As filed with the Securities and Exchange Commission on March 30, 1995
1933 Act File No. 33-1657
1940 Act File No. 811-4492
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
POST-EFFECTIVE AMENDMENT NO. 11
AND
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
AMENDMENT NO. 12
MFS GOVERNMENT MORTGAGE FUND
(Exact Name of Registrant as Specified in Charter)
500 Boylston Street, Boston, Massachusetts 02116
(Address of Principal Executive Offices)
Registrant's Telephone Number, including Area Code: 617-954-5000
Stephen E. Cavan, Massachusetts Financial Services Company
500 Boylston Street, Boston, Massachusetts 02116
(Name and Address of Agent for Service)
APPROXIMATE DATE OF PROPOSED PUBLIC OFFERING:
It is proposed that this filing will become effective (check appropriate box)
|_| immediately upon filing pursuant to paragraph (b)
|X| on March 30, 1995 pursuant to paragraph (b)
|_| 60 days after filing pursuant to paragraph (a)(i)
|_| on [date] pursuant to paragraph (a)(i)
|_| 75 days after filing pursuant to paragraph (a)(ii)
|_| on [date] pursuant to paragraph (a)(ii) of rule 485.
If appropriate, check the following box:
|_| this post-effective amendment designates a new effective date for
a previously filed post-effective amendment
Pursuant to Rule 24f-2, the Registrant has registered an indefinite number of
its shares of Beneficial Interest (without par value), under the Securities Act
of 1933. The Registrant filed a Rule 24f-2 Notice for its fiscal year ended July
31, 1994 on September 29, 1994.
CALCULATION OF REGISTRATION FEE
Proposed Proposed
Number maximum maximum
of shares offering aggregate Amount of
Title of securities being price per offering registration
being registered registered share price fee
Shares of Beneficial
Interest (without 64,261,904 $6.46 $290,000 $100
par value)
Registrant elects to calculate the maximum aggregate offering price pursuant to
Rule 24e-2. 72,638,095 shares were redeemed during the fiscal year ended July
31, 1994. 8,421,083 shares were used for reductions pursuant to paragraph (c) of
Rule 24f-2 during the current fiscal year. 64,217,012 shares is the amount of
redeemed shares used for reduction in this Amendment. Pursuant to Rule 457(d)
under the Securities Act of 1933, the maximum public offering price of $6.46 per
share on March 20, 1995 is the price used as the basis for calculating the
registration fee. While no fee is required for the 8,421,083 shares, Registrant
has elected to register, for $100, an additional $290,000 of shares (44,892
shares at $6.46 per share).
<PAGE>
MFS GOVERNMENT MORTGAGE FUND
CROSS REFERENCE SHEET
(Pursuant to Rule 404 showing location in Prospectus and/or Statement of
Additional Information of the responses to the Items in Parts A and B of Form
N-1A)
STATEMENT OF
ITEM NUMBER ADDITIONAL
FORM N-1A, PART A PROSPECTUS CAPTION INFORMATION
1 (a), (b) Front Cover Page *
2 (a) Expense Summary *
(b), (c) * *
3 (a) Condensed Financial Information *
(b) * *
(c) Information Concerning Shares *
of Fund - Performance Information
(d) Condensed Financial Information *
4 (a) The Fund; Investment Objective *
and Policies
(b), (c) Investment Objective and *
Policies
5 (a) The Fund; Management of the *
Fund - Investment Adviser
(b) Front Cover Page; Management *
of the Fund - Investment Adviser;
Back Cover Page
(c), (d) Management of the Fund - *
Investment Adviser
(e) Management of the Fund - *
Shareholder Servicing Agent;
Back Cover Page
(f) Expense Summary; Condensed *
Financial Information
<PAGE>
STATEMENT OF
ITEM NUMBER ADDITIONAL
FORM N-1A, PART A PROSPECTUS CAPTION INFORMATION
(g) Information Concerning Shares *
of the Fund - Purchases
5A (a), (b), (c) ** **
6 (a) Information Concerning Shares *
of the Fund - Description of Shares,
Voting Rights and Liabilities;
Information Concerning Shares
of the Fund - Redemptions and
Repurchases; Information
Concerning Shares of the Fund -
Purchases; Information Concerning
Shares of the Fund - Exchanges
(b), (c), (d) * *
(e) Shareholder Services *
(f) Information Concerning Shares *
of the Fund - Distributions; Shareholder
Services - Distribution
Options
(g) Information Concerning Shares *
of the Fund - Tax Status; Information
Concerning Shares of the Fund -
Distributions
7 (a) Front Cover Page; Management *
of the Fund - Distributor; Back
