokerage commissions were paid by the Fund during the
specified time periods:
BROKERAGE COMMISSIONS
FISCAL YEAR END PAID BY FUND
--------------------------------------------------------------------------
November 30, 1998 $ 3
November 30, 1997 $ 0
November 30, 1996 $ 0
SECURITIES ISSUED BY REGULAR BROKER-DEALERS
..........................................................................
During the fiscal year ended November 30, 1998, the Fund purchased
securities issued by the following regular broker-dealers of the Fund,
which had the following values as of November 30, 1998:
VALUE OF SECURITIES
BROKER-DEALER AS OF NOVEMBER 30, 1998
--------------------------------------------------------------------------
None
<PAGE>
- - -----------------------
PART I - APPENDIX F
- - -----------------------
SHARE OWNERSHIP
OWNERSHIP BY TRUSTEES AND OFFICERS
As of December 31, 1998, the Trustees and officers of the Trust as a group
owned less than 1% of any class of the Fund's shares, not including 916
class I shares of the Fund (which represent approximately 99% of the
outstanding class I shares of the Fund) owned of record by certain
employee benefit plans of MFS of which Messrs. Scott and Shames are
Trustees.
25% OR GREATER OWNERSHIP
The following table identifies those investors who own 25% or more of the
Fund's shares (all share classes taken together) as of December 31, 1998,
and are therefore presumed to control the Fund:
JURISDICTION OF ORGANIZATION PERCENTAGE
NAME AND ADDRESS OF INVESTOR (IF A COMPANY) OWNERSHIP
----------------------------------------------------------------------------
None
5% OR GREATER OWNERSHIP OF SHARE CLASS
The following table identifies those investors who own 5% or more of any
class of the Fund's shares as of December 31, 1998:
NAME AND ADDRESS OF INVESTOR OWNERSHIP PERCENTAGE
..........................................................................
TRS MFS DEF Contribution Plan 98.63% of Class I shares
c/o Mark Leary 19th FL
Mass Financial Services
500 Boylston Street
Boston, MA 02116-3740
..........................................................................
<PAGE>
- - -----------------------
PART I - APPENDIX G
- - -----------------------
PERFORMANCE INFORMATION
..........................................................................
All performance quotations are as of November 30, 1998.
<TABLE>
<CAPTION>
AVERAGE ANNUAL ACTUAL 30- YIELD
TOTAL RETURNS DAY YIELD (WITHOUT CURRENT
-------------------------------------- (INCLUDING ANY DISTRIBUTION
1 YEAR 5 YEAR 10 YEAR WAIVERS) WAIVERS) RATE+
-------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Class A Shares, with initial sales
charge (SEC Performance) 0.83% 4.43% 5.80% 5.62% 5.44% 6.52%
Class A Shares, at net asset value 5.86% 5.45% 6.32% N/A N/A N/A
Class B Shares, with CDSC (SEC
Performance) 0.90% 4.07% 5.74% N/A N/A N/A
Class B Shares, at net asset value 4.86% 4.38% 5.74% 4.89% 4.71% 5.63%
Class C Shares, with CDSC (SEC
Performance) N/A N/A N/A N/A N/A N/A
Class C Shares, at net asset value N/A N/A N/A N/A N/A N/A
Class I Shares, at net asset value 5.97% 4.70% 5.91% 5.86% 5.68% 6.82%
----------------
+Annualized, based upon the last distribution.
</TABLE>
Class A share performance calculated according to Securities and Exchange
Commission (referred to as the SEC) rules (referred to as SEC performance)
takes into account the deduction of the 4.75% maximum sales charge. Class
B SEC performance takes into account the deduction of the applicable
contingent deferred sales charge (referred to as a CDSC), which declines
over six years from 4% to 0%.
The fund commenced investment operations on August 1, 1988 with the
offering of class B shares, and subsequently offered class A shares on
September 7, 1993, and class I shares on January 2, 1997. Class A share
performance includes the performance of the Fund's class B shares for
periods prior to the offering of class A shares. This blended class A
share performance has been adjusted to take into account the initial sales
charge (load) applicable to class A shares rather than the CDSC applicable
to class B shares. This blended performance has not been adjusted to take
into account differences in class specific operating expenses. Class A
share performance generally would have been higher than class B share
performance had class A shares been offered for the entire period, because
certain operating expenses (e.g., distribution and service fees)
attributable to class B shares are higher than those of class A shares.
Class I share performance includes the performance of the fund's class B
shares for periods prior to the offering of class I shares. The blended
class I share performance has been adjusted to take into account the fact
that class I shares have no CDSC. This blended performance has not been
adjusted to take into account differences in class specific operating
expenses. Class I share performance generally would have been higher than
class B share performance had class I shares been offered for the entire
period, because certain operating expenses (e.g., distribution and service
fees) attributable to class B shares are higher than those of class I
shares.
Performance results include any applicable expense subsidies and waivers,
which may cause the results to be more favorable.
<PAGE>
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
PART II
Part II of this SAI describes policies and practices that apply to each of the
Funds in the MFS Family of Funds. References in this Part II to a "Fund" means
each Fund in the MFS Family of Funds, unless noted otherwise. References in
this Part II to a "Trust" means the Massachusetts business trust of which the
Fund is a series, or, if the Fund is not a series of a Massachusetts business
trust, references to a "Trust" shall mean the Fund.
- - ---------------------
TABLE OF CONTENTS
- - ---------------------
Page
I Management of the Fund ........................................... 1
Trustees/Officers ................................................ 1
Investment Adviser ............................................... 1
Administrator .................................................... 2
Custodian ........................................................ 2
Shareholder Servicing Agent ...................................... 2
Distributor ...................................................... 2
II Principal Share Characteristics .................................. 2
Class A Shares ................................................... 2
Class B Shares, Class C Shares and Class I Shares ................ 2
Waiver of Sales Charges .......................................... 3
Dealer Commissions and Concessions ............................... 3
General .......................................................... 3
III Distribution Plan ................................................ 3
Features Common to Each Class of Shares .......................... 3
Features Unique to Each Class of Shares .......................... 4
IV Investment Techniques, Practices and Risks ....................... 5
V Net Income and Distributions ..................................... 5
Money Market Funds ............................................... 5
Other Funds ...................................................... 5
VI Tax Considerations ............................................... 5
Taxation of the Fund ............................................. 5
Taxation of Shareholders ......................................... 6
Special Rules for Municipal Fund Distributions ................... 7
VII Portfolio Transactions and Brokerage Commissions ................. 8
VIII Determination of Net Asset Value ................................. 9
Money Market Funds ............................................... 9
Other Funds ...................................................... 10
IX Performance Information .......................................... 10
Money Market Funds ............................................... 10
Other Funds ...................................................... 11
General .......................................................... 12
MFS Firsts ....................................................... 12
X Shareholder Services ............................................. 13
Investment and Withdrawal Programs ............................... 13
Exchange Privilege ............................................... 15
Tax-Deferred Retirement Plans .................................... 16
XI Description of Shares, Voting Rights and Liabilities ............. 16
Appendix A -- Waivers of Sales Charges ........................... A-1
Appendix B -- Dealer Commissions and Concessions ................. B-1
Appendix C -- Investment Techniques, Practices and Risks ......... C-1
Appendix D -- Description of Bond Ratings ........................ D-1
<PAGE>
I MANAGEMENT OF THE FUND
TRUSTEES/OFFICERS BOARD OVERSIGHT -- The Board of Trustees which oversees
the Fund provides broad supervision over the affairs of the Fund. The
Adviser is responsible for the investment management of the Fund's assets,
and the officers of the Trust are responsible for its operations.
TRUSTEE RETIREMENT PLAN -- The Trust has a retirement plan for Trustees
who are non-interested Trustees and Trustees who are not officers of the
Trust. Under this plan, a Trustee will retire upon reaching a specified
age (see Part I -- "Appendix B ") ("Retirement Age") and if the Trustee
has completed at least 5 years of service, he would be entitled to annual
payments during his lifetime of up to 50% of such Trustee's average annual
compensation (based on the three years prior to his retirement) depending
on his length of service. A Trustee may also retire prior to his
Retirement Age and receive reduced payments if he has completed at least 5
years of service. Under the plan, a Trustee (or his beneficiaries) will
also receive benefits for a period of time in the event the Trustee is
disabled or dies. These benefits will also be based on the Trustee's
average annual compensation and length of service. The Fund will accrue
its allocable portion of compensation expenses under the retirement plan
each year to cover the current year's service and amortize past service
cost.
INDEMNIFICATION OF TRUSTEES AND OFFICERS -- The Declaration of Trust of
the Trust provides that the Trust will indemnify its Trustees and officers
against liabilities and expenses incurred in connection with litigation in
which they may be involved because of their offices with the Trust,
unless, as to liabilities of the Trust or its shareholders, it is
determined that they engaged in willful misfeasance, bad faith, gross
negligence or reckless disregard of the duties involved in their offices,
or with respect to any matter, unless it is adjudicated that they did not
act in good faith in the reasonable belief that their actions were in the
best interest of the Trust. In the case of settlement, such
indemnification will not be provided unless it has been determined
pursuant to the Declaration of Trust, that they have not engaged in
willful misfeasance, bad faith, gross negligence or reckless disregard of
their duties.
INVESTMENT ADVISER
The Trust has retained Massachusetts Financial Services Company ("MFS" or
the "Adviser") as the Fund's investment adviser. MFS and its predecessor
organizations have a history of money management dating from 1924. MFS is
a subsidiary of Sun Life of Canada (U.S.) Financial Services Holdings,
Inc., which in turn is an indirect wholly owned subsidiary of Sun Life of
Canada (an insurance company).
MFS has retained, on behalf of certain MFS Funds, sub-investment advisers
to assist MFS in the management of the Fund's assets. A description of
these sub-advisers, the services they provide and their compensation is
provided under the caption "Management of the Fund -- Sub-Adviser" in
Part I of this SAI for Funds which use sub-advisers.
INVESTMENT ADVISORY AGREEMENT -- The Adviser manages the Fund pursuant to
an Investment Advisory Agreement (the "Advisory Agreement"). Under the
Advisory Agreement, the Adviser provides the Fund with overall investment
advisory services. Subject to such policies as the Trustees may determine,
the Adviser makes investment decisions for the Fund. For these services
and facilities, the Adviser receives an annual management fee, computed
and paid monthly, as disclosed in the Prospectus under the heading
"Management of the Fund[s]."
The Adviser pays the compensation of the Trust's officers and of any
Trustee who is an officer of the Adviser. The Adviser also furnishes at
its own expense all necessary administrative services, including office
space, equipment, clerical personnel, investment advisory facilities, and
all executive and supervisory personnel necessary for managing the Fund's
investments and effecting its portfolio transactions.
The Trust pays the compensation of the Trustees who are not officers of
MFS and all expenses of the Fund (other than those assumed by MFS)
including but not limited to: advisory and administrative services;
governmental fees; interest charges; taxes; membership dues in the
Investment Company Institute allocable to the Fund; fees and expenses of
independent auditors, of legal counsel, and of any transfer agent,
registrar or dividend disbursing agent of the Fund; expenses of
repurchasing and redeeming shares and servicing shareholder accounts;
expenses of preparing, printing and mailing prospectuses, periodic
reports, notices and proxy statements to shareholders and to governmental
officers and commissions; brokerage and other expenses connected with the
execution, recording and settlement of portfolio security transactions;
insurance premiums; fees and expenses of State Street Bank and Trust
Company, the Fund's custodian, for all services to the Fund, including
safekeeping of funds and securities and maintaining required books and
accounts; expenses of calculating the net asset value of shares of the
Fund; and expenses of shareholder meetings. Expenses relating to the
issuance, registration and qualification of shares of the Fund and the
preparation, printing and mailing of prospectuses are borne by the Fund
except that the Distribution Agreement with MFD requires MFD to pay for
prospectuses that are to be used for sales purposes. Expenses of the Trust
which are not attributable to a specific series are allocated between the
series in a manner believed by management of the Trust to be fair and
equitable.
The Advisory Agreement has an initial two year term and continues in
effect thereafter only if such continuance is specifically approved at
least annually by the Board of Trustees or by vote of a majority of the
Fund's shares (as defined in "Investment Restrictions" in Part I of this
SAI) and, in either case, by a majority of the Trustees who are not
parties to the Advisory Agreement or interested persons of any such party.
The Advisory Agreement terminates automatically if it is assigned and may
be terminated without penalty by vote of a majority of the Fund's shares
(as defined in "Investment Restrictions" in Part I of this SAI), or by
either party on not more than 60 days" nor less than 30 days" written
notice. The Advisory Agreement provides that if MFS ceases to serve as the
Adviser to the Fund, the Fund will change its name so as to delete the
initials "MFS" and that MFS may render services to others and may permit
other fund clients to use the initials "MFS" in their names. The Advisory
Agreement also provides that neither the Adviser nor its personnel shall
be liable for any error of judgment or mistake of law or for any loss
arising out of any investment or for any act or omission in the execution
and management of the Fund, except for willful misfeasance, bad faith or
gross negligence in the performance of its or their duties or by reason of
reckless disregard of its or their obligations and duties under the
Advisory Agreement.
ADMINISTRATOR
MFS provides the Fund with certain financial, legal, compliance,
shareholder communications and other administrative services pursuant to a
Master Administrative Services Agreement. Under this Agreement, the Fund
pays MFS an administrative fee 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.
CUSTODIAN
State Street Bank and Trust Company (the "Custodian") is the custodian of
the Fund's assets. The Custodian's responsibilities include safekeeping
and controlling the Fund's cash and securities, handling the receipt and
delivery of securities, determining income and collecting interest and
dividends on the Fund's investments, maintaining books of original entry
for portfolio and fund accounting and other required books and accounts,
and calculating the daily net asset value of each class of shares of the
Fund. The Custodian does not determine the investment policies of the Fund
or decide which securities the Fund will buy or sell. The Fund may,
however, invest in securities of the Custodian and may deal with the
Custodian as principal in securities transactions. The Custodian also acts
as the dividend disbursing agent of the Fund.
SHAREHOLDER SERVICING AGENT
MFS Service Center, Inc. ("MFSC"), a wholly owned subsidiary of MFS, is
the Fund's shareholder servicing agent, pursuant to an Amended and
Restated Shareholder Servicing Agreement (the "Agency Agreement"). The
Shareholder Servicing Agent's responsibilities under the Agency Agreement
include administering and performing transfer agent functions and the
keeping of records in connection with the issuance, transfer and
redemption of each class of shares of the Fund. For these services, MFSC
will receive a fee calculated as a percentage of the average daily net
assets of the Fund at an effective annual rate of up to 0.1125%. In
addition, MFSC will be reimbursed by the Fund for certain expenses
incurred by MFSC on behalf of the Fund. The Custodian has contracted with
MFSC to perform certain dividend disbursing agent functions for the Fund.
DISTRIBUTOR
MFS Fund Distributors, Inc. ("MFD"), a wholly owned subsidiary of MFS,
serves as distributor for the continuous offering of shares of the Fund
pursuant to an Amended and Restated Distribution Agreement (the
"Distribution Agreement"). The Distribution Agreement has an initial two
year term and continues in effect thereafter only if such continuance is
specifically approved at least annually by the Board of Trustees or by
vote of a majority of the Fund's shares (as defined in "Investment
Restrictions" in Part I of this SAI) and in either case, by a majority of
the Trustees who are not parties to the Distribution Agreement or
interested persons of any such party. The Distribution Agreement
terminates automatically if it is assigned and may be terminated without
penalty by either party on not more than 60 days' nor less than 30 days'
notice.
II PRINCIPAL SHARE CHARACTERISTICS
Set forth below is a description of Class A, B, C and I shares offered by
the MFS Family of Funds. Some MFS Funds may not offer each class of shares
-- see the Prospectus of the Fund to determine which classes of shares the
Fund offers.
CLASS A SHARES
MFD acts as agent in selling Class A shares of the Fund to dealers. The
public offering price of Class A shares of the Fund is their net asset
value next computed after the sale plus a sales charge which varies based
upon the quantity purchased. The public offering price of a Class A share
of the Fund is calculated by dividing the net asset value of a Class A
share by the difference (expressed as a decimal) between 100% and the
sales charge percentage of offering price applicable to the purchase (see
"How to Purchase, Exchange and Redeem Shares" in the Prospectus). The
sales charge scale set forth in the Prospectus applies to purchases of
Class A shares of the Fund alone or in combination with shares of all
classes of certain other funds in the MFS Family of Funds and other funds
(as noted under Right of Accumulation) by any person, including members of
a family unit (e.g., husband, wife and minor children) and bona fide
trustees, and also applies to purchases made under the Right of
Accumulation or a Letter of Intent (see "Investment and Withdrawal
Programs" below). A group might qualify to obtain quantity sales charge
discounts (see "Investment and Withdrawal Programs" below). Certain
purchases of Class A shares may be subject to a 1% CDSC instead of an
initial sales charge, as described in the Fund's Prospectus.
CLASS B SHARES, CLASS C SHARES AND CLASS I SHARES
MFD acts as agent in selling Class B, Class C and Class I shares of the
Fund. The public offering price of Class B, Class C and Class I shares is
their net asset value next computed after the sale. Class B and C shares
are generally subject to a CDSC, as described in the Fund's Prospectus.
WAIVER OF SALES CHARGES
In certain circumstances, the initial sales charge imposed upon purchases
of Class A shares and the CDSC imposed upon redemptions of Class A, B and
C shares are waived. These circumstances are described in Appendix A of
this Part II. Such sales are made without a sales charge to promote good
will with employees and others with whom MFS, MFD and/or the Fund have
business relationships, because the sales effort, if any, involved in
making such sales is negligible, or in the case of certain CDSC waivers,
because the circumstances surrounding the redemption of Fund shares were
not foreseeable or voluntary.
DEALER COMMISSIONS AND CONCESSIONS
MFD pays commission and provides concessions to dealers that sell Fund
shares. These dealer commissions and concessions are described in Appendix
B of this Part II.
GENERAL
Neither MFD nor dealers are permitted to delay placing orders to benefit
themselves by a price change. On occasion, MFD may obtain brokers loans
from various banks, including the custodian banks for the MFS Funds, to
facilitate the settlement of sales of shares of the Fund to dealers. MFD
may benefit from its temporary holding of funds paid to it by investment
dealers for the purchase of Fund shares.
III DISTRIBUTION PLAN
The Trustees have adopted a Distribution Plan for Class A, Class B and
Class C shares (the "Distribution Plan") pursuant to Section 12(b) of the
1940 Act and Rule 12b-1 thereunder (the "Rule") after having concluded
that there is a reasonable likelihood that the Distribution Plan would
benefit the Fund and each respective class of shareholders. The provisions
of the Distribution Plan are severable with respect to each Class of
shares offered by the Fund. The Distribution Plan is designed to promote
sales, thereby increasing the net assets of the Fund. Such an increase may
reduce the expense ratio to the extent the Fund's fixed costs are spread
over a larger net asset base. Also, an increase in net assets may lessen
the adverse effect that could result were the Fund required to liquidate
portfolio securities to meet redemptions. There is, however, no assurance
that the net assets of the Fund will increase or that the other benefits
referred to above will be realized.
In certain circumstances, the fees described below may not be imposed,
are being waived or do not apply to certain MFS Funds. Current
distribution and service fees for each Fund are reflected under the
caption "Expense Summary" in the Prospectus.
FEATURES COMMON TO EACH CLASS OF SHARES
There are features of the Distribution Plan that are common to each Class
of shares, as described below.
SERVICE FEES -- The Distribution Plan provides that the Fund may pay MFD a
service fee of up to 0.25% of the average daily net assets attributable to
the class of shares to which the Distribution Plan relates (i.e., Class A,
Class B or Class C shares, as appropriate) (the "Designated Class")
annually in order that MFD may pay expenses on behalf of the Fund relating
to the servicing of shares of the Designated Class. The service fee is
used by MFD to compensate dealers which enter into a sales agreement with
MFD in consideration for all personal services and/or account maintenance
services rendered by the dealer with respect to shares of the Designated
Class owned by investors for whom such dealer is the dealer or holder of
record. MFD may from time to time reduce the amount of the service fees
paid for shares sold prior to a certain date. Service fees may be reduced
for a dealer that is the holder or dealer of record for an investor who
owns shares of the Fund having an aggregate net asset value at or above a
certain dollar level. Dealers may from time to time be required to meet
certain criteria in order to receive service fees. MFD or its affiliates
are entitled to retain all service fees payable under the Distribution
Plan for which there is no dealer of record or for which qualification
standards have not been met as partial consideration for personal services
and/or account maintenance services performed by MFD or its affiliates to
shareholder accounts.
DISTRIBUTION FEES -- The Distribution Plan provides that the Fund may pay
MFD a distribution fee in addition to the service fee described above
based on the average daily net assets attributable to the Designated Class
as partial consideration for distribution services performed and expenses
incurred in the performance of MFD's obligations under its distribution
agreement with the Fund. MFD pays commissions to dealers as well as
expenses of printing prospectuses and reports used for sales purposes,
expenses with respect to the preparation and printing of sales literature
and other distribution related expenses, including, without limitation,
the cost necessary to provide distribution-related services, or personnel,
travel, office expense and equipment. The amount of the distribution fee
paid by the Fund with respect to each class differs under the Distribution
Plan, as does the use by MFD of such distribution fees. Such amounts and
uses are described below in the discussion of the provisions of the
Distribution Plan relating to each Class of shares. While the amount of
compensation received by MFD in the form of distribution fees during any
year may be more or less than the expenses incurred by MFD under its
distribution agreement with the Fund, the Fund is not liable to MFD for
any losses MFD may incur in performing services under its distribution
agreement with the Fund.
OTHER COMMON FEATURES -- Fees payable under the Distribution Plan are
charged to, and therefore reduce, income allocated to shares of the
Designated Class. The provisions of the Distribution Plan relating to
operating policies as well as initial approval, renewal, amendment and
termination are substantially identical as they relate to each Class of
shares covered by the Distribution Plan.
The Distribution Plan remains in effect from year to year only if its
continuance is specifically approved at least annually by vote of both the
Trustees and a majority of the Trustees who are not "interested persons"
or financially interested parties of such Plan ("Distribution Plan
Qualified Trustees"). The Distribution Plan also requires that the Fund
and MFD each shall provide the Trustees, and the Trustees shall review, at
least quarterly, a written report of the amounts expended (and purposes
therefor) under such Plan. The Distribution Plan may be terminated at any
time by vote of a majority of the Distribution Plan Qualified Trustees or
by vote of the holders of a majority of the respective class of the Fund's
shares (as defined in "Investment Restrictions" in Part I of this SAI).
All agreements relating to the Distribution Plan entered into between the
Fund or MFD and other organizations must be approved by the Board of
Trustees, including a majority of the Distribution Plan Qualified
Trustees. Agreements under the Distribution Plan must be in writing, will
be terminated automatically if assigned, and may be terminated at any time
without payment of any penalty, by vote of a majority of the Distribution
Plan Qualified Trustees or by vote of the holders of a majority of the
respective class of the Fund's shares. The Distribution Plan may not be
amended to increase materially the amount of permitted distribution
expenses without the approval of a majority of the respective class of the
Fund's shares (as defined in "Investment Restrictions" in Part I of this
SAI) or may not be materially amended in any case without a vote of the
Trustees and a majority of the Distribution Plan Qualified Trustees. The
selection and nomination of Distribution Plan Qualified Trustees shall be
committed to the discretion of the non-interested Trustees then in office.
No Trustee who is not an "interested person" has any financial interest in
the Distribution Plan or in any related agreement.
FEATURES UNIQUE TO EACH CLASS OF SHARES
There are certain features of the Distribution Plan that are unique to
each class of shares, as described below.
CLASS A SHARES -- Class A shares are generally offered pursuant to an
initial sales charge, a substantial portion of which is paid to or
retained by the dealer making the sale (the remainder of which is paid to
MFD). In addition to the initial sales charge, the dealer also generally
receives the ongoing 0.25% per annum service fee, as discussed above.
No service fees will be paid: (i) to any dealer who is the holder or
dealer or record for investors who own Class A shares having an aggregate
net asset value less than $750,000, or such other amount as may be
determined from time to time by MFD (MFD, however, may waive this minimum
amount requirement from time to time); or (ii) to any insurance company
which has entered into an agreement with the Fund and MFD that permits
such insurance company to purchase Class A shares from the Fund at their
net asset value in connection with annuity agreements issued in connection
with the insurance company's separate accounts.
The distribution fee paid to MFD under the Distribution Plan is equal,
on an annual basis, to 0.10% of the Fund's average daily net assets
attributable to Class A shares (0.25% per annum for certain Funds). As
noted above, MFD may use the distribution fee to cover distribution-
related expenses incurred by it under its distribution agreement with the
Fund, including commissions to dealers and payments to wholesalers
employed by MFD (e.g., MFD pays commissions to dealers with respect to
purchases of $1 million or more and purchases by certain retirement plans
of Class A shares which are sold at net asset value but which are subject
to a 1% CDSC for one year after purchase). In addition, to the extent that
the aggregate service and distribution fees paid under the Distribution
Plan do not exceed 0.35% per annum of the average daily net assets of the
Fund attributable to Class A shares (0.50% per annum for certain Funds),
the Fund is permitted to pay such distribution-related expenses or other
distribution-related expenses.
CLASS B SHARES -- Class B shares are offered at net asset value without an
initial sales charge but subject to a CDSC. MFD will advance to dealers
the first year service fee described above at a rate equal to 0.25% of the
purchase price of such shares and, as compensation therefor, MFD may
retain the service fee paid by the Fund with respect to such shares for
the first year after purchase. Dealers will become eligible to receive the
ongoing 0.25% per annum service fee with respect to such shares commencing
in the thirteenth month following purchase.
Except in the case of the first year service fee, no service fees will
be paid to any securities dealer who is the holder or dealer of record for
investors who own Class B shares having an aggregate net asset value of
less than $750,000 or such other amount as may be determined by MFD from
time to time. MFD, however, may waive this minimum amount requirement from
time to time.
Under the Distribution Plan, the Fund pays MFD a distribution fee equal,
on an annual basis, to 0.75% of the Fund's average daily net assets
attributable to Class B shares. As noted above, this distribution fee may
be used by MFD to cover its distribution-related expenses under its
distribution agreement with the Fund (including the 3.75% commission it
pays to dealers upon purchase of Class B shares).
CLASS C SHARES -- Class C shares are offered at net asset value without an
initial sales charge but subject to a CDSC of 1.00% upon redemption during
the first year. MFD will pay a commission to dealers of 1.00% of the
purchase price of Class C shares purchased through dealers at the time of
purchase. In compensation for this 1.00% commission paid by MFD to
dealers, MFD will retain the 1.00% per annum Class C distribution and
service fees paid by the Fund with respect to such shares for the first
year after purchase, and dealers will become eligible to receive from MFD
the ongoing 1.00% per annum distribution and service fees paid by the Fund
to MFD with respect to such shares commencing in the thirteenth month
following purchase.
This ongoing 1.00% fee is comprised of the 0.25% per annum service fee
paid to MFD under the Distribution Plan (which MFD in turn pays to
dealers), as discussed above, and a distribution fee paid to MFD (which
MFD also in turn pays to dealers) under the Distribution Plan, equal, on
an annual basis, to 0.75% of the Fund's average daily net assets
attributable to Class C shares.
IV INVESTMENT TECHNIQUES, PRACTICES AND RISKS
Set forth in Appendix C of this Part II is a description of investment
techniques and practices which the MFS Funds may generally use in pursuing
their investment objectives and principal investment policies, and the
risks associated with these investment techniques and practices. The Fund
will engage only in certain of these investment techniques and practices,
as identified in Part I. Investment practices and techniques that are not
identified in Part I do not apply to the Fund.
V NET INCOME AND DISTRIBUTIONS MONEY MARKET FUNDS
The net income attributable to each MFS Fund that is a money market fund
is determined each day during which the New York Stock Exchange is open
for trading (see "Determination of Net Asset Value" below for a list of
days the Exchange is closed).
For this purpose, the net income attributable to shares of a money
market fund (from the time of the immediately preceding determination
thereof) shall consist of (i) all interest income accrued on the portfolio
assets of the money market fund, (ii) less all actual and accrued expenses
of the money market fund determined in accordance with generally accepted
accounting principles, and (iii) plus or minus net realized gains and
losses and net unrealized appreciation or depreciation on the assets of
the money market fund, if any. Interest income shall include discount
earned (including both original issue and market discount) on discount
paper accrued ratably to the date of maturity.
Since the net income is declared as a dividend each time the net income
is determined, the net asset value per share (i.e., the value of the net
assets of the money market fund divided by the number of shares
outstanding) remains at $1.00 per share immediately after each such
determination and dividend declaration. Any increase in the value of a
shareholder's investment, representing the reinvestment of dividend
income, is reflected by an increase in the number of shares in the
shareholder's account.
It is expected that the shares of the money market fund will have a
positive net income at the time of each determination thereof. If for any
reason the net income determined at any time is a negative amount, which
could occur, for instance, upon default by an issuer of a portfolio
security, the money market fund would first offset the negative amount
with respect to each shareholder account from the dividends declared
during the month with respect to each such account. If and to the extent
that such negative amount exceeds such declared dividends at the end of
the month (or during the month in the case of an account liquidated in its
entirety), the money market fund could reduce the number of its
outstanding shares by treating each shareholder of the money market fund
as having contributed to its capital that number of full and fractional
shares of the money market fund in the account of such shareholder which
represents its proportion of such excess. Each shareholder of the money
market fund will be deemed to have agreed to such contribution in these
circumstances by its investment in the money market fund. This procedure
would permit the net asset value per share of the money market fund to be
maintained at a constant $1.00 per share.
OTHER FUNDS
Each MFS Fund other than the MFS money market funds intends to distribute
to its shareholders dividends equal to all of its net investment income
with such frequency as is disclosed in the Fund's prospectus. These Funds'
net investment income consists of non-capital gain income less expenses.
In addition, these Funds intend to distribute net realized short- and
long-term capital gains, if any, at least annually. Shareholders will be
informed of the tax consequences of such distributions, including whether
any portion represents a return of capital, after the end of each calendar
year.
VI TAX CONSIDERATIONS
The following discussion is a brief summary of some of the important
federal (and, where noted, state) income tax consequences affecting the
Fund and its shareholders. The discussion is very general, and therefore
prospective investors are urged to consult their tax advisors about the
impact an investment in the Fund may have on their own tax situations.
TAXATION OF THE FUND
FEDERAL TAXES -- The Fund (even if it is a fund in a Trust with multiple
series) is treated as a separate entity for federal income tax purposes
under the Internal Revenue Code of 1986, as amended (the "Code"). The Fund
has elected (or in the case of a new Fund, intends to elect) to be, and
intends to qualify to be treated each year as, a "regulated investment
company" under Subchapter M of the Code by meeting all applicable
requirements of Subchapter M, including requirements as to the nature of
the Fund's gross income, the amount of its distributions (as a percentage
of both its overall income and any tax-exempt income), and the composition
of its portfolio assets. As a regulated investment company, the Fund will
not be subject to any federal income or excise taxes on its net investment
income and net realized capital gains that it distributes to shareholders
in accordance with the timing requirements imposed by the Code. The Fund's
foreign-source income, if any, may be subject to foreign withholding
taxes. If the Fund failed to qualify as a "regulated investment company"
in any year, it would incur a regular federal corporate income tax on all
of its taxable income, whether or not distributed, and Fund distributions
would generally be taxable as ordinary dividend income to the
shareholders.
MASSACHUSETTS TAXES -- As long as it qualifies as a regulated investment
company under the Code, the Fund will not be required to pay Massachusetts
income or excise taxes.
TAXATION OF SHAREHOLDERS
TAX TREATMENT OF DISTRIBUTIONS -- Subject to the special rules discussed
below for Municipal Funds, shareholders of the Fund normally will have to
pay federal income tax and any state or local income taxes on the
dividends and capital gain distributions they receive from the Fund. Any
distributions from ordinary income and from net short-term capital gains
are taxable to shareholders as ordinary income for federal income tax
purposes whether paid in cash or reinvested in additional shares.
Distributions of net capital gain (i.e., the excess of net long-term
capital gain over net short-term capital loss), whether paid in cash or
reinvested in additional shares, are taxable to shareholders as long-term
capital gains for federal income tax purposes without regard to the length
of time the shareholders have held their shares. Any Fund dividend that is
declared in October, November, or December of any calendar year, payable
to shareholders of record in such a month, and paid during the following
January will be treated as if received by the shareholders on December 31
of the year in which the dividend is declared. The Fund will notify
shareholders regarding the federal tax status of its distributions after
the end of each calendar year.
Any Fund distribution, other than dividends that are declared by the
Fund on a daily basis, will have the effect of reducing the per share net
asset value of Fund shares by the amount of the distribution. Shareholders
purchasing shares shortly before the record date of any such distribution
(other than an exempt-interest dividend) may thus pay the full price for
the shares and then effectively receive a portion of the purchase price
back as a taxable distribution.
DIVIDENDS-RECEIVED DEDUCTION -- If the Fund receives dividend income from
U.S. corporations, a portion of the Fund's ordinary income dividends is
normally eligible for the dividends-received deduction for corporations if
the recipient otherwise qualifies for that deduction with respect to its
holding of Fund shares. Availability of the deduction for particular
corporate shareholders is subject to certain limitations, and deducted
amounts may be subject to the alternative minimum tax or result in certain
basis adjustments.
DISPOSITION OF SHARES -- In general, any gain or loss realized upon a
disposition of Fund shares by a shareholder that holds such shares as a
capital asset will be treated as a long-term capital gain or loss if the
shares have been held for more than twelve months and otherwise as a
short-term capital gain or loss. However, any loss realized upon a
disposition of Fund shares held for six months or less will be treated as
a long-term capital loss to the extent of any distributions of net capital
gain made with respect to those shares. Any loss realized upon a
disposition of shares may also be disallowed under rules relating to "wash
sales." Gain may be increased (or loss reduced) upon a redemption of Class
A Fund shares held for 90 days or less followed by any purchase (including
purchases by exchange or by reinvestment) without payment of an additional
sales charge of Class A shares of the Fund or of any other shares of an
MFS Fund generally sold subject to a sales charge.
DISTRIBUTION/ACCOUNTING POLICIES -- The Fund's current distribution and
accounting policies will affect the amount, timing, and character of
distributions to shareholders and may, under certain circumstances, make
an economic return of capital taxable to shareholders.
U.S. TAXATION OF NON-U.S. PERSONS -- Dividends and certain other payments
(but not including distributions of net capital gains) to persons who are
not citizens or residents of the United States or U.S. entities ("Non-U.S.
Persons") are generally subject to U.S. tax withholding at the rate of
30%. The Fund intends to withhold at that rate on taxable dividends and
other payments to Non-U.S. Persons that are subject to such withholding.
The Fund may withhold at a lower rate permitted by an applicable treaty if
the shareholder provides the documentation required by the Fund. Any
amounts overwithheld may be recovered by such persons by filing a claim
for refund with the U.S. Internal Revenue Service within the time period
appropriate to such claims.
BACKUP WITHHOLDING -- The Fund is also required in certain circumstances
to apply backup withholding at the rate of 31% on taxable dividends and
capital gain distributions (and redemption proceeds, if applicable) paid
to any non-corporate shareholder (including a Non-U.S. Person) who does
not furnish to the Fund certain information and certifications or who is
otherwise subject to backup withholding. Backup withholding will not,
however, be applied to payments that have been subject to 30% withholding.
FOREIGN INCOME TAXATION OF NON-U.S. PERSONS -- Distributions received from
the Fund by Non-U.S. Persons may also be subject to tax under the laws of
their own jurisdictions.
STATE AND LOCAL INCOME TAXES: U.S. GOVERNMENT SECURITIES -- Dividends paid
by the Fund that are derived from interest on obligations of the U.S.
Government and certain of its agencies and instrumentalities (but
generally not distributions of capital gains realized upon the disposition
of such obligations) may be exempt from state and local income taxes. The
Fund generally intends to advise shareholders of the extent, if any, to
which its dividends consist of such interest. Shareholders are urged to
consult their tax advisors regarding the possible exclusion of such
portion of their dividends for state and local income tax purposes.
CERTAIN SPECIFIC INVESTMENTS -- Any investment in zero coupon bonds,
deferred interest bonds, payment-in-kind bonds, certain stripped
securities, and certain securities purchased at a market discount will
cause the Fund to recognize income prior to the receipt of cash payments
with respect to those securities. To distribute this income (as well as
non-cash income described in the next two paragraphs) and avoid a tax on
the Fund, the Fund may be required to liquidate portfolio securities that
it might otherwise have continued to hold, potentially resulting in
additional taxable gain or loss to the Fund. Any investment in residual
interests of a CMO that has elected to be treated as a real estate
mortgage investment conduit, or "REMIC," can create complex tax problems,
especially if the Fund has state or local governments or other tax-exempt
organizations as shareholders.
OPTIONS, FUTURES CONTRACTS, AND FORWARD CONTRACTS -- The Fund's
transactions in options, Futures Contracts, Forward Contracts, short sales
"against the box," and swaps and related transactions will be subject to
special tax rules that may affect the amount, timing, and character of
Fund income and distributions to shareholders. For example, certain
positions held by the Fund on the last business day of each taxable year
will be marked to market (i.e., treated as if closed out) on that day, and
any gain or loss associated with the positions will be treated as 60%
long-term and 40% short-term capital gain or loss. Certain positions held
by the Fund that substantially diminish its risk of loss with respect to
other positions in its portfolio may constitute "straddles," and may be
subject to special tax rules that would cause deferral of Fund losses,
adjustments in the holding periods of Fund securities, and conversion of
short-term into long-term capital losses. Certain tax elections exist for
straddles that may alter the effects of these rules. The Fund will limit
its activities in options, Futures Contracts, Forward Contracts, short
sales "against the box" and swaps and related transactions to the extent
necessary to meet the requirements of Subchapter M of the Code.
FOREIGN INVESTMENTS -- Special tax considerations apply with respect to
foreign investments by the Fund. Foreign exchange gains and losses
realized by the Fund may be treated as ordinary income and loss. Use of
foreign currencies for non-hedging purposes and investment by the Fund in
certain "passive foreign investment companies" may be limited in order to
avoid a tax on the Fund. The Fund may elect to mark to market any
investments in "passive foreign investment companies" on the last day of
each year. This election may cause the Fund to recognize income prior to
the receipt of cash payments with respect to those investments; in order
to distribute this income and avoid a tax on the Fund, the Fund may be
required to liquidate portfolio securities that it might otherwise have
continued to hold, potentially resulting in additional taxable gain or
loss to the Fund.
FOREIGN INCOME TAXES -- Investment income received by the Fund and gains
with respect to foreign securities may be subject to foreign income taxes
withheld at the source. The United States has entered into tax treaties
with many foreign countries that may entitle the Fund to a reduced rate of
tax or an exemption from tax on such income; the Fund intends to qualify
for treaty reduced rates where available. It is not possible, however, to
determine the Fund's effective rate of foreign tax in advance, since the
amount of the Fund's assets to be invested within various countries is not
known.
If the Fund holds more than 50% of its assets in foreign stock and
securities at the close of its taxable year, it may elect to "pass
through" to its shareholders foreign income taxes paid by it. If the Fund
so elects, shareholders will be required to treat their pro rata portions
of the foreign income taxes paid by the Fund as part of the amounts
distributed to them by it and thus includable in their gross income for
federal income tax purposes. Shareholders who itemize deductions would
then be allowed to claim a deduction or credit (but not both) on their
federal income tax returns for such amounts, subject to certain
limitations. Shareholders who do not itemize deductions would (subject to
such limitations) be able to claim a credit but not a deduction. No
deduction will be permitted to individuals in computing their alternative
minimum tax liability. If the Fund is not eligible, or does not elect, to
"pass through" to its shareholders foreign income taxes it has paid,
shareholders will not be able to claim any deduction or credit for any
part of the foreign taxes paid by the Fund.
SPECIAL RULES FOR MUNICIPAL FUND DISTRIBUTIONS
The following special rules apply to shareholders of funds whose objective
is to invest primarily in obligations that pay interest that is exempt
from federal income tax ("Municipal Funds").
TAX EXEMPT DISTRIBUTIONS -- The portion of a Municipal Fund's
distributions of net investment income that is attributable to interest
from tax-exempt securities will be designated by the Fund as an "exempt-
interest dividend" under the Code and will generally be exempt from
federal income tax in the hands of shareholders so long as at least 50% of
the total value of the Fund's assets consists of tax-exempt securities at
the close of each quarter of the Fund's taxable year. Distributions of
tax-exempt interest earned from certain securities may, however, be
treated as an item of tax preference for shareholders under the federal
alternative minimum tax, and all exempt-interest dividends may increase a
corporate shareholder's alternative minimum tax. Except when the Fund
provides actual monthly percentage breakdowns, the percentage of income
designated as tax-exempt will be applied uniformly to all distributions by
the Fund of net investment income made during each fiscal year of the Fund
and may differ from the percentage of distributions consisting of tax-
exempt interest in any particular month. Shareholders are required to
report exempt-interest dividends received from the Fund on their federal
income tax returns.
TAXABLE DISTRIBUTIONS -- A Municipal Fund may also earn some income that
is taxable (including interest from any obligations that lose their
federal tax exemption) and may recognize capital gains and losses as a
result of the disposition of securities and from certain options and
futures transactions. Shareholders normally will have to pay federal
income tax on the non-exempt-interest dividends and capital gain
distributions they receive from the Fund, whether paid in cash or
reinvested in additional shares. However, the Fund does not expect that
the non-tax-exempt portion of its net investment income, if any, will be
substantial. Because the Fund expects to earn primarily tax-exempt
interest income, it is expected that no Fund dividends will qualify for
the dividends-received deduction for corporations.
CONSEQUENCES OF DISTRIBUTIONS BY A MUNICIPAL FUND: EFFECT OF ACCRUED TAX-
EXEMPT INCOME -- Shareholders redeeming shares after tax-exempt income has
been accrued but not yet declared as a dividend should be aware that a
portion of the proceeds realized upon redemption of the shares will
reflect the existence of such accrued tax-exempt income and that this
portion will be subject to tax as a capital gain even though it would have
been tax-exempt had it been declared as a dividend prior to the
redemption. For this reason, if a shareholder wishes to redeem shares of a
Municipal Fund that does not declare dividends on a daily basis, the
shareholder may wish to consider whether he or she could obtain a better
tax result by redeeming immediately after the Fund declares dividends
representing substantially all the ordinary income (including tax-exempt
income) accrued for that month.
CERTAIN ADDITIONAL INFORMATION FOR MUNICIPAL FUND SHAREHOLDERS -- Interest
on indebtedness incurred by shareholders to purchase or carry Fund shares
will not be deductible for federal income tax purposes. Exempt-interest
dividends are taken into account in calculating the amount of social
security and railroad retirement benefits that may be subject to federal
income tax. Entities or persons who are "substantial users" (or persons
related to "substantial users") of facilities financed by private activity
bonds should consult their tax advisors before purchasing Fund shares.
CONSEQUENCES OF REDEMPTION OF SHARES -- Any loss realized on a redemption
of Municipal Fund shares held for six months or less will be disallowed to
the extent of any exempt-interest dividends received with respect to those
shares. If not disallowed, any such loss will be treated as a long-term
capital loss to the extent of any distributions of net capital gain made
with respect to those shares.
STATE AND LOCAL INCOME TAXES: MUNICIPAL OBLIGATIONS -- The exemption of
exempt-interest dividends for federal income tax purposes does not
necessarily result in exemption under the income tax laws of any state or
local taxing authority. Some states do exempt from tax that portion of an
exempt-interest dividend that represents interest received by a regulated
investment company on its holdings of securities issued by that state and
its political subdivisions and instrumentalities. Therefore, the Fund will
report annually to its shareholders the percentage of interest income
earned by it during the preceding year on Municipal Bonds and will
indicate, on a state-by-state basis only, the source of such income.
VII PORTFOLIO TRANSACTIONS AND BROKERAGE COMMISSIONS
Specific decisions to purchase or sell securities for the Fund are made by
persons affiliated with the Adviser. Any such person may serve other
clients of the Adviser, or any subsidiary of the Adviser in a similar
capacity. Changes in the Fund's investments are reviewed by the Trust's
Board of Trustees.
The primary consideration in placing portfolio security transactions is
execution at the most favorable prices. The Adviser has complete freedom
as to the markets in and broker-dealers through which it seeks this
result. In the U.S. and in some other countries debt securities are traded
principally in the over-the-counter market on a net basis through dealers
acting for their own account and not as brokers. In other countries both
debt and equity securities are traded on exchanges at fixed commission
rates. The cost of securities purchased from underwriters includes an
underwriter's commission or concession, and the prices at which securities
are purchased and sold from and to dealers include a dealer's mark-up or
mark-down. The Adviser normally seeks to deal directly with the primary
market makers or on major exchanges unless, in its opinion, better prices
are available elsewhere. Subject to the requirement of seeking execution
at the best available price, securities may, as authorized by the Advisory
Agreement, be bought from or sold to dealers who have furnished
statistical, research and other information or services to the Adviser. At
present no arrangements for the recapture of commission payments are in
effect.
Consistent with the foregoing primary consideration, the Conduct Rules
of the National Association of Securities Dealers, Inc. ("NASD") and such
other policies as the Trustees may determine, the Adviser may consider
sales of shares of the Fund and of the other investment company clients of
MFD as a factor in the selection of broker-dealers to execute the Fund's
portfolio transactions.
Under the Advisory Agreement and as permitted by Section 28(e) of the
Securities Exchange Act of 1934, the Adviser may cause the Fund to pay a
broker-dealer which provides brokerage and research services to the
Adviser, an amount of commission for effecting a securities transaction
for the Fund in excess of the amount other broker-dealers would have
charged for the transaction, if the Adviser determines in good faith that
the greater commission is reasonable in relation to the value of the
brokerage and research services provided by the executing broker-dealer
viewed in terms of either a particular transaction or their respective
overall responsibilities to the Fund or to their other clients. Not all of
such services are useful or of value in advising the Fund.
The term "brokerage and research services" includes advice as to the
value of securities, the advisability of investing in, purchasing or
selling securities, and the availability of securities or of purchasers or
sellers of securities; furnishing analyses and reports concerning issues,
industries, securities, economic factors and trends, portfolio strategy
and the performance of accounts; and effecting securities transactions and
performing functions incidental thereto, such as clearance and settlement.
Although commissions paid on every transaction will, in the judgment of
the Adviser, be reasonable in relation to the value of the brokerage
services provided, commissions exceeding those which another broker might
charge may be paid to broker-dealers who were selected to execute
transactions on behalf of the Fund and the Adviser's other clients in part
for providing advice as to the availability of securities or of purchasers
or sellers of securities and services in effecting securities transactions
and performing functions incidental thereto, such as clearance and
settlement.
Broker-dealers may be willing to furnish statistical, research and other
factual information or services ("Research") to the Adviser for no
consideration other than brokerage or underwriting commissions. Securities
may be bought or sold from time to time through such broker-dealers, on
behalf of the Fund.
The Adviser's investment management personnel attempt to evaluate the
quality of Research provided by brokers. The Adviser sometimes uses
evaluations resulting from this effort as a consideration in the selection
of brokers to execute portfolio transactions.
The management fee of the Adviser will not be reduced as a consequence
of the Adviser's receipt of brokerage and research service. To the extent
the Fund's portfolio transactions are used to obtain brokerage and
research services, the brokerage commissions paid by the Fund will exceed
those that might otherwise be paid for such portfolio transactions, or for
such portfolio transactions and research, by an amount which cannot be
presently determined. Such services would be useful and of value to the
Adviser in serving both the Fund and other clients and, conversely, such
services obtained by the placement of brokerage business of other clients
would be useful to the Adviser in carrying out its obligations to the
Fund. While such services are not expected to reduce the expenses of the
Adviser, the Adviser would, through use of the services, avoid the
additional expenses which would be incurred if it should attempt to
develop comparable information through its own staff.
In certain instances there may be securities which are suitable for the
Fund's portfolio as well as for that of one or more of the other clients
of the Adviser or any subsidiary of the Adviser. Investment decisions for
the Fund and for such other clients are made with a view to achieving
their respective investment objectives. It may develop that a particular
security is bought or sold for only one client even though it might be
held by, or bought or sold for, other clients. Likewise, a particular
security may be bought for one or more clients when one or more other
clients are selling that same security. Some simultaneous transactions are
inevitable when several clients receive investment advice from the same
investment adviser, particularly when the same security is suitable for
the investment objectives of more than one client. When two or more
clients are simultaneously engaged in the purchase or sale of the same
security, the securities are allocated among clients in a manner believed
by the adviser to be equitable to each. It is recognized that in some
cases this system could have a detrimental effect on the price or volume
of the security as far as the Fund is concerned. In other cases, however,
the Fund believes that its ability to participate in volume transactions
will produce better executions for the Fund.
VIII DETERMINATION OF NET ASSET VALUE
The net asset value per share of each class of the Fund is determined each
day during which the New York Stock Exchange is open for trading. (As of
the date of this SAI, the Exchange is open for trading every weekday
except for the following holidays (or the days on which they are
observed): New Year's Day; Martin Luther King Day; Presidents' Day; Good
Friday; Memorial Day; Independence Day; Labor Day; Thanksgiving Day and
Christmas Day.) This determination is made once each day as of the close
of regular trading on the Exchange by deducting the amount of the
liabilities attributable to the class from the value of the assets
attributable to the class and dividing the difference by the number of
shares of the class outstanding.
MONEY MARKET FUNDS
Portfolio securities of each MFS Fund that is a money market fund are
valued at amortized cost, which the Board of Trustees which oversees the
money market fund has determined in good faith constitutes fair value for
the purposes of complying with the 1940 Act. This valuation method will
continue to be used until such time as the Board of Trustees determines
that it does not constitute fair value for such purposes. Each money
market fund will limit its portfolio to those investments in U.S. dollar-
denominated instruments which its Board of Trustees determines present
minimal credit risks, and which are of high quality as determined by any
major rating service or, in the case of any instrument that is not so
rated, of comparable quality as determined by the Board of Trustees. Each
money market fund has also agreed to maintain a dollar-weighted average
maturity of 90 days or less and to invest only in securities maturing in
13 months or less. The Board of Trustees which oversees each money market
fund has established procedures designed to stabilize its net asset value
per share, as computed for the purposes of sales and redemptions, at $1.00
per share. If the Board determines that a deviation from the $1.00 per
share price may exist which may result in a material dilution or other
unfair result to investors or existing shareholders, it will take
corrective action it regards as necessary and appropriate, which action
could include the sale of instruments prior to maturity (to realize
capital gains or losses); shortening average portfolio maturity;
withholding dividends; or using market quotations for valuation purposes.
OTHER FUNDS
The following valuation techniques apply to each MFS Fund that is not a
money market fund.
Equity securities in the Fund's portfolio are valued at the last sale
price on the exchange on which they are primarily traded or on the Nasdaq
stock market system for unlisted national market issues, or at the last
quoted bid price for listed securities in which there were no sales during
the day or for unlisted securities not reported on the Nasdaq stock market
system. Bonds and other fixed income securities (other than short-term
obligations) of U.S. issuers in the Fund's portfolio are valued on the
basis of valuations furnished by a pricing service which utilizes both
dealer-supplied valuations and electronic data processing techniques which
take into account appropriate factors such as institutional-size trading
in similar groups of securities, yield, quality, coupon rate, maturity,
type of issue, trading characteristics and other market data without
exclusive reliance upon quoted prices or exchange or over-the-counter
prices, since such valuations are believed to reflect more accurately the
fair value of such securities. Forward Contracts will be valued using a
pricing model taking into consideration market data from an external
pricing source. Use of the pricing services has been approved by the Board
of Trustees.
All other securities, futures contracts and options in the Fund's
portfolio (other than short-term obligations) for which the principal
market is one or more securities or commodities exchanges (whether
domestic or foreign) will be valued at the last reported sale price or at
the settlement price prior to the determination (or if there has been no
current sale, at the closing bid price) on the primary exchange on which
such securities, futures contracts or options are traded; but if a
securities exchange is not the principal market for securities, such
securities will, if market quotations are readily available, be valued at
current bid prices, unless such securities are reported on the Nasdaq
stock market system, in which case they are valued at the last sale price
or, if no sales occurred during the day, at the last quoted bid price.
Short-term obligations in the Fund's portfolio are valued at amortized
cost, which constitutes fair value as determined by the Board of Trustees.
Short-term obligations with a remaining maturity in excess of 60 days will
be valued upon dealer supplied valuations. Portfolio investments for which
there are no such quotations or valuations are valued at fair value as
determined in good faith by or at the direction of the Board of Trustees.
Generally, trading in foreign securities is substantially completed each
day at various times prior to the close of regular trading on the
Exchange. Occasionally, events affecting the values of such securities may
occur between the times at which they are determined and the close of
regular trading on the Exchange which will not be reflected in the
computation of the Fund's net asset value unless the Trustees deem that
such event would materially affect the net asset value in which case an
adjustment would be made.
All investments and assets are expressed in U.S. dollars based upon
current currency exchange rates. A share's net asset value is effective
for orders received by the dealer prior to its calculation and received by
MFD prior to the close of that business day.
IX PERFORMANCE INFORMATION
MONEY MARKET FUNDS
Each MFS Fund that is a money market fund will provide current annualized
and effective annualized yield quotations based on the daily dividends of
shares of the money market fund. These quotations may from time to time be
used in advertisements, shareholder reports or other communications to
shareholders.
Any current yield quotation of a money market fund which is used in such
a manner as to be subject to the provisions of Rule 482(d) under the 1933
Act shall consist of an annualized historical yield, carried at least to
the nearest hundredth of one percent based on a specific seven calendar
day period and shall be calculated by dividing the net change in the value
of an account having a balance of one share of that class at the beginning
of the period by the value of the account at the beginning of the period
and multiplying the quotient by 365/7. For this purpose the net change in
account value would reflect the value of additional shares purchased with
dividends declared on the original share and dividends declared on both
the original share and any such additional shares, but would not reflect
any realized gains or losses from the sale of securities or any unrealized
appreciation or depreciation on portfolio securities. In addition, any
effective yield quotation of a money market fund so used shall be
calculated by compounding the current yield quotation for such period by
multiplying such quotation by 7/365, adding 1 to the product, raising the
sum to a power equal to 365/7, and subtracting 1 from the result. These
yield quotations should not be considered as representative of the yield
of a money market fund in the future since the yield will vary based on
the type, quality and maturities of the securities held in its portfolio,
fluctuations in short-term interest rates and changes in the money market
fund's expenses.
OTHER FUNDS
Each MFS Fund that is not a money market fund may quote the following
performance results.
TOTAL RATE OF RETURN -- The Fund will calculate its total rate of return
for each class of shares for certain periods by determining the average
annual compounded rates of return over those periods that would cause an
investment of $1,000 (made with all distributions reinvested and
reflecting the CDSC or the maximum public offering price) to reach the
value of that investment at the end of the periods. The Fund may also
calculate (i) a total rate of return, which is not reduced by any
applicable CDSC and therefore may result in a higher rate of return, (ii)
a total rate of return assuming an initial account value of $1,000, which
will result in a higher rate of return since the value of the initial
account will not be reduced by any applicable sales charge and/or (iii)
total rates of return which represent aggregate performance over a period
or year-by-year performance, and which may or may not reflect the effect
of the maximum or other sales charge or CDSC.
The Fund offers multiple classes of shares which were initially offered
for sale to, and purchased by, the public on different dates (the class
"inception date"). The calculation of total rate of return for a class of
shares which has a later class inception date than another class of shares
of the Fund is based both on (i) the performance of the Fund's newer class
from its inception date and (ii) the performance of the Fund's oldest
class from its inception date up to the class inception date of the newer
class.
As discussed in the Prospectus, the sales charges, expenses and expense
ratios, and therefore the performance, of the Fund's classes of shares
differ. In calculating total rate of return for a newer class of shares in
accordance with certain formulas required by the SEC, the performance will
be adjusted to take into account the fact that the newer class is subject
to a different sales charge than the oldest class (e.g., if the newer
class is Class A shares, the total rate of return quoted will reflect the
deduction of the initial sales charge applicable to Class A shares; if the
newer class is Class B shares, the total rate of return quoted will
reflect the deduction of the CDSC applicable to Class B shares). However,
the performance will not be adjusted to take into account the fact that
the newer class of shares bears different class specific expenses than the
oldest class of shares (e.g., Rule 12b-1 fees). Therefore, the total rate
of return quoted for a newer class of shares will differ from the return
that would be quoted had the newer class of shares been outstanding for
the entire period over which the calculation is based (i.e., the total
rate of return quoted for the newer class will be higher than the return
that would have been quoted had the newer class of shares been outstanding
for the entire period over which the calculation is based if the class
specific expenses for the newer class are higher than the class specific
expenses of the oldest class, and the total rate of return quoted for the
newer class will be lower than the return that would be quoted had the
newer class of shares been outstanding for this entire period if the class
specific expenses for the newer class are lower than the class specific
expenses of the oldest class).
Any total rate of return quotation provided by the Fund should not be
considered as representative of the performance of the Fund in the future
since the net asset value of shares of the Fund will vary based not only
on the type, quality and maturities of the securities held in the Fund's
portfolio, but also on changes in the current value of such securities and
on changes in the expenses of the Fund. These factors and possible
differences in the methods used to calculate total rates of return should
be considered when comparing the total rate of return of the Fund to total
rates of return published for other investment companies or other
investment vehicles. Total rate of return reflects the performance of both
principal and income. Current net asset value and account balance
information may be obtained by calling 1-800-MFS-TALK (637-8255).
YIELD -- Any yield quotation for a class of shares of the Fund is based on
the annualized net investment income per share of that class for the 30-
day period. The yield for each class of the Fund is calculated by dividing
the net investment income allocated to that class earned during the period
by the maximum offering price per share of that class of the Fund on the
last day of the period. The resulting figure is then annualized. Net
investment income per share of a class is determined by dividing (i) the
dividends and interest allocated to that class during the period, minus
accrued expense of that class for the period by (ii) the average number of
shares of the class entitled to receive dividends during the period
multiplied by the maximum offering price per share on the last day of the
period. The Fund's yield calculations assume a maximum sales charge of
5.75% in the case of Class A shares and no payment of any CDSC in the case
of Class B and Class C shares.
TAX-EQUIVALENT YIELD -- The tax-equivalent yield for a class of shares of
a Fund is calculated by determining the rate of return that would have to
be achieved on a fully taxable investment in such shares to produce the
after-tax equivalent of the yield of that class. In calculating tax-
equivalent yield, a Fund assumes certain federal tax brackets for
shareholders and does not take into account state taxes.
CURRENT DISTRIBUTION RATE -- Yield, which is calculated according to a
formula prescribed by the Securities and Exchange Commission, is not
indicative of the amounts which were or will be paid to the Fund's
shareholders. Amounts paid to shareholders of each class are reflected in
the quoted "current distribution rate" for that class. The current
distribution rate for a class is computed by (i) annualizing the
distributions (excluding short-term capital gains) of the class for a
stated period; (ii) adding any short-term capital gains paid within the
immediately preceding twelve-month period; and (iii) dividing the result
by the maximum offering price or net asset value per share on the last day
of the period. The current distribution rate differs from the yield
computation because it may include distributions to shareholders from
sources other than dividends and interest, such as premium income for
option writing, short-term capital gains and return of invested capital,
and may be calculated over a different period of time. The Fund's current
distribution rate calculation for Class B shares and Class C shares
assumes no CDSC is paid.
GENERAL
From time to time the Fund may, as appropriate, quote Fund rankings or
reprint all or a portion of evaluations of fund performance and operations
appearing in various independent publications, including but not limited
to the following: Money, Fortune, U.S. News and World Report, Kiplinger's
Personal Finance, The Wall Street Journal, Barron's, Investors Business
Daily, Newsweek, Financial World, Financial Planning, Investment Advisor,
USA Today, Pensions and Investments, SmartMoney, Forbes, Global Finance,
Registered Representative, Institutional Investor, the Investment Company
Institute, Johnson's Charts, Morningstar, Lipper Analytical Securities
Corporation, CDA Wiesenberger, Shearson Lehman and Salomon Bros. Indices,
Ibbotson, Business Week, Lowry Associates, Media General, Investment
Company Data, The New York Times, Your Money, Strangers Investment
Advisor, Financial Planning on Wall Street, Standard and Poor's,
Individual Investor, The 100 Best Mutual Funds You Can Buy, by Gordon K.
Williamson, Consumer Price Index, and Sanford C. Bernstein & Co. Fund
performance may also be compared to the performance of other mutual funds
tracked by financial or business publications or periodicals. The Fund may
also quote evaluations mentioned in independent radio or television
broadcasts and use charts and graphs to illustrate the past performance of
various indices such as those mentioned above and illustrations using
hypothetical rates of return to illustrate the effects of compounding and
tax-deferral. The Fund may advertise examples of the effects of periodic
investment plans, including the principle of dollar cost averaging. In
such a program, an investor invests a fixed dollar amount in a fund at
periodic intervals, thereby purchasing fewer shares when prices are high
and more shares when prices are low. While such a strategy does not assure
a profit or guard against a loss in a declining market, the investor's
average cost per share can be lower than if fixed numbers of shares are
purchased at the same intervals.
From time to time, the Fund may discuss or quote its current portfolio
manager as well as other investment personnel, including such persons'
views on: the economy; securities markets; portfolio securities and their
issuers; investment philosophies, strategies, techniques and criteria used
in the selection of securities to be purchased or sold for the Fund; the
Fund's portfolio holdings; the investment research and analysis process;
the formulation and evaluation of investment recommendations; and the
assessment and evaluation of credit, interest rate, market and economic
risks, and similar or related matters.
The Fund may also use charts, graphs or other presentation formats to
illustrate the historical correlation of its performance to fund
categories established by Morningstar (or other nationally recognized
statistical ratings organizations) and to other MFS Funds.
From time to time the Fund may also discuss or quote the views of its
distributor, its investment adviser and other financial planning, legal,
tax, accounting, insurance, estate planning and other professionals, or
from surveys, regarding individual and family financial planning. Such
views may include information regarding: retirement planning; tax
management strategies; estate planning; general investment techniques
(e.g., asset allocation and disciplined saving and investing); business
succession; ideas and information provided through the MFS Heritage
Planning(SM) program, an intergenerational financial planning assistance
program; issues with respect to insurance (e.g., disability and life
insurance and Medicare supplemental insurance); issues regarding financial
and health care management for elderly family members; and other similar
or related matters.
From time to time, the Fund may also advertise annual returns showing
the cumulative value of an initial investment in the Fund in various
amounts over specified periods, with capital gain and dividend
distributions invested in additional shares or taken in cash, and with no
adjustment for any income taxes (if applicable) payable by shareholders.
MFS FIRSTS
MFS has a long history of innovations.
o 1924 -- Massachusetts Investors Trust is established as the first
open-end mutual fund in America.
o 1924 -- Massachusetts Investors Trust is the first mutual fund to make
full public disclosure of its operations in shareholder reports.
o 1932 -- One of the first internal research departments is established to
provide in-house analytical capability for an investment management
firm.
o 1933 -- Massachusetts Investors Trust is the first mutual fund to
register under the Securities Act of 1933 ("Truth in Securities Act" or
"Full Disclosure Act").
o 1936 -- Massachusetts Investors Trust is the first mutual fund to allow
shareholders to take capital gain distributions either in additional
shares or in cash.
o 1976 -- MFS(R) Municipal Bond Fund is among the first municipal bond
funds established.
o 1979 -- Spectrum becomes the first combination fixed/ variable annuity
with no initial sales charge.
o 1981 -- MFS(R) Global Governments Fund is established as America's first
globally diversified fixed-income mutual fund.
o 1984 -- MFS(R) Municipal High Income Fund is the first open-end mutual
fund to seek high tax-free income from lower-rated municipal securities.
o 1986 -- MFS(R) Managed Sectors Fund becomes the first mutual fund to
target and shift investments among industry sectors for shareholders.
o 1986 -- MFS(R) Municipal Income Trust is the first closed-end,
high-yield municipal bond fund traded on the New York Stock Exchange.
o 1987 -- MFS(R) Multimarket Income Trust is the first closed-end,
multimarket high income fund listed on the New York Stock Exchange.
o 1989 -- MFS(R) Regatta becomes America's first non-qualified market
value adjusted fixed/variable annuity.
o 1990 -- MFS(R) Global Total Return Fund is the first global balanced
fund.
o 1993 -- MFS(R) Global Growth Fund is the first global emerging markets
fund to offer the expertise of two sub-advisers.
o 1993 -- MFS(R) becomes money manager of MFS(R) Union Standard(R) Equity
Fund, the first fund to invest principally in companies deemed to be
union-friendly by an advisory board of senior labor officials, senior
managers of companies with significant labor contracts, academics and
other national labor leaders or experts.
X SHAREHOLDER SERVICES
INVESTMENT AND WITHDRAWAL PROGRAMS
The Fund makes available the following programs designed to enable
shareholders to add to their investment or withdraw from it with a minimum
of paper work. These programs are described below and, in certain cases,
in the Prospectus. The programs involve no extra charge to shareholders
(other than a sales charge in the case of certain Class A share purchases)
and may be changed or discontinued at any time by a shareholder or the
Fund.
LETTER OF INTENT -- If a shareholder (other than a group purchaser
described below) anticipates purchasing $50,000 or more of Class A shares
of the Fund alone or in combination with shares of any class of MFS Funds
or MFS Fixed Fund (a bank collective investment fund) within a 13-month
period (or 36-month period, in the case of purchases of $1 million or
more), the shareholder may obtain Class A shares of the Fund at the same
reduced sales charge as though the total quantity were invested in one
lump sum by completing the Letter of Intent section of the Account
Application or filing a separate Letter of Intent application (available
from MFSC) within 90 days of the commencement of purchases. Subject to
acceptance by MFD and the conditions mentioned below, each purchase will
be made at a public offering price applicable to a single transaction of
the dollar amount specified in the Letter of Intent application. The
shareholder or his dealer must inform MFD that the Letter of Intent is in
effect each time shares are purchased. The shareholder makes no commitment
to purchase additional shares, but if his purchases within 13 months (or
36 months in the case of purchases of $1 million or more) plus the value
of shares credited toward completion of the Letter of Intent do not total
the sum specified, he will pay the increased amount of the sales charge as
described below. Instructions for issuance of shares in the name of a
person other than the person signing the Letter of Intent application must
be accompanied by a written statement from the dealer stating that the
shares were paid for by the person signing such Letter. Neither income
dividends nor capital gain distributions taken in additional shares will
apply toward the completion of the Letter of Intent. Dividends and
distributions of other MFS Funds automatically reinvested in shares of the
Fund pursuant to the Distribution Investment Program will also not apply
toward completion of the Letter of Intent.
Out of the shareholder's initial purchase (or subsequent purchases if
necessary), 5% of the dollar amount specified in the Letter of Intent
application shall be held in escrow by MFSC in the form of shares
registered in the shareholder's name. All income dividends and capital
gain distributions on escrowed shares will be paid to the shareholder or
to his order. When the minimum investment so specified is completed
(either prior to or by the end of the 13-month period or 36-month period,
as applicable), the shareholder will be notified and the escrowed shares
will be released.
If the intended investment is not completed, MFSC will redeem an
appropriate number of the escrowed shares in order to realize such
difference. Shares remaining after any such redemption will be released by
MFSC. By completing and signing the Account Application or separate Letter
of Intent application, the shareholder irrevocably appoints MFSC his
attorney to surrender for redemption any or all escrowed shares with full
power of substitution in the premises.
RIGHT OF ACCUMULATION -- A shareholder qualifies for cumulative quantity
discounts on the purchase of Class A shares when his new investment,
together with the current offering price value of all holdings of Class A,
Class B and Class C shares of that shareholder in the MFS Funds or MFS
Fixed Fund reaches a discount level. See "Purchases" in the Prospectus for
the sales charges on quantity discounts. A shareholder must provide MFSC
(or his investment dealer must provide MFD) with information to verify
that the quantity sales charge discount is applicable at the time the
investment is made.
SUBSEQUENT INVESTMENT BY TELEPHONE -- Each shareholder may purchase
additional shares of any MFS Fund by telephoning MFSC toll-free at (800)
225-2606. The minimum purchase amount is $50 and the maximum purchase
amount is $100,000. Shareholders wishing to avail themselves of this
telephone purchase privilege must so elect on their Account Application
and designate thereon a bank and account number from which purchases will
be made. If a telephone purchase request is received by MFSC on any
business day prior to the close of regular trading on the Exchange
(generally, 4:00 p.m., Eastern time), the purchase will occur at the
closing net asset value of the shares purchased on that day. MFSC may be
liable for any losses resulting from unauthorized telephone transactions
if it does not follow reasonable procedures designed to verify the
identity of the caller. MFSC will request personal or other information
from the caller, and will normally also record calls. Shareholders should
verify the accuracy of confirmation statements immediately after their
receipt.
DISTRIBUTION INVESTMENT PROGRAM -- Distributions of dividends and capital
gains made by the Fund with respect to a particular class of shares may be
automatically invested in shares of the same class of one of the other MFS
Funds, if shares of that fund are available for sale. Such investments
will be subject to additional purchase minimums. Distributions will be
invested at net asset value (exclusive of any sales charge) and will not
be subject to any CDSC. Distributions will be invested at the close of
business on the payable date for the distribution. A shareholder
considering the Distribution Investment Program should obtain and read the
prospectus of the other fund and consider the differences in objectives
and policies before making any investment.
SYSTEMATIC WITHDRAWAL PLAN -- A shareholder may direct MFSC to send him
(or anyone he designates) regular periodic payments based upon the value
of his account. Each payment under a Systematic Withdrawal Plan ("SWP")
must be at least $100, except in certain limited circumstances. The
aggregate withdrawals of Class B and Class C shares in any year pursuant
to a SWP generally are limited to 10% of the value of the account at the
time of establishment of the SWP. SWP payments are drawn from the proceeds
of share redemptions (which would be a return of principal and, if
reflecting a gain, would be taxable). Redemptions of Class B and Class C
shares will be made in the following order: (i) shares representing
reinvested distributions; (ii) shares representing undistributed capital
gains and income; and (iii) to the extent necessary, shares representing
direct investments subject to the lowest CDSC. The CDSC will be waived in
the case of redemptions of Class B and Class C shares pursuant to a SWP,
but will not be waived in the case of SWP redemptions of Class A shares
which are subject to a CDSC. To the extent that redemptions for such
periodic withdrawals exceed dividend income reinvested in the account,
such redemptions will reduce and may eventually exhaust the number of
shares in the shareholder's account. All dividend and capital gain
distributions for an account with a SWP will be received in full and
fractional shares of the Fund at the net asset value in effect at the
close of business on the record date for such distributions. To initiate
this service, shares having an aggregate value of at least $5,000 either
must be held on deposit by, or certificates for such shares must be
deposited with, MFSC. With respect to Class A shares, maintaining a
withdrawal plan concurrently with an investment program would be
disadvantageous because of the sales charges included in share purchases
and the imposition of a CDSC on certain redemptions. The shareholder may
deposit into the account additional shares of the Fund, change the payee
or change the dollar amount of each payment. MFSC may charge the account
for services rendered and expenses incurred beyond those normally assumed
by the Fund with respect to the liquidation of shares. No charge is
currently assessed against the account, but one could be instituted by
MFSC on 60 days' notice in writing to the shareholder in the event that
the Fund ceases to assume the cost of these services. The Fund may
terminate any SWP for an account if the value of the account falls below
$5,000 as a result of share redemptions (other than as a result of a SWP)
or an exchange of shares of the Fund for shares of another MFS Fund. Any
SWP may be terminated at any time by either the shareholder or the Fund.