Cover Page
(b) Information Concerning Shares *
of the Fund - Purchases; Information
Concerning Shares of the Fund -
Net Asset Value
(c) Information Concerning Shares *
of the Fund - Purchases; Information
Concerning Shares of the Fund -
Exchanges; Shareholder Services
(d) Front Cover Page; Information *
Concerning Shares of the Fund -
Purchases
<PAGE>
STATEMENT OF
ITEM NUMBER ADDITIONAL
FORM N-1A, PART A PROSPECTUS CAPTION INFORMATION
(e) Information Concerning Shares *
of the Fund - Distribution Plans;
Expense Summary
(f) Information Concerning Shares *
of the Fund - Distribution Plans
8 (a) Information Concerning Shares *
of the Fund - Purchases; Information
Concerning Shares of the Fund
Redemptions and Repurchases
(b), (c), (d)Information Concerning Shares *
of the Fund - Redemptions and
Repurchases
9 * *
<PAGE>
STATEMENT OF
ITEM NUMBER ADDITIONAL
FORM N-1A, PART B PROSPECTUS CAPTION INFORMATION
10 (a), (b) * Front Cover Page
11 * Front Cover Page
12 * Definitions
13 (a), (b), (c) * Investment Objective,
Policies and
Restrictions
(d) * *
14 (a), (b) * Management of the Fund -
Trustees and Officers
(c) * Management of the Fund -
Trustees and Officers;
Appendix A
15 (a) * *
(b), (c) * Management of the Fund -
Trustees and Officers
16 (a) Management of the Fund - Management of the Fund -
Investment Adviser Investment Adviser;
Management of the Fund -
Trustees and Officers
(b) Management of the Fund - Management of the Fund -
Investment Adviser Investment Adviser
(c) * *
(d) * Management of the Fund -
Investment Adviser
(e) * Portfolio Transactions
and Brokerage
Commissions
(f) Information Concerning Shares Distribution Plans
of the Fund - Distribution Plans
(g) * *
(h) * Management of the Fund -
Custodian; Independent
Accountants and Financial
Statements; Back Cover
Page
<PAGE>
STATEMENT OF
ITEM NUMBER ADDITIONAL
FORM N-1A, PART B PROSPECTUS CAPTION INFORMATION
(i) * Management of the Fund -
Shareholder Servicing
Agent
17 (a), (b), (c), * Portfolio Transactions and
(d), (e) Brokerage Commissions
18 (a) Information Concerning Shares Description of Shares,
of the Fund - Description of Voting Rights and
Shares, Voting Rights and Liabilities
Liabilities
(b) * *
19 (a) Information Concerning Shares Shareholder Services
of the Fund - Purchases;
Shareholder Services
(b) Information Concerning Shares Management of the Fund -
of the Fund - Net Asset Value; Distributor; Net Asset
Information Concerning Shares Value and Performance -
of the Fund - Purchases Net Asset Value
(c) * *
20 * Tax Status
21 (a), (b) * Management of the Fund -
Distributor; Distribution
Plans
(c) * *
22 (a) * *
22 (b) * Determination of Net Asset
Value and Performance
23 * Independent Accountants
and Financial Statements
------------------------
* Not Applicable
** Contained in Annual Report
MFS((r)) GOVERNMENT
MORTGAGE FUND
(A member of the MFS Family of Funds(R))
PROSPECTUS
April 1, 1995
Class A Shares of Beneficial Interest
Class B Shares of Beneficial Interest
<TABLE>
<CAPTION>
Page
<S> <C>
1. Expense Summary 2
2. The Fund 3
3. Condensed Financial Information 4
4. Investment Objective and Policies 5
5. Management of the Fund 9
6. Information Concerning Shares of the Fund 10
Purchases 10
Exchanges 16
Redemptions and Repurchases 16
Distribution Plans 19
Distributions 20
Tax Status 20
Net Asset Value 21
Description of Shares, Voting Rights and Liabilities 21
Performance Information 21
7. Shareholder Services 22
Appendix A A-1
</TABLE>
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
MFS GOVERNMENT MORTGAGE FUND
500 Boylston Street, Boston, Massachusetts 02116 (617) 954-5000
The primary investment objective of MFS Government Mortgage Fund (the "Fund") is
to provide a high level of current income. The secondary objective of the Fund
is to protect shareholders' capital. The Fund seeks to achieve this objective by
investing, under normal circumstances, at least 65% of its assets in obligations
issued or guaranteed by the Government National Mortgage Association ("GNMA")
(including pass-through certificates of GNMA) and in obligations fully
collateralized or otherwise fully secured by obligations issued or guaranteed by
GNMA (see "Investment Objective and Policies"). The minimum initial investment
is generally $1,000 per account (see "Purchases").