INVEST BY MAIL -- Additional investments of $50 or more may be made at any
time by mailing a check payable to the Fund directly to MFSC. The
shareholder's account number and the name of his investment dealer must be
included with each investment.
GROUP PURCHASES -- A bona fide group and all its members may be treated as
a single purchaser and, under the Right of Accumulation (but not the
Letter of Intent) obtain quantity sales charge discounts on the purchase
of Class A shares if the group (1) gives its endorsement or authorization
to the investment program so it may be used by the investment dealer to
facilitate solicitation of the membership, thus effecting economies of
sales effort; (2) has been in existence for at least six months and has a
legitimate purpose other than to purchase mutual fund shares at a
discount; (3) is not a group of individuals whose sole organizational
nexus is as credit cardholders of a company, policyholders of an insurance
company, customers of a bank or broker-dealer, clients of an investment
adviser or other similar groups; and (4) agrees to provide certification
of membership of those members investing money in the MFS Funds upon the
request of MFD.
AUTOMATIC EXCHANGE PLAN -- Shareholders having account balances of at
least $5,000 in any MFS Fund may participate in the Automatic Exchange
Plan. The Automatic Exchange Plan provides for automatic exchanges of
funds from the shareholder's account in an MFS Fund for investment in the
same class of shares of other MFS Funds selected by the shareholder (if
available for sale). Under the Automatic Exchange Plan, exchanges of at
least $50 each may be made to up to six different funds effective on the
seventh day of each month or of every third month, depending whether
monthly or quarterly exchanges are elected by the shareholder. If the
seventh day of the month is not a business day, the transaction will be
processed on the next business day. Generally, the initial transfer will
occur after receipt and processing by MFSC of an application in good
order. Exchanges will continue to be made from a shareholder's account in
any MFS Fund, as long as the balance of the account is sufficient to
complete the exchanges. Additional payments made to a shareholder's
account will extend the period that exchanges will continue to be made
under the Automatic Exchange Plan. However, if additional payments are
added to an account subject to the Automatic Exchange Plan shortly before
an exchange is scheduled, such funds may not be available for exchanges
until the following month; therefore, care should be used to avoid
inadvertently terminating the Automatic Exchange Plan through exhaustion
of the account balance.
No transaction fee for exchanges will be charged in connection with the
Automatic Exchange Plan. However, exchanges of shares of MFS Money Market
Fund, MFS Government Money Market Fund and Class A shares of MFS Cash
Reserve Fund will be subject to any applicable sales charge. Changes in
amounts to be exchanged to the Fund, the funds to which exchanges are to
be made and the timing of exchanges (monthly or quarterly), or termination
of a shareholder's participation in the Automatic Exchange Plan will be
made after instructions in writing or by telephone (an "Exchange Change
Request") are received by MFSC in proper form (i.e., if in writing --
signed by the record owner(s) exactly as shares are registered; if by
telephone -- proper account identification is given by the dealer or
shareholder of record). Each Exchange Change Request (other than
termination of participation in the program) must involve at least $50.
Generally, if an Exchange Change Request is received by telephone or in
writing before the close of business on the last business day of a month,
the Exchange Change Request will be effective for the following month's
exchange.
A shareholder's right to make additional investments in any of the MFS
Funds, to make exchanges of shares from one MFS Fund to another and to
withdraw from an MFS Fund, as well as a shareholder's other rights and
privileges are not affected by a shareholder's participation in the
Automatic Exchange Plan. The Automatic Exchange Plan is part of the
Exchange Privilege. For additional information regarding the Automatic
Exchange Plan, including the treatment of any CDSC, see "Exchange
Privilege" below.
REINSTATEMENT PRIVILEGE -- Shareholders of the Fund and shareholders of
the other MFS Funds (except MFS Money Market Fund, MFS Government Money
Market Fund and holders of Class A shares of MFS Cash Reserve Fund in the
case where shares of such funds are acquired through direct purchase or
reinvested dividends) who have redeemed their shares have a one-time right
to reinvest the redemption proceeds in the same class of shares of any of
the MFS Funds (if shares of the fund are available for sale) at net asset
value (without a sales charge) and, if applicable, with credit for any
CDSC paid. In the case of proceeds reinvested in MFS Money Market Fund,
MFS Government Money Market Fund and Class A shares of MFS Cash Reserve
Fund, the shareholder has the right to exchange the acquired shares for
shares of another MFS Fund at net asset value pursuant to the exchange
privilege described below. Such a reinvestment must be made within 90 days
of the redemption and is limited to the amount of the redemption proceeds.
If the shares credited for any CDSC paid are then redeemed within six
years of the initial purchase in the case of Class B shares or 12 months
of the initial purchase in the case of 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 see your tax adviser for further information.
EXCHANGE PRIVILEGE
Subject to the requirements set forth below, some or all of the shares of
the same class in an account with the Fund for which payment has been
received by the Fund (i.e., an established account) may be exchanged for
shares of the same class of any of the other MFS Funds (if available for
sale and if the purchaser is eligible to purchase the Class of shares) at
net asset value. Exchanges will be made only after instructions in writing
or by telephone (an "Exchange Request") are received for an established
account by MFSC.
EXCHANGES AMONG MFS FUNDS (excluding exchanges from MFS money market
funds) -- No initial sales charge or CDSC will be imposed in connection
with an exchange from shares of an MFS Fund to shares of any other MFS
Fund, except with respect to exchanges from an MFS money market fund to
another MFS Fund which is not an MFS money market fund (discussed below).
With respect to an exchange involving shares subject to a CDSC, the CDSC
will be unaffected by the exchange and the holding period for purposes of
calculating the CDSC will carry over to the acquired shares.
EXCHANGES FROM AN MFS MONEY MARKET FUND -- Special rules apply with
respect to the imposition of an initial sales charge or a CDSC for
exchanges from an MFS money market fund to another MFS Fund which is not
an MFS money market fund. These rules are described under the caption "How
to Purchase, Exchange and Redeem Shares" in the Prospectuses of those MFS
money market funds.
EXCHANGES INVOLVING THE MFS FIXED FUND -- Class A shares of any MFS Fund
held by certain qualified retirement plans may be exchanged for units of
participation of the MFS Fixed Fund (a bank collective investment fund)
(the "Units"), and Units may be exchanged for Class A shares of any MFS
Fund. With respect to exchanges between Class A shares subject to a CDSC
and Units, the CDSC will carry over to the acquired shares or Units and
will be deducted from the redemption proceeds when such shares or Units
are subsequently redeemed, assuming the CDSC is then payable (the period
during which the Class A shares and the Units were held will be aggregated
for purposes of calculating the applicable CDSC). In the event that a
shareholder initially purchases Units and then exchanges into Class A
shares subject to an initial sales charge of an MFS Fund, the initial
sales charge shall be due upon such exchange, but will not be imposed with
respect to any subsequent exchanges between such Class A shares and Units
with respect to shares on which the initial sales charge has already been
paid. In the event that a shareholder initially purchases Units and then
exchanges into Class A shares subject to a CDSC of an MFS Fund, the CDSC
period will commence upon such exchange, and the applicability of the CDSC
with respect to subsequent exchanges shall be governed by the rules set
forth above in this paragraph.
GENERAL -- Each Exchange Request must be in proper form (i.e., if in
writing -- signed by the record owner(s) exactly as the shares are
registered; if by telephone -- proper account identification is given by
the dealer or shareholder of record), and each exchange must involve
either shares having an aggregate value of at least $1,000 ($50 in the
case of retirement plan participants whose sponsoring organizations
subscribe to MFS FUNDamental 401(k) Plan or another similar 401(k)
recordkeeping system made available by MFSC) or all the shares in the
account. Each exchange involves the redemption of the shares of the Fund
to be exchanged and the purchase of shares of the same class of the other
MFS Fund. Any gain or loss on the redemption of the shares exchanged is
reportable on the shareholder's federal income tax return, unless both the
shares received and the shares surrendered in the exchange are held in a
tax-deferred retirement plan or other tax-exempt account. No more than
five exchanges may be made in any one Exchange Request by telephone. If
the Exchange Request is received by MFSC prior to the close of regular
trading on the Exchange the exchange usually will occur on that day if all
the requirements set forth above have been complied with at that time.
However, payment of the redemption proceeds by the Fund, and thus the
purchase of shares of the other MFS Fund, may be delayed for up to seven
days if the Fund determines that such a delay would be in the best
interest of all its shareholders. Investment dealers which have satisfied
criteria established by MFD may also communicate a shareholder's Exchange
Request to MFD by facsimile subject to the requirements set forth above.
Additional information with respect to any of the MFS Funds, including a
copy of its current prospectus, may be obtained from investment dealers or
MFSC. A shareholder considering an exchange should obtain and read the
prospectus of the other fund and consider the differences in objectives
and policies before making any exchange.
Any state income tax advantages for investment in shares of each state-
specific series of MFS Municipal Series Trust may only benefit residents
of such states. Investors should consult with their own tax advisers to be
sure this is an appropriate investment, based on their residency and each
state's income tax laws. The exchange privilege (or any aspect of it) may
be changed or discontinued and is subject to certain limitations imposed
from time to time at the discretion of the Funds in order to protect the
Funds.
TAX-DEFERRED RETIREMENT PLANS
Shares of the Fund may be purchased by all types of tax-deferred
retirement plans. MFD makes available, through investment dealers, plans
and/or custody agreements, the following:
o Traditional Individual Retirement Accounts (IRAs) (for individuals who
desire to make limited contributions to a tax-deferred retirement
program and, if eligible, to receive a federal income tax deduction
for amounts contributed);
o Roth Individual Retirement Accounts (Roth IRAs) (for individuals who
desire to make limited contributions to a tax-favored retirement
program);
o Simplified Employee Pension (SEP-IRA) Plans;
o Retirement Plans Qualified under Section 401(k) of the Internal
Revenue Code of 1986, as amended (the "Code");
o 403(b) Plans (deferred compensation arrangements for employees of
public school systems and certain non-profit organizations); and
o Certain other qualified pension and profit-sharing plans.
The plan documents provided by MFD designate a trustee or custodian
(unless another trustee or custodian is designated by the individual or
group establishing the plan) and contain specific information about the
plans. Each plan provides that dividends and distributions will be
reinvested automatically. For further details with respect to any plan,
including fees charged by the trustee, custodian or MFD, tax consequences
and redemption information, see the specific documents for that plan. Plan
documents other than those provided by MFD may be used to establish any of
the plans described above. Third party administrative services, available
for some corporate plans, may limit or delay the processing of
transactions.
An investor should consult with his tax adviser before establishing any
of the tax-deferred retirement plans described above.
Class C shares are not currently available for purchase by any
retirement plan qualified under Internal Revenue Code Section 401(a) or
403(b) if the retirement plan and/or the sponsoring organization subscribe
to the MFS FUNDamental 401(k) Plan or another similar Section 401(a) or
403(b) recordkeeping program made available by MFSC.
XI DESCRIPTION OF SHARES, VOTING RIGHTS AND LIABILITIES
The Declaration of Trust permits the Trustees to issue an unlimited number
of full and fractional Shares of Beneficial Interest (without par value)
of one or more separate series and to divide or combine the shares of any
series into a greater or lesser number of shares without thereby changing
the proportionate beneficial interests in that series. The Declaration of
Trust further authorizes the Trustees to classify or reclassify any series
of shares into one or more classes. Each share of a class of the Fund
represents an equal proportionate interest in the assets of the Fund
allocable to that class. Upon liquidation of the Fund, shareholders of
each class of the Fund are entitled to share pro rata in the Fund's net
assets allocable to such class available for distribution to shareholders.
The Trust reserves the right to create and issue a number of series and
additional classes of shares, in which case the shares of each class of a
series would participate equally in the earnings, dividends and assets
allocable to that class of the particular series.
Shareholders are entitled to one vote for each share held and may vote
in the election of Trustees and on other matters submitted to meetings of
shareholders. To the extent a shareholder of the Fund owns a controlling
percentage of the Fund's shares, such shareholder may affect the outcome
of such matters to a greater extent than other Fund shareholders. Although
Trustees are not elected annually by the shareholders, the Declaration of
Trust provides that a Trustee may be removed from office at a meeting of
shareholders by a vote of two-thirds of the outstanding shares of the
Trust. A meeting of shareholders will be called upon the request of
shareholders of record holding in the aggregate not less than 10% of the
outstanding voting securities of the Trust. No material amendment may be
made to the Declaration of Trust without the affirmative vote of a
majority of the Trust's outstanding shares (as defined in "Investment
Restrictions" in Part I of this SAI). The Trust or any series of the Trust
may be terminated (i) upon the merger or consolidation of the Trust or any
series of the Trust with another organization or upon the sale of all or
substantially all of its assets (or all or substantially all of the assets
belonging to any series of the Trust), if approved by the vote of the
holders of two-thirds of the Trust's or the affected series' outstanding
shares voting as a single class, or of the affected series of the Trust,
except that if the Trustees recommend such merger, consolidation or sale,
the approval by vote of the holders of a majority of the Trust's or the
affected series' outstanding shares will be sufficient, or (ii) upon
liquidation and distribution of the assets of a Fund, if approved by the
vote of the holders of two-thirds of its outstanding shares of the Trust,
or (iii) by the Trustees by written notice to its shareholders. If not so
terminated, the Trust will continue indefinitely.
The Trust is an entity of the type commonly known as a "Massachusetts
business trust." Under Massachusetts law, shareholders of such a trust
may, under certain circumstances, be held personally liable as partners
for its obligations. However, the Declaration of Trust contains an express
disclaimer of shareholder liability for acts or obligations of the Trust
and provides for indemnification and reimbursement of expenses out of
Trust property for any shareholder held personally liable for the
obligations of the Trust. The Declaration of Trust also provides that the
Trust shall maintain appropriate insurance (for example, fidelity bonding
and errors and omissions insurance) for the protection of the Trust and
its shareholders and the Trustees, officers, employees and agents of the
Trust covering possible tort and other liabilities. Thus, the risk of a
shareholder incurring financial loss on account of shareholder liability
is limited to circumstances in which both inadequate insurance existed and
the Trust itself was unable to meet its obligations.
The Declaration of Trust further provides that obligations of the Trust
are not binding upon the Trustees individually but only upon the property
of the Trust and that the Trustees will not be liable for any action or
failure to act, but nothing in the Declaration of Trust protects a Trustee
against any liability to which he would otherwise be subject by reason of
his willful misfeasance, bad faith, gross negligence, or reckless
disregard of the duties involved in the conduct of his office.
<PAGE>
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PART II - APPENDIX A
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WAIVERS OF SALES CHARGES
This Appendix sets forth the various circumstances in which all applicable
sales charges are waived (Section I), the initial sales charge and the
CDSC for Class A shares are waived (Section II), and the CDSC for Class B
and Class C shares is waived (Section III). Some of the following
information will not apply to certain funds in the MFS Family of Funds,
depending on which classes of shares are offered by such fund. As used in
this Appendix, the term "dealer" includes any broker, dealer, bank
(including bank trust departments), registered investment adviser,
financial planner and any other financial institutions having a selling
agreement or other similar agreement with MFD.
I WAIVERS OF ALL APPLICABLE SALES CHARGES
In the following circumstances, the initial sales charge imposed on
purchases of Class A shares and the CDSC imposed on certain redemptions of
Class A shares and on redemptions of Class B and Class C shares, as
applicable, are waived:
DIVIDEND REINVESTMENT
o Shares acquired through dividend or capital gain reinvestment; and
o Shares acquired by automatic reinvestment of distributions of
dividends and capital gains of any fund in the MFS Funds pursuant to
the Distribution Investment Program.
CERTAIN ACQUISITIONS/LIQUIDATIONS
o Shares acquired on account of the acquisition or liquidation of assets
of other investment companies or personal holding companies.
AFFILIATES OF AN MFS FUND/CERTAIN DEALERS.
Shares acquired by:
o Officers, eligible directors, employees (including retired employees)
and agents of MFS, Sun Life or any of their subsidiary companies;
o Trustees and retired trustees of any investment company for which MFD
serves as distributor;
o Employees, directors, partners, officers and trustees of any
sub-adviser to any MFS Fund;
o Employees or registered representatives of dealers;
o Certain family members of any such individual and their spouses or
domestic partners identified above and certain trusts, pension,
profit-sharing or other retirement plans for the sole benefit of such
persons, provided the shares are not resold except to the MFS Fund
which issued the shares; and
o Institutional Clients of MFS or MFS Institutional Advisors, Inc.
INVOLUNTARY REDEMPTIONS (CDSC WAIVER ONLY)
o Shares redeemed at an MFS Fund's direction due to the small size of a
shareholder's account. See "Redemptions and Repurchases -- General --
Involuntary Redemptions/Small Accounts" in the Prospectus.
RETIREMENT PLANS (CDSC WAIVER ONLY).
Shares redeemed on account of distributions made under the following
circumstances:
o Individual Retirement Accounts ("IRAs")
> Death or disability of the IRA owner.
o Section 401(a) Plans ("401(a) Plans") and Section 403(b) Employer
Sponsored Plans ("ESP Plans")
> Death, disability or retirement of 401(a) or ESP Plan participant;
> Loan from 401(a) or ESP Plan;
> Financial hardship (as defined in Treasury Regulation Section
1.401(k)-1(d)(2), as amended from time to time);
> Termination of employment of 401(a) or ESP Plan participant
(excluding, however, a partial or other termination of the Plan);
> Tax-free return of excess 401(a) or ESP Plan contributions;
> To the extent that redemption proceeds are used to pay expenses (or
certain participant expenses) of the 401(a) or ESP Plan (e.g.,
participant account fees), provided that the Plan sponsor subscribes
to the MFS FUNDamental 401(k) Plan or another similar recordkeeping
system made available by MFSC (the "MFS Participant Recordkeeping
System");
> Distributions from a 401(a) or ESP Plan that has invested its assets
in one or more of the MFS Funds for more than 10 years from the
later to occur of: (i) January 1, 1993 or (ii) the date such 401(a)
or ESP Plan first invests its assets in one or more of the MFS
Funds. The sales charges will be waived in the case of a redemption
of all of the 401(a) or ESP Plan's shares in all MFS Funds (i.e.,
all the assets of the 401(a) or ESP Plan invested in the MFS Funds
are withdrawn), unless immediately prior to the redemption, the
aggregate amount invested by the 401(a) or ESP Plan in shares of the
MFS Funds (excluding the reinvestment of distributions) during the
prior four years equals 50% or more of the total value of the 401(a)
or ESP Plan's assets in the MFS Funds, in which case the sales
charges will not be waived; and
> Shares purchased by certain retirement plans or trust accounts if:
(i) the plan is currently a party to a retirement plan recordkeeping
or administration services agreement with MFD or one of its
affiliates and (ii) the shares purchased or redeemed represent
transfers from or transfers to plan investments other than the MFS
Funds for which retirement plan recordkeeping services are provided
under the terms of such agreement.
o Section 403(b) Salary Reduction Only Plans ("SRO Plans")
> Death or disability of SRO Plan participant.
CERTAIN TRANSFERS OF REGISTRATION (CDSC WAIVER ONLY).
Shares transferred:
o To an IRA rollover account where any sales charges with respect to the
shares being reregistered would have been waived had they been
redeemed; and
o From a single account maintained for a 401(a) Plan to multiple
accounts maintained by MFSC on behalf of individual participants of
such Plan, provided that the Plan sponsor subscribes to the MFS
FUNDamental 401(k) Plan or another similar recordkeeping system made
available by MFSC.
LOAN REPAYMENTS
o Shares acquired pursuant to repayments by retirement plan participants
of loans from 401(a) or ESP Plans with respect to which such Plan or
its sponsoring organization subscribes to the MFS FUNDamental 401(k)
Program or the MFS Recordkeeper Plus Program (but not the MFS
Recordkeeper Program).
II WAIVERS OF CLASS A SALES CHARGES
In addition to the waivers set forth in Section I above, in the following
circumstances the initial sales charge imposed on purchases of Class A
shares and the CDSC imposed on certain redemptions of Class A shares are
waived:
WRAP ACCOUNT AND FUND "SUPERMARKET" INVESTMENTS
o Shares acquired by investments through certain dealers (including
registered investment advisers and financial planners) which have
established certain operational arrangements with MFD which include a
requirement that such shares be sold for the sole benefit of clients
participating in a "wrap" account, mutual fund "supermarket" account
or a similar program under which such clients pay a fee to such
dealer.
INVESTMENT BY INSURANCE COMPANY SEPARATE ACCOUNTS
o Shares acquired by insurance company separate accounts.
RETIREMENT PLANS
o Administrative Services Arrangements
> Shares acquired by retirement plans or trust accounts whose third
party administrators or dealers have entered into an administrative
services agreement with MFD or one of its affiliates to perform
certain administrative services, subject to certain operational and
minimum size requirements specified from time to time by MFD or one
or more of its affiliates. o Reinvestment of Distributions from
Qualified Retirement Plans
> Shares acquired through the automatic reinvestment in Class A shares
of Class A or Class B distributions which constitute required
withdrawals from qualified retirement plans.
SHARES REDEEMED ON ACCOUNT OF DISTRIBUTIONS MADE UNDER THE FOLLOWING
CIRCUMSTANCES:
o IRAs
> Distributions made on or after the IRA owner has attained the age of
59 1/2 years old; and
> Tax-free returns of excess IRA contributions.
o 401(a) Plans
> Distributions made on or after the 401(a) Plan participant has
attained the age of 59 1/2 years old; and
> Certain involuntary redemptions and redemptions in connection with
certain automatic withdrawals from a 401(a) Plan.
o ESP Plans and SRO Plans
> Distributions made on or after the ESP or SRO Plan participant has
attained the age of 59 1/2 years old.
o 401(a) Plans and ESP Plans
> where the retirement plan and/or sponsoring organization does not
subscribe to the MFS Participant Recordkeeping System; and
> where the retirement plan and/or sponsoring organization
demonstrates to the satisfaction of, and certifies to, MFSC that the
retirement plan has, at the time of certification or will have
pursuant to a purchase order placed with the certification, a market
value of $500,000 or more invested in shares of any class or classes
of the MFS Family of Funds and aggregate assets of at least $10
million;
provided, however, that the CDSC will not be waived (i.e., it will be
imposed) (a) with respect to plans which establish an account with MFSC on
or after November 1, 1997, in the event that the plan makes a complete
redemption of all of its shares in the MFS Family of Funds, or (b) with
respect to plans which establish an account with MFSC prior to November 1,
1997, in the event that there is a change in law or regulations which
result in a material adverse change to the tax advantaged nature of the
plan, or in the event that the plan and/or sponsoring organization: (i)
becomes insolvent or bankrupt; (ii) is terminated under ERISA or is
liquidated or dissolved; or (iii) is acquired by, merged into, or
consolidated with any other entity.
PURCHASES OF AT LEAST $5 MILLION (CDSC WAIVER ONLY)
o Shares acquired of Eligible Funds (as defined below) if the
shareholder's investment equals or exceeds $5 million in one or more
Eligible Funds (the "Initial Purchase") (this waiver applies to the
shares acquired from the Initial Purchase and all shares of Eligible
Funds subsequently acquired by the shareholder); provided that the
dealer through which the Initial Purchase is made enters into an
agreement with MFD to accept delayed payment of commissions with
respect to the Initial Purchase and all subsequent investments by the
shareholder in the Eligible Funds subject to such requirements as may
be established from time to time by MFD (for a schedule of the amount
of commissions paid by MFD to the dealer on such investments, see
"Purchases -- Class A Shares -- Purchases subject to a CDSC" in the
Prospectus). The Eligible Funds are all funds included in the MFS
Family of Funds, except for Massachusetts Investors Trust,
Massachusetts Investors Growth Stock Fund, MFS Municipal Bond Fund,
MFS Municipal Limited Maturity Fund, MFS Money Market Fund, MFS
Government Money Market Fund and MFS Cash Reserve Fund.
BANK TRUST DEPARTMENTS AND LAW FIRMS
o Shares acquired by certain bank trust departments or law firms acting
as trustee or manager for trust accounts which have entered into an
administrative services agreement with MFD and are acquiring such
shares for the benefit of their trust account clients.
INVESTMENT OF PROCEEDS FROM CERTAIN REDEMPTIONS OF CLASS I SHARES.
o The initial sales charge imposed on purchases of Class A shares, and
the contingent deferred sales charge imposed on certain redemptions of
Class A shares, are waived with respect to Class A shares acquired of
any of the MFS Funds through the immediate reinvestment of the
proceeds of a redemption of Class I shares of any of the MFS Funds.
III WAIVERS OF CLASS B AND CLASS C SALES CHARGES
In addition to the waivers set forth in Section I above, in the following
circumstances the CDSC imposed on redemptions of Class B and Class C
shares is waived:
SYSTEMATIC WITHDRAWAL PLAN
o Systematic Withdrawal Plan redemptions with respect to up to 10% per
year (or 15% per year, in the case of accounts registered as IRAs
where the redemption is made pursuant to Section 72(t) of the Internal
Revenue Code of 1986, as amended) of the account value at the time of
establishment.
DEATH OF OWNER
o Shares redeemed on account of the death of the account owner if the
shares are held solely in the deceased individual's name or in a
living trust for the benefit of the deceased individual.
DISABILITY OF OWNER
o Shares redeemed on account of the disability of the account owner if
shares are held either solely or jointly in the disabled individual's
name or in a living trust for the benefit of the disabled individual
(in which case a disability certification form is required to be
submitted to MFSC).
RETIREMENT PLANS.
Shares redeemed on account of distributions made under the following
circumstances:
o IRAs, 401(a) Plans, ESP Plans and SRO Plans
> Distributions made on or after the IRA owner or the 401(a), ESP or
SRO Plan participant, as applicable, has attained the age of 70 1/2
years old, but only with respect to the minimum distribution under
Code rules;
> Salary Reduction Simplified Employee Pension Plans ("SAR-SEP
Plans");
> Distributions made on or after the SAR-SEP Plan participant has
attained the age of 70 1/2 years old, but only with respect to the
minimum distribution under applicable Code rules; and
> Death or disability of a SAR-SEP Plan participant.
o 401(a) and ESP Plans Only (Class B CDSC Waiver Only)
> By a retirement plan whose sponsoring organization subscribes to the
MFS Participant Recordkeeping System and which established an
account with MFSC between July 1, 1996 and December 31, 1998;
provided, however, that the CDSC will not be waived (i.e., it will
be imposed) in the event that there is a change in law or
regulations which results in a material adverse change to the tax
advantaged nature of the plan, or in the event that the plan and/or
sponsoring organization: (i) becomes insolvent or bankrupt; (ii) is
terminated under ERISA or is liquidated or dissolved; or (iii) is
acquired by, merged into, or consolidated with any other entity.
> By a retirement plan whose sponsoring organization subscribes to the
MFS Recordkeeper Plus product and which established its account with
MFSC on or after January 1, 1999 (provided that the plan
establishment paperwork is received by MFSC in good order on or
after November 15, 1998). A plan with a pre-existing account(s) with
any MFS Fund which switches to the MFS Recordkeeper Plus product
will not become eligible for this waiver category.
<PAGE>
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PART II - APPENDIX B
- - ------------------------
DEALER COMMISSIONS AND CONCESSIONS
This Appendix describes the various commissions paid and concessions made
to dealers by MFD in connection with the sale of Fund shares. As used in
this Appendix, the term "dealer" includes any broker, dealer, bank
(including bank trust departments), registered investment adviser,
financial planner and any other financial institutions having a selling
agreement or other similar agreement with MFD.
CLASS A SHARES
Purchases Subject to an Initial Sales Charge. For purchases of Class A
shares subject to an initial sales charge, MFD reallows a portion of the
initial sales charge to dealers (which are alike for all dealers), as
shown in Appendix D to Part I of this SAI. The difference between the
total amount invested and the sum of (a) the net proceeds to the Fund and
(b) the dealer reallowance, is the amount of the initial sales charge
retained by MFD (as shown in Appendix D to Part I of this SAI). Because of
rounding in the computation of offering price, the portion of the sales
charge retained by MFD may vary and the total sales charge may be more or
less than the sales charge calculated using the sales charge expressed as
a percentage of the offering price or as a percentage of the net amount
invested as listed in the Prospectus.
Purchases Subject to a CDSC (but not an Initial Sales Charge). For
purchases of Class A shares subject to a CDSC, MFD pays commissions to
dealers on new investments made through such dealers as follows:
COMMISSION
PAID BY MFD
TO DEALERS CUMULATIVE PURCHASE AMOUNT
------------------------------------------------------------
1.00% On the first $2,000,000, plus
0.80% Over $2,000,000 to $3,000,000, plus
0.50% Over $3,000,000 to $50,000,000, plus
0.25% Over $50,000,000
For purposes of determining the level of commissions to be paid to
dealers with respect to a shareholder's new investment in Class A shares
purchases for each shareholder account (and certain other accounts for
which the shareholder is a record or beneficial holder) will be aggregated
over a 12-month period (commencing from the date of the first such
purchase).
CLASS B SHARES
For purchases of Class B shares, MFD will pay commissions to dealers of
3.75% of the purchase price of Class B shares purchased through dealers.
MFD will also advance to dealers the first year service fee payable under
the Fund's Distribution Plan at a rate equal to 0.25% of the purchase
price of such shares. Therefore, the total amount paid to a dealer upon
the sale of Class B shares is 4% of the purchase price of the shares
(commission rate of 3.75% plus a service fee equal to 0.25% of the
purchase price).
For purchases of Class B shares by a retirement plan whose sponsoring
organization subscribes to the MFS Participant Recordkeeping System and
which established its account with MFSC between July 1, 1996 and December
31, 1998, MFD pays an amount to dealers equal to 3.00% of the amount
purchased through such dealers (rather than the 4.00% payment described
above), which is comprised of a commission of 2.75% plus the advancement
of the first year service fee equal to 0.25% of the purchase price payable
under the Fund's Distribution Plan.
For purchases of Class B shares by a retirement plan whose sponsoring
organization subscribes to the MFS Recordkeeper Plus product and which has
established its account with MFSC on or after January 1, 1999 (provided
that the plan establishment paperwork is received by MFSC in good order on
or after November 15, 1998), MFD pays no up front commissions to dealers,
but instead pays an amount to dealers equal to 1% per annum of the average
daily net assets of the Fund attributable to plan assets, payable at the
rate of 0.25% at the end of each calendar quarter, in arrears. This
commission structure is not available with respect to a plan with a pre-
existing account(s) with any MFS Fund which seeks to switch to the MFS
Recordkeeper Plus product.
CLASS C SHARES
For purchases of Class C shares, MFD will pay dealers 1.00% of the
purchase price of Class C shares purchased through dealers and, as
compensation therefor, MFD will retain the 1.00% per annum distribution
and service fee paid under the Fund's Distribution Plan to MFD for the
first year after purchase.
ADDITIONAL DEALER COMMISSIONS/CONCESSIONS
Dealers may receive different compensation with respect to sales of Class
A, Class B and Class C shares. In addition, from time to time, MFD may pay
dealers 100% of the applicable sales charge on sales of Class A shares of
certain specified Funds sold by such dealer during a specified sales
period. In addition, MFD or its affiliates may, from time to time, pay
dealers an additional commission equal to 0.50% of the net asset value of
all of the Class B and/or Class C shares of certain specified Funds sold
by such dealer during a specified sales period. In addition, from time to
time, MFD, at its expense, may provide additional commissions,
compensation or promotional incentives ("concessions") to dealers which
sell or arrange for the sale of shares of the Fund. Such concessions
provided by MFD may include financial assistance to dealers in connection
with preapproved conferences or seminars, sales or training programs for
invited registered representatives and other employees, payment for travel
expenses, including lodging, incurred by registered representatives and
other employees for such seminars or training programs, seminars for the
public, advertising and sales campaigns regarding one or more Funds, and/
or other dealer-sponsored events. From time to time, MFD may make expense
reimbursements for special training of a dealer's registered
representatives and other employees in group meetings or to help pay the
expenses of sales contests. Other concessions may be offered to the extent
not prohibited by state laws or any self-regulatory agency, such as the
NASD.
<PAGE>
- - ------------------------
PART II - APPENDIX C
- - ------------------------
INVESTMENT TECHNIQUES, PRACTICES AND RISKS
Set forth below is a description of investment techniques and practices
which the MFS Funds may generally use in pursuing their investment
objectives and principal investment policies, and the risks associated with
these investment techniques and practices. The Fund will engage only in
certain of these investment techniques and practices, as identified in
Appendix A of the Fund's Prospectus. Investment practices and techniques
that are not identified in Appendix A of the Fund's Prospectus do not apply
to the Fund.
INVESTMENT TECHNIQUES AND PRACTICES DEBT SECURITIES
To the extent the Fund invests in the following types of debt securities,
its net asset value may change as the general levels of interest rates
fluctuate. When interest rates decline, the value of debt securities can
be expected to rise. Conversely, when interest rates rise, the value of
debt securities can be expected to decline. The Fund's investment in debt
securities with longer terms to maturity are subject to greater volatility
than the Fund's shorter-term obligations. Debt securities may have all
types of interest rate payment and reset terms, including fixed rate,
adjustable rate, zero coupon, contingent, deferred, payment in kind and
auction rate features.
ASSET-BACKED SECURITIES: The Fund may purchase the following types of
asset-backed securities:
COLLATERALIZED MORTGAGE OBLIGATIONS AND MULTICLASS PASS-THROUGH
SECURITIES: The Fund may invest a portion of its assets in collateralized
mortgage obligations or "CMOs," which are debt obligations collateralized
by mortgage loans or mortgage pass-through securities (such collateral
referred to collectively as "Mortgage Assets"). Unless the context
indicates otherwise, all references herein to CMOs include multiclass
pass-through securities.
Interest is paid or accrues on all classes of the CMOs on a monthly,
quarterly or semi-annual basis. The principal of and interest on the
Mortgage Assets may be allocated among the several classes of a CMO in
innumerable ways. In a common structure, payments of principal, including
any principal prepayments, on the Mortgage Assets are applied to the
classes of a CMO in the order of their respective stated maturities or
final distribution dates, so that no payment of principal will be made on
any class of CMOs until all other classes having an earlier stated
maturity or final distribution date have been paid in full. Certain CMOs
may be stripped (securities which provide only the principal or interest
factor of the underlying security). See "Stripped Mortgage-Backed
Securities" below for a discussion of the risks of investing in these
stripped securities and of investing in classes consisting of interest
payments or principal payments.
The Fund may also invest in parallel pay CMOs and Planned Amortization
Class CMOs ("PAC Bonds"). Parallel pay CMOs are structured to provide
payments of principal on each payment date to more than one class. These
simultaneous payments are taken into account in calculating the stated
maturity date or final distribution date of each class, which, as with
other CMO structures, must be retired by its stated maturity date or final
distribution date but may be retired earlier.
CORPORATE ASSET-BACKED SECURITIES: The Fund may invest in corporate
asset-backed securities. These securities, issued by trusts and special
purpose corporations, are backed by a pool of assets, such as credit card
and automobile loan receivables, representing the obligations of a number
of different parties. These securities present certain risks. For
instance, in the case of credit card receivables, these securities may not
have the benefit of any security interest in the related collateral.