The Fund's investment adviser and distributor are Massachusetts Financial
Services Company ("MFS"or the "Adviser") and MFS Fund Distributors, Inc.
("MFD"), respectively, both of which are located at 500 Boylston Street, Boston,
Massachusetts 02116.
Shares of the Fund are not deposits or obligations of, or guaranteed or endorsed
by, any bank and the shares are not federally insured by the Federal Deposit
Insurance Corporation, the Federal Reserve Board, or any other agency.
This Prospectus sets forth concisely the information concerning the Fund that a
prospective investor ought to know before investing. The Fund has filed with the
Securities and Exchange Commission (the "SEC") a Statement of Additional
Information, dated April 1, 1995, which contains more detailed information about
the Fund and is incorporated into this Prospectus by reference. See page 24 for
a further description of the information set forth in the Statement of
Additional Information. A copy of the Statement of Additional Information may be
obtained without charge by contacting the Shareholder Servicing Agent (see back
cover for address and phone number).
Investors should read this Prospectus and retain it for future reference.
<PAGE>
1. EXPENSE SUMMARY
<TABLE>
<CAPTION>
Class A Class B
<S> <C> <C>
Shareholder Transaction Expenses:
Maximum Initial Sales Charge Imposed on Purchases of Fund Shares (as a percentage of
offering price) 4.75% 0.00%
Maximum Contingent Deferred Sales Charge (as a percentage of original purchase
price or redemption proceeds, as applicable) See Below((1)) 4.00%
Annual Operating Expenses (as a percentage of average net assets):((2))
Management Fees 0.65% 0.65%
Rule 12b-1 Fees 0.35%((3)) 1.00%((4))
Other Expenses 0.27% 0.31%
Total Operating Expenses (after applicable fee reduction) 1.27% 1.96%
</TABLE>
((1)) Purchases of $1 million or more are not subject to an initial sales
charge; however, a contingent deferred sales charge (a "CDSC") of 1% will be
imposed on such purchases in the event of certain redemption transactions within
12 months following such purchases (see "Information Concerning Shares of the
Fund--Purchases" below).
((2)) For Class A and Class B shares, percentages are based on fees and expenses
incurred during the fiscal year ended July 31, 1994.
((3)) The Fund has adopted a Distribution Plan for its Class A shares in
accordance with Rule 12b-1 under the Investment Company Act of 1940, as amended
(the "1940 Act"), which provides that it will pay distribution/service fees
aggregating up to (but not necessarily all of) 0.35% per annum of the average
daily net assets attributable to Class A shares (see "Distribution Plans").
After a substantial period of time, distribution expenses paid under this Plan,
together with the initial sales charge, may total more than the maximum sales
charge that would have been permissible if imposed entirely as an initial sales
charge.
((4)) The Fund has adopted a Distribution Plan for its Class B shares in
accordance with Rule 12b-1 under the 1940 Act, which provides that it will pay
distribution/service fees aggregating up to 1.00% per annum of the average daily
net assets attributable to Class B shares (see "Distribution Plans"). After a
substantial period of time, distribution expenses paid under this Plan, together
with any CDSC, may total more than the maximum sales charge that would have been
permissible if imposed entirely as an initial sales charge.
Example of Expenses
An investor would pay the following dollar amounts of expenses on a $1,000
investment in the Fund, assuming (a) 5% annual return and (b) redemption at the
end of each of the time periods indicated (unless otherwise noted):
<TABLE>
<CAPTION>
Period Class A Class B
((1))
<S> <C> <C> <C>
1 year $ 60 $60 $20
3 years 86 92 62
5 years 114 126 106
10 years 194 211((2)) 211((2))
</TABLE>
((1)) Assumes no redemption.
((2)) Class B shares convert to Class A shares approximately eight years after
purchase; therefore, years nine and ten reflect Class A expenses.
The purpose of the expense table above is to assist investors in understanding
the various costs and expenses that a shareholder of the Fund will bear directly
or indirectly. More complete descriptions of the following Fund expenses are set
forth in the following sections: (i) varying sales charges on sale
purchases--"Purchases"; (ii) varying CDSCs--"Purchases"; (iii) management
fees--"Investment Adviser"; and (iv) Rule 12b-1 (i.e., distribution plan)
fees--"Distribution Plans."
The "Example" set forth above should not be considered a representation of past
or future expenses of the Fund; actual expenses may be greater or less than
those shown.
2
<PAGE>
2. THE FUND
The Fund is an open-end, diversified management investment company which was
organized as a business trust under the laws of The Commonwealth of
Massachusetts in 1985. Shares of the Fund are continuously sold to the public
and the Fund then uses the proceeds to buy securities for its portfolio. Two
classes of shares of the Fund currently are offered to the general public. Class
A shares are offered at net asset value plus an initial sales charge (or a CDSC
in the case of certain purchases of $1 million or more) and subject to a
Distribution Plan providing for a distribution and service fee. Class B shares
are offered at net asset value without an initial sales charge but subject to a
CDSC and a Distribution Plan providing for a distribution fee which is greater
than the Class A distribution and service fee. Class B shares will convert to
Class A shares approximately eight years after purchase.
The Fund's Board of Trustees provides broad supervision over the affairs of the
Fund. MFS is the Fund's investment adviser. The Adviser is responsible for the
management of the Fund's assets and the officers of the Fund are responsible for
its operations. The Adviser manages the portfolio from day to day in accordance
with the Fund's investment objective and policies. A majority of the Trustees
are not affiliated with the Adviser. The Fund also offers to buy back (redeem)
its shares from its shareholders at any time at net asset value, less any
applicable CDSC.
3
<PAGE>
3. CONDENSED FINANCIAL INFORMATION
The following information should be read in conjunction with the financial
statements included in the Fund's Annual Report to Shareholders which are
incorporated by reference into the Statement of Additional Information in
reliance upon the report of Deloitte & Touche LLP, independent certified public
accountants, as experts in accounting and auditing.