Credit card receivables are generally unsecured and the debtors are
entitled to the protection of a number of state and federal consumer
credit laws, many of which give such debtors the right to set off certain
amounts owed on the credit cards, thereby reducing the balance due. Most
issuers of automobile receivables permit the servicers to retain
possession of the underlying obligations. If the servicer were to sell
these obligations to another party, there is a risk that the purchaser
would acquire an interest superior to that of the holders of the related
automobile receivables. In addition, because of the large number of
vehicles involved in a typical issuance and technical requirements under
state laws, the trustee for the holders of the automobile receivables may
not have a proper security interest in all of the obligations backing such
receivables. Therefore, there is the possibility that recoveries on
repossessed collateral may not, in some cases, be available to support
payments on these securities. The underlying assets (e.g., loans) are also
subject to prepayments which shorten the securities' weighted average life
and may lower their return.
Corporate asset-backed securities are backed by a pool of assets
representing the obligations of a number of different parties. To lessen
the effect of failures by obligors on underlying assets to make payments,
the securities may contain elements of credit support which fall into two
categories: (i) liquidity protection and (ii) protection against losses
resulting from ultimate default by an obligor on the underlying assets.
Liquidity protection refers to the provision of advances, generally by the
entity administering the pool of assets, to ensure that the receipt of
payments on the underlying pool occurs in a timely fashion. Protection
against losses resulting from ultimate default ensures payment through
insurance policies or letters of credit obtained by the issuer or sponsor
from third parties. The Fund will not pay any additional or separate fees
for credit support. The degree of credit support provided for each issue
is generally based on historical information respecting the level of
credit risk associated with the underlying assets. Delinquency or loss in
excess of that anticipated or failure of the credit support could
adversely affect the return on an investment in such a security.
MORTGAGE PASS-THROUGH SECURITIES: The Fund may invest in mortgage pass-
through securities. Mortgage pass-through securities are securities
representing interests in "pools" of mortgage loans. Monthly payments of
interest and principal by the individual borrowers on mortgages are passed
through to the holders of the securities (net of fees paid to the issuer
or guarantor of the securities) as the mortgages in the underlying
mortgage pools are paid off. The average lives of mortgage pass-throughs
are variable when issued because their average lives depend on prepayment
rates. The average life of these securities is likely to be substantially
shorter than their stated final maturity as a result of unscheduled
principal prepayment. Prepayments on underlying mortgages result in a loss
of anticipated interest, and all or part of a premium if any has been
paid, and the actual yield (or total return) to the Fund may be different
than the quoted yield on the securities. Mortgage premiums generally
increase with falling interest rates and decrease with rising interest
rates. Like other fixed income securities, when interest rates rise the
value of a mortgage pass-through security generally will decline; however,
when interest rates are declining, the value of mortgage pass-through
securities with prepayment features may not increase as much as that of
other fixed-income securities. In the event of an increase in interest
rates which results in a decline in mortgage prepayments, the anticipated
maturity of mortgage pass-through securities held by the Fund may
increase, effectively changing a security which was considered short or
intermediate-term at the time of purchase into a long-term security. Long-
term securities generally fluctuate more widely in response to changes in
interest rates than short or intermediate-term securities.
Payment of principal and interest on some mortgage pass-through
securities (but not the market value of the securities themselves) may be
guaranteed by the full faith and credit of the U.S. Government (in the
case of securities guaranteed by the Government National Mortgage
Association ("GNMA")); or guaranteed by agencies or instrumentalities of
the U.S. Government (such as the Federal National Mortgage Association
"FNMA") or the Federal Home Loan Mortgage Corporation, ("FHLMC") which are
supported only by the discretionary authority of the U.S. Government to
purchase the agency's obligations). Mortgage pass-through securities may
also be issued by non-governmental issuers (such as commercial banks,
savings and loan institutions, private mortgage insurance companies,
mortgage bankers and other secondary market issuers). Some of these
mortgage pass-through securities may be supported by various forms of
insurance or guarantees.
Interests in pools of mortgage-related securities differ from other
forms of debt securities, which normally provide for periodic payment of
interest in fixed amounts with principal payments at maturity or specified
call dates. Instead, these securities provide a monthly payment which
consists of both interest and principal payments. In effect, these
payments are a "pass-through" of the monthly payments made by the
individual borrowers on their mortgage loans, net of any fees paid to the
issuer or guarantor of such securities. Additional payments are caused by
prepayments of principal resulting from the sale, refinancing or
foreclosure of the underlying property, net of fees or costs which may be
incurred. Some mortgage pass-through securities (such as securities issued
by the GNMA) are described as "modified pass-through." These securities
entitle the holder to receive all interests and principal payments owed on
the mortgages in the mortgage pool, net of certain fees, at the scheduled
payment dates regardless of whether the mortgagor actually makes the
payment.
The principal governmental guarantor of mortgage pass-through securities
is GNMA. GNMA is a wholly owned U.S. Government corporation within the
Department of Housing and Urban Development. GNMA is authorized to
guarantee, with the full faith and credit of the U.S. Government, the
timely payment of principal and interest on securities issued by
institutions approved by GNMA (such as savings and loan institutions,
commercial banks and mortgage bankers) and backed by pools of Federal
Housing Administration ("FHA") insured or Veterans Administration ("VA")
guaranteed mortgages. These guarantees, however, do not apply to the
market value or yield of mortgage pass-through securities. GNMA securities
are often purchased at a premium over the maturity value of the underlying
mortgages. This premium is not guaranteed and will be lost if prepayment
occurs.
Government-related guarantors (i.e., whose guarantees are not backed by
the full faith and credit of the U.S. Government) include FNMA and FHLMC.
FNMA is a government-sponsored corporation owned entirely by private
stockholders. It is subject to general regulation by the Secretary of
Housing and Urban Development. FNMA purchases conventional residential
mortgages (i.e., mortgages not insured or guaranteed by any governmental
agency) from a list of approved seller/servicers which include state and
federally chartered savings and loan associations, mutual savings banks,
commercial banks, credit unions and mortgage bankers. Pass-through
securities issued by FNMA are guaranteed as to timely payment by FNMA of
principal and interest.
FHLMC is also a government-sponsored corporation owned by private
stockholders. FHLMC issues Participation Certificates ("PCs") which
represent interests in conventional mortgages (i.e., not federally insured
or guaranteed) for FHLMC's national portfolio. FHLMC guarantees timely
payment of interest and ultimate collection of principal regardless of the
status of the underlying mortgage loans.
Commercial banks, savings and loan institutions, private mortgage
insurance companies, mortgage bankers and other secondary market issuers
also create pass through pools of mortgage loans. Such issuers may also be
the originators and/or servicers of the underlying mortgage-related
securities. Pools created by such non-governmental issuers generally offer
a higher rate of interest than government and government-related pools
because there are no direct or indirect government or agency guarantees of
payments in the former pools. However, timely payment of interest and
principal of mortgage loans in these pools may be supported by various
forms of insurance or guarantees, including individual loan, title, pool
and hazard insurance and letters of credit. The insurance and guarantees
are issued by governmental entities, private insurers and the mortgage
poolers. There can be no assurance that the private insurers or guarantors
can meet their obligations under the insurance policies or guarantee
arrangements. The Fund may also buy mortgage-related securities without
insurance or guarantees.
STRIPPED MORTGAGE-BACKED SECURITIES: The Fund may invest a portion of
its assets in stripped mortgage-backed securities ("SMBS") which are
derivative multiclass mortgage securities issued by agencies or
instrumentalities of the U.S. Government, or by private originators of, or
investors in, mortgage loans, including savings and loan institutions,
mortgage banks, commercial banks and investment banks.
SMBS are usually structured with two classes that receive different
proportions of the interest and principal distributions from a pool of
mortgage assets. A common type of SMBS will have one class receiving some
of the interest and most of the principal from the Mortgage Assets, while
the other class will receive most of the interest and the remainder of the
principal. In the most extreme case, one class will receive all of the
interest (the interest-only or "I0" class) while the other class will
receive all of the principal (the principal-only or "P0" class). The yield
to maturity on an I0 is extremely sensitive to the rate of principal
payments, including prepayments on the related underlying Mortgage Assets,
and a rapid rate of principal payments may have a material adverse effect
on such security's yield to maturity. If the underlying Mortgage Assets
experience greater than anticipated prepayments of principal, the Fund may
fail to fully recoup its initial investment in these securities. The
market value of the class consisting primarily or entirely of principal
payments generally is unusually volatile in response to changes in
interest rates. Because SMBS were only recently introduced, established
trading markets for these securities have not yet developed, although the
securities are traded among institutional investors and investment banking
firms.
CORPORATE SECURITIES: The Fund may invest in debt securities, such as
convertible and non-convertible bonds, notes and debentures, issued by
corporations, limited partnerships and other similar entities.
LOANS AND OTHER DIRECT INDEBTEDNESS: The Fund may purchase loans and
other direct indebtedness. In purchasing a loan, the Fund acquires some or
all of the interest of a bank or other lending institution in a loan to a
corporate, governmental or other borrower. Many such loans are secured,
although some may be unsecured. Such loans may be in default at the time
of purchase. Loans that are fully secured offer the Fund more protection
than an unsecured loan in the event of non-payment of scheduled interest
or principal. However, there is no assurance that the liquidation of
collateral from a secured loan would satisfy the corporate borrowers
obligation, or that the collateral can be liquidated.
These loans are made generally to finance internal growth, mergers,
acquisitions, stock repurchases, leveraged buy-outs and other corporate
activities. Such loans are typically made by a syndicate of lending
institutions, represented by an agent lending institution which has
negotiated and structured the loan and is responsible for collecting
interest, principal and other amounts due on its own behalf and on behalf
of the others in the syndicate, and for enforcing its and their other
rights against the borrower. Alternatively, such loans may be structured
as a novation, pursuant to which the Fund would assume all of the rights
of the lending institution in a loan or as an assignment, pursuant to
which the Fund would purchase an assignment of a portion of a lenders
interest in a loan either directly from the lender or through an
intermediary. The Fund may also purchase trade or other claims against
companies, which generally represent money owned by the company to a
supplier of goods or services. These claims may also be purchased at a
time when the company is in default.
Certain of the loans and the other direct indebtedness acquired by the
Fund may involve revolving credit facilities or other standby financing
commitments which obligate the Fund to pay additional cash on a certain
date or on demand. These commitments may have the effect of requiring the
Fund to increase its investment in a company at a time when the Fund might
not otherwise decide to do so (including at a time when the company's
financial condition makes it unlikely that such amounts will be repaid).
To the extent that the Fund is committed to advance additional funds, it
will at all times hold and maintain in a segregated account cash or other
high grade debt obligations in an amount sufficient to meet such
commitments.
The Fund's ability to receive payment of principal, interest and other
amounts due in connection with these investments will depend primarily on
the financial condition of the borrower. In selecting the loans and other
direct indebtedness which the Fund will purchase, the Adviser will rely
upon its own (and not the original lending institution's) credit analysis
of the borrower. As the Fund may be required to rely upon another lending
institution to collect and pass onto the Fund amounts payable with respect
to the loan and to enforce the Fund's rights under the loan and other
direct indebtedness, an insolvency, bankruptcy or reorganization of the
lending institution may delay or prevent the Fund from receiving such
amounts. In such cases, the Fund will evaluate as well the
creditworthiness of the lending institution and will treat both the
borrower and the lending institution as an "issuer" of the loan for
purposes of certain investment restrictions pertaining to the
diversification of the Fund's portfolio investments. The highly leveraged
nature of many such loans and other direct indebtedness may make such
loans and other direct indebtedness especially vulnerable to adverse
changes in economic or market conditions. Investments in such loans and
other direct indebtedness may involve additional risk to the Fund.
LOWER RATED BONDS: The Fund may invest in fixed income securities rated
Ba or lower by Moody's or BB or lower by S&P, Fitch or Duff & Phelps and
comparable unrated securities (commonly known as "junk bonds"). See
Appendix D for a description of bond ratings. No minimum rating standard
is required by the Fund. These securities are considered speculative and,
while generally providing greater income than investments in higher rated
securities, will involve greater risk of principal and income (including
the possibility of default or bankruptcy of the issuers of such
securities) and may involve greater volatility of price (especially during
periods of economic uncertainty or change) than securities in the higher
rating categories and because yields vary over time, no specific level of
income can ever be assured. These lower rated high yielding fixed income
securities generally tend to reflect economic changes (and the outlook for
economic growth), short-term corporate and industry developments and the
market's perception of their credit quality (especially during times of
adverse publicity) to a greater extent than higher rated securities which
react primarily to fluctuations in the general level of interest rates
(although these lower rated fixed income securities are also affected by
changes in interest rates). In the past, economic downturns or an increase
in interest rates have, under certain circumstances, caused a higher
incidence of default by the issuers of these securities and may do so in
the future, especially in the case of highly leveraged issuers. The prices
for these securities may be affected by legislative and regulatory
developments. The market for these lower rated fixed income securities may
be less liquid than the market for investment grade fixed income
securities. Furthermore, the liquidity of these lower rated securities may
be affected by the market's perception of their credit quality. Therefore,
the Adviser's judgment may at times play a greater role in valuing these
securities than in the case of investment grade fixed income securities,
and it also may be more difficult during times of certain adverse market
conditions to sell these lower rated securities to meet redemption
requests or to respond to changes in the market.
While the Adviser may refer to ratings issued by established credit
rating agencies, it is not the Fund's policy to rely exclusively on
ratings issued by these rating agencies, but rather to supplement such
ratings with the Adviser's own independent and ongoing review of credit
quality. To the extent a Fund invests in these lower rated securities, the
achievement of its investment objectives may be a more dependent on the
Adviser's own credit analysis than in the case of a fund investing in
higher quality fixed income securities. These lower rated securities may
also include zero coupon bonds, deferred interest bonds and PIK bonds.
MUNICIPAL BONDS: The Fund may invest in debt securities issued by or on
behalf of states, territories and possessions of the United States and the
District of Columbia and their political subdivisions, agencies or
instrumentalities, the interest on which is exempt from federal income tax
("Municipal Bonds"). Municipal Bonds include debt securities which pay
interest income that is subject to the alternative minimum tax. The Fund
may invest in Municipal Bonds whose issuers pay interest on the Bonds from
revenues from projects such as multifamily housing, nursing homes,
electric utility systems, hospitals or life care facilities.
If a revenue bond is secured by payments generated from a project, and
the revenue bond is also secured by a lien on the real estate comprising
the project, foreclosure by the indenture trustee on the lien for the
benefit of the bondholders creates additional risks associated with owning
real estate, including environmental risks.
Housing revenue bonds typically are issued by a state, county or local
housing authority and are secured only by the revenues of mortgages
originated by the authority using the proceeds of the bond issue. Because
of the impossibility of precisely predicting demand for mortgages from the
proceeds of such an issue, there is a risk that the proceeds of the issue
will be in excess of demand, which would result in early retirement of the
bonds by the issuer. Moreover, such housing revenue bonds depend for their
repayment upon the cash flow from the underlying mortgages, which cannot
be precisely predicted when the bonds are issued. Any difference in the
actual cash flow from such mortgages from the assumed cash flow could have
an adverse impact upon the ability of the issuer to make scheduled
payments of principal and interest on the bonds, or could result in early
retirement of the bonds. Additionally, such bonds depend in part for
scheduled payments of principal and interest upon reserve funds
established from the proceeds of the bonds, assuming certain rates of
return on investment of such reserve funds. If the assumed rates of return
are not realized because of changes in interest rate levels or for other
reasons, the actual cash flow for scheduled payments of principal and
interest on the bonds may be inadequate. The financing of multi-family
housing projects is affected by a variety of factors, including
satisfactory completion of construction within cost constraints, the
achievement and maintenance of a sufficient level of occupancy, sound
management of the developments, timely and adequate increases in rents to
cover increases in operating expenses, including taxes, utility rates and
maintenance costs, changes in applicable laws and governmental regulations
and social and economic trends.
Electric utilities face problems in financing large construction
programs in inflationary periods, cost increases and delay occasioned by
environmental considerations (particularly with respect to nuclear
facilities), difficulty in obtaining fuel at reasonable prices, the cost
of competing fuel sources, difficulty in obtaining sufficient rate
increases and other regulatory problems, the effect of energy conservation
and difficulty of the capital market to absorb utility debt.
Health care facilities include life care facilities, nursing homes and
hospitals. Life care facilities are alternative forms of long-term housing
for the elderly which offer residents the independence of condominium life
style and, if needed, the comprehensive care of nursing home services.
Bonds to finance these facilities have been issued by various state
industrial development authorities. Since the bonds are secured only by
the revenues of each facility and not by state or local government tax
payments, they are subject to a wide variety of risks. Primarily, the
projects must maintain adequate occupancy levels to be able to provide
revenues adequate to maintain debt service payments. Moreover, in the case
of life care facilities, since a portion of housing, medical care and
other services may be financed by an initial deposit, there may be risk if
the facility does not maintain adequate financial reserves to secure
estimated actuarial liabilities. The ability of management to accurately
forecast inflationary cost pressures weighs importantly in this process.
The facilities may also be affected by regulatory cost restrictions
applied to health care delivery in general, particularly state regulations
or changes in Medicare and Medicaid payments or qualifications, or
restrictions imposed by medical insurance companies. They may also face
competition from alternative health care or conventional housing
facilities in the private or public sector. Hospital bond ratings are
often based on feasibility studies which contain projections of expenses,
revenues and occupancy levels. A hospital's gross receipts and net income
available to service its debt are influenced by demand for hospital
services, the ability of the hospital to provide the services required,
management capabilities, economic developments in the service area,
efforts by insurers and government agencies to limit rates and expenses,
confidence in the hospital, service area economic developments,
competition, availability and expense of malpractice insurance, Medicaid
and Medicare funding, and possible federal legislation limiting the rates
of increase of hospital charges.
The Fund may invest in municipal lease securities. These are undivided
interests in a portion of an obligation in the from of a lease or
installment purchase which is issued by state and local governments to
acquire equipment and facilities. Municipal leases frequently have special
risks not normally associated with general obligation or revenue bonds.
Leases and installment purchase or conditional sale contracts (which
normally provide for title to the leased asset to pass eventually to the
governmental issuer) have evolved as a means for governmental issuers to
acquire property and equipment without meeting the constitutional and
statutory requirements for the issuance of debt. The debt-issuance
limitations are deemed to be inapplicable because of the inclusion in many
leases or contracts of "non-appropriation" clauses that provide that the
governmental issuer has no obligation to make future payments under the
lease or contract unless money is appropriated for such purpose by the
appropriate legislative body on a yearly or other periodic basis. Although
the obligations will be secured by the leased equipment or facilities, the
disposition of the property in the event of non-appropriation or
foreclosure might, in some cases, prove difficult. There are, of course,
variations in the security of municipal lease securities, both within a
particular classification and between classifications, depending on
numerous factors.
The Fund may also invest in bonds for industrial and other projects,
such as sewage or solid waste disposal or hazardous waste treatment
facilities. Financing for such projects will be subject to inflation and
other general economic factors as well as construction risks including
labor problems, difficulties with construction sites and the ability of
contractors to meet specifications in a timely manner. Because some of the
materials, processes and wastes involved in these projects may include
hazardous components, there are risks associated with their production,
handling and disposal.
SPECULATIVE BONDS: The Fund may invest in fixed income and convertible
securities rated Baa by Moody's or BBB by S&P, Fitch or Duff & Phelps and
comparable unrated securities. See Appendix D for a description of bond
ratings. These securities, while normally exhibiting adequate protection
parameters, have speculative characteristics and changes in economic
conditions or other circumstances are more likely to lead to a weakened
capacity to make principal and interest payments than in the case of
higher grade securities.
U.S. GOVERNMENT SECURITIES: The Fund may invest in U.S. Government
Securities including (i) U.S. Treasury obligations, all of which are backed
by the full faith and credit of the U.S. Government and (ii) U.S. Government
Securities, some of which are backed by the full faith and credit of the
U.S. Treasury, e.g., direct pass-through certificates of the GNMA; some of
which are backed only by the credit of the issuer itself, e.g., obligations
of the Student Loan Marketing Association; and some of which are supported
by the discretionary authority of the U.S. Government to purchase the
agency's obligations, e.g., obligations of the FNMA.
U.S. Government Securities also include interests in trust or other
entities representing interests in obligations that are issued or
guaranteed by the U.S. Government, its agencies, authorities or
instrumentalities.
VARIABLE AND FLOATING RATE OBLIGATIONS: The Fund may invest in floating
or variable rate securities. Investments in floating or variable rate
securities normally will involve industrial development or revenue bonds
which provide that the rate of interest is set as a specific percentage of
a designated base rate, such as rates on Treasury Bonds or Bills or the
prime rate at a major commercial bank, and that a bondholder can demand
payment of the obligations on behalf of the Fund on short notice at par
plus accrued interest, which amount may be more or less than the amount
the bondholder paid for them. The maturity of floating or variable rate
obligations (including participation interests therein) is deemed to be
the longer of (i) the notice period required before the Fund is entitled
to receive payment of the obligation upon demand or (ii) the period
remaining until the obligation's next interest rate adjustment. If not
redeemed by the Fund through the demand feature, the obligations mature on
a specified date which may range up to thirty years from the date of
issuance.
ZERO COUPON BONDS, DEFERRED INTEREST BONDS AND PIK BONDS: The Fund may
invest in zero coupon bonds, deferred interest bonds and bonds on which
the interest is payable in kind ("PIK bonds"). Zero coupon and deferred
interest bonds are debt obligations which are issued at a significant
discount from face value. The discount approximates the total amount of
interest the bonds will accrue and compound over the period until maturity
or the first interest payment date at a rate of interest reflecting the
market rate of the security at the time of issuance. While zero coupon
bonds do not require the periodic payment of interest, deferred interest
bonds provide for a period of delay before the regular payment of interest
begins. PIK bonds are debt obligations which provide that the issuer may,
at its option, pay interest on such bonds in cash or in the form of
additional debt obligations. Such investments benefit the issuer by
mitigating its need for cash to meet debt service, but also require a
higher rate of return to attract investors who are willing to defer
receipt of such cash. Such investments may experience greater volatility
in market value than debt obligations which make regular payments of
interest. The Fund will accrue income on such investments for tax and
accounting purposes, which is distributable to shareholders and which,
because no cash is received at the time of accrual, may require the
liquidation of other portfolio securities to satisfy the Fund's
distribution obligations.
EQUITY SECURITIES
The Fund may invest in all types of equity securities, including the
following: common stocks, preferred stocks and preference stocks;
securities such as bonds, warrants or rights that are convertible into
stocks; and depositary receipts for those securities. These securities may
be listed on securities exchanges, traded in various over-the-counter
markets or have no organized market.
FOREIGN SECURITIES EXPOSURE
The Fund may invest in various types of foreign securities, or securities
which provide the Fund with exposure to foreign securities or foreign
currencies, as discussed below:
BRADY BONDS: The Fund may invest in Brady Bonds, which are securities
created through the exchange of existing commercial bank loans to public
and private entities in certain emerging markets for new bonds in
connection with debt restructurings under a debt restructuring plan
introduced by former U.S. Secretary of the Treasury, Nicholas F. Brady
(the "Brady Plan"). Brady Plan debt restructurings have been implemented
to date in Argentina, Brazil, Bulgaria, Costa Rica, Croatia, Dominican
Republic, Ecuador, Jordan, Mexico, Morocco, Nigeria, Panama, Peru, the
Philippines, Poland, Slovenia, Uruguay and Venezuela. Brady Bonds have
been issued only recently, and for that reason do not have a long payment
history. Brady Bonds may be collateralized or uncollateralized, are issued
in various currencies (but primarily the U.S. dollar) and are actively
traded in over-the-counter secondary markets. U.S. dollar-denominated,
collateralized Brady Bonds, which may be fixed rate bonds or floating-rate
bonds, are generally collateralized in full as to principal by U.S.
Treasury zero coupon bonds having the same maturity as the bonds. Brady
Bonds are often viewed as having three or four valuation components: the
collateralized repayment of principal at final maturity; the
collateralized interest payments; the uncollateralized interest payments;
and any uncollateralized repayment of principal at maturity (these
uncollateralized amounts constituting the "residual risk"). In light of
the residual risk of Brady Bonds and the history of defaults of countries
issuing Brady Bonds with respect to commercial bank loans by public and
private entities, investments in Brady Bonds may be viewed as speculative.
DEPOSITARY RECEIPTS: The Fund may invest in American Depositary Receipts
("ADRs"), Global Depositary Receipts ("GDRs") and other types of
depositary receipts. ADRs are certificates by a U.S. depositary (usually a
bank) and represent a specified quantity of shares of an underlying non-
U.S. stock on deposit with a custodian bank as collateral. GDRs and other
types of depositary receipts are typically issued by foreign banks or
trust companies and evidence ownership of underlying securities issued by
either a foreign or a U.S. company. Generally, ADRs are in registered form
and are designed for use in U.S. securities markets and GDRs are in bearer
form and are designed for use in foreign securities markets. For the
purposes of the Fund's policy to invest a certain percentage of its assets
in foreign securities, the investments of the Fund in ADRs, GDRs and other
types of depositary receipts are deemed to be investments in the
underlying securities.
ADRs may be sponsored or unsponsored. A sponsored ADR is issued by a
depositary which has an exclusive relationship with the issuer of the
underlying security. An unsponsored ADR may be issued by any number of
U.S. depositories. Under the terms of most sponsored arrangements,
depositories agree to distribute notices of shareholder meetings and
voting instructions, and to provide shareholder communications and other
information to the ADR holders at the request of the issuer of the
deposited securities. The depository of an unsponsored ADR, on the other
hand, is under no obligation to distribute shareholder communications
received from the issuer of the deposited securities or to pass through
voting rights to ADR holders in respect of the deposited securities. The
Fund may invest in either type of ADR. Although the U.S. investor holds a
substitute receipt of ownership rather than direct stock certificates, the
use of the depositary receipts in the United States can reduce costs and
delays as well as potential currency exchange and other difficulties. The
Fund may purchase securities in local markets and direct delivery of these
ordinary shares to the local depositary of an ADR agent bank in foreign
country. Simultaneously, the ADR agents create a certificate which settles
at the Fund's custodian in five days. The Fund may also execute trades on
the U.S. markets using existing ADRs. A foreign issuer of the security
underlying an ADR is generally not subject to the same reporting
requirements in the United States as a domestic issuer. Accordingly,
information available to a U.S. investor will be limited to the
information the foreign issuer is required to disclose in its country and
the market value of an ADR may not reflect undisclosed material
information concerning the issuer of the underlying security. ADRs may
also be subject to exchange rate risks if the underlying foreign
securities are denominated in a foreign currency.
DOLLAR-DENOMINATED FOREIGN DEBT SECURITIES: The Fund may invest in dollar-
denominated foreign debt securities. Investing in dollar-denominated
foreign debt represents a greater degree of risk than investing in
domestic securities, due to less publicly available information, less
securities regulation, war or expropriation. Special considerations may
include higher brokerage costs and thinner trading markets. Investments in
foreign countries could be affected by other factors including extended
settlement periods.
EMERGING MARKETS: The Fund may invest in securities of government,
government-related, supranational and corporate issuers located in emerging
markets. Such investments entail significant risks as described below.
o Company Debt -- Governments of many emerging market countries have
exercised and continue to exercise substantial influence over many aspects
of the private sector through the ownership or control of many companies,
including some of the largest in any given country. As a result,
government actions in the future could have a significant effect on
economic conditions in emerging markets, which in turn, may adversely
affect companies in the private sector, general market conditions and
prices and yields of certain of the securities in the Fund's portfolio.
Expropriation, confiscatory taxation, nationalization, political, economic
or social instability or other similar developments have occurred
frequently over the history of certain emerging markets and could
adversely affect the Fund's assets should these conditions recur.
o Default; Legal Recourse -- The Fund may have limited legal recourse in the
event of a default with respect to certain debt obligations it may hold.
If the issuer of a fixed income security owned by the Fund defaults, the
Fund may incur additional expenses to seek recovery. Debt obligations
issued by emerging market governments differ from debt obligations of
private entities; remedies from defaults on debt obligations issued by
emerging market governments, unlike those on private debt, must be pursued
in the courts of the defaulting party itself. The Fund's ability to
enforce its rights against private issuers may be limited. The ability to
attach assets to enforce a judgment may be limited. Legal recourse is
therefore somewhat diminished. Bankruptcy, moratorium and other similar
laws applicable to private issuers of debt obligations may be
substantially different from those of other countries. The political
context, expressed as an emerging market governmental issuer's willingness
to meet the terms of the debt obligation, for example, is of considerable
importance. In addition, no assurance can be given that the holders of
commercial bank debt may not contest payments to the holders of debt
obligations in the event of default under commercial bank loan agreements.
o Foreign Currencies -- The securities in which the Fund invests may be
denominated in foreign currencies and international currency units and the
Fund may invest a portion of its assets directly in foreign currencies.
Accordingly, the weakening of these currencies and units against the U.S.
dollar may result in a decline in the Fund's asset value.
Some emerging market countries also may have managed currencies, which are
not free floating against the U.S. dollar. In addition, there is risk that
certain emerging market countries may restrict the free conversion of
their currencies into other currencies. Further, certain emerging market
currencies may not be internationally traded. Certain of these currencies
have experienced a steep devaluation relative to the U.S. dollar. Any
devaluations in the currencies in which a Fund's portfolio securities are
denominated may have a detrimental impact on the Fund's net asset value.
o Inflation -- Many emerging markets have experienced substantial, and in
some periods extremely high, rates of inflation for many years. Inflation
and rapid fluctuations in inflation rates have had and may continue to
have adverse effects on the economies and securities markets of certain
emerging market countries. In an attempt to control inflation, wage and
price controls have been imposed in certain countries. Of these countries,
some, in recent years, have begun to control inflation through prudent
economic policies.
o Liquidity; Trading Volume; Regulatory Oversight -- The securities markets
of emerging market countries are substantially smaller, less developed,
less liquid and more volatile than the major securities markets in the
U.S. Disclosure and regulatory standards are in many respects less
stringent than U.S. standards. Furthermore, there is a lower level of
monitoring and regulation of the markets and the activities of investors
in such markets.
The limited size of many emerging market securities markets and limited
trading volume in the securities of emerging market issuers compared to
volume of trading in the securities of U.S. issuers could cause prices to
be erratic for reasons apart from factors that affect the soundness and
competitiveness of the securities issuers. For example, limited market
size may cause prices to be unduly influenced by traders who control large
positions. Adverse publicity and investors' perceptions, whether or not
based on in-depth fundamental analysis, may decrease the value and
liquidity of portfolio securities.
The risk also exists that an emergency situation may arise in one or more
emerging markets, as a result of which trading of securities may cease or
may be substantially curtailed and prices for the Fund's securities in
such markets may not be readily available. The Fund may suspend redemption
of its shares for any period during which an emergency exists, as
determined by the Securities and Exchange Commission (the "SEC").
Accordingly, if the Fund believes that appropriate circumstances exist, it
will promptly apply to the SEC for a determination that an emergency is
present. During the period commencing from the Fund's identification of
such condition until the date of the SEC action, the Fund's securities in
the affected markets will be valued at fair value determined in good faith
by or under the direction of the Board of Trustees.
o Sovereign Debt -- Investment in sovereign debt can involve a high degree
of risk. The governmental entity that controls the repayment of sovereign
debt may not be able or willing to repay the principal and/or interest
when due in accordance with the terms of such debt. A governmental
entity's willingness or ability to repay principal and interest due in a
timely manner may be affected by, among other factors, its cash flow
situation, the extent of its foreign reserves, the availability of
sufficient foreign exchange on the date a payment is due, the relative
size of the debt service burden to the economy as a whole, the
governmental entity's policy towards the International Monetary Fund and
the political constraints to which a governmental entity may be subject.
Governmental entities may also be dependent on expected disbursements from
foreign governments, multilateral agencies and others abroad to reduce
principal and interest on their debt. The commitment on the part of these
governments, agencies and others to make such disbursements may be
conditioned on a governmental entity's implementation of economic reforms
and/or economic performance and the timely service of such debtor's
obligations. Failure to implement such reforms, achieve such levels of
economic performance or repay principal or interest when due may result in
the cancellation of such third parties' commitments to lend funds to the
governmental entity, which may further impair such debtor's ability or
willingness to service its debts in a timely manner. Consequently,
governmental entities may default on their sovereign debt. Holders of
sovereign debt (including the Fund) may be requested to participate in the
rescheduling of such debt and to extend further loans to governmental
entities. There is no bankruptcy proceedings by which sovereign debt on
which governmental entities have defaulted may be collected in whole or in
part.
Emerging market governmental issuers are among the largest debtors to
commercial banks, foreign governments, international financial
organizations and other financial institutions. Certain emerging market
governmental issuers have not been able to make payments of interest on or
principal of debt obligations as those payments have come due. Obligations
arising from past restructuring agreements may affect the economic
performance and political and social stability of those issuers.
The ability of emerging market governmental issuers to make timely
payments on their obligations is likely to be influenced strongly by the
issuer's balance of payments, including export performance, and its access
to international credits and investments. An emerging market whose exports
are concentrated in a few commodities could be vulnerable to a decline in
the international prices of one or more of those commodities. Increased
protectionism on the part of an emerging market's trading partners could
also adversely affect the country's exports and tarnish its trade account
surplus, if any. To the extent that emerging markets receive payment for
their exports in currencies other than dollars or non-emerging market
currencies, its ability to make debt payments denominated in dollars or
non-emerging market currencies could be affected.
To the extent that an emerging market country cannot generate a trade
surplus, it must depend on continuing loans from foreign governments,
multilateral organizations or private commercial banks, aid payments from
foreign governments and on inflows of foreign investment. The access of
emerging markets to these forms of external funding may not be certain,
and a withdrawal of external funding could adversely affect the capacity
of emerging market country governmental issuers to make payments on their
obligations. In addition, the cost of servicing emerging market debt
obligations can be affected by a change in international interest rates
since the majority of these obligations carry interest rates that are
adjusted periodically based upon international rates.
Another factor bearing on the ability of emerging market countries to
repay debt obligations is the level of international reserves of the
country. Fluctuations in the level of these reserves affect the amount of
foreign exchange readily available for external debt payments and thus
could have a bearing on the capacity of emerging market countries to make
payments on these debt obligations.
o Withholding -- Income from securities held by the Fund could be reduced by
a withholding tax on the source or other taxes imposed by the emerging
market countries in which the Fund makes its investments. The Fund's net
asset value may also be affected by changes in the rates or methods of
taxation applicable to the Fund or to entities in which the Fund has
invested. The Adviser will consider the cost of any taxes in determining
whether to acquire any particular investments, but can provide no
assurance that the taxes will not be subject to change.
FOREIGN SECURITIES: The Fund may invest in dollar-denominated and non
dollar-denominated foreign securities. Investing in securities of foreign
issuers generally involves risks not ordinarily associated with investing
in securities of domestic issuers. These include changes in currency
rates, exchange control regulations, securities settlement practices,
governmental administration or economic or monetary policy (in the United
States or abroad) or circumstances in dealings between nations. Costs may
be incurred in connection with conversions between various currencies.
Special considerations may also include more limited information about
foreign issuers, higher brokerage costs, different accounting standards
and thinner trading markets. Foreign securities markets may also be less
liquid, more volatile and less subject to government supervision than in
the United States. Investments in foreign countries could be affected by
other factors including expropriation, confiscatory taxation and potential
difficulties in enforcing contractual obligations and could be subject to
extended settlement periods. As a result of its investments in foreign
securities, the Fund may receive interest or dividend payments, or the
proceeds of the sale or redemption of such securities, in the foreign
currencies in which such securities are denominated. Under certain
circumstances, such as where the Adviser believes that the applicable
exchange rate is unfavorable at the time the currencies are received or
the Adviser anticipates, for any other reason, that the exchange rate will
improve, the Fund may hold such currencies for an indefinite period of
time. While the holding of currencies will permit the Fund to take
advantage of favorable movements in the applicable exchange rate, such
strategy also exposes the Fund to risk of loss if exchange rates move in a
direction adverse to the Fund's position. Such losses could reduce any
profits or increase any losses sustained by the Fund from the sale or
redemption of securities and could reduce the dollar value of interest or
dividend payments received.