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
For the For the
Eight Eight For the
Months Months Period
Ended Ended Ended
July 31, For the Year Ended November 30, July 31, Nov. 30,
1994 1993 1992 1991 1990 1989 1988 1987 1986** 1994 1993***
Class Class A Class B
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset
value--beginning
of period $ 6.85 $ 6.82 $ 6.95 $ 7.01 $ 7.86 $ 7.82 $ 8.34 $ 9.82 $ 9.53 $ 6.84 $ 6.97
Income from investment operations--
Net investment
income[section] $ 0.29 $ 0.34 $ 0.46 $ 0.48 $ 0.53 $ 0.59 $ 0.64 $ 0.75 $ 0.72 $ 0.26 $ 0.38
Net realized
and unrealized
gain (loss) on
investments (0.36) 0.20 0.09 0.25 (0.40) 0.48 (0.06) (1.08) 0.43 (0.35) (0.44)
Total from
investment
operations $(0.07) $ 0.54 $ 0.55 $ 0.73 $ 0.13 $ 1.07 $ 0.58 $(0.33) $ 1.15 $ (0.09) $(0.06)
Less
distributions
declared to
shareholders--
From net
investment
income $(0.20) $(0.47) $(0.42) $(0.44) $(0.49) $(0.58) $(0.64) $(0.82) $(0.65) $ (0.18) $(0.07)
From paid-in
capital (0.09) -- (0.26) (0.35) (0.49) (0.45) (0.46) (0.32) -- (0.08) --
From net
realized gain
on investments -- -- -- -- -- -- -- (0.01) (0.21) -- --
In excess of
net realized
gains -- (0.04) -- -- -- -- -- -- -- -- --
Total
distributions
declared to
shareholders $(0.29) $(0.51) $(0.68) $(0.79) $(0.98) $(1.03) $(1.10) $(1.15) $(0.86) $ (0.26) $(0.07)
Net asset
value--end of
period $ 6.49 $ 6.85 $ 6.82 $ 6.95 $ 7.01 $ 7.86 $ 7.82 $ 8.34 $ 9.82 $ 6.49 $ 6.84
Total return+ (1.51)%* 8.11% 8.25% 11.00% 2.05% 14.72% 7.39% (3.37)% 13.75% (1.97)%* (3.91)%*
Ratios (to average net assets)/Supplemental data:
Expenses [section] 1.27%* 1.38% 1.42% 1.44% 1.40% 1.37% 1.38% 1.34% 1.00%* 1.94%* 1.87%*
Net investment
income [section] 6.46%* 6.30% 6.57% 6.91% 7.29% 7.57% 7.88% 8.34% 9.54%* 5.80%* 5.92%*
Portfolio
turnover 37% 167% 484% 731% 507% 489% 285% 212% 169% 37% 167%
Net assets at end of
period (000,000s
omitted) $ 424 $ 522 $ 715 $ 886 $1,068 $1,380 $1,295 $1,129 $ 593 $ 1,229 $1,28
</TABLE>
* Annualized. + Total returns
for Class A shares do not include the applicable sales charge. If the sales
charge had been included, the results would have been lower. ** For the period
from January 9, 1986 (commencement of operations) to November 30, 1986. *** For
the period from the date of issue of Class B shares, September 7, 1993 to
November 30, 1993. [section] The investment adviser did not impose a portion of
its management fee for the periods indicated. If this fee had been incurred by
the Fund, the Class A and Class B net investment income per share and ratios
would have been:
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net investment income $0.29 $0.34 -- -- -- -- -- -- -- $0.26 $0.38
Ratios (to average net assets):
Expenses 1.28%* 1.46% -- -- -- -- -- -- -- 1.94%* 1.94%*
Net investment income 6.45%* 6.22% -- -- -- -- -- -- -- 5.80%* 5.85%*
</TABLE>
4
<PAGE>
4. INVESTMENT OBJECTIVE AND POLICIES Investment Objective--The
Fund's primary investment objective is to provide a high level of current
income. The Fund's secondary objective is to protect shareholders' capital. Any
investment involves risk and there can be no assurance that the Fund will
achieve its objectives.
Investment Policies--The Fund seeks to achieve its investment objectives by
investing at least 65% of its total assets, under normal circumstances, in
obligations issued or guaranteed by the Government National Mortgage Association
("GNMA") (including pass-through certificates of GNMA which are described below)
and in obligations fully collateralized or otherwise fully secured by
obligations issued or guaranteed by GNMA. The Fund may also invest in other
securities that are issued or guaranteed as to principal and interest by the
U.S. Government, its agencies, authorities or instrumentalities ("Government
Securities"). Such Government Securities include (1) U.S. Treasury obligations,
which differ only in their interest rates, maturities and times of issuance:
U.S. Treasury bills (maturities of one year or less), U.S. Treasury notes
(maturities of one to 10 years), and U.S. Treasury bonds (generally maturities
of greater than 10 years) all of which are backed by the full faith and credit
of the United States; and (2) obligations issued or guaranteed by U.S.