FORWARD CONTRACTS
The Fund may enter into contracts for the purchase or sale of a specific
currency at a future date at a price set at the time the contract is
entered into (a "Forward Contract"), for hedging purposes (e.g., to
protect its current or intended investments from fluctuations in currency
exchange rates) as well as for non-hedging purposes.
A Forward Contract to sell a currency may be entered into where the Fund
seeks to protect against an anticipated increase in the exchange rate for
a specific currency which could reduce the dollar value of portfolio
securities denominated in such currency. Conversely, the Fund may enter
into a Forward Contract to purchase a given currency to protect against a
projected increase in the dollar value of securities denominated in such
currency which the Fund intends to acquire.
If a hedging transaction in Forward Contracts is successful, the decline
in the dollar value of portfolio securities or the increase in the dollar
cost of securities to be acquired may be offset, at least in part, by
profits on the Forward Contract. Nevertheless, by entering into such Forward
Contracts, the Fund may be required to forego all or a portion of the
benefits which otherwise could have been obtained from favorable movements
in exchange rates. The Fund does not presently intend to hold Forward
Contracts entered into until the value date, at which time it would be
required to deliver or accept delivery of the underlying currency, but will
seek in most instances to close out positions in such Contracts by entering
into offsetting transactions, which will serve to fix the Fund's profit or
loss based upon the value of the Contracts at the time the offsetting
transaction is executed.
The Fund will also enter into transactions in Forward Contracts for
other than hedging purposes, which presents greater profit potential but
also involves increased risk. For example, the Fund may purchase a given
foreign currency through a Forward Contract if, in the judgment of the
Adviser, the value of such currency is expected to rise relative to the
U.S. dollar. Conversely, the Fund may sell the currency through a Forward
Contract if the Adviser believes that its value will decline relative to
the dollar.
The Fund will profit if the anticipated movements in foreign currency
exchange rates occur, which will increase its gross income. Where exchange
rates do not move in the direction or to the extent anticipated, however,
the Fund may sustain losses which will reduce its gross income. Such
transactions, therefore, could be considered speculative and could involve
significant risk of loss.
The use by the Fund of Forward Contracts also involves the risks
described under the caption "Special Risk Factors -- Options, Futures,
Forwards, Swaps and Other Derivative Transactions" in this Appendix.
FUTURES CONTRACTS
The Fund may purchase and sell futures contracts ("Futures Contracts") on
stock indices, foreign currencies, interest rates or interest-rate related
instruments, indices of foreign currencies or commodities. The Fund may
also purchase and sell Futures Contracts on foreign or domestic fixed
income securities or indices of such securities including municipal bond
indices and any other indices of foreign or domestic fixed income
securities that may become available for trading. Such investment
strategies will be used for hedging purposes and for non-hedging purposes,
subject to applicable law.
A Futures Contract is a bilateral agreement providing for the purchase
and sale of a specified type and amount of a financial instrument, foreign
currency or commodity, or for the making and acceptance of a cash
settlement, at a stated time in the future for a fixed price. By its
terms, a Futures Contract provides for a specified settlement month in
which, in the case of the majority of commodities, interest rate and
foreign currency futures contracts, the underlying commodities, fixed
income securities or currency are delivered by the seller and paid for by
the purchaser, or on which, in the case of index futures contracts and
certain interest rate and foreign currency futures contracts, the
difference between the price at which the contract was entered into and
the contract's closing value is settled between the purchaser and seller
in cash. Futures Contracts differ from options in that they are bilateral
agreements, with both the purchaser and the seller equally obligated to
complete the transaction. Futures Contracts call for settlement only on
the expiration date and cannot be "exercised" at any other time during
their term.
The purchase or sale of a Futures Contract differs from the purchase or
sale of a security or the purchase of an option in that no purchase price
is paid or received. Instead, an amount of cash or cash equivalents, which
varies but may be as low as 5% or less of the value of the contract, must
be deposited with the broker as "initial margin." Subsequent payments to
and from the broker, referred to as "variation margin," are made on a
daily basis as the value of the index or instrument underlying the Futures
Contract fluctuates, making positions in the Futures Contract more or less
valuable -- a process known as "mark-to-market."
Purchases or sales of stock index futures contracts are used to attempt
to protect the Fund's current or intended stock investments from broad
fluctuations in stock prices. For example, the Fund may sell stock index
futures contracts in anticipation of or during a market decline to attempt
to offset the decrease in market value of the Fund's securities portfolio
that might otherwise result. If such decline occurs, the loss in value of
portfolio securities may be offset, in whole or part, by gains on the
futures position. When the Fund is not fully invested in the securities
market and anticipates a significant market advance, it may purchase stock
index futures contracts in order to gain rapid market exposure that may,
in part or entirely, offset increases in the cost of securities that the
Fund intends to purchase. As such purchases are made, the corresponding
positions in stock index futures contracts will be closed out. In a
substantial majority of these transactions, the Fund will purchase such
securities upon termination of the futures position, but under unusual
market conditions, a long futures position may be terminated without a
related purchase of securities.
Interest rate Futures Contracts may be purchased or sold to attempt to
protect against the effects of interest rate changes on the Fund's current
or intended investments in fixed income securities. For example, if the
Fund owned long-term bonds and interest rates were expected to increase,
the Fund might enter into interest rate futures contracts for the sale of
debt securities. Such a sale would have much the same effect as selling
some of the long-term bonds in the Fund's portfolio. If interest rates did
increase, the value of the debt securities in the portfolio would decline,
but the value of the Fund's interest rate futures contracts would increase
at approximately the same rate, subject to the correlation risks described
below, thereby keeping the net asset value of the Fund from declining as
much as it otherwise would have.
Similarly, if interest rates were expected to decline, interest rate
futures contracts may be purchased to hedge in anticipation of subsequent
purchases of long-term bonds at higher prices. Since the fluctuations in
the value of the interest rate futures contracts should be similar to that
of long-term bonds, the Fund could protect itself against the effects of
the anticipated rise in the value of long-term bonds without actually
buying them until the necessary cash became available or the market had
stabilized. At that time, the interest rate futures contracts could be
liquidated and the Fund's cash reserves could then be used to buy long-
term bonds on the cash market. The Fund could accomplish similar results
by selling bonds with long maturities and investing in bonds with short
maturities when interest rates are expected to increase. However, since
the futures market may be more liquid than the cash market in certain
cases or at certain times, the use of interest rate futures contracts as a
hedging technique may allow the Fund to hedge its interest rate risk
without having to sell its portfolio securities.
The Fund may purchase and sell foreign currency futures contracts for
hedging purposes, to attempt to protect its current or intended
investments from fluctuations in currency exchange rates. Such
fluctuations could reduce the dollar value of portfolio securities
denominated in foreign currencies, or increase the dollar cost of foreign-
denominated securities to be acquired, even if the value of such
securities in the currencies in which they are denominated remains
constant. The Fund may sell futures contracts on a foreign currency, for
example, where it holds securities denominated in such currency and it
anticipates a decline in the value of such currency relative to the
dollar. In the event such decline occurs, the resulting adverse effect on
the value of foreign-denominated securities may be offset, in whole or in
part, by gains on the futures contracts.
Conversely, the Fund could protect against a rise in the dollar cost of
foreign-denominated securities to be acquired by purchasing futures
contracts on the relevant currency, which could offset, in whole or in
part, the increased cost of such securities resulting from a rise in the
dollar value of the underlying currencies. Where the Fund purchases
futures contracts under such circumstances, however, and the prices of
securities to be acquired instead decline, the Fund will sustain losses on
its futures position which could reduce or eliminate the benefits of the
reduced cost of portfolio securities to be acquired.
The use by the Fund of Futures Contracts also involves the risks
described under the caption "Special Risk Factors -- Options, Futures,
Forwards, Swaps and Other Derivative Transactions" in this Appendix.
INDEXED SECURITIES
The Fund may purchase securities with principal and/or interest payments
whose prices are indexed to the prices of other securities, securities
indices, currencies, precious metals or other commodities, or other
financial indicators. Indexed securities typically, but not always, are
debt securities or deposits whose value at maturity or coupon rate is
determined by reference to a specific instrument or statistic. The Fund
may also purchase indexed deposits with similar characteristics. Gold-
indexed securities, for example, typically provide for a maturity value
that depends on the price of gold, resulting in a security whose price
tends to rise and fall together with gold prices. Currency-indexed
securities typically are short-term to intermediate-term debt securities
whose maturity values or interest rates are determined by reference to the
values of one or more specified foreign currencies, and may offer higher
yields than U.S. dollar denominated securities of equivalent issuers.
Currency-indexed securities may be positively or negatively indexed; that
is, their maturity value may increase when the specified currency value
increases, resulting in a security that performs similarly to a foreign-
denominated instrument, or their maturity value may decline when foreign
currencies increase, resulting in a security whose price characteristics
are similar to a put on the underlying currency. Currency-indexed
securities may also have prices that depend on the values of a number of
different foreign currencies relative to each other. Certain indexed
securities may expose the Fund to the risk of loss of all or a portion of
the principal amount of its investment and/or the interest that might
otherwise have been earned on the amount invested.
The performance of indexed securities depends to a great extent on the
performance of the security, currency, or other instrument to which they
are indexed, and may also be influenced by interest rate changes in the
U.S. and abroad. At the same time, indexed securities are subject to the
credit risks associated with the issuer of the security, and their values
may decline substantially if the issuer's creditworthiness deteriorates.
Recent issuers of indexed securities have included banks, corporations,
and certain U.S. Government-sponsored entities.
INVERSE FLOATING RATE OBLIGATIONS
The Fund may invest in so-called "inverse floating rate obligations" or
"residual interest bonds" or other obligations or certificates relating
thereto structured to have similar features. In creating such an
obligation, a municipality issues a certain amount of debt and pays a
fixed interest rate. Half of the debt is issued as variable rate short
term obligations, the interest rate of which is reset at short intervals,
typically 35 days. The other half of the debt is issued as inverse
floating rate obligations, the interest rate of which is calculated based
on the difference between a multiple of (approximately two times) the
interest paid by the issuer and the interest paid on the short-term
obligation. Under usual circumstances, the holder of the inverse floating
rate obligation can generally purchase an equal principal amount of the
short term obligation and link the two obligations in order to create
long-term fixed rate bonds. Because the interest rate on the inverse
floating rate obligation is determined by subtracting the short-term rate
from a fixed amount, the interest rate will decrease as the short-term
rate increases and will increase as the short-term rate decreases. The
magnitude of increases and decreases in the market value of inverse
floating rate obligations may be approximately twice as large as the
comparable change in the market value of an equal principal amount of
long-term bonds which bear interest at the rate paid by the issuer and
have similar credit quality, redemption and maturity provisions.
INVESTMENT IN OTHER INVESTMENT COMPANIES
The Fund may invest in other investment companies. The total return on such
investment will be reduced by the operating expenses and fees of such other
investment companies, including advisory fees.
OPEN-END FUNDS. The Fund may invest in open-end investment companies
CLOSED-END FUNDS. The Fund may invest in closed-end investment companies.
Such investment may involve the payment of substantial premiums above the
value of such investment companies' portfolio securities.
LENDING OF PORTFOLIO SECURITIES
The Fund may seek to increase its income by lending portfolio securities.
Such loans will usually be made only to member firms of the New York Stock
Exchange (the "Exchange") (and subsidiaries thereof) and member banks of
the Federal Reserve System, and would be required to be secured
continuously by collateral in cash, an irrevocable letter of credit or
United States ("U.S.") Treasury securities maintained on a current basis
at an amount at least equal to the market value of the securities loaned.
The Fund would have the right to call a loan and obtain the securities
loaned at any time on customary industry settlement notice (which will not
usually exceed five business days). For the duration of a loan, the Fund
would continue to receive the equivalent of the interest or dividends paid
by the issuer on the securities loaned. The Fund would also receive a fee
from the borrower or compensation from the investment of the collateral,
less a fee paid to the borrower (if the collateral is in the form of
cash). The Fund would not, however, have the right to vote any securities
having voting rights during the existence of the loan, but the Fund would
call the loan in anticipation of an important vote to be taken among
holders of the securities or of the giving or withholding of their consent
on a material matter affecting the investment. As with other extensions of
credit there are risks of delay in recovery or even loss of rights in the
collateral should the borrower of the securities fail financially.
However, the loans would be made only to firms deemed by the Adviser to be
of good standing, and when, in the judgment of the Adviser, the
consideration which can be earned currently from securities loans of this
type justifies the attendant risk.
LEVERAGING TRANSACTIONS
The Fund may engage in the types of transactions described below, which
involve "leverage" because in each case the Fund receives cash which it
can invest in portfolio securities and has a future obligation to make a
payment. The use of these transactions by the Fund will generally cause
its net asset value to increase or decrease at a greater rate than would
otherwise be the case. Any investment income or gains earned from the
portfolio securities purchased with the proceeds from these transactions
which is in excess of the expenses associated from these transactions can
be expected to cause the value of the Fund's shares and distributions on
the Fund's shares to rise more quickly than would otherwise be the case.
Conversely, if the investment income or gains earned from the portfolio
securities purchased with proceeds from these transactions fail to cover
the expenses associated with these transactions, the value of the Fund's
shares is likely to decrease more quickly than otherwise would be the case
and distributions thereon will be reduced or eliminated. Hence, these
transactions are speculative, involve leverage and increase the risk of
owning or investing in the shares of the Fund. These transactions also
increase the Fund's expenses because of interest and similar payments and
administrative expenses associated with them. Unless the appreciation and
income on assets purchased with proceeds from these transactions exceed
the costs associated with them, the use of these transactions by a Fund
would diminish the investment performance of the Fund compared with what
it would have been without using these transactions.
BANK BORROWINGS: The Fund may borrow money for investment purposes from
banks and invest the proceeds in accordance with its investment objectives
and policies.
MORTGAGE "DOLLAR ROLL" TRANSACTIONS: The Fund may enter into mortgage
"dollar roll" transactions pursuant to which it sells mortgage-backed
securities for delivery in the future and simultaneously contracts to
repurchase substantially similar securities on a specified future date.
During the roll period, the Fund foregoes principal and interest paid on
the mortgage-backed securities. The Fund is compensated for the lost
interest by the difference between the current sales price and the lower
price for the future purchase (often referred to as the "drop") as well as
by the interest earned on, and gains from, the investment of the cash
proceeds of the initial sale. The Fund may also be compensated by receipt
of a commitment fee.
If the income and capital gains from the Fund's investment of the cash
from the initial sale do not exceed the income, capital appreciation and
gain or loss that would have been realized on the securities sold as part
of the dollar roll, the use of this technique will diminish the investment
performance of the Fund compared with what the performance would have been
without the use of the dollar rolls. Dollar roll transactions involve the
risk that the market value of the securities the Fund is required to
purchase may decline below the agreed upon repurchase price of those
securities. If the broker/dealer to whom the Fund sells securities becomes
insolvent, the Fund's right to purchase or repurchase securities may be
restricted. Successful use of mortgage dollar rolls may depend upon the
Adviser's ability to correctly predict interest rates and prepayments.
There is no assurance that dollar rolls can be successfully employed.
REVERSE REPURCHASE AGREEMENTS: The Fund may enter into reverse repurchase
agreements. In a reverse repurchase agreement, the Fund will sell
securities and receive cash proceeds, subject to its agreement to
repurchase the securities at a later date for a fixed price reflecting a
market rate of interest. There is a risk that the counter party to a
reverse repurchase agreement will be unable or unwilling to complete the
transaction as scheduled, which may result in losses to the Fund. The Fund
will invest the proceeds received under a reverse repurchase agreement in
accordance with its investment objective and policies.
OPTIONS
The Fund may invest in the following types of options, which involve the
risks described under the caption "Special Risk Factors -- Options,
Futures, Forwards, Swaps and Other Derivative Transactions" in this
Appendix:
OPTIONS ON FOREIGN CURRENCIES: The Fund may purchase and write options on
foreign currencies for hedging and non-hedging purposes in a manner
similar to that in which Futures Contracts on foreign currencies, or
Forward Contracts, will be utilized. For example, a decline in the dollar
value of a foreign currency in which portfolio securities are denominated
will reduce the dollar value of such securities, even if their value in
the foreign currency remains constant. In order to protect against such
diminutions in the value of portfolio securities, the Fund may purchase
put options on the foreign currency. If the value of the currency does
decline, the Fund will have the right to sell such currency for a fixed
amount in dollars and will thereby offset, in whole in part, the adverse
effect on its portfolio which otherwise would have resulted.
Conversely, where a rise in the dollar value of a currency in which
securities to be acquired are denominated is projected, thereby increasing
the cost of such securities, the Fund may purchase call options thereon.
The purchase of such options could offset, at least partially, the effect
of the adverse movements in exchange rates. As in the case of other types
of options, however, the benefit to the Fund deriving from purchases of
foreign currency options will be reduced by the amount of the premium and
related transaction costs. In addition, where currency exchange rates do
not move in the direction or to the extent anticipated, the Fund could
sustain losses on transactions in foreign currency options which would
require it to forego a portion or all of the benefits of advantageous
changes in such rates. The Fund may write options on foreign currencies
for the same types of hedging purposes. For example, where the Fund
anticipates a decline in the dollar value of foreign-denominated
securities due to adverse fluctuations in exchange rates it could, instead
of purchasing a put option, write a call option on the relevant currency.
If the expected decline occurs, the option will most likely not be
exercised, and the diminution in value of portfolio securities will be
offset by the amount of the premium received less related transaction
costs. As in the case of other types of options, therefore, the writing of
Options on Foreign Currencies will constitute only a partial hedge.
Similarly, instead of purchasing a call option to hedge against an
anticipated increase in the dollar cost of securities to be acquired, the
Fund could write a put option on the relevant currency which, if rates
move in the manner projected, will expire unexercised and allow the Fund
to hedge such increased cost up to the amount of the premium. Foreign
currency options written by the Fund will generally be covered in a manner
similar to the covering of other types of options. As in the case of other
types of options, however, the writing of a foreign currency option will
constitute only a partial hedge up to the amount of the premium, and only
if rates move in the expected direction. If this does not occur, the
option may be exercised and the Fund would be required to purchase or sell
the underlying currency at a loss which may not be offset by the amount of
the premium. Through the writing of options on foreign currencies, the
Fund also may be required to forego all or a portion of the benefits which
might otherwise have been obtained from favorable movements in exchange
rates. The use of foreign currency options for non-hedging purposes, like
the use of other types of derivatives for such purposes, presents greater
profit potential but also significant risk of loss and could be considered
speculative.
OPTIONS ON FUTURES CONTRACTS: The Fund also may purchase and write options
to buy or sell those Futures Contracts in which it may invest ("Options on
Futures Contracts") as described above under "Futures Contracts." Such
investment strategies will be used for hedging purposes and for non-
hedging purposes, subject to applicable law.
An Option on a Futures Contract provides the holder with the right to
enter into a "long" position in the underlying Futures Contract, in the
case of a call option, or a "short" position in the underlying Futures
Contract, in the case of a put option, at a fixed exercise price up to a
stated expiration date or, in the case of certain options, on such date.
Upon exercise of the option by the holder, the contract market
clearinghouse establishes a corresponding short position for the writer of
the option, in the case of a call option, or a corresponding long position
in the case of a put option. In the event that an option is exercised, the
parties will be subject to all the risks associated with the trading of
Futures Contracts, such as payment of initial and variation margin
deposits. In addition, the writer of an Option on a Futures Contract,
unlike the holder, is subject to initial and variation margin requirements
on the option position.
A position in an Option on a Futures Contract may be terminated by the
purchaser or seller prior to expiration by effecting a closing purchase or
sale transaction, subject to the availability of a liquid secondary
market, which is the purchase or sale of an option of the same type (i.e.,
the same exercise price and expiration date) as the option previously
purchased or sold. The difference between the premiums paid and received
represents the fund's profit or loss on the transaction.
Options on Futures Contracts that are written or purchased by the Fund
on U.S. exchanges are traded on the same contract market as the underlying
Futures Contract, and, like Futures Contracts, are subject to regulation
by the Commodity Futures Trading Commission (the "CFTC") and the
performance guarantee of the exchange clearinghouse. In addition, Options
on Futures Contracts may be traded on foreign exchanges. The Fund may
cover the writing of call Options on Futures Contracts (a) through
purchases of the underlying Futures Contract, (b) through ownership of the
instrument, or instruments included in the index, underlying the Futures
Contract, or (c) through the holding of a call on the same Futures
Contract and in the same principal amount as the call written where the
exercise price of the call held (i) is equal to or less than the exercise
price of the call written or (ii) is greater than the exercise price of
the call written if the Fund owns liquid and unencumbered assets equal to
the difference. The Fund may cover the writing of put Options on Futures
Contracts (a) through sales of the underlying Futures Contract, (b)
through the ownership of liquid and unencumbered assets equal to the value
of the security or index underlying the Futures Contract, or (c) through
the holding of a put on the same Futures Contract and in the same
principal amount as the put written where the exercise price of the put
held (i) is equal to or greater than the exercise price of the put written
or where the exercise price of the put held (ii) is less than the exercise
price of the put written if the Fund owns liquid and unencumbered assets
equal to the difference. Put and call Options on Futures Contracts may
also be covered in such other manner as may be in accordance with the
rules of the exchange on which the option is traded and applicable laws
and regulations. Upon the exercise of a call Option on a Futures Contract
written by the Fund, the Fund will be required to sell the underlying
Futures Contract which, if the Fund has covered its obligation through the
purchase of such Contract, will serve to liquidate its futures position.
Similarly, where a put Option on a Futures Contract written by the Fund is
exercised, the Fund will be required to purchase the underlying Futures
Contract which, if the Fund has covered its obligation through the sale of
such Contract, will close out its futures position.
The writing of a call option on a Futures Contract for hedging purposes
constitutes a partial hedge against declining prices of the securities or
other instruments required to be delivered under the terms of the Futures
Contract. If the futures price at expiration of the option is below the
exercise price, the Fund will retain the full amount of the option
premium, less related transaction costs, which provides a partial hedge
against any decline that may have occurred in the Fund's portfolio
holdings. The writing of a put option on a Futures Contract constitutes a
partial hedge against increasing prices of the securities or other
instruments required to be delivered under the terms of the Futures
Contract. If the futures price at expiration of the option is higher than
the exercise price, the Fund will retain the full amount of the option
premium which provides a partial hedge against any increase in the price
of securities which the Fund intends to purchase. If a put or call option
the Fund has written is exercised, the Fund will incur a loss which will
be reduced by the amount of the premium it receives. Depending on the
degree of correlation between changes in the value of its portfolio
securities and the changes in the value of its futures positions, the
Fund's losses from existing Options on Futures Contracts may to some
extent be reduced or increased by changes in the value of portfolio
securities.
The Fund may purchase Options on Futures Contracts for hedging purposes
instead of purchasing or selling the underlying Futures Contracts. For
example, where a decrease in the value of portfolio securities is
anticipated as a result of a projected market-wide decline or changes in
interest or exchange rates, the Fund could, in lieu of selling Futures
Contracts, purchase put options thereon. In the event that such decrease
occurs, it may be offset, in whole or in part, by a profit on the option.
Conversely, where it is projected that the value of securities to be
acquired by the Fund will increase prior to acquisition, due to a market
advance or changes in interest or exchange rates, the Fund could purchase
call Options on Futures Contracts rather than purchasing the underlying
Futures Contracts.
OPTIONS ON SECURITIES: The Fund may write (sell) covered put and call
options, and purchase put and call options, on securities. Call and put
options written by the Fund may be covered in the manner set forth below.
A call option written by the Fund is "covered" if the Fund owns the
security underlying the call or has an absolute and immediate right to
acquire that security without additional cash consideration (or for
additional cash consideration if the Fund owns liquid and unencumbered
assets equal to the amount of cash consideration) upon conversion or
exchange of other securities held in its portfolio. A call option is also
covered if the Fund holds a call on the same security and in the same
principal amount as the call written where the exercise price of the call
held (a) is equal to or less than the exercise price of the call written
or (b) is greater than the exercise price of the call written if the Fund
owns liquid and unencumbered assets equal to the difference. A put option
written by the Fund is "covered" if the Fund owns liquid and unencumbered
assets with a value equal to the exercise price, or else holds a put on
the same security and in the same principal amount as the put written
where the exercise price of the put held is equal to or greater than the
exercise price of the put written or where the exercise price of the put
held is less than the exercise price of the put written if the Fund owns
liquid and unencumbered assets equal to the difference. Put and call
options written by the Fund may also be covered in such other manner as
may be in accordance with the requirements of the exchange on which, or
the counterparty with which, the option is traded, and applicable laws and
regulations. If the writer's obligation is not so covered, it is subject
to the risk of the full change in value of the underlying security from
the time the option is written until exercise.
Effecting a closing transaction in the case of a written call option
will permit the Fund to write another call option on the underlying
security with either a different exercise price or expiration date or
both, or in the case of a written put option will permit the Fund to write
another put option to the extent that the Fund owns liquid and
unencumbered assets. Such transactions permit the Fund to generate
additional premium income, which will partially offset declines in the
value of portfolio securities or increases in the cost of securities to be
acquired. Also, effecting a closing transaction will permit the cash or
proceeds from the concurrent sale of any securities subject to the option
to be used for other investments of the Fund, provided that another option
on such security is not written. If the Fund desires to sell a particular
security from its portfolio on which it has written a call option, it will
effect a closing transaction in connection with the option prior to or
concurrent with the sale of the security.
The Fund will realize a profit from a closing transaction if the premium
paid in connection with the closing of an option written by the Fund is
less than the premium received from writing the option, or if the premium
received in connection with the closing of an option purchased by the Fund
is more than the premium paid for the original purchase. Conversely, the
Fund will suffer a loss if the premium paid or received in connection with
a closing transaction is more or less, respectively, than the premium
received or paid in establishing the option position. Because increases in
the market price of a call option will generally reflect increases in the
market price of the underlying security, any loss resulting from the
repurchase of a call option previously written by the Fund is likely to be
offset in whole or in part by appreciation of the underlying security
owned by the Fund.
The Fund may write options in connection with buy-and-write
transactions; that is, the Fund may purchase a security and then write a
call option against that security. The exercise price of the call option
the Fund determines to write will depend upon the expected price movement
of the underlying security. The exercise price of a call option may be
below ("in-the-money"), equal to ("at-the-money") or above ("out-of-the-
money") the current value of the underlying security at the time the
option is written. Buy-and-write transactions using in-the-money call
options may be used when it is expected that the price of the underlying
security will decline moderately during the option period. Buy-and-write
transactions using out-of-the-money call options may be used when it is
expected that the premiums received from writing the call option plus the
appreciation in the market price of the underlying security up to the
exercise price will be greater than the appreciation in the price of the
underlying security alone. If the call options are exercised in such
transactions, the Fund's maximum gain will be the premium received by it
for writing the option, adjusted upwards or downwards by the difference
between the Fund's purchase price of the security and the exercise price,
less related transaction costs. If the options are not exercised and the
price of the underlying security declines, the amount of such decline will
be offset in part, or entirely, by the premium received.
The writing of covered put options is similar in terms of risk/return
characteristics to buy-and-write transactions. If the market price of the
underlying security rises or otherwise is above the exercise price, the
put option will expire worthless and the Fund's gain will be limited to
the premium received, less related transaction costs. If the market price
of the underlying security declines or otherwise is below the exercise
price, the Fund may elect to close the position or retain the option until
it is exercised, at which time the Fund will be required to take delivery
of the security at the exercise price; the Fund's return will be the
premium received from the put option minus the amount by which the market
price of the security is below the exercise price, which could result in a
loss. Out-of-the-money, at-the-money and in-the-money put options may be
used by the Fund in the same market environments that call options are
used in equivalent buy-and-write transactions.
The Fund may also write combinations of put and call options on the same
security, known as "straddles" with the same exercise price and expiration
date. By writing a straddle, the Fund undertakes a simultaneous obligation
to sell and purchase the same security in the event that one of the
options is exercised. If the price of the security subsequently rises
sufficiently above the exercise price to cover the amount of the premium
and transaction costs, the call will likely be exercised and the Fund will
be required to sell the underlying security at a below market price. This
loss may be offset, however, in whole or part, by the premiums received on
the writing of the two options. Conversely, if the price of the security
declines by a sufficient amount, the put will likely be exercised. The
writing of straddles will likely be effective, therefore, only where the
price of the security remains stable and neither the call nor the put is
exercised. In those instances where one of the options is exercised, the
loss on the purchase or sale of the underlying security may exceed the
amount of the premiums received.
By writing a call option, the Fund limits its opportunity to profit from
any increase in the market value of the underlying security above the
exercise price of the option. By writing a put option, the Fund assumes
the risk that it may be required to purchase the underlying security for
an exercise price above its then-current market value, resulting in a
capital loss unless the security subsequently appreciates in value. The
writing of options on securities will not be undertaken by the Fund solely
for hedging purposes, and could involve certain risks which are not
present in the case of hedging transactions. Moreover, even where options
are written for hedging purposes, such transactions constitute only a
partial hedge against declines in the value of portfolio securities or
against increases in the value of securities to be acquired, up to the
amount of the premium.
The Fund may also purchase options for hedging purposes or to increase
its return. Put options may be purchased to hedge against a decline in the
value of portfolio securities. If such decline occurs, the put options
will permit the Fund to sell the securities at the exercise price, or to
close out the options at a profit. By using put options in this way, the
Fund will reduce any profit it might otherwise have realized in the
underlying security by the amount of the premium paid for the put option
and by transaction costs.
The Fund may also purchase call options to hedge against an increase in
the price of securities that the Fund anticipates purchasing in the
future. If such increase occurs, the call option will permit the Fund to
purchase the securities at the exercise price, or to close out the options
at a profit. The premium paid for the call option plus any transaction
costs will reduce the benefit, if any, realized by the Fund upon exercise
of the option, and, unless the price of the underlying security rises
sufficiently, the option may expire worthless to the Fund.
OPTIONS ON STOCK INDICES: The Fund may write (sell) covered call and put
options and purchase call and put options on stock indices. In contrast to
an option on a security, an option on a stock index provides the holder
with the right but not the obligation to make or receive a cash settlement
upon exercise of the option, rather than the right to purchase or sell a
security. The amount of this settlement is generally equal to (i) the
amount, if any, by which the fixed exercise price of the option exceeds
(in the case of a call) or is below (in the case of a put) the closing
value of the underlying index on the date of exercise, multiplied by (ii)
a fixed "index multiplier." The Fund may cover written call options on
stock indices by owning securities whose price changes, in the opinion of
the Adviser, are expected to be similar to those of the underlying index,
or by having an absolute and immediate right to acquire such securities
without additional cash consideration (or for additional cash
consideration if the Fund owns liquid and unencumbered assets equal to the
amount of cash consideration) upon conversion or exchange of other
securities in its portfolio. Where the Fund covers a call option on a
stock index through ownership of securities, such securities may not match
the composition of the index and, in that event, the Fund will not be
fully covered and could be subject to risk of loss in the event of adverse
changes in the value of the index. The Fund may also cover call options on
stock indices by holding a call on the same index and in the same
principal amount as the call written where the exercise price of the call
held (a) is equal to or less than the exercise price of the call written
or (b) is greater than the exercise price of the call written if the Fund
owns liquid and unencumbered assets equal to the difference. The Fund may
cover put options on stock indices by owning liquid and unencumbered
assets with a value equal to the exercise price, or by holding a put on
the same stock index and in the same principal amount as the put written
where the exercise price of the put held (a) is equal to or greater than
the exercise price of the put written or (b) is less than the exercise
price of the put written if the Fund owns liquid and unencumbered assets
equal to the difference. Put and call options on stock indices may also be
covered in such other manner as may be in accordance with the rules of the
exchange on which, or the counterparty with which, the option is traded
and applicable laws and regulations.
The Fund will receive a premium from writing a put or call option, which
increases the Fund's gross income in the event the option expires
unexercised or is closed out at a profit. If the value of an index on
which the Fund has written a call option falls or remains the same, the
Fund will realize a profit in the form of the premium received (less
transaction costs) that could offset all or a portion of any decline in
the value of the securities it owns. If the value of the index rises,
however, the Fund will realize a loss in its call option position, which
will reduce the benefit of any unrealized appreciation in the Fund's stock
investments. By writing a put option, the Fund assumes the risk of a
decline in the index. To the extent that the price changes of securities
owned by the Fund correlate with changes in the value of the index,
writing covered put options on indices will increase the Fund's losses in
the event of a market decline, although such losses will be offset in part
by the premium received for writing the option.
The Fund may also purchase put options on stock indices to hedge its
investments against a decline in value. By purchasing a put option on a
stock index, the Fund will seek to offset a decline in the value of
securities it owns through appreciation of the put option. If the value of
the Fund's investments does not decline as anticipated, or if the value of
the option does not increase, the Fund's loss will be limited to the
premium paid for the option plus related transaction costs. The success of
this strategy will largely depend on the accuracy of the correlation
between the changes in value of the index and the changes in value of the
Fund's security holdings.
The purchase of call options on stock indices may be used by the Fund to
attempt to reduce the risk of missing a broad market advance, or an
advance in an industry or market segment, at a time when the Fund holds
uninvested cash or short-term debt securities awaiting investment. When
purchasing call options for this purpose, the Fund will also bear the risk
of losing all or a portion of the premium paid if the value of the index
does not rise. The purchase of call options on stock indices when the Fund
is substantially fully invested is a form of leverage, up to the amount of
the premium and related transaction costs, and involves risks of loss and
of increased volatility similar to those involved in purchasing calls on
securities the Fund owns.
The index underlying a stock index option may be a "broad-based" index,
such as the Standard & Poor's 500 Index or the New York Stock Exchange
Composite Index, the changes in value of which ordinarily will reflect
movements in the stock market in general. In contrast, certain options may
be based on narrower market indices, such as the Standard & Poor's 100
Index, or on indices of securities of particular industry groups, such as
those of oil and gas or technology companies. A stock index assigns
relative values to the stocks included in the index and the index
fluctuates with changes in the market values of the stocks so included.
The composition of the index is changed periodically.
RESET OPTIONS:
In certain instances, the Fund may purchase or write options on U.S.
Treasury securities which provide for periodic adjustment of the strike
price and may also provide for the periodic adjustment of the premium
during the term of each such option. Like other types of options, these
transactions, which may be referred to as "reset" options or "adjustable
strike" options grant the purchaser the right to purchase (in the case of
a call) or sell (in the case of a put), a specified type of U.S. Treasury
security at any time up to a stated expiration date (or, in certain
instances, on such date). In contrast to other types of options, however,
the price at which the underlying security may be purchased or sold under
a "reset" option is determined at various intervals during the term of the
option, and such price fluctuates from interval to interval based on
changes in the market value of the underlying security. As a result, the
strike price of a "reset" option, at the time of exercise, may be less
advantageous than if the strike price had been fixed at the initiation of
the option. In addition, the premium paid for the purchase of the option
may be determined at the termination, rather than the initiation, of the
option. If the premium for a reset option written by the Fund is paid at
termination, the Fund assumes the risk that (i) the premium may be less
than the premium which would otherwise have been received at the
initiation of the option because of such factors as the volatility in
yield of the underlying Treasury security over the term of the option and
adjustments made to the strike price of the option, and (ii) the option
purchaser may default on its obligation to pay the premium at the
termination of the option. Conversely, where the Fund purchases a reset
option, it could be required to pay a higher premium than would have been
the case at the initiation of the option.