Government agencies or instrumentalities, some of which are backed by the full
faith and credit of the U.S. Treasury; some of which are supported by the right
of the issuer to borrow from the U.S. Government, e.g., obligations of Federal
Home Loan Banks; some of which are backed only by the credit of the issuer
itself, e.g., obligations of the Student Loan Marketing Association; and some of
which are supported by the discretionary authority of the U.S. Government to
purchase the agency's obligations, e.g., obligations of the Federal National
Mortgage Association ("FNMA"). No assurance can be given that the U.S.
Government will provide financial support to these agencies and
instrumentalities because it is not obligated by law, in certain instances, to
do so. The primary types of Government Securities in which the Fund invests are
described in Appendix A.
The Fund may invest in pass-through certificates of GNMA. These certificates
are mortgage-backed securities which represent a partial ownership interest in a
pool of mortgage loans issued by lenders such as mortgage bankers, commercial
banks and savings and loan associations. Each mortgage loan included in the pool
is either insured by the Federal Housing Administration or guaranteed by the
Veterans Administration. For a further description of these and other such
obligations and of the consequences of the prepayment of mortgages underlying
these certificates, see "Mortgage Pass-Through Securities" below and Appendix A.
When and if available, Government Securities may be purchased at a discount from
face value. However, the Fund does not intend to hold such securities to
maturity for the purpose of achieving potential capital gains, unless current
yields on these securities remain attractive.
Depending on market conditions, the Fund may temporarily take a defensive
position by investing a substantial portion of its assets in cash, short-term
Government Securities and related repurchase agreements.
Government Securities do not generally involve the credit risks associated with
other types of fixed income securities, although, as a result, the yields
available from Government Securities are generally lower than the yields
available from corporate fixed income securities. Like other fixed income
securities, however, the values of Government Securities change as interest
rates fluctuate. Therefore, the net asset value of the shares of an open-end
investment company such as the Fund which invests in fixed income securities
changes as the general levels of interest rates fluctuate. When interest rates
decline, the value of a portfolio invested at higher yields can be expected to
rise. Conversely, when interest rates rise, the value of a portfolio invested at
lower yields can be expected to decline. Although changes in the value of the
Fund's portfolio securities subsequent to their acquisition are reflected in the
net asset value of shares of the Fund, such changes will not affect the income
received by the Fund from such securities. While the Fund seeks to maintain a
relatively high, stable dividend, no specific level of income or yield
differential can ever be assured since available yields vary over time. The
dividends paid by the Fund will increase or decrease in relation to the income
received by the Fund from its investments which will in any case be reduced by
the Fund's expenses before being distributed to the Fund's shareholders.
Mortgage Pass-Through Securities: The Fund may invest in mortgage pass-through
securities that are Government Securities. Mortgage pass-through securities are
securities representing interests in "pools" of mortgage loans. Monthly payments
of inter-
5
<PAGE>
est and principal by the individual borrowers on mortgages are passed through to
the holders of the securities (net of fees paid to the issuer or guarantor of
the securities) as the mortgages in the underlying mortgage pools are paid off.
The average lives of mortgage pass-throughs are variable when issued because
their average lives depend on prepayment rates. The average life of these
securities is likely to be substantially shorter than their stated final
maturity as a result of unscheduled principal prepayment. Prepayments on
underlying mortgages result in a loss of anticipated interest, and all or part
of a premium if any has been paid, and the actual yield (or total return) to the
Fund may be different than the quoted yield on the securities. Mortgage
prepayments generally increase with falling interest rates and decrease with
rising interest rates. Like other fixed income securities, when interest rates
rise, the value of a mortgage pass-through security generally will decline;
however, when interest rates are declining, the value of mortgage pass-through
securities with prepayment features may not increase as much as that of other
fixed income securities.
Repurchase Agreements: The Fund may enter into repurchase agreements in order to
earn additional income on available cash or as a temporary defensive measure.
Under a repurchase agreement, the Fund acquires securities subject to the
seller's agreement to repurchase at a specified time and price. If the seller
becomes subject to a proceeding under the bankruptcy laws or its assets are
otherwise subject to a stay order, the Fund's right to liquidate the securities
may be restricted (during which time the value of the securities could decline).
As discussed in the Statement of Additional Information, the Fund has adopted
certain procedures intended to minimize any risk.
"When-Issued" Securities: Some Government Securities may be purchased on a
"when-issued" or on a "forward delivery" basis, which means that the securities
will be delivered to the Fund at a future date usually beyond customary
settlement time. The commitment to purchase a security for which payment will be
made on a future date may be deemed a separate security. Although the Fund is
not limited as to the amount of Government Securities for which it may have
commitments to purchase on such bases, it is expected that under normal
circumstances the Fund will not commit more than 30% of its total assets to such
purchases. The Fund does not pay for the securities until received, and does not
start earning interest on the securities until the contractual settlement date.
While awaiting delivery of the securities purchased on such bases, the Fund will
hold cash, short-term money market instruments or Government Securities in a
segregated account.
Mortgage "Dollar Roll" Transactions: The Fund may enter into mortgage "dollar
roll" transactions with selected banks and broker-dealers pursuant to which the
Fund sells mortgage-backed securities for delivery in the future (generally
within 30 days) and simultaneously contracts to repurchase substantially similar
(same type, coupon and maturity) securities on a specified future date. The Fund
will only enter into covered rolls. A "covered roll" is a specific type of
dollar roll for which there is an offsetting cash position or a cash equivalent
security position which matures on or before the forward settlement date of the
dollar roll transaction.
Zero Coupon Bonds: The Fund may invest in zero coupon bonds, which are debt
obligations issued or purchased at a significant discount from face value. The
Fund will only purchase zero coupon bonds which are Government Securities. The
discount approximates the total amount of interest the bonds will accrue and
compound over the period until maturity at a rate of interest reflecting the
market rate of the security at the time of issuance. Zero coupon bonds do not
require the periodic payment of interest. Such investments benefit the issuer by
mitigating its need for cash to meet debt service, but also require a higher
rate of return to attract investors who are willing to defer receipt of such
cash. Such investments may experience greater volatility in market value due to
changes in interest rates than debt obligations which make regular payments of
interest. The Fund will accrue income on such investments for tax and accounting
purposes, as required, which is distributable to shareholders and which, because
no cash is received at the time of accrual, may require the liquidation of other
portfolio securities to satisfy the Fund's distribution obligations.
Collateralized Mortgage Obligations and Multiclass Pass-Through Securities: The
Fund may invest a portion of its assets in collateralized mortgage obligations
("CMOs") which are debt obligations collateralized by mortgage loans or mortgage
pass- through securities (such collateral collectively hereinafter referred to
as "Mortgage Assets"). Mortgage Assets underlying CMOs purchased by the Fund
must be issued or guaranteed by the U.S. Government, its agencies, authorities
or instrumentalities.
6
<PAGE>
The Fund may also invest a portion of its assets in multiclass pass-through
securities which are interests in a trust composed of Mortgage Assets. Unless
the context indicates otherwise, all references herein to CMOs include
multiclass pass-through securities. Payments of principal of and interest on the
Mortgage Assets, and any reinvestment income thereon, provide the funds to pay
debt service on the CMOs or make scheduled distributions on the multiclass
pass-through securities. In a CMO, a series of bonds or certificates is usually
issued in multiple classes with different maturities. Each class of CMOs, often
referred to as a "tranche", is issued at a specific fixed or floating coupon
rate and has a stated maturity or final distribution date. Principal prepayments
on the Mortgage Assets may cause the CMOs to be retired substantially earlier
than their stated maturities or final distribution dates resulting in a loss of
all or part of the premium, if any has been paid. Certain classes of CMOs have
priority over others with respect to the receipt of prepayments on the
mortgages. Therefore, depending on the type of CMOs in which the Fund invests,
the investment may be subject to a greater or lesser risk of prepayment than
other types of mortgage-related securities.
The Fund may also invest in parallel pay CMOs and Planned Amortization Class
CMOs ("PAC Bonds"). Parallel pay CMOs are structured to provide payments of
principal on each payment date to more than one class. PAC Bonds generally
require payments of a specified amount of principal on each payment date. PAC
Bonds are always parallel pay CMOs with the required principal payment on such
securities having the highest priority after interest has been paid to all
classes. For a further description of CMOs and the risks related to transactions
therein, see the Statement of Additional Information.