"YIELD CURVE" OPTIONS: The Fund may also enter into options on the
"spread," or yield differential, between two fixed income securities, in
transactions referred to as "yield curve" options. In contrast to other
types of options, a yield curve option is based on the difference between
the yields of designated securities, rather than the prices of the
individual securities, and is settled through cash payments. Accordingly,
a yield curve option is profitable to the holder if this differential
widens (in the case of a call) or narrows (in the case of a put),
regardless of whether the yields of the underlying securities increase or
decrease.
Yield curve options may be used for the same purposes as other options
on securities. Specifically, the Fund may purchase or write such options
for hedging purposes. For example, the Fund may purchase a call option on
the yield spread between two securities, if it owns one of the securities
and anticipates purchasing the other security and wants to hedge against
an adverse change in the yield spread between the two securities. The Fund
may also purchase or write yield curve options for other than hedging
purposes (i.e., in an effort to increase its current income) if, in the
judgment of the Adviser, the Fund will be able to profit from movements in
the spread between the yields of the underlying securities. The trading of
yield curve options is subject to all of the risks associated with the
trading of other types of options. In addition, however, such options
present risk of loss even if the yield of one of the underlying securities
remains constant, if the spread moves in a direction or to an extent which
was not anticipated. Yield curve options written by the Fund will be
"covered". A call (or put) option is covered if the Fund holds another
call (or put) option on the spread between the same two securities and
owns liquid and unencumbered assets sufficient to cover the Fund's net
liability under the two options. Therefore, the Fund's liability for such
a covered option is generally limited to the difference between the amount
of the Fund's liability under the option written by the Fund less the
value of the option held by the Fund. Yield curve options may also be
covered in such other manner as may be in accordance with the requirements
of the counterparty with which the option is traded and applicable laws
and regulations. Yield curve options are traded over-the-counter and
because they have been only recently introduced, established trading
markets for these securities have not yet developed.
REPURCHASE AGREEMENTS
The Fund may enter into repurchase agreements with sellers who are member
firms (or a subsidiary thereof) of the New York Stock Exchange or members
of the Federal Reserve System, recognized primary U.S. Government
securities dealers or institutions which the Adviser has determined to be
of comparable creditworthiness. The securities that the Fund purchases and
holds through its agent are U.S. Government securities, the values of
which are equal to or greater than the repurchase price agreed to be paid
by the seller. The repurchase price may be higher than the purchase price,
the difference being income to the Fund, or the purchase and repurchase
prices may be the same, with interest at a standard rate due to the Fund
together with the repurchase price on repurchase. In either case, the
income to the Fund is unrelated to the interest rate on the Government
securities.
The repurchase agreement provides that in the event the seller fails to
pay the amount agreed upon on the agreed upon delivery date or upon
demand, as the case may be, the Fund will have the right to liquidate the
securities. If at the time the Fund is contractually entitled to exercise
its right to liquidate the securities, the seller is subject to a
proceeding under the bankruptcy laws or its assets are otherwise subject
to a stay order, the Fund's exercise of its right to liquidate the
securities may be delayed and result in certain losses and costs to the
Fund. The Fund has adopted and follows procedures which are intended to
minimize the risks of repurchase agreements. For example, the Fund only
enters into repurchase agreements after the Adviser has determined that
the seller is creditworthy, and the Adviser monitors that seller's
creditworthiness on an ongoing basis. Moreover, under such agreements, the
value of the securities (which are marked to market every business day) is
required to be greater than the repurchase price, and the Fund has the
right to make margin calls at any time if the value of the securities
falls below the agreed upon collateral.
RESTRICTED SECURITIES
The Fund may purchase securities that are not registered under the
Securities Act of 1933, as amended ("1933 Act") ("restricted securities"),
including those that can be offered and sold to "qualified institutional
buyers" under Rule 144A under the 1933 Act ("Rule 144A securities") and
commercial paper issued under Section 4(2) of the 1933 Act ("4(2) Paper").
A determination is made, based upon a continuing review of the trading
markets for the Rule 144A security or 4(2) Paper, whether such security is
liquid and thus not subject to the Fund's limitation on investing in
illiquid investments. The Board of Trustees has adopted guidelines and
delegated to MFS the daily function of determining and monitoring the
liquidity of Rule 144A securities and 4(2) Paper. The Board, however,
retains oversight of the liquidity determinations focusing on factors such
as valuation, liquidity and availability of information. Investing in Rule
144A securities could have the effect of decreasing the level of liquidity
in the Fund to the extent that qualified institutional buyers become for a
time uninterested in purchasing these Rule 144A securities held in the
Fund's portfolio. Subject to the Fund's limitation on investments in
illiquid investments, the Fund may also invest in restricted securities
that may not be sold under Rule 144A, which presents certain risks. As a
result, the Fund might not be able to sell these securities when the
Adviser wishes to do so, or might have to sell them at less than fair
value. In addition, market quotations are less readily available.
Therefore, judgment may at times play a greater role in valuing these
securities than in the case of unrestricted securities.
SHORT SALES
The Fund may seek to hedge investments or realize additional gains through
short sales. The Fund may make short sales, which are transactions in
which the Fund sells a security it does not own, in anticipation of a
decline in the market value of that security. To complete such a
transaction, the Fund must borrow the security to make delivery to the
buyer. The Fund then is obligated to replace the security borrowed by
purchasing it at the market price at the time of replacement. The price at
such time may be more or less than the price at which the security was
sold by the Fund. Until the security is replaced, the Fund is required to
repay the lender any dividends or interest which accrue during the period
of the loan. To borrow the security, the Fund also may be required to pay
a premium, which would increase the cost of the security sold. The net
proceeds of the short sale will be retained by the broker, to the extent
necessary to meet margin requirements, until the short position is closed
out. The Fund also will incur transaction costs in effecting short sales.
The Fund will incur a loss as a result of the short sale if the price of
the security increases between the date of the short sale and the date on
which the Fund replaces the borrowed security. The Fund will realize a
gain if the price of the security declines between those dates. The amount
of any gain will be decreased, and the amount of any loss increased, by
the amount of the premium, dividends or interest the Fund may be required
to pay in connection with a short sale.
Whenever the Fund engages in short sales, it identifies liquid and
unencumbered assets in an amount that, when combined with the amount of
collateral deposited with the broker connection with the short sale,
equals the current market value of the security sold short.
SHORT SALES AGAINST THE BOX
The Fund may make short sales "against the box," i.e., when a security
identical to one owned by the Fund is borrowed and sold short. If the Fund
enters into a short sale against the box, it is required to segregate
securities equivalent in kind and amount to the securities sold short (or
securities convertible or exchangeable into such securities) and is
required to hold such securities while the short sale is outstanding. The
Fund will incur transaction costs, including interest, in connection with
opening, maintaining, and closing short sales against the box.
SHORT TERM INSTRUMENTS
The Fund may hold cash and invest in cash equivalents, such as short-term
U.S. Government Securities, commercial paper and bank instruments.
SWAPS AND RELATED DERIVATIVE INSTRUMENTS
The Fund may enter into interest rate swaps, currency swaps and other
types of available swap agreements, including swaps on securities,
commodities and indices, and related types of derivatives, such as caps,
collars and floors. A swap is an agreement between two parties pursuant to
which each party agrees to make one or more payments to the other on
regularly scheduled dates over a stated term, based on different interest
rates, currency exchange rates, security or commodity prices, the prices
or rates of other types of financial instruments or assets or the levels
of specified indices. Under a typical swap, one party may agree to pay a
fixed rate or a floating rate determined by reference to a specified
instrument, rate or index, multiplied in each case by a specified amount
(the "notional amount"), while the other party agrees to pay an amount
equal to a different floating rate multiplied by the same notional amount.
On each payment date, the obligations of parties are netted, with only the
net amount paid by one party to the other. All swap agreements entered
into by the Fund with the same counterparty are generally governed by a
single master agreement, which provides for the netting of all amounts
owed by the parties under the agreement upon the occurrence of an event of
default, thereby reducing the credit risk to which such party is exposed.
Swap agreements are typically individually negotiated and structured to
provide exposure to a variety of different types of investments or market
factors. Swap agreements may be entered into for hedging or non-hedging
purposes and therefore may increase or decrease the Fund's exposure to the
underlying instrument, rate, asset or index. Swap agreements can take many
different forms and are known by a variety of names. The Fund is not
limited to any particular form or variety of swap agreement if the Adviser
determines it is consistent with the Fund's investment objective and
policies.
For example, the Fund may enter into an interest rate swap in order to
protect against declines in the value of fixed income securities held by
the Fund. In such an instance, the Fund would agree with a counterparty to
pay a fixed rate (multiplied by a notional amount) and the counterparty
would agree to pay a floating rate multiplied by the same notional amount.
If interest rates rise, resulting in a diminution in the value of the
Fund's portfolio, the Fund would receive payments under the swap that
would offset, in whole or part, such diminution in value. The Fund may
also enter into swaps to modify its exposure to particular markets or
instruments, such as a currency swap between the U.S. dollar and another
currency which would have the effect of increasing or decreasing the
Fund's exposure to each such currency. The Fund might also enter into a
swap on a particular security, or a basket or index of securities, in
order to gain exposure to the underlying security or securities, as an
alternative to purchasing such securities. Such transactions could be more
efficient or less costly in certain instances than an actual purchase or
sale of the securities.
The Fund may enter into other related types of over-the-counter
derivatives, such as "caps", "floors", "collars" and options on swaps, or
"swaptions", for the same types of hedging or non-hedging purposes. Caps
and floors are similar to swaps, except that one party pays a fee at the
time the transaction is entered into and has no further payment
obligations, while the other party is obligated to pay an amount equal to
the amount by which a specified fixed or floating rate exceeds or is below
another rate (multiplied by a notional amount). Caps and floors,
therefore, are also similar to options. A collar is in effect a
combination of a cap and a floor, with payments made only within or
outside a specified range of prices or rates. A swaption is an option to
enter into a swap agreement. Like other types of options, the buyer of a
swaption pays a non-refundable premium for the option and obtains the
right, but not the obligation, to enter into the underlying swap on the
agreed-upon terms.
The Fund will maintain liquid and unencumbered assets to cover its
current obligations under swap and other over-the-counter derivative
transactions. If the Fund enters into a swap agreement on a net basis
(i.e., the two payment streams are netted out, with the Fund receiving or
paying, as the case may be, only the net amount of the two payments), the
Fund will maintain liquid and unencumbered assets with a daily value at
least equal to the excess, if any, of the Fund's accrued obligations under
the swap agreement over the accrued amount the Fund is entitled to receive
under the agreement. If the Fund enters into a swap agreement on other
than a net basis, it will maintain liquid and unencumbered assets with a
value equal to the full amount of the Fund's accrued obligations under the
agreement.
The most significant factor in the performance of swaps, caps, floors
and collars is the change in the underlying price, rate or index level
that determines the amount of payments to be made under the arrangement.
If the Adviser is incorrect in its forecasts of such factors, the
investment performance of the Fund would be less than what it would have
been if these investment techniques had not been used. If a swap agreement
calls for payments by the Fund, the Fund must be prepared to make such
payments when due. In addition, if the counterparty's creditworthiness
would decline, the value of the swap agreement would be likely to decline,
potentially resulting in losses.
If the counterparty defaults, the Fund's risk of loss consists of the
net amount of payments that the Fund is contractually entitled to receive.
The Fund anticipates that it will be able to eliminate or reduce its
exposure under these arrangements by assignment or other disposition or by
entering into an offsetting agreement with the same or another
counterparty, but there can be no assurance that it will be able to do so.
The uses by the Fund of swaps and related derivative instruments also
involves the risks described under the caption "Special Risk Factors --
Options, Futures, Forwards, Swaps and Other Derivative Transactions" in
this Appendix.
TEMPORARY BORROWINGS
The Fund may borrow money for temporary purposes (e.g., to meet redemption
requests or settle outstanding purchases of portfolio securities).
TEMPORARY DEFENSIVE POSITIONS
During periods of unusual market conditions when the Adviser believes that
investing for temporary defensive purposes is appropriate, or in order to
meet anticipated redemption requests, a large portion or all of the assets
of the Fund may be invested in cash (including foreign currency) or cash
equivalents, including, but not limited to, obligations of banks
(including certificates of deposit, bankers' acceptances, time deposits
and repurchase agreements), commercial paper, short-term notes, U.S.
Government Securities and related repurchase agreements.
WARRANTS
The Fund may invest in warrants. Warrants are securities that give the
Fund the right to purchase equity securities from the issuer at a specific
price (the "strike price") for a limited period of time. The strike price
of warrants typically is much lower than the current market price of the
underlying securities, yet they are subject to similar price fluctuations.
As a result, warrants may be more volatile investments than the underlying
securities and may offer greater potential for capital appreciation as
well as capital loss. Warrants do not entitle a holder to dividends or
voting rights with respect to the underlying securities and do not
represent any rights in the assets of the issuing company. Also, the value
of the warrant does not necessarily change with the value of the
underlying securities and a warrant ceases to have value if it is not
exercised prior to the expiration date. These factors can make warrants
more speculative than other types of investments.
"WHEN-ISSUED" SECURITIES
The Fund may purchase securities on a "when-issued" or on a "forward
delivery" basis which means that the securities will be delivered to the
Fund at a future date usually beyond customary settlement time. The
commitment to purchase a security for which payment will be made on a
future date may be deemed a separate security. In general, the Fund does
not pay for such securities until received, and does not start earning
interest on the securities until the contractual settlement date. While
awaiting delivery of securities purchased on such bases, a Fund will
identify liquid and unencumbered assets equal to its forward delivery
commitment.
SPECIAL RISK FACTORS -- OPTIONS, FUTURES, FORWARDS, SWAPS AND OTHER
DERIVATIVE TRANSACTIONS
RISK OF IMPERFECT CORRELATION OF HEDGING INSTRUMENTS WITH THE FUND'S
PORTFOLIO: The Fund's ability effectively to hedge all or a portion of its
portfolio through transactions in derivatives, including options, Futures
Contracts, Options on Futures Contracts, Forward Contracts, swaps and
other types of derivatives depends on the degree to which price movements
in the underlying index or instrument correlate with price movements in
the relevant portion of the Fund's portfolio. In the case of derivative
instruments based on an index, the portfolio will not duplicate the
components of the index, and in the case of derivative instruments on
fixed income securities, the portfolio securities which are being hedged
may not be the same type of obligation underlying such derivatives. The
use of derivatives for "cross hedging" purposes (such as a transaction in
a Forward Contract on one currency to hedge exposure to a different
currency) may involve greater correlation risks. Consequently, the Fund
bears the risk that the price of the portfolio securities being hedged
will not move in the same amount or direction as the underlying index or
obligation.
If the Fund purchases a put option on an index and the index decreases
less than the value of the hedged securities, the Fund would experience a
loss which is not completely offset by the put option. It is also possible
that there may be a negative correlation between the index or obligation
underlying an option or Futures Contract in which the Fund has a position
and the portfolio securities the Fund is attempting to hedge, which could
result in a loss on both the portfolio and the hedging instrument. It
should be noted that stock index futures contracts or options based upon a
narrower index of securities, such as those of a particular industry
group, may present greater risk than options or futures based on a broad
market index. This is due to the fact that a narrower index is more
susceptible to rapid and extreme fluctuations as a result of changes in
the value of a small number of securities. Nevertheless, where the Fund
enters into transactions in options or futures on narrowly-based indices
for hedging purposes, movements in the value of the index should, if the
hedge is successful, correlate closely with the portion of the Fund's
portfolio or the intended acquisitions being hedged.
The trading of derivatives for hedging purposes entails the additional
risk of imperfect correlation between movements in the price of the
derivative and the price of the underlying index or obligation. The
anticipated spread between the prices may be distorted due to the
differences in the nature of the markets such as differences in margin
requirements, the liquidity of such markets and the participation of
speculators in the derivatives markets. In this regard, trading by
speculators in derivatives has in the past occasionally resulted in market
distortions, which may be difficult or impossible to predict, particularly
near the expiration of such instruments.
The trading of Options on Futures Contracts also entails the risk that
changes in the value of the underlying Futures Contracts will not be fully
reflected in the value of the option. The risk of imperfect correlation,
however, generally tends to diminish as the maturity date of the Futures
Contract or expiration date of the option approaches.
Further, with respect to options on securities, options on stock
indices, options on currencies and Options on Futures Contracts, the Fund
is subject to the risk of market movements between the time that the
option is exercised and the time of performance thereunder. This could
increase the extent of any loss suffered by the Fund in connection with
such transactions.
In writing a covered call option on a security, index or futures
contract, the Fund also incurs the risk that changes in the value of the
instruments used to cover the position will not correlate closely with
changes in the value of the option or underlying index or instrument. For
example, where the Fund covers a call option written on a stock index
through segregation of securities, such securities may not match the
composition of the index, and the Fund may not be fully covered. As a
result, the Fund could be subject to risk of loss in the event of adverse
market movements.
The writing of options on securities, options on stock indices or
Options on Futures Contracts constitutes only a partial hedge against
fluctuations in the value of the Fund's portfolio. When the Fund writes an
option, it will receive premium income in return for the holder's purchase
of the right to acquire or dispose of the underlying obligation. In the
event that the price of such obligation does not rise sufficiently above
the exercise price of the option, in the case of a call, or fall below the
exercise price, in the case of a put, the option will not be exercised and
the Fund will retain the amount of the premium, less related transaction
costs, which will constitute a partial hedge against any decline that may
have occurred in the Fund's portfolio holdings or any increase in the cost
of the instruments to be acquired.
Where the price of the underlying obligation moves sufficiently in favor
of the holder to warrant exercise of the option, however, and the option
is exercised, the Fund will incur a loss which may only be partially
offset by the amount of the premium it received. Moreover, by writing an
option, the Fund may be required to forego the benefits which might
otherwise have been obtained from an increase in the value of portfolio
securities or other assets or a decline in the value of securities or
assets to be acquired. In the event of the occurrence of any of the
foregoing adverse market events, the Fund's overall return may be lower
than if it had not engaged in the hedging transactions. Furthermore, the
cost of using these techniques may make it economically infeasible for the
Fund to engage in such transactions.
RISKS OF NON-HEDGING TRANSACTIONS: The Fund may enter transactions in
derivatives for non-hedging purposes as well as hedging purposes. Non-
hedging transactions in such instruments involve greater risks and may
result in losses which may not be offset by increases in the value of
portfolio securities or declines in the cost of securities to be acquired.
The Fund will only write covered options, such that liquid and
unencumbered assets necessary to satisfy an option exercise will be
identified, unless the option is covered in such other manner as may be in
accordance with the rules of the exchange on which, or the counterparty
with which, the option is traded and applicable laws and regulations.
Nevertheless, the method of covering an option employed by the Fund may
not fully protect it against risk of loss and, in any event, the Fund
could suffer losses on the option position which might not be offset by
corresponding portfolio gains. The Fund may also enter into futures,
Forward Contracts or swaps for non-hedging purposes. For example, the Fund
may enter into such a transaction as an alternative to purchasing or
selling the underlying instrument or to obtain desired exposure to an
index or market. In such instances, the Fund will be exposed to the same
economic risks incurred in purchasing or selling the underlying instrument
or instruments. However, transactions in futures, Forward Contracts or
swaps may be leveraged, which could expose the Fund to greater risk of
loss than such purchases or sales. Entering into transactions in
derivatives for other than hedging purposes, therefore, could expose the
Fund to significant risk of loss if the prices, rates or values of the
underlying instruments or indices do not move in the direction or to the
extent anticipated.
With respect to the writing of straddles on securities, the Fund incurs
the risk that the price of the underlying security will not remain stable,
that one of the options written will be exercised and that the resulting
loss will not be offset by the amount of the premiums received. Such
transactions, therefore, create an opportunity for increased return by
providing the Fund with two simultaneous premiums on the same security,
but involve additional risk, since the Fund may have an option exercised
against it regardless of whether the price of the security increases or
decreases.
RISK OF A POTENTIAL LACK OF A LIQUID SECONDARY MARKET: Prior to exercise
or expiration, a futures or option position can only be terminated by
entering into a closing purchase or sale transaction. This requires a
secondary market for such instruments on the exchange on which the initial
transaction was entered into. While the Fund will enter into options or
futures positions only if there appears to be a liquid secondary market
therefor, there can be no assurance that such a market will exist for any
particular contract at any specific time. In that event, it may not be
possible to close out a position held by the Fund, and the Fund could be
required to purchase or sell the instrument underlying an option, make or
receive a cash settlement or meet ongoing variation margin requirements.
Under such circumstances, if the Fund has insufficient cash available to
meet margin requirements, it will be necessary to liquidate portfolio
securities or other assets at a time when it is disadvantageous to do so.
The inability to close out options and futures positions, therefore, could
have an adverse impact on the Fund's ability effectively to hedge its
portfolio, and could result in trading losses.
The liquidity of a secondary market in a Futures Contract or option
thereon may be adversely affected by "daily price fluctuation limits,"
established by exchanges, which limit the amount of fluctuation in the
price of a contract during a single trading day. Once the daily limit has
been reached in the contract, no trades may be entered into at a price
beyond the limit, thus preventing the liquidation of open futures or
option positions and requiring traders to make additional margin deposits.
Prices have in the past moved to the daily limit on a number of
consecutive trading days.
The trading of Futures Contracts and options is also subject to the risk
of trading halts, suspensions, exchange or clearinghouse equipment
failures, government intervention, insolvency of a brokerage firm or
clearinghouse or other disruptions of normal trading activity, which could
at times make it difficult or impossible to liquidate existing positions
or to recover excess variation margin payments.
MARGIN: Because of low initial margin deposits made upon the establishment
of a futures, forward or swap position (certain of which may require no
initial margin deposits) and the writing of an option, such transactions
involve substantial leverage. As a result, relatively small movements in
the price of the contract can result in substantial unrealized gains or
losses. Where the Fund enters into such transactions for hedging purposes,
any losses incurred in connection therewith should, if the hedging
strategy is successful, be offset, in whole or in part, by increases in
the value of securities or other assets held by the Fund or decreases in
the prices of securities or other assets the Fund intends to acquire.
Where the Fund enters into such transactions for other than hedging
purposes, the margin requirements associated with such transactions could
expose the Fund to greater risk.
POTENTIAL BANKRUPTCY OF A CLEARINGHOUSE OR BROKER: When the Fund enters
into transactions in exchange-traded futures or options, it is exposed to
the risk of the potential bankruptcy of the relevant exchange
clearinghouse or the broker through which the Fund has effected the
transaction. In that event, the Fund might not be able to recover amounts
deposited as margin, or amounts owed to the Fund in connection with its
transactions, for an indefinite period of time, and could sustain losses
of a portion or all of such amounts. Moreover, the performance guarantee
of an exchange clearinghouse generally extends only to its members and the
Fund could sustain losses, notwithstanding such guarantee, in the event of
the bankruptcy of its broker.
TRADING AND POSITION LIMITS: The exchanges on which futures and options
are traded may impose limitations governing the maximum number of
positions on the same side of the market and involving the same underlying
instrument which may be held by a single investor, whether acting alone or
in concert with others (regardless of whether such contracts are held on
the same or different exchanges or held or written in one or more accounts
or through one or more brokers). Further, the CFTC and the various
contract markets have established limits referred to as "speculative
position limits" on the maximum net long or net short position which any
person may hold or control in a particular futures or option contract. An
exchange may order the liquidation of positions found to be in violation
of these limits and it may impose other sanctions or restrictions. The
Adviser does not believe that these trading and position limits will have
any adverse impact on the strategies for hedging the portfolios of the
Fund.
RISKS OF OPTIONS ON FUTURES CONTRACTS: The amount of risk the Fund assumes
when it purchases an Option on a Futures Contract is the premium paid for
the option, plus related transaction costs. In order to profit from an
option purchased, however, it may be necessary to exercise the option and
to liquidate the underlying Futures Contract, subject to the risks of the
availability of a liquid offset market described herein. The writer of an
Option on a Futures Contract is subject to the risks of commodity futures
trading, including the requirement of initial and variation margin
payments, as well as the additional risk that movements in the price of
the option may not correlate with movements in the price of the underlying
security, index, currency or Futures Contract.
RISKS OF TRANSACTIONS IN FOREIGN CURRENCIES AND OVER-THE-COUNTER
DERIVATIVES AND OTHER TRANSACTIONS NOT CONDUCTED ON U.S. EXCHANGES:
Transactions in Forward Contracts on foreign currencies, as well as
futures and options on foreign currencies and transactions executed on
foreign exchanges, are subject to all of the correlation, liquidity and
other risks outlined above. In addition, however, such transactions are
subject to the risk of governmental actions affecting trading in or the
prices of currencies underlying such contracts, which could restrict or
eliminate trading and could have a substantial adverse effect on the value
of positions held by the Fund. Further, the value of such positions could
be adversely affected by a number of other complex political and economic
factors applicable to the countries issuing the underlying currencies.
Further, unlike trading in most other types of instruments, there is no
systematic reporting of last sale information with respect to the foreign
currencies underlying contracts thereon. As a result, the available
information on which trading systems will be based may not be as complete
as the comparable data on which the Fund makes investment and trading
decisions in connection with other transactions. Moreover, because the
foreign currency market is a global, 24-hour market, events could occur in
that market which will not be reflected in the forward, futures or options
market until the following day, thereby making it more difficult for the
Fund to respond to such events in a timely manner.
Settlements of exercises of over-the-counter Forward Contracts or
foreign currency options generally must occur within the country issuing
the underlying currency, which in turn requires traders to accept or make
delivery of such currencies in conformity with any U.S. or foreign
restrictions and regulations regarding the maintenance of foreign banking
relationships, fees, taxes or other charges.
Unlike transactions entered into by the Fund in Futures Contracts and
exchange-traded options, options on foreign currencies, Forward Contracts,
over-the-counter options on securities, swaps and other over-the-counter
derivatives are not traded on contract markets regulated by the CFTC or
(with the exception of certain foreign currency options) the SEC. To the
contrary, such instruments are traded through financial institutions
acting as market-makers, although foreign currency options are also traded
on certain national securities exchanges, such as the Philadelphia Stock
Exchange and the Chicago Board Options Exchange, subject to SEC
regulation. In an over-the-counter trading environment, many of the
protections afforded to exchange participants will not be available. For
example, there are no daily price fluctuation limits, and adverse market
movements could therefore continue to an unlimited extent over a period of
time. Although the purchaser of an option cannot lose more than the amount
of the premium plus related transaction costs, this entire amount could be
lost. Moreover, the option writer and a trader of Forward Contracts could
lose amounts substantially in excess of their initial investments, due to
the margin and collateral requirements associated with such positions.
In addition, over-the-counter transactions can only be entered into with
a financial institution willing to take the opposite side, as principal,
of the Fund's position unless the institution acts as broker and is able
to find another counterparty willing to enter into the transaction with
the Fund. Where no such counterparty is available, it will not be possible
to enter into a desired transaction. There also may be no liquid secondary
market in the trading of over-the-counter contracts, and the Fund could be
required to retain options purchased or written, or Forward Contracts or
swaps entered into, until exercise, expiration or maturity. This in turn
could limit the Fund's ability to profit from open positions or to reduce
losses experienced, and could result in greater losses.
Further, over-the-counter transactions are not subject to the guarantee
of an exchange clearinghouse, and the Fund will therefore be subject to
the risk of default by, or the bankruptcy of, the financial institution
serving as its counterparty. One or more of such institutions also may
decide to discontinue their role as market-makers in a particular currency
or security, thereby restricting the Fund's ability to enter into desired
hedging transactions. The Fund will enter into an over-the-counter
transaction only with parties whose creditworthiness has been reviewed and
found satisfactory by the Adviser.
Options on securities, options on stock indices, Futures Contracts,
Options on Futures Contracts and options on foreign currencies may be
traded on exchanges located in foreign countries. Such transactions may
not be conducted in the same manner as those entered into on U.S.
exchanges, and may be subject to different margin, exercise, settlement or
expiration procedures. As a result, many of the risks of over-the-counter
trading may be present in connection with such transactions.
Options on foreign currencies traded on national securities exchanges
are within the jurisdiction of the SEC, as are other securities traded on
such exchanges. As a result, many of the protections provided to traders
on organized exchanges will be available with respect to such
transactions. In particular, all foreign currency option positions entered
into on a national securities exchange are cleared and guaranteed by the
Options Clearing Corporation (the "OCC"), thereby reducing the risk of
counterparty default. Further, a liquid secondary market in options traded
on a national securities exchange may be more readily available than in
the over-the-counter market, potentially permitting the Fund to liquidate
open positions at a profit prior to exercise or expiration, or to limit
losses in the event of adverse market movements.
The purchase and sale of exchange-traded foreign currency options,
however, is subject to the risks of the availability of a liquid secondary
market described above, as well as the risks regarding adverse market
movements, margining of options written, the nature of the foreign
currency market, possible intervention by governmental authorities and the
effects of other political and economic events. In addition, exchange-
traded options on foreign currencies involve certain risks not presented
by the over-the-counter market. For example, exercise and settlement of
such options must be made exclusively through the OCC, which has
established banking relationships in applicable foreign countries for this
purpose. As a result, the OCC may, if it determines that foreign
governmental restrictions or taxes would prevent the orderly settlement of
foreign currency option exercises, or would result in undue burdens on the
OCC or its clearing member, impose special procedures on exercise and
settlement, such as technical changes in the mechanics of delivery of
currency, the fixing of dollar settlement prices or prohibitions on
exercise.
POLICIES ON THE USE OF FUTURES AND OPTIONS ON FUTURES CONTRACTS: In order
to assure that the Fund will not be deemed to be a "commodity pool" for
purposes of the Commodity Exchange Act, regulations of the CFTC require
that the Fund enter into transactions in Futures Contracts, Options on
Futures Contracts and Options on Foreign Currencies traded on a CFTC-
regulated exchange only (i) for bona fide hedging purposes (as defined in
CFTC regulations), or (ii) for non-bona fide hedging purposes, provided
that the aggregate initial margin and premiums required to establish such
non-bona fide hedging positions does not exceed 5% of the liquidation
value of the Fund's assets, after taking into account unrealized profits
and unrealized losses on any such contracts the Fund has entered into, and
excluding, in computing such 5%, the in-the-money amount with respect to
an option that is in-the-money at the time of purchase.
<PAGE>
PART II - APPENDIX D
DESCRIPTION OF BOND RATINGS
The ratings of Moody's, S&P and Fitch represent their opinions as to the
quality of various debt instruments. It should be emphasized, however,
that ratings are not absolute standards of quality. Consequently, debt
instruments with the same maturity, coupon and rating may have different
yields while debt instruments of the same maturity and coupon with
different ratings may have the same yield.
MOODY'S INVESTORS SERVICE, INC.
Aaa: Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to
as "gilt edged." Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be
visualized are most unlikely to impair the fundamentally strong position
of such issues.
Aa: Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally
known as high grade bonds. They are rated lower than the best bonds
because margins of protection may not be as large as in Aaa securities or
fluctuation of protective elements may be of greater amplitude or there
may be other elements present which make the long-term risk appear
somewhat larger than the Aaa securities.
A: Bonds which are rated A possess many favorable investment attributes
and are to be considered as upper-medium-grade obligations. Factors giving
security to principal and interest are considered adequate, but elements
may be present which suggest a susceptibility to impairment some time in
the future.
Baa: Bonds which are rated Baa are considered as medium-grade obligations,
(i.e., they are neither highly protected nor poorly secured). Interest
payments and principal security appear adequate for the present but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding
investment characteristics and in fact have speculative characteristics as
well.
Ba: Bonds which are rated Ba are judged to have speculative elements;
their future cannot be considered as well-assured. Often the protection of
interest and principal payments may be very moderate, and thereby not well
safeguarded during both good and bad times over the future. Uncertainty of
position characterizes bonds in this class.
B: Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance
of other terms of the contract over any long period of time may be small.
Caa: Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to
principal or interest.
Ca: Bonds which are rated Ca represent obligations which are speculative
in a high degree. Such issues are often in default or have other marked
shortcomings.
C: Bonds which are rated C are the lowest rated class of bonds, and issues
so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.
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.
STANDARD & POOR'S RATINGS SERVICES
AAA: An obligation rated AAA has the highest rating assigned by S&P. The
obligor's capacity to meet its financial commitment on the obligation is
EXTREMELY STRONG.
AA: An obligation rated AA differs from the highest rated obligations only
in small degree. The obligor's capacity to meet its financial commitment
on the obligation is VERY STRONG.
A: An obligation rated A is somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than
obligations in higher rated categories. However, the obligor's capacity to
meet its financial commitment on the obligation is still STRONG.
BBB: An obligation rated BBB exhibits ADEQUATE protection parameters.
However, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity of the obligor to meet its financial
commitment on the obligation.
Obligations rated BB, B, CCC, CC, and C are regarded as having significant
speculative characteristics. BB indicates the least degree of speculation
and C the highest. While such obligations will likely have some quality
and protective characteristics, these may be outweighed by large
uncertainties or major exposures to adverse conditions.
BB: An obligation rated BB is LESS VULNERABLE to nonpayment than other
speculative issues. However, it faces major ongoing uncertainties or
exposure to adverse business, financial, or economic conditions which
could lead to the obligor's inadequate capacity to meet its financial
commitment on the obligation.
B: An obligation rated B is MORE VULNERABLE to nonpayment than obligations
rated BB, but the obligor currently has the capacity to meet its financial
commitment on the obligation. Adverse business, financial, or economic
conditions will likely impair the obligor's capacity or willingness to
meet its financial commitment on the obligation.
CCC: An obligation rated CCC is CURRENTLY VULNERABLE to nonpayment, and is
dependent upon favorable business, financial, and economic conditions for
the obligor to meet its financial commitment on the obligation. In the
event of adverse business, financial, or economic conditions the obligor
is not likely to have the capacity to meet its financial commitment on the
obligation.
CC: An obligation rated CC is CURRENTLY HIGHLY VULNERABLE to nonpayment.
C: The C rating may be used to cover a situation where a bankruptcy
petition has been filed or similar action has been taken, but payments on
this obligation are being continued.
D: An obligation rated D is in payment default. The D rating category is
used when payments on an obligation are not made on the date due even if
the applicable grace period has not expired, unless Standard & Poor's
believes that such payments will be made during such grace period. The D
rating also will be used upon the filing of a bankruptcy petition or the
taking of a similar action if payments on an obligation are jeopardized.
PLUS (+) OR MINUS (-) The ratings from AA to CCC may be modified by the
addition of a plus or minus sign to show relative standing within the
major rating categories.
R: This symbol is attached to the ratings of instruments with significant
noncredit risks. It highlights risks to principal or volatility of
expected returns which are not addressed in the credit rating. Examples
include: obligations linked or indexed to equities, currencies, or
commodities; obligations exposed to severe prepayment risk -- such as
interest-only or principal-only mortgage securities; and obligations with
unusually risky interest terms, such as inverse floaters.
FITCH IBCA
AAA: Highest credit quality. AAA ratings denote the lowest expectation of
credit risk. They are assigned only in case of exceptionally strong
capacity for timely payment of financial commitments. This capacity is
highly unlikely to be adversely affected by foreseeable events.
AA: Very high credit quality. AA ratings denote a very low expectation of
credit risk. They indicate very strong capacity for timely payment of
financial commitments. This capacity is not significantly vulnerable to
foreseeable events.
A: High credit quality. A ratings denote a low expectation of credit risk.
The capacity for timely payment of financial commitments is considered
strong. This capacity may, nevertheless, be more vulnerable to changes in
circumstances or in economic conditions than is the case for higher
ratings.
BBB: Good credit quality. BBB ratings indicate that there is currently a
low expectation of credit risk. The capacity for timely payment of
financial commitments is considered adequate, but adverse changes in
circumstances and in economic conditions are more likely to impair this
capacity. This is the lowest investment-grade category.
Speculative Grade
BB: Speculative. BB ratings indicate that there is a possibility of credit
risk developing, particularly as the result of adverse economic change
over time; however, business or financial alternatives may be available to
allow financial commitments to be met. Securities rated in this category
are not investment grade.
B: Highly speculative. B ratings indicate that significant credit risk is
present, but a limited margin of safety remains. Financial commitments are
currently being met; however, capacity for continued payment is contingent
upon a sustained, favorable business and economic environment.
CCC, CC, C: High default risk. Default is a real possibility. Capacity for
meeting financial commitments is solely reliant upon sustained, favorable
business or economic developments. A CC rating indicates that default of
some kind appears probable. C ratings signal imminent default.
DDD, DD, D: Default. Securities are not meeting current obligations and
are extremely speculative. DDD designates the highest potential for
recovery of amounts outstanding on any securities involved. For U.S.
corporates, for example, DD indicates expected recovery of 50% -- 90% of
such outstandings, and D the lowest recovery potential, i.e. below 50%.
DUFF & PHELPS CREDIT RATING CO.
AAA: Highest credit quality. The risk factors are negligible, being only
slightly more than for risk-free U.S. Treasury debt.
AA+, AA, AA-: High credit quality. Protection factors are strong. Risk is
modest but may vary slightly from time to time because of economic
conditions.
A+, A, A-: Protection factors are average but adequate. However, risk
factors are more variable and greater in periods of economic stress.
BBB+, BBB, BBB-: Below-average protection factors but still considered
sufficient for prudent investment. Considerable variability in risk during
economic cycles.
BB+, BB, BB-: Below investment grade but deemed likely to meet obligations
when due. Present or prospective financial protection factors fluctuate
according to industry conditions or company fortunes. Overall quality may
move up or down frequently within this category.
B+, B, B-: Below investment grade and possessing risk that obligations
will not be met when due. Financial protection factors will fluctuate
widely according to economic cycles, industry conditions and/or company
fortunes. Potential exists for frequent changes in the rating within this
category or into a higher or lower rating grade.
CCC: Well below investment-grade securities. Considerable uncertainty
exists as to timely payment of principal, interest or preferred dividends.
Protection factors are narrow and risk can be substantial with unfavorable
economic/industry conditions, and/or with unfavorable company
developments.
DD: Defaulted debt-obligations. Issuer failed to meet scheduled principal
and/or interest payments.
DP: Preferred stock with dividend arrearages.
<PAGE>
INVESTMENT ADVISER
MFS Investment Management(R)
500 Boylston Street, Boston, MA 02116
(617) 954-5000
DISTRIBUTOR
MFS Fund Distributors, Inc.
500 Boylston Street, Boston, MA 02116
(617) 954-5000
CUSTODIAN AND DIVIDEND DISBURSING AGENT
State Street Bank and Trust Company
225 Franklin Street, Boston, MA 02110
SHAREHOLDER SERVICING AGENT
MFS Service Center, Inc.
500 Boylston Street, Boston, MA 02116
Toll free: (800) 225-2606
MAILING ADDRESS:
P.O. Box 2281, Boston, MA 02107-9906
[Logo](R)
INVESTMENT MANAGEMENT
We invented the mutual fund(R)
500 Boylston Street, Boston, MA 02116
GENERIC 1/22/99
<PAGE>
EXHIBIT NO. 99.17(g)
[Logo] M F S (R)
INVESTMENT MANAGEMENT
We invented the mutual fund(R)
[graphic omitted]
MFS(R) INTERMEDIATE
INCOME FUND
ANNUAL REPORT o NOVEMBER 30, 1999
<PAGE>
TABLE OF CONTENTS
Letter from the Chairman .................................................. 1
Management Review and Outlook ............................................. 4
Performance Summary ....................................................... 9
Portfolio of Investments .................................................. 13
Financial Statements ...................................................... 18
Notes to Financial Statements ............................................. 24
Independent Auditors' Report .............................................. 33
MFS' Year 2000 Readiness Disclosure ....................................... 35
Trustees and Officers ..................................................... 37
MFS ORIGINAL RESEARCH(R)
RESEARCH HAS BEEN CENTRAL TO INVESTMENT MANAGEMENT AT MFS
SINCE 1932, WHEN WE CREATED ONE OF THE FIRST IN-HOUSE
RESEARCH DEPARTMENTS IN THE MUTUAL FUND (SM)
INDUSTRY. ORIGINAL RESEARCH(SM) AT MFS IS MORE ORIGINAL RESEARCH
THAN JUST CRUNCHING NUMBERS AND CREATING
ECONOMIC MODELS: IT'S GETTING TO KNOW MFS
EACH SECURITY AND EACH COMPANY PERSONALLY.
MAKES A DIFFERENCE
- - --------------------------------------------------------------------------------
NOT FDIC INSURED MAY LOSE VALUE NO BANK GUARANTEE
- - --------------------------------------------------------------------------------
<PAGE>
LETTER FROM THE CHAIRMAN
[Photo of Jeffrey L. Shames]
Jeffrey L. Shames
Dear Shareholders,
One could easily argue that the Internet represents the greatest technological
development most of us may see in our lifetimes. There is no disputing that
this new communication medium is changing forever the way we work, play, and
shop. One might also argue that investing in this new technology represents
the investment opportunity of a lifetime. The question for any investor is
whether and how to take advantage of it.
The popular press, it seems, would have us believe that by surfing the Web, we
can learn everything we need to know about investing. Indeed, there is no
doubt that Internet-delivered information and brokerage services enable
individual investors to be well-informed and to trade at bargain prices. But
we believe the numbers and facts argue that, for most of us, mutual funds
purchased through a financial professional will continue to be one of the best
products for long-term investing in this new millennium.
According to a survey by the Investment Company Institute, a national
association of American investment companies, 44% of American households own
stock or bond mutual funds, while only 25.5% own individual stocks.(1) Of course
that doesn't tell us how well they did owning those funds or stocks, but another
statistic gives us a clue. In the third quarter of 1999, during a period of
volatility in the greatest bull market in history, a quarter of the 7,500 stocks
tracked by Morningstar, a popular rating service, lost more than 20% of their
value. But during the same period, less than 1% of the mutual funds tracked by
Morningstar -- 6 out of 10,000 funds -- were down by a similar amount.(2) So,
with all things being equal, an investor's chance of picking one of those losing
stocks was about 25 times greater than his or her chance of picking an equally
losing fund.
The numbers also show that a majority of Americans seek professional advice
when buying mutual funds. Outside of employer-sponsored retirement plans,
approximately 68% of fund shareholders state that their primary method of
purchasing shares is through a financial professional.(1)
Why do we at MFS(R) believe that mutual funds plus professional advice will
continue to define the best course of action for many investors? Let's look at
some of the characteristics of a successful long-term investment approach:
o HAVING A PLAN AND STICKING TO IT: Our experience is that successful investors
-- those whose lives are enriched by the fruits of their investing -- share
two characteristics. They have a plan for reaching their monetary goals, and
they stick with that plan through up markets and down ones. And for many
investors, working with a financial professional may be the best way to
develop a plan. Although the Internet abounds with calculators for developing
all sorts of investment plans, none has your broker or consultant's high
level of experience and an understanding of your unique situation. And no
calculator can counsel you during a down market, when you may be tempted to
abandon your goals and your plan.
o DIVERSIFICATION: Few investors can afford to own a large number of holdings,
so poor performance of one company can potentially drag down their entire
portfolio. This is especially true when investing in volatile new areas such
as the Internet. On the other hand, a diversified mutual fund that owns
dozens or even hundreds of holdings is better positioned to survive a
disappointment in one or several investments.
o GOOD IN A DOWN MARKET: As we enter the tenth year of the greatest bull market
in history, it's easy to forget that market downturns are an almost
inevitable part of investing. Few mutual funds, of course, are going to be up
when the overall market is down. But as the numbers above from the third
quarter of 1999 demonstrate, mutual funds may be less likely to suffer the
extreme downturns experienced by a large number of individual holdings when
the market heads south.
o MFS ORIGINAL RESEARCH(R): The Internet is one of the greatest research tools
ever invented, but it's still not the same as being eyeball to eyeball with
the management of a company and discussing their plans for their firm's
future.
o GOOD PERFORMANCE AT AN ACCEPTABLE LEVEL OF RISK: Investing in individual
stocks or bonds does indeed offer the potential of exhilarating performance
that few mutual funds even attempt. The downside is that the most exciting
investments are also likely to be the ones that give you sleepless nights.
The diversification and professional management of mutual funds help make
them inherently less risky than individual stock picking, and funds are
available in a wide range of risk profiles.
We believe that now, more than ever, mutual funds sold by an investment
professional may offer many investors the best way to participate in whatever
investment opportunities the new millennium may bring. The combination of
professional portfolio management and professional advice recognizes the key
reason that investors give us their money: because they don't want to make a
hobby or a second profession out of investing; they simply want their money to
work for them so they have a better likelihood of realizing their dreams.
As always, we appreciate your confidence in MFS and welcome any questions or
comments you may have.
Respectfully,
/s/ Jeffrey L. Shames
Jeffrey L. Shames
Chairman and Chief Executive Officer
MFS Investment Management(R)
December 15, 1999
(1) Source: Investment Company Institute.
(2) Source: Morningstar CEO Don Phillips' keynote address at The Baltimore Sun's
Dollars and Sense Conference, 10/99. In the period 7/1/99 through 9/30/99,
of the 7,500 stocks tracked by Morningstar, 1,865 lost 20% or more; of the
10,000 mutual funds tracked by Morningstar, six lost 20% or more. Mutual
fund results are at net asset value; if sales charges had been reflected,
results would have been lower.
Investments in mutual funds will fluctuate and may be worth more or less upon
redemption.
The opinions expressed in this letter are those of Jeffrey L. Shames, and no
forecasts can be guaranteed.
<PAGE>
MANAGEMENT REVIEW AND OUTLOOK
For the 12 months ended November 30, 1999, Class A shares of the Fund provided
a total return of -0.21%, Class B shares -1.24%, and Class I shares -0.20%.
These returns assume the reinvestment of any distributions but exclude the
effects of any sales charges.
During the same period, the average short-term world multimarket income fund
tracked by Lipper Analytical Services, Inc., an independent firm that reports
mutual fund performance, returned 1.89%. The Fund's returns also compare to a
1.20% return for the Lehman Brothers Intermediate Government Bond Index (an
unmanaged index comprised of issues of the U.S. government and its agencies
with remaining maturities of less than 10 years), a 2.54% return for the
Lehman Brothers Mortgage Index (which includes maturities of both 15 and 30
years), and a -3.44% return for the J.P. Morgan Non-Dollar Government Bond
Index (an aggregate of actively traded government bonds issued by 12
countries, excluding the United States, with remaining maturities of at least
one year).
Q. THE BOND MARKETS ACROSS THE WORLD EXPERIENCED SHARP REVERSALS IN
FORTUNE DURING THE PAST YEAR. WHAT INFLUENCED THE PERFORMANCE OF VARIOUS
TYPES OF BONDS?
A. Let's begin with the U.S. Treasury market, which began to lose some of its
allure at the start of the period in response to news that the U.S. economy
was growing at a faster-than-expected rate. From December 1998 through
February 1999, Treasury securities languished as investors impatiently
waited for clues about the economy's health and the Federal Reserve Board's
(the Fed's) stance on interest rates. In February, Fed Chairman Alan
Greenspan jolted the fixed-income markets by hinting that the Fed was
unlikely to cut interest rates further, as it had done throughout the second
half of 1998. Bond prices slipped as their yields rose. In April, investors'
moods worsened when the Fed hinted that its next move was more likely to be
an interest-rate hike, rather than a rate cut. By the end of June,
investors' fears became reality. The Fed raised short-term interest rates
one-quarter of a percentage point at month's end, a move it would repeat in
August and again in November.
Q. WHAT WAS THE ENVIRONMENT FOR FOREIGN GOVERNMENT BONDS?
A. Rising U.S. interest rates, coupled with improving economies in Europe,
Asia, and emerging markets, fanned inflationary fears abroad and pressured
many high-quality foreign government bonds as well. Emerging market bonds,
on the other hand, surprised many observers by turning in very strong gains
for the year. We feel that most of the fears that had plagued emerging
market bonds in 1998 dissipated in 1999. Renewed optimism about the world's
economy, coupled with rising commodity prices, helped many emerging markets
post double-digit returns for the year.
Q. HOW DID THE NONGOVERNMENT SECTORS OF THE MARKET FARE?
A. Mortgage securities performed reasonably well. As interest rates rose, the
rate of mortgage prepayment activity slowed dramatically, which we viewed as
a positive. In addition, the fact that mortgage securities paid higher
levels of income and were generally less sensitive to interest rates than
Treasury bonds with comparable maturities also was a plus. (Principal value
and interest on Treasury securities are guaranteed by the U.S. government if
held to maturity.) Corporate bonds, on the other hand, were weak throughout
much of the period, but came on strong at the end. The corporate market
struggled with too much supply. Many corporations rushed to issue debt in
the summer and fall of 1999 in order to lock in interest rates in case they
moved higher, while others hastened issuance in order to sidestep a
potential market freeze due to year 2000 (Y2K) concerns. However, when
issuance subsided in November, corporate bonds began to perform better.
Q. THE FUND HAD A MUCH LARGER STAKE IN CORPORATE BONDS AT THE END OF THE
PERIOD THAN IT DID AT THE BEGINNING. WHAT EXPLAINS THAT SHIFT?
A. Our decision to increase our corporate bond holdings stemmed from our desire
to lock in what we felt were cheap prices and attractive yields that
resulted from oversupply. So, we all but eliminated our Treasury holdings
and added bonds issued by telecommunications and cable companies such as
Sprint, Comcast, and Cox Communications. We think these companies could
benefit from the advent of new technologies, the explosion of the Internet,
and the convergence of media and telecommunications companies. We also
initiated or added to existing positions in high-quality utility companies
such as Entergy, CMS, and Midamerican Funding, all of which offered
attractive yields.
Q. WHAT OPPORTUNITIES DID ASSET-BACKED SECURITIES PRESENT?
A. Like corporate bonds, asset-backed securities fared poorly due to a Y2K-
related supply glut. As supply increased, the prices of asset-backed
securities moved lower as their yields rose. In fact, the difference in
yield between a five-year "AAA"-rated security backed by a credit card and a
five-year Treasury note was as much as 80 basis points (0.80%). In our view,
the excess yield we could capture with "AAA"-rated asset-backed securities
more than compensated for the slight difference in credit quality between
them and comparable-maturity Treasury securities. Furthermore, we feel their
higher yields should provide somewhat of a cushion should rates move higher.
Q. HAVE YOU CHANGED THE FUND'S DURATION, WHICH INDICATES SENSITIVITY TO
INTEREST-RATE CHANGES?
A. For most of the period, we kept the Fund's duration neutral, a position we
take when we don't have a strong conviction about the direction of interest
rates. While we believe it's true that the economic growth rate in 1999
exceeded most observers' expectations, inflation remained in check. Because
of those contrary indicators, we maintained a neutral stance.
Q. WHAT CHANGES DID YOU MAKE TO THE FUND'S FOREIGN HOLDINGS DURING
THE PERIOD?
A. We reduced our overall stake in high-quality foreign bonds but maintained
our holdings in Germany, Australia, and Greece. We hedged the bulk of our
European holdings into U.S. dollars, which helped the Fund's performance
when the euro weakened. Beyond that, we felt that high-quality government
bonds offered little value, in large measure because they offered yields
well below U.S. Treasury yields. Among emerging markets, we concentrated our
holdings in the higher-quality tiers, with holdings in Argentinian
investment-grade government securities, among others.
Q. WHAT'S YOUR OUTLOOK FOR THE GLOBAL MARKETS?
A. We think the world is headed for a more stable interest-rate environment.
While economic growth across the globe may continue to be healthy, we don't
believe that inflation will rise. We do believe that interest rates will
remain relatively stable in the near term. Given attractive yield levels,
corporate and asset-backed securities remain among our favorite investments.
In a more stable interest-rate environment, income -- rather than price
appreciation or depreciation -- should make up a larger part of a bond's
total return than it has over the past year.
/s/ Stephen C. Bryant /s/ James J. Calmas
Stephen C. Bryant James J. Calmas
Portfolio Manager Portfolio Manager
The opinions expressed in this report are those of the portfolio managers and
are current only through the end of the period of the report as stated on the
cover. The managers' views are subject to change at any time based on market
and other conditions, and no forecasts can be guaranteed.
<PAGE>
- - --------------------------------------------------------------------------------
PORTFOLIO MANAGERS' PROFILES
- - --------------------------------------------------------------------------------
STEPHEN C. BRYANT IS SENIOR VICE PRESIDENT OF MFS INVESTMENT MANAGEMENT(R)
AND PORTFOLIO MANAGER OF MFS(R) INSTITUTIONAL GLOBAL FIXED INCOME FUND,
MFS(R) INTERMEDIATE INCOME FUND, AND THE GLOBAL GOVERNMENTS SERIES
OFFERED THROUGH MFS(R)/SUN LIFE ANNUITY PRODUCTS. HE ALSO MANAGES MFS(R)
GOVERNMENT MARKETS INCOME TRUST AND MFS(R) INTERMEDIATE INCOME TRUST,
TWO CLOSED-END FUNDS. HE JOINED MFS IN 1987 AS ASSISTANT VICE PRESIDENT.
HE WAS NAMED VICE PRESIDENT IN 1989, PORTFOLIO MANAGER IN 1992, AND
SENIOR VICE PRESIDENT IN 1993. MR. BRYANT IS A GRADUATE OF WESLEYAN
UNIVERSITY.
JAMES J. CALMAS IS VICE PRESIDENT OF MFS INVESTMENT MANAGEMENT(R) AND
PORTFOLIO MANAGER OF MFS(R) INTERMEDIATE INCOME FUND, MFS(R) LIMITED
MATURITY FUND, MERIDIAN LIMITED MATURITY FUND, AND MFS(R) LIMITED
MATURITY SERIES (PART OF MFS(R) VARIABLE INSURANCE TRUST(SM)). MR.
CALMAS JOINED MFS IN 1988 AND WAS NAMED ASSISTANT VICE PRESIDENT IN
1991, VICE PRESIDENT IN 1993, AND PORTFOLIO MANAGER IN 1998. HE IS A
GRADUATE OF DARTMOUTH COLLEGE AND HOLDS AN M.B.A. DEGREE FROM THE AMOS
TUCK SCHOOL OF BUSINESS ADMINISTRATION OF DARTMOUTH COLLEGE.
ALL PORTFOLIO MANAGERS AT MFS INVESTMENT MANAGEMENT(R) ARE SUPPORTED BY
AN INVESTMENT STAFF OF OVER 100 PROFESSIONALS UTILIZING MFS ORIGINAL
RESEARCH(R), A GLOBAL, ISSUER-ORIENTED, BOTTOM-UP PROCESS OF SELECTING
SECURITIES.
- - --------------------------------------------------------------------------------
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. A prospectus containing more information,
including the exchange privilege and all charges and expenses, for any other
MFS product is available from your financial consultant, or by calling MFS at
1-800-225-2606. Please read it carefully before investing or sending money.
<PAGE>
- - --------------------------------------------------------------------------------
FUND FACTS
- - --------------------------------------------------------------------------------
OBJECTIVE: SEEKS PRESERVATION OF CAPITAL AND HIGH CURRENT INCOME.
COMMENCEMENT OF
INVESTMENT OPERATIONS: AUGUST 1, 1988
CLASS INCEPTION: CLASS A SEPTEMBER 7, 1993
CLASS B AUGUST 1, 1988
CLASS I JANUARY 2, 1997
SIZE: $107.5 MILLION NET ASSETS AS OF NOVEMBER 30, 1999
- - --------------------------------------------------------------------------------
PERFORMANCE SUMMARY
The following information illustrates the historical performance of the Fund's
original share class in comparison to various market indicators. Performance
results include any applicable contingent deferred sales charges and reflect
the percentage change in net asset value, including reinvestment of dividends.
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. (See Notes to Performance Summary.) It is not possible to invest
directly in an index.
GROWTH OF A HYPOTHETICAL $10,000 INVESTMENT
(For the 10-year period ended November 30, 1999)
J.P. Morgan Lehman Brothers
MFS Intermediate Non-Dollar Intermediate
Income Fund Government Government Lehman Brothers
- Class B Bond Index Bond Index Mortgage Index
- - --------------------------------------------------------------------------------
11/89 $10,000 $10,000 $10,000 $10,000
11/91 11,752 12,804 12,241 12,635
11/93 13,242 15,747 14,443 14,611
11/95 14,320 20,088 16,143 16,719
11/97 15,649 20,779 18,127 19,350
11/99 16,207 22,880 19,985 21,324
<PAGE>
PERFORMANCE SUMMARY -- continued
AVERAGE ANNUAL AND CUMULATIVE TOTAL RATES OF RETURN
THROUGH NOVEMBER 30, 1999
CLASS A
1 Year 3 Years 5 Years 10 Years
- - --------------------------------------------------------------------------------
Cumulative Total Return Excluding Sales
Charge - 0.21% +10.49% +35.94% +72.83%
- - --------------------------------------------------------------------------------
Average Annual Total Return Excluding
Sales Charge - 0.21% + 3.38% + 6.33% + 5.62%
- - --------------------------------------------------------------------------------
Average Annual Total Return Including
Sales Charge - 4.95% + 1.72% + 5.30% + 5.11%
- - --------------------------------------------------------------------------------
CLASS B
1 Year 3 Years 5 Years 10 Years
- - --------------------------------------------------------------------------------
Cumulative Total Return Excluding Sales
Charge - 1.24% + 7.26% +29.16% +62.07%
- - --------------------------------------------------------------------------------
Average Annual Total Return Excluding
Sales Charge - 1.24% + 2.36% + 5.25% + 4.95%
- - --------------------------------------------------------------------------------
Average Annual Total Return Including
Sales Charge - 5.00% + 1.48% + 4.93% + 4.95%
- - --------------------------------------------------------------------------------
CLASS I
1 Year 3 Years 5 Years 10 Years
- - --------------------------------------------------------------------------------
Cumulative Total Return Excluding Sales
Charge - 0.20% +10.05% +32.52% +66.29%
- - --------------------------------------------------------------------------------
Average Annual Total Return Excluding
Sales Charge - 0.20% + 3.24% + 5.79% + 5.22%
- - --------------------------------------------------------------------------------
COMPARATIVE INDICES
1 Year 3 Years 5 Years 10 Years
- - --------------------------------------------------------------------------------
Average short-term world multimarket
income fund+(+) + 1.89% + 3.55% + 4.15% + 4.73%
- - --------------------------------------------------------------------------------
J.P. Morgan Non-Dollar Government Bond
Index#(+) - 3.44% + 0.34% + 6.39% + 8.63%
- - --------------------------------------------------------------------------------
Lehman Brothers Intermediate Government
Bond Index#(+) + 1.20% + 5.42% + 7.07% + 7.17%
- - --------------------------------------------------------------------------------
Lehman Brothers Mortgage Index#(+) + 2.54% + 5.96% + 8.20% + 7.87%
- - --------------------------------------------------------------------------------
+ Source: Lipper Analytical Services, Inc.
(+) Average annual rates of return.
# Source: Standard & Poor's Micropal, Inc.
NOTES TO PERFORMANCE SUMMARY
Class A Share Performance Including Sales Charge takes into account the
deduction of the maximum 4.75% sales charge. Class B Share Performance
Including Sales Charge takes into account the deduction of the applicable
contingent deferred sales charge (CDSC), which declines over six years from 4%
to 0%. Class I shares have no sales charge and are only available to certain
institutional investors.
Class A and I share performance include the performance of the Fund's Class B
shares for periods prior to their inception (blended performance). Class A
blended performance has been adjusted to take into account the initial sales
charge applicable to Class A shares rather than the CDSC applicable to Class B
shares. Class I blended performance has been adjusted to account for the fact
that Class I shares have no sales charge. These blended performance figures
have not been adjusted to take into account differences in class-specific
operating expenses. Because operating expenses for Class A and I shares are
lower than those of Class B shares, the blended Class A and I share
performance is lower than it would have been had Class A and I shares been
offered for the entire period.
All performance results reflect any applicable expense subsidies and waivers,
without which the results would have been less favorable. Subsidies and
waivers may be rescinded at any time. See the prospectus for details. All
results are historical and assume the reinvestment of 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.
Investments in foreign and emerging market securities may provide superior
returns but also involve greater risk than U.S. investments. Investments in
foreign and emerging market securities may be favorably or unfavorably
affected by changes in interest rates and currency exchange rates, market
conditions, and the economic and political conditions of the countries where
investments are made. These risks may increase share price volatility. See the
prospectus for details.
This Fund is a nondiversified fund and has more risk than a diversified fund.
An investment in shares of the Fund should not be considered to constitute a
complete investment program.
<PAGE>
PORTFOLIO CONCENTRATION AS OF NOVEMBER 30, 1999
QUALITY (U.S. PORTION ONLY)
Source: Standard & Poor's and Moody's
"AAA" 34.8%
"AA" 5.3%
"A" 19.1%
"BBB" 23.9%
"BB" 1.3%
Governments 15.6%
The portfolio is actively managed, and current holdings may be different.
<PAGE>
<TABLE>
PORTFOLIO OF INVESTMENTS -- November 30, 1999
Bonds - 96.1%
<CAPTION>
- - ------------------------------------------------------------------------------------------------------
PRINCIPAL AMOUNT
ISSUER (000 OMITTED) VALUE
- - ------------------------------------------------------------------------------------------------------
<S> <C> <C>
U.S. Bonds - 76.8%
Airlines - 0.6%
Delta Airlines, Inc., 6.65s, 2004 $ 661 $ 634,401
- - ------------------------------------------------------------------------------------------------------
Automotive - 2.9%
Daimlerchrysler N A Holding Corp., 6.63s, 2001 $ 1,447 $ 1,449,605
Ford Motor Credit Co., 5.75s, 2004 1,750 1,671,722
------------
$ 3,121,327
- - ------------------------------------------------------------------------------------------------------
Banks and Credit Companies - 2.6%
Fleet Boston Corp., 9.9s, 2001 $ 1,127 $ 1,177,625
Great Western Financial Corp., 6.375s, 2000 1,664 1,661,404
------------
$ 2,839,029
- - ------------------------------------------------------------------------------------------------------
Conglomerates - 1.1%
General Electric Capital Corp., 6.52s, 2002 $ 1,167 $ 1,158,131
- - ------------------------------------------------------------------------------------------------------
Corporate Asset Backed - 25.9%
Amresco Residential Securities Mortgage Loan, 5.94s, 2015 $ 2,750 $ 2,722,500
BankBoston Home Equity Loan Trust, 5.89s, 2013 1,331 1,305,472
Carco Auto Loan Master Trust, 5.65s, 2003 2,000 1,984,062
Case Equipment Receivables Trust, 5.285s, 2002 1,232 1,225,223
Commonwealth Edison Transition Funding Trust, 5.29s, 2003 1,331 1,312,140
Discover Card Master Trust I, 5.85s, 2006 2,100 2,028,453
Fleet Credit Card Master Trust, 5.977s, 2007 1,375 1,375,853
Ford Credit Auto Owner Trust, 5.31s, 2001 473 472,218
Ford Credit Auto Owner Trust, 6.2s, 2002 600 599,058
GE Capital Mortgage Services, Inc., 6.035s, 2020 2,400 2,337,750
Green Tree Financial Corp., 6.91s, 2028 2,305 2,304,262
Green Tree Financial Corp., 6.39s, 2029 817 816,390
Merrill Lynch Mortgage Investors, Inc., 5.65s, 2030 1,242 1,176,371
Partners First Credit Card Master Trust, 5.528s, 2027 1,650 1,647,937
Peco Energy Transition Trust, 5.48s, 2003 1,067 1,059,717
Pemex Finance Limited, 5.72s, 2003 2,700 2,575,179
Premier Auto Trust, 5.88s, 2001 1,470 1,464,943
Providian Home Equity Loan Trust, 5.699s, 2025 511 509,942
Student Loan Trust, 5.389s, 2004 930 926,263
------------
$ 27,843,733
- - ------------------------------------------------------------------------------------------------------
Financial Institutions - 7.1%
Aristar, Inc., 7.375s, 2004*** $ 1,264 $ 1,261,725
Countrywide Home Loan, Inc., 6.85s, 2004 1,457 1,434,227
General Motors Acceptance Corp., 7s, 2002 1,898 1,905,174
Lehman Brothers Holdings, Inc., 6.375s, 2001 1,373 1,361,618
Merrill Lynch & Co., 6.06s, 2001 1,665 1,645,303
------------
$ 7,608,047
- - ------------------------------------------------------------------------------------------------------
Food and Beverage Products - 2.7%
J Seagram & Sons, Inc., 5.79s, 2001 $ 1,513 $ 1,487,869
Whitman Corp., 6s, 2004 1,477 1,397,094
------------
$ 2,884,963
- - ------------------------------------------------------------------------------------------------------
Forest and Paper Products - 1.0%
Georgia-Pacific Corp., 9.95s, 2002 $ 1,000 $ 1,061,630
- - ------------------------------------------------------------------------------------------------------
Government National Mortgage Association - 8.0%
GNMA, 7s, 2008 - 2012 $ 4,670 $ 4,665,547
GNMA, 8.5s, 2001 - 2009 3,061 3,163,787
GNMA, 9.25s, 2001 451 466,675
GNMA TBA, 7s, 2012 275 274,318
------------
$ 8,570,327
- - ------------------------------------------------------------------------------------------------------
Insurance - 1.1%
Conseco, Inc., 6.4s, 2001 $ 1,253 $ 1,210,467
- - ------------------------------------------------------------------------------------------------------
Media - 0.9%
Time Warner Pass-Through Asset Trust, 6.1s, 2001## $ 1,000 $ 982,650
- - ------------------------------------------------------------------------------------------------------
Oils - 1.3%
Occidental Petroleum Corp., 10.125s, 2001 $ 1,360 $ 1,429,754
- - ------------------------------------------------------------------------------------------------------
Railroads - 1.1%
Union Pacific Corp., 6.34s, 2003 $ 1,250 $ 1,210,963
- - ------------------------------------------------------------------------------------------------------
Telecommunications and Cable - 6.1%
Comcast Corp., 9.125s, 2006 $ 1,591 $ 1,642,596
Cox Communications, Inc., 7s, 2001 1,107 1,106,270
Sprint Spectrum LP, 11s, 2006 2,000 2,231,160
Telecomunicaiones De Puerto Rico, 6.15s, 2002## 1,596 1,564,399
------------
$ 6,544,425
- - ------------------------------------------------------------------------------------------------------
U.S. Federal Agencies - 6.9%
Agency for Intl Development (Israel), 6.625s, 2003 $ 3,000 $ 2,990,310
Federal Home Loan Mortgage Corp., 5.83s, 2013 1,313 1,299,221
Federal National Mortgage Assn., 6.75s, 2003 1,426 1,410,458
Federal National Mortgage Assn., 6.13s, 2011 976 944,261
Federal National Mortgage Assn., 6s, 2013 804 769,350
------------
$ 7,413,600
- - ------------------------------------------------------------------------------------------------------
Utilities - Electric - 4.7%
California Infrastructure, 6.17s, 2003*** $ 1,000 $ 997,180
Connecticut Light & Power Co., 7.875s, 2001 414 418,691
Entergy Mississippi, Inc., 6.2s, 2004 1,500 1,427,385
Midamerican Funding LLC, 5.85s, 2001## 1,964 1,940,646
Narragansett Electric Co., 7.83s, 2002 279 285,453
------------
$ 5,069,355
- - ------------------------------------------------------------------------------------------------------
Utilities - Gas - 2.8%
CMS Panhandle Holding Co., 6.125s, 2004 $ 1,161 $ 1,101,766
Columbia Gas Systems, Inc., 6.39s, 2000 1,417 1,407,761
Duke Capital Corp., 7.25s, 2004 501 500,780
------------
$ 3,010,307
- - ------------------------------------------------------------------------------------------------------
Total U.S. Bonds $ 82,593,109
- - ------------------------------------------------------------------------------------------------------
Foreign Bonds - 19.3%
Argentina - 0.8%
Republic of Argentina, 0s, 2001 $ 516 $ 456,041
Republic of Argentina, 11.786s, 2005 400 364,000
------------
$ 820,041
- - ------------------------------------------------------------------------------------------------------
Australia - 2.2%
Commonwealth of Australia, 7.5s, 2005 AUD 3,558 $ 2,369,244
- - ------------------------------------------------------------------------------------------------------
Canada - 1.0%
Metronet Communications Corp., 12s, 2007
(Telecommunications) $ 898 $ 1,043,925
- - ------------------------------------------------------------------------------------------------------
Chile - 0.4%
Enersis S. A., 6.6s, 2026 (Utilities - Electric) $ 433 $ 407,423
- - ------------------------------------------------------------------------------------------------------
Denmark - 0.3%
Kingdom of Denmark, 7s, 2007 DKK 2,447 $ 364,662
- - ------------------------------------------------------------------------------------------------------
France - 0.4%
Republic of France, 4s, 2009 EUR 435 $ 397,026
- - ------------------------------------------------------------------------------------------------------
Germany - 4.5%
Bayerische Landesbank Girozent, 5.625s, 2001 (Banks
and Credit Cos.)*** $ 465 $ 459,625
Federal Republic of Germany, 4.5s, 2009 EUR 2,318 2,224,234
KFW International Finance, Inc., 9.4s, 2004 (Agency) $ 592 648,814
Landesbank Baden Wurttemberg, 7.875s, 2004 (Banks and
Credit Cos.) 1,500 1,552,050
------------
$ 4,884,723
- - ------------------------------------------------------------------------------------------------------
Greece - 2.0%
Hellenic Republic, 8.01s, 2003 GRD 300,000 974,351
Hellenic Republic, 8.7s, 2005 72,000 240,118
Hellenic Republic, 6s, 2006 250,000 741,317
Hellenic Republic, 5.75s, 2008 EUR 151 152,650
------------
$ 2,108,436
- - ------------------------------------------------------------------------------------------------------
Iceland - 0.6%
Republic of Iceland, 6.125s, 2004 $ 635 $ 611,499
- - ------------------------------------------------------------------------------------------------------
Israel - 0.9%
Israel Electric Corp., 8.25s, 2009 (Utilities - Electric)## $ 1,000 $ 992,880
- - ------------------------------------------------------------------------------------------------------
Mexico - 0.1%
Petroleos Mexicanos, 9.5s, 2027 (Oils) $ 110 $ 103,950
- - ------------------------------------------------------------------------------------------------------
New Zealand - 0.5%
Government of New Zealand, 8s, 2006 NZD 1,100 $ 590,501
- - ------------------------------------------------------------------------------------------------------
Norway - 1.3%
Union Bank Norway, 7.35s, 2049 (Banks and Credit Cos.)## $ 1,500 $ 1,452,195
- - ------------------------------------------------------------------------------------------------------
Panama - 0.2%
Republic of Panama, 4.25s, 2014 $ 230 $ 170,200
- - ------------------------------------------------------------------------------------------------------
Peru - 0.2%
Republic of Peru, 4.5s, 2017 $ 420 $ 275,646
- - ------------------------------------------------------------------------------------------------------
Philippines - 0.3%
Republic of Philippines, 9.875s, 2019 $ 290 $ 295,075
- - ------------------------------------------------------------------------------------------------------
South Korea - 0.5%
Export-Import Bank Korea, 7.1s, 2007 (Banks and Credit Cos.) $ 530 $ 520,778
- - ------------------------------------------------------------------------------------------------------
Spain - 2.3%
Kingdom of Spain, 9.125s, 2000 $ 2,400 $ 2,442,456
- - ------------------------------------------------------------------------------------------------------
Sweden - 0.8%
AB Spintab, 6.8s, 2049 (Banks & Credit Cos.)## $ 950 $ 915,496
- - ------------------------------------------------------------------------------------------------------
United Kingdom
United Kingdom Treasury, 6.75s, 2004 GBP 2 $ 3,288
- - ------------------------------------------------------------------------------------------------------
Total Foreign Bonds $ 20,769,444
- - ------------------------------------------------------------------------------------------------------
Total Bonds (Identified Cost, $105,873,211) $103,362,553
- - ------------------------------------------------------------------------------------------------------
Repurchase Agreement - 3.9%
- - ------------------------------------------------------------------------------------------------------
PRINCIPAL AMOUNT
(000 OMITTED) VALUE
- - ------------------------------------------------------------------------------------------------------
Goldman Sachs, dated 11/30/99, due 12/01/99, total to
be received $4,191,652 (secured by various U.S.
Treasury and Federal Agency obligations in a
jointly traded account),
at Cost $ 4,191 $ 4,191,000
- - ------------------------------------------------------------------------------------------------------
Total Investments (Identified Cost, $110,064,211) $107,553,553
Other Assets, Less Liabilities - 0.0% (5,885)
- - ------------------------------------------------------------------------------------------------------
Net Assets - 100.0% $107,547,668
- - ------------------------------------------------------------------------------------------------------
*** Securities held as futures collateral.
## SEC Rule 144A restriction.
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 GBP = British Pounds
CAD = Canadian Dollars GRD = Greek Drachmas
CHF = Swiss Franc JPY = Japanese Yen
DKK = Danish Kroner NOK = Norwegian Krone
EUR = Euro NZD = New Zealand Dollars
See notes to financial statements.
</TABLE>
<PAGE>
FINANCIAL STATEMENTS
Statement of Assets and Liabilities
- - --------------------------------------------------------------------------------
NOVEMBER 30, 1999
- - --------------------------------------------------------------------------------
Assets:
Investments, at value (identified cost, $110,064,211) $ 107,553,553
Foreign currency, at value (identified cost, $46,799) 45,755
Cash 20,799
Receivable for daily variation margin on open futures
contracts 29,219
Net receivable for forward foreign currency exchange
contracts to purchase 123,145
Net receivable for forward foreign currency exchange
contracts to sell 112,156
Receivable for Fund shares sold 24,155
Interest receivable 1,445,998
Other assets 1,849
-------------
Total assets $ 109,356,629
-------------
Liabilities:
Payable for Fund shares reacquired $ 138,613
Payable for investments purchased 1,076,253
Net payable for forward foreign currency exchange
contracts closed or subject to master netting
agreements 414,630
Payable to affiliates -
Management fee 4,832
Shareholder servicing agent fee 879
Distribution and service fee 4,980
Accrued expenses and other liabilities 168,774
-------------
Total liabilities $ 1,808,961
-------------
Net assets $ 107,547,668
=============
Net assets consist of:
Paid-in capital $ 119,328,965
Unrealized depreciation on investments and translation of
assets and liabilities in foreign currencies (2,802,420)
Accumulated net realized loss on investments and foreign
currency transactions (9,156,218)
Accumulated undistributed net investment income 177,341
-------------
Total $ 107,547,668
=============
Shares of beneficial interest outstanding 13,756,427
==========
Class A shares:
Net asset value per share
(net assets of $46,550,366 / 5,965,473 shares of
beneficial interest outstanding) $7.80
=====
Offering price per share (100/95.25) $8.19
=====
Class B shares:
Net asset value and offering price per share
(net assets of $60,984,156 / 7,789,273 shares of
beneficial interest outstanding) $7.83
=====
Class I shares:
Net asset value and offering price per share
(net assets of $13,146 / 1,681 shares of beneficial
interest outstanding) $7.82
=====
On sales of $100,000 or more, the offering price of Class A shares is reduced. A
contingent deferred sales charge may be imposed on redemptions of Class A and
Class B shares.
See notes to financial statements.
<PAGE>
<TABLE>
FINANCIAL STATEMENTS -- continued
Statement of Operations
<CAPTION>
- - --------------------------------------------------------------------------------------
YEAR ENDED NOVEMBER 30, 1999
- - --------------------------------------------------------------------------------------
<S> <C>
Net investment income:
Interest income $ 8,196,583
-----------
Expenses -
Management fee $ 845,824
Trustees' compensation 41,644
Shareholder servicing agent fee 126,737
Distribution and service fee (Class A) 114,372
Distribution and service fee (Class B) 755,996
Administrative fee 15,631
Custodian fee 58,082
Auditing fees 39,823
Printing 35,154
Postage 27,618
Legal fees 4,809
Miscellaneous 107,016
-----------
Total expenses $ 2,172,706
Fees paid indirectly (17,299)
Reduction of expenses by investment adviser and distributor (292,738)
-----------
Net expenses $ 1,862,669
-----------
Net investment income $ 6,333,914
-----------
Realized and unrealized gain (loss) on investments:
Realized gain (loss) (identified cost basis) -
Investment transactions $(1,977,584)
Written option transactions 269,128
Foreign currency transactions (743,411)
Futures contracts (404,367)
-----------
Net realized loss on investments and foreign currency transactions $(2,856,234)
-----------
Change in unrealized appreciation (depreciation) -
Investments $(4,398,659)
Written options (46,880)
Translation of assets and liabilities in foreign currencies 51,843
Futures contracts (102,864)
-----------
Net unrealized loss on investments and foreign currency
translation $(4,496,560)
-----------
Net realized and unrealized loss on investments and foreign
currency $(7,352,794)
-----------
Decrease in net assets from operations $(1,018,880)
===========
See notes to financial statements.
</TABLE>
<PAGE>
<TABLE>
FINANCIAL STATEMENTS -- continued
Statement of Changes in Net Assets
<CAPTION>
- - ------------------------------------------------------------------------------------------
YEAR ENDED NOVEMBER 30, 1999 1998
- - ------------------------------------------------------------------------------------------
<S> <C> <C>
Increase (decrease) in net assets:
From operations -
Net investment income $ 6,333,914 $ 7,795,666
Net realized loss on investments and foreign currency
transactions (2,856,234) (2,272,438)
Net unrealized gain (loss) on investments and foreign
currency translation (4,496,560) 1,509,991
------------ ------------
Increase (decrease) in net assets from operations $ (1,018,880) $ 7,033,219
------------ ------------
Distributions declared to shareholders -
From net investment income (Class A) $ (2,293,617) $ (2,360,988)
From net investment income (Class B) (3,171,540) (5,169,854)
From net investment income (Class I) (526) (350)
From paid-in capital (Class A) (389,768) (287,926)
From paid-in capital (Class B) (538,960) (630,471)
From paid-in capital (Class I) (89) (43)
------------ ------------
Total distributions declared to shareholders $ (6,394,500) $ (8,449,632)
------------ ------------
Decrease in net assets from Fund share transactions $(18,508,199) $(15,385,822)
------------ ------------
Total decrease in net assets $(25,921,579) $(16,802,235)
Net assets:
At beginning of period 133,469,247 150,271,482
------------ ------------
At end of period (including accumulated undistributed net
investment income of $177,341 and 74,049, respectively) $107,547,668 $133,469,247
============ ============
See notes to financial statements.
</TABLE>
<PAGE>
<TABLE>
FINANCIAL STATEMENTS -- continued
Financial Highlights
<CAPTION>
- - -----------------------------------------------------------------------------------------------------------------------------
YEAR ENDED NOVEMBER 30, 1999 1998 1997 1996 1995
- - -----------------------------------------------------------------------------------------------------------------------------
CLASS A
- - -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per share data (for a share outstanding
throughout each period):
Net asset value - beginning of period $ 8.29 $ 8.39 $ 8.57 $ 8.59 $ 7.96
------ ------ ------ ------ ------
Income from investment operations# -
Net investment income(S) $ 0.47 $ 0.53 $ 0.55 $ 0.55 $ 0.57
Net realized and unrealized gain (loss) on
investments and foreign currency (0.49) (0.05) (0.18) (0.01) 0.61
------ ------ ------ ------ ------
Total from investment operations $(0.02) $ 0.48 $ 0.37 $ 0.54 $ 1.18
------ ------ ------ ------ ------
Less distributions declared to shareholders -
From net investment income $(0.40) $(0.52) $(0.55) $(0.56) $(0.55)
In excess of net investment income+++ -- -- -- (0.00) --
From paid-in capital (0.07) (0.06) -- -- --
------ ------ ------ ------ ------
Total distributions declared to shareholders $(0.47) $(0.58) $(0.55) $(0.56) $(0.55)
------ ------ ------ ------ ------
Net asset value - end of period $ 7.80 $ 8.29 $ 8.39 $ 8.57 $ 8.59
====== ====== ====== ====== ======
Total return(+) (0.21)% 5.86% 4.59% 6.61% 15.40%
Ratios (to average net assets)/Supplemental data(S):
Expenses## 0.93% 1.12% 1.17% 1.17% 1.14%
Net investment income 5.85% 6.33% 6.63% 6.58% 6.81%
Portfolio turnover 154% 173% 226% 288% 275%
Net assets at end of period (000 Omitted) $46,550 $44,116 $30,833 $21,291 $12,659
# Per share data are based on average shares outstanding.
## Ratios do not reflect expense reductions from certain expense offset arrangements.
(+) Total returns for Class A shares do not include the applicable sales charge. If the charge had been included, the results
would have been lower.
+++ For the year ended November 30, 1996, the per share distribution in excess of net investment income was less than $0.01.
(S) The investment adviser voluntarily waived a portion of its fee for certain of the periods indicated. If the fee had been
incurred by the Fund, the net investment income per share and the ratios would have been:
Net investment income $ 0.44 $ 0.52 -- -- --
Ratios (to average net assets):
Expenses## 1.32% 1.15% -- -- --
Net investment income 5.45% 6.30% -- -- --
See notes to financial statements.
</TABLE>
<PAGE>
<TABLE>
FINANCIAL STATEMENTS -- continued
Financial Highlights - continued
<CAPTION>
- - -----------------------------------------------------------------------------------------------------------------------------
YEAR ENDED NOVEMBER 30, 1999 1998 1997 1996 1995
- - -----------------------------------------------------------------------------------------------------------------------------
CLASS B
- - -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per share data (for a share outstanding
throughout each period):
Net asset value - beginning of period $ 8.32 $ 8.40 $ 8.57 $ 8.58 $ 7.96
------ ------ ------ ------ ------
Income from investment operations# -
Net investment income(S) $ 0.39 $ 0.44 $ 0.47 $ 0.46 $ 0.48
Net realized and unrealized gain (loss) on
investments and foreign currency (0.49) (0.04) (0.18) (0.01) 0.61
------ ------ ------ ------ ------
Total from investment operations $(0.10) $ 0.40 $ 0.29 $ 0.45 $ 1.09
------ ------ ------ ------ ------
Less distributions declared to shareholders -
From net investment income $(0.33) $(0.43) $(0.46) $(0.46) $(0.47)
In excess of net investment income+++ -- -- -- (0.00) --
From paid-in capital (0.06) (0.05) -- -- --
------ ------ ------ ------ ------
Total distributions declared to shareholders $(0.39) $(0.48) $(0.46) $(0.46) $(0.47)
------ ------ ------ ------ ------
Net asset value - end of period $ 7.83 $ 8.32 $ 8.40 $ 8.57 $ 8.58
====== ====== ====== ====== ======
Total return (1.24)% 4.86% 3.57% 5.52% 14.12%
Ratios (to average net assets)/Supplemental data(S):
Expenses## 1.93% 2.12% 2.19% 2.24% 2.23%
Net investment income 4.84% 5.30% 5.61% 5.47% 5.79%
Portfolio turnover 154% 173% 226% 288% 275%
Net assets at end of period (000 Omitted)
$60,984 $89,345 $119,436 $171,148 $232,312
# Per share data are based on average shares outstanding.
## Ratios do not reflect expense reductions from certain expense offset arrangements.
+++ For the year ended November 30, 1996, the per share distribution in excess of net investment income was less than $0.01.
(S) The investment adviser voluntarily waived a portion of its fee for certain of the periods indicated. If the fee had been
incurred by the Fund, the net investment income per share and the ratios would have been:
Net investment income $ 0.38 $ 0.44 -- -- --
Ratios (to average net assets):
Expenses## 2.07% 2.15% -- -- --
Net investment income 4.69% 5.27% -- -- --
See notes to financial statements.
</TABLE>
<PAGE>
<TABLE>
FINANCIAL STATEMENTS -- continued
Financial Highlights - continued
<CAPTION>
- - -------------------------------------------------------------------------------------------------------------------------
YEAR ENDED NOVEMBER 30, 1999 1998 1997*
- - -------------------------------------------------------------------------------------------------------------------------
CLASS I
- - -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per share data (for a share outstanding
throughout each period):
Net asset value - beginning of period $ 8.31 $ 8.41 $ 8.43
------ ------ ------
Income from investment operations# -
Net investment income(S) $ 0.48 $ 0.55 $ 0.61
Net realized and unrealized loss on investments and foreign
currency (0.50) (0.07) (0.17)
------ ------ ------
Total from investment operations $(0.02) $ 0.48 $ 0.44
------ ------ ------
Less distributions declared to shareholders -
From net investment income $(0.40) $(0.52) $(0.46)
From paid-in capital (0.07) (0.06) --
------ ------ ------
Total distributions declared to shareholders $(0.47) $(0.58) $(0.46)
------ ------ ------
Net asset value - end of period $ 7.82 $ 8.31 $ 8.41
====== ====== ======
Total return (0.20)% 5.97% 5.07%++
Ratios (to average net assets)/Supplemental data(S):
Expenses## 0.93% 1.10% 1.03%+
Net investment income 5.86% 6.36% 6.52%+
Portfolio turnover 154% 173% 226%
Net assets at end of period (000 Omitted) $ 13 $ 8 $ 3
* For the period from the inception of Class I, January 2, 1997, through November 30, 1997.
+ Annualized.
++ Not annualized.
# Per share data are based on average shares outstanding.
## Ratios do not reflect expense reductions from certain expense offset arrangements.
(S) The investment adviser voluntarily waived a portion of its fee for certain of the periods indicated. If the fee had been
incurred by the Fund, the net investment income per share and the ratios would have been:
Net investment income $ 0.47 $ 0.55 --
Ratios (to average net assets):
Expenses## 1.07% 1.13% --
Net investment income 5.71% 6.33% --
See notes to financial statements.
</TABLE>
<PAGE>
NOTES TO FINANCIAL STATEMENTS
(1) Business and Organization
MFS Intermediate Income Fund (the Fund) is a nondiversified series of MFS
Series Trust II (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. The Fund
can invest in foreign securities. 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, political, and economic environment.
Investment Valuations - Debt securities (other than short-term obligations
which mature in 60 days or less), including listed issues, forward contracts,
and swap agreements, 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
foreign 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 reported at market value using closing
settlement prices. Over-the-counter options on securities are valued by
brokers. Over-the-counter currency options are valued through the use of a
pricing model which takes into account foreign currency exchange spot and
forward rates, implied volatility, and short-term repurchase rates. Securities
for which there are no such quotations or valuations are valued in good faith
by 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 collateral 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 collateral to ensure that its
value, including accrued interest, 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.
Foreign Currency Translation - Investment valuations, other assets, and
liabilities initially expressed in foreign currencies are converted each
business day into U.S. dollars based upon current exchange rates. Purchases and
sales of foreign investments, income, and expenses are converted into U.S.
dollars based upon currency exchange rates prevailing on the respective dates of
such transactions. Gains and losses attributable to foreign currency exchange
rates on sales of securities are recorded for financial statement purposes as
net realized gains and losses on investments. Gains and losses attributable to
foreign exchange rate movements on income and expenses are recorded for
financial statement purposes as foreign currency transaction gains and losses.
That portion of both realized and unrealized gains and losses on investments
that results from fluctuations in foreign currency exchange rates is not
separately disclosed.
Written Options - The Fund may write call or put options in exchange for a
premium. The premium is initially recorded as a liability which is
subsequently adjusted to the current value of the options contract. When a
written option expires, the Fund realizes a gain equal to the amount of the
premium received. When a written call option is exercised or closed, the
premium received is offset against the proceeds to determine the realized gain
or loss. When a written put option is exercised, the premium reduces the cost
basis of the security purchased by the Fund. The Fund, as writer of an option,
may have no control over whether the underlying securities may be sold (call)
or purchased (put) and, as a result, bears the market risk of an unfavorable
change in the price of the securities underlying the written option. In
general, written call options may serve as a partial hedge against decreases
in value in the underlying securities to the extent of the premium received.
Written options may also be used as part of an income producing strategy
reflecting the view of the Fund's management on the direction of interest
rates.
Futures Contracts - The Fund may enter into futures contracts for the delayed
delivery of securities or 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 with the broker 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 contract, 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. Investments in equity index contracts or contracts on related options
for purposes other than hedging, may be made when the Fund has cash on hand
and wishes to participate in anticipated market appreciation while the cash is
being invested. 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 may enter into
forward contracts for hedging purposes as well as for non-hedging purposes. For
hedging purposes, the Fund may enter into contracts to deliver or receive
foreign currency it will receive from or require for its normal investment
activities. 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. For non-hedging purposes, the Fund may
enter into contracts with the intent of changing the relative exposure of the
Fund's portfolio of securities to different currencies to take advantage of
anticipated changes. The forward foreign currency exchange contracts are
adjusted by the daily exchange rate of the underlying currency and any gains or
losses are recorded as unrealized until the contract settlement date. On
contract settlement date, the gains or losses are recorded as realized gains or
losses on foreign currency transactions.
Investment Transactions and Income - Investment transactions are recorded on
the trade date. Interest income is recorded on the accrual basis. All discount
is accreted for financial statement and tax reporting purposes as required by
federal income tax regulations. Interest payments received in additional
securities are recorded on the ex-interest date in an amount equal to the
value of the security on such date. Some securities may be purchased on a
"when-issued" or "forward delivery" basis, which means that the securities
will be delivered to the Fund at a future date, usually beyond customary
settlement time.
Fees Paid Indirectly - The Fund's custody fee is calculated as a percentage of
the Fund's month end net assets. The fee is reduced according to an
arrangement that measures the value of cash deposited with the custodian by
the Fund. This amount is shown as a reduction of expenses on the Statement of
Operations.
Tax Matters and Distributions - The Fund's policy is to comply with the
provisions of the Internal Revenue Code (the Code) applicable to regulated
investment companies and to distribute to shareholders all of its taxable
income, including any net realized gain on investments. Accordingly, no
provision for federal income or excise tax is provided.
Distributions to shareholders are recorded on the ex-dividend date. 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 be reported in the financial statements as distributions from paid-in
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 net realized gains.
During the year ended November 30, 1999, $764,939 was reclassified from
accumulated undistributed net investment income to accumulated net realized
loss on investments due to differences between book and tax accounting for
mortgage-backed securities and foreign currency transactions. This change had
no effect on the net assets or net asset value per share. In addition,
$928,817 was redesignated as a tax return of capital distribution. At November
30, 1999, accumulated undistributed net investment income and accumulated net
realized loss on investments and foreign currency transactions under book
accounting were different from tax accounting due to temporary differences in
accounting for capital losses and foreign currency transactions.
At November 30, 1999, the Fund, for federal income tax purposes, had a capital
loss carryforward of $9,259,081 which may be applied against any net taxable
realized gains of each succeeding year until the earlier of its utilization or
expiration on November 30, 2002, ($4,226,362), November 30, 2005,
($1,473,779), November 30, 2006, ($1,217,310), and November 30, 2007,
($2,341,630).
Multiple Classes of Shares of Beneficial Interest - The Fund offers multiple
classes of shares, which differ in their respective distribution and service
fees. All shareholders bear the common expenses of the Fund based on daily net
assets of each class, without distinction between share classes. Dividends are
declared separately for each class. Differences in per share dividend rates
are generally due to differences in separate class expenses. Class B shares
will convert to Class A shares approximately eight years after purchase.
(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 0.32%
of the Fund's average daily net assets and 5.65% of investment income. The
investment adviser has voluntarily agreed to waive a portion of its fee, which
is shown as a reduction of expenses in the Statement of Operations.
The Fund pays no compensation directly to its Trustees who are officers of the
investment adviser, or to officers of the Fund, all of whom receive
remuneration for their services to the Fund from MFS. Certain 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
$11,366 for the year ended November 30, 1999.
Administrator - The Fund has an administrative services agreement with MFS to
provide the Fund with certain financial, legal, shareholder servicing,
compliance, and other administrative services. As a partial reimbursement for
the cost of providing these services, the Fund pays MFS an administrative fee
at the following annual percentages of the Fund's average daily net assets:
First $1 billion 0.0150%
Next $1 billion 0.0125%
Next $1 billion 0.0100%
In excess of $3 billion 0.0000%
Distributor - MFD, a wholly owned subsidiary of MFS, as distributor, received
$29,671 for the year ended November 30, 1999, 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 and Class B shares
pursuant to Rule 12b-1 of the Investment Company Act of 1940 as follows:
The Fund's distribution plan provides that the Fund will pay MFD 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 paid 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 and 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. The service fee of up to 0.25% per annum of the Fund's daily net
assets is currently being waived on a voluntary basis and may be imposed with
the next prospectus update at the discretion of MFD. Payments of up to 0.10% per
annum of the distribution fee will commence on such date as the trustees of the
Fund may determine.
The Fund's distribution plan provides that the Fund will pay MFD a
distribution fee of 0.75% per annum, and a service fee of up to 0.25% per
annum, of the Fund's average daily net assets attributable to Class B shares.
MFD will pay to securities dealers that enter into a sales agreement with MFD
all or a portion of the service fee attributable to Class B shares. The
service fee is intended to be consideration for services rendered by the
dealer with respect to Class B shares. MFD retains the service fee for
accounts not attributable to a securities dealer, which amounted to $26,954
for Class B shares for the year ended November 30, 1999. Fees incurred under
the distribution plan during the year ended November 30, 1999, were 1.00% of
average daily net assets attributable to Class B shares on an annualized
basis.
Certain Class A shares are subject to a contingent deferred sales charge in
the event of a shareholder redemption within 12 months following purchase. A
contingent deferred sales charge is imposed on shareholder redemptions of
Class B shares in the event of a shareholder redemption within six years of
purchase. MFD receives all contingent deferred sales charges. Contingent
deferred sales charges imposed during the year ended November 30, 1999, were
$3,989 and $72,540 for Class A and Class B shares, respectively.
Shareholder Servicing Agent - MFSC, a wholly owned subsidiary of MFS, earns a
fee for its services as shareholder servicing agent. The fee is calculated as
a percentage of the Fund's average daily net assets at an annual rate of
0.10%. Prior to April 1, 1999, the fee was calculated as a percentage of the
Fund's average daily net assets at an annual rate of 0.1125%.
(4) Portfolio Securities
Purchases and sales of investments, other than purchased option transactions
and short-term obligations, were as follows:
PURCHASES SALES
- - -------------------------------------------------------------------------------
U.S. government securities $ 41,882,842 $125,459,492
------------ ------------
Investments (non-U.S. government
securities) $142,551,823 $ 73,911,940
------------ ------------
The cost and unrealized appreciation and depreciation in the value of the
investments owned by the Fund, as computed on a federal income tax basis, are
as follows:
Aggregate cost $110,064,211
------------
Gross unrealized depreciation $ (2,583,929)
Gross unrealized appreciation 73,271
------------
Net unrealized depreciation $ (2,510,658)
============
(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. Transactions in
Fund shares
were as follows:
<TABLE>
Class A Shares
<CAPTION>
YEAR ENDED NOVEMBER 30, 1999 YEAR ENDED NOVEMBER 30, 1998
--------------------------------- -----------------------------------
SHARES AMOUNT SHARES AMOUNT
- - ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Shares sold 2,433,733 $ 19,595,486 3,557,110 $ 29,662,076
Shares issued to shareholders
in reinvestment of
distributions 233,950 1,877,269 216,409 1,800,509
Shares reacquired (2,020,674) (16,238,209) (2,129,785) (17,689,458)
---------- ------------ ---------- ------------
Net increase 647,009 $ 5,234,546 1,643,734 $ 13,773,127
========== ============ ========== ============
</TABLE>
<TABLE>
Class B Shares
<CAPTION>
YEAR ENDED NOVEMBER 30, 1999 YEAR ENDED NOVEMBER 30, 1998
--------------------------------- -----------------------------------
SHARES AMOUNT SHARES AMOUNT
- - ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Shares sold 923,209 $ 7,484,786 1,345,750 $ 11,221,642
Shares issued to shareholders
in reinvestment of
distributions 260,988 2,107,645 380,682 3,178,360
Shares reacquired (4,136,977) (33,340,759) (5,204,805) (43,564,370)
---------- ------------ ---------- ------------
Net decrease (2,952,780) $(23,748,328) (3,478,373) $(29,164,368)
========== ============ ========== ============
</TABLE>
<TABLE>
Class I Shares
<CAPTION>
YEAR ENDED NOVEMBER 30, 1999 YEAR ENDED NOVEMBER 30, 1998
--------------------------------- -----------------------------------
SHARES AMOUNT SHARES AMOUNT
- - ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Shares sold 680 $ 5,498 715 $ 6,023
Shares issued to shareholders
in reinvestment of
distributions 77 618 47 390
Shares reacquired (64) (533) (117) (994)
---------- ------------ ---------- ------------
Net increase 693 $ 5,583 645 $ 5,419
========== ============ ========== ============
</TABLE>
(6) Line of Credit
The Fund and other affiliated funds participate in an $820 million unsecured
line
of credit provided by a syndication of banks under a line of credit agreement.
Borrowings may be made to temporarily finance the repurchase of Fund shares.
Interest is charged to each fund, based on its borrowings, at a rate equal to
the bank's base rate. In addition, a commitment fee, based on the average
daily unused portion of the line of credit, is allocated among the
participating funds at the end
of each quarter. The commitment fee allocated to the Fund for the year ended
November 30, 1999, was $842. The Fund had no significant borrowings during
the year.
(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.
<TABLE>
Written Option Transactions
<CAPTION>
NUMBER OF
CONTRACTS PREMIUMS
- - -------------------------------------------------------------------------------------------------------
<S> <C> <C>
OUTSTANDING, BEGINNING OF PERIOD 1 $ 59,837
Options written 17 454,114
Options terminated in closing transactions (9) (247,619)
Options exercised (2) (92,992)
Options expired (7) (173,340)
---------
OUTSTANDING, END OF PERIOD $ 0
=========
</TABLE>
<TABLE>
Forward Foreign Currency Exchange Contracts
<CAPTION>
NET UNREALIZED
CONTRACTS TO CONTRACTS APPRECIATION
SETTLEMENT DATE DELIVER/RECEIVE IN EXCHANGE FOR AT VALUE (DEPRECIATION)
- - ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Sales 12/01/99 - 03/15/00 AUD 4,514,127 $ 2,907,428 $ 2,871,376 $ 36,052
12/02/99 CAD 985,769 674,330 670,075 4,255
12/03/99 CHF 1,024,822 672,733 644,865 27,868
12/01/99 - 03/15/00 DKK 5,613,697 784,964 763,394 21,570
12/01/99 - 12/03/99 EUR 3,340,475 3,476,766 3,365,350 111,416
12/03/99 GBP 409,411 664,077 652,776 11,301
12/01/99 - 12/06/99 JPY 742,339,870 7,085,528 7,296,201 (210,673)
12/03/99 NOK 5,286,876 667,080 656,186 10,894
12/01/99 - 03/15/00 NZD 5,001,607 2,655,135 2,555,662 99,473
----------- ----------- --------
$19,588,401 $19,475,885 $112,156
=========== =========== ========
Purchases 12/01/99 - 12/03/99 AUD 4,159,394 $ 2,696,499 $ 2,645,398 $(51,101)
12/02/99 CAD 985,769 672,733 670,075 (2,658)
12/03/99 CHF 1,024,822 660,558 644,866 (15,692)
12/01/99 DKK 2,806,849 387,579 380,435 (7,144)
12/01/99 - 12/03/99 EUR 2,759,108 2,867,798 2,779,681 (88,117)
12/03/99 GBP 409,411 672,734 652,776 (19,958)
12/01/99 - 03/15/00 JPY 1,023,013,256 9,716,847 10,066,163 349,316
12/03/99 NOK 5,286,876 672,733 656,186 (16,547)
12/01/99 NZD 4,131,928 2,131,411 2,106,457 (24,954)
----------- ----------- --------
$20,478,892 $20,602,037 $123,145
=========== =========== ========
</TABLE>
At November 30, 1999, forward foreign currency purchases and sales under
master netting agreements excluded above amounted to a net payable of $34,130
with Deutschebank and $389,642 with Merrill Lynch and a net receivable of
$9,142 with C.S. First Boston.
At November 30, 1999, the Fund had sufficient cash and/or securities to cover
any commitments under these contracts.
<TABLE>
Futures Contracts
<CAPTION>
UNREALIZED
DESCRIPTION EXPIRATION CONTRACTS POSITION DEPRECIATION
- - -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury Notes December 1999 170 Long $102,864
--------
</TABLE>
At November 30, 1999, the Fund had sufficient cash and/or securities to cover
any margin requirements under these contracts.
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Trustees of the MFS Series Trust II and the Shareholders of
MFS Intermediate Income Fund:
We have audited the accompanying statement of assets and liabilities of MFS
Intermediate Income Fund (a series of MFS Series Trust II), including the
portfolio of investments, as of November 30, 1999, and the related statement
of operations for the year then ended, the statement of changes in net assets
for each of the two years in the period then ended, and the financial
highlights for each of the five years in the period then ended. 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 securities
owned as of November 30, 1999, 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, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of MFS
Intermediate Income Fund as of November 30, 1999, the results of its
operations for the year then ended, the changes in its net assets for each of
the two years in the period then ended, and the financial highlights for each
of the five years in the period then ended, in conformity with generally
accepted accounting principles.
DELOITTE & TOUCHE LLP
Boston, Massachusetts
January 6, 2000
<PAGE>
- - --------------------------------------------------------------------------------
FEDERAL TAX INFORMATION
- - --------------------------------------------------------------------------------
IN JANUARY 2000, SHAREHOLDERS WILL BE MAILED A FORM 1099-DIV REPORTING
THE FEDERAL TAX STATUS OF ALL DISTRIBUTIONS PAID DURING THE CALENDAR
YEAR 1999.
<PAGE>
MFS' YEAR 2000 READINESS DISCLOSURE
MFS Investment Management(R), as an investment adviser and
on behalf of the MFS funds, is committed to the effective
use of technology in managing our portfolio investments,
delivering high-quality service to MFS fund shareholders, [Graphic Omitted]
retirement plan participants, and MFS' institutional
clients, and supporting the financial consultants who sell
our products.
MFS can now say that it is ready for the Year 2000. Our testing has demonstrated
that MFS' computer hardware and software will recognize "00" as the Year 2000
and will not confuse those digits with 1900. All of our critical business
applications and processes have been successfully tested, and we have adopted
companywide policies that will help us maintain our readiness through the
remainder of the year. Any new technology that is brought into the company
before the end of the year will be held to the same stringent standards as our
current technology. We have also developed a vendor readiness survey, contacted
over 700 of our vendors, and established an ongoing process to review responses,
as well as to review readiness statements of new vendors and products.
MFS recognizes that fund shareholders and institutional clients also are
concerned about whether the companies whose securities are held in their
portfolios are addressing Y2K issues. As part of the MFS Original Research(R)
process of evaluating portfolio investments, one of the many relevant factors
that MFS' portfolio managers and research analysts may consider is a company's
Y2K readiness.
Y2K readiness is an enormously complex, worldwide issue. No company or
institution can guarantee that it will be unaffected by the Y2K issue. While MFS
is taking significant steps to protect the integrity of its internal systems,
there can be no assurance that these steps will be sufficient to avoid any
adverse impact on MFS fund shareholders, retirement plan participants, or
institutional clients.
If you have further questions regarding MFS' Year 2000 Readiness Program, please
visit our Web site at www.mfs.com, call our toll-free line, 1-800-637-4406, or
write to the MFS Year 2000 Program Management Office by e-mail at [email protected] or
by letter at 500 Boylston Street, Boston, MA 02116-3741.
<PAGE>
<TABLE>
MFS(R) INTERMEDIATE INCOME FUND
<S> <C>
TRUSTEES ASSISTANT TREASURERS
Richard B. Bailey+ - Private Investor; Mark E. Bradley*
Former Chairman and Director (until 1991), Ellen Moynihan*
MFS Investment Management James O. Yost*
Marshall N. Cohan+ - Private Investor SECRETARY
Stephen E. Cavan*
Lawrence H. Cohn, M.D.+ - Chief of Cardiac
Surgery, Brigham and Women's Hospital; ASSISTANT SECRETARY
Professor of Surgery, Harvard Medical School James R. Bordewick, Jr.*
The Hon. Sir J. David Gibbons, KBE+ - Chief CUSTODIAN
Executive Officer, Edmund Gibbons Ltd.; State Street Bank and Trust Company
Chairman, Colonial Insurance Company, Ltd.
AUDITORS
Abby M. O'Neill+ - Private Investor Deloitte & Touche LLP
Walter E. Robb, III+ - President and Treasurer, INVESTOR INFORMATION
Benchmark Advisors, Inc. (corporate financial For information on MFS mutual funds, call your
consultants); President, Benchmark Consulting financial consultant or, for an information
Group, Inc. (office services) kit, call toll free: 1-800-637-2929 any
business day from 9 a.m. to 5 p.m. Eastern time
Arnold D. Scott* - Senior Executive (or leave a message anytime).
Vice President, Director, and Secretary,
MFS Investment Management INVESTOR SERVICE
MFS Service Center, Inc.
Jeffrey L. Shames* - Chairman and Chief P.O. Box 2281
Executive Officer, MFS Investment Management Boston, MA 02107-9906
J. Dale Sherratt+ - President, Insight For general information, call toll free:
Resources, Inc. (acquisition planning specialists) 1-800-225-2606 any business day from 8 a.m. to
8 p.m. Eastern time.
Ward Smith+ - Former Chairman (until 1994),
NACCO Industries (holding company) For service to speech- or hearing-impaired,
call toll free: 1-800-637-6576 any business day
INVESTMENT ADVISER from 9 a.m. to 5 p.m. Eastern time. (To use
Massachusetts Financial Services Company this service, your phone must be equipped with
500 Boylston Street a Telecommunications Device for the Deaf.)
Boston, MA 02116-3741
For share prices, account balances, exchanges,
DISTRIBUTOR or stock and bond outlooks, call toll free:
MFS Fund Distributors, Inc. 1-800-MFS-TALK (1-800-637-8255) anytime from a
500 Boylston Street touch-tone telephone.
Boston, MA 02116-3741
WORLD WIDE WEB
CHAIRMAN AND PRESIDENT www.mfs.com
Jeffrey L. Shames*
PORTFOLIO MANAGERS
Stephen C. Bryant*
James J. Calmas*
TREASURER
W. Thomas London*
+Independent Trustee
*MFS Investment Management
</TABLE>
<PAGE>
MFS(R) INTERMEDIATE INCOME FUND ------------
BULK RATE
U.S. POSTAGE
[Logo] M F S(R) PAID
INVESTMENT MANAGEMENT MFS
We invented the mutual fund(R) ------------
500 Boylston Street
Boston, MA 02116-3741
(c)2000 MFS Investment Management.(R)
MFS(R) investment products are offered through MFS Fund Distributors, Inc.,
500 Boylston Street, Boston, MA 02116
MII-2 01/00 17.5M 05/205/805