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 usually structured with two classes that receive different
proportions of the interest and principal distributions from an underlying pool
of mortgage assets. The Fund will only invest in SMBS whose mortgage assets are
issued or guaranteed by the U.S. Government, its agencies, authorities or
instrumentalities. For a further description of SMBS and the risks related to
transactions therein, see the Statement of Additional Information.
Swaps and Related Transactions: The Fund may enter into interest rate swaps and
other types of available swap agreements. Swaps involve the exchange by the Fund
with another party of cash payments based upon different interest rate indexes,
and other prices or rates, such as the value of mortgage prepayment rates. For
example, in the typical interest rate swap, the Fund might exchange a sequence
of cash payments based on a floating rate index for cash payments based on a
fixed rate.
The Fund may also purchase and sell caps, floors and collars. In a typical cap
or floor agreement, one party agrees to make payments only under specified
circumstances, usually in return for payment of a fee by the counterparty. For
example, the purchase of an interest rate cap entitles the buyer, to the extent
that a specified index exceeds a predetermined interest rate, to receive
payments of interest on a contractually-based principal amount from the
counterparty selling such interest rate cap. The sale of an interest rate floor
obligates the seller to make payments to the extent that a specified interest
rate falls below an agreed-upon level. A collar arrangement combines elements of
buying a cap and selling a floor.
Swaps, caps, floors and collars are highly specialized activities which involve
certain risks. See the Statement of Additional Information for further
information on, and the risks involved in, these activities.
Lending of Securities and Short Sales: The Fund may make loans of its portfolio
securities. Such loans will usually be made to member banks of the Federal
Reserve System and member firms of the New York Stock Exchange (and subsidiaries
thereof) under contracts calling for collateral in U.S. Government securities,
cash or cash equivalents. The Fund will continue to collect the equivalent of
interest on the securities loaned and will also receive either interest (through
investment of cash collateral) or a fee (if the collateral is Government
Securities). The Fund may pay finder's and other fees in connection with
securities loans. The Fund may also make short sales involving either securities
retained in the Fund's portfolio or securities which the Fund has the right to
acquire without paying additional consideration.
Portfolio Trading: The Fund intends to manage its portfolio by buying and
selling Government Securities, as well as holding selected obligations to
maturity, and by engaging in transactions involving related options, Futures
Contracts and swap transactions. In managing its portfolio the Fund seeks to
maximize the return on its portfolio by taking advantage of market devel-
7
<PAGE>
opments and yield disparities. As the Fund has historically had a relatively
high portfolio turnover rate, transaction costs incurred by the Fund and the
Fund's realized capital gains and losses may be greater than that of a fund with
a lesser portfolio turnover rate. For a description of the strategies which may
be used by the Fund in managing its portfolio, see the Statement of Additional
Information.
The primary consideration in placing portfolio security transactions with
broker-dealers for execution is to obtain and maintain the availability of
execution at the most favorable prices and in the most effective manner
possible. Consistent with the foregoing primary consideration, the Rules of Fair
Practice 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 other investment company clients of MFD, the
Fund's distributor, as a factor in the selection of broker-dealers to execute
the Fund's portfolio transactions. From time to time, the Adviser may direct
certain portfolio transactions to broker-dealer firms which, in turn, have
agreed to pay a portion of the Fund's operating expenses (e.g., fees charged by
the custodian of the Fund's assets. For a further discussion of portfolio
trading, see the Statement of Additional Information.
Options on Fixed Income Securities: The Fund may write (sell) covered put and
call options on fixed income securities and purchase put and call options. The
Fund will write such options for hedging purposes and to increase its return;
however, it will not write such options for the purpose of attempting to pay out
a pre-established level of dividends or distributions. The Fund may also write
combinations of put and call options on the same security, known as "straddles."
The Fund may purchase put or call options in anticipation of declines in the
value of fixed income portfolio securities or increases in the value of
securities to be acquired.
The Fund may also enter into options on the yield "spread," or yield
differential, between two securities, a transaction referred to as a "yield
curve" option, for hedging purposes. In contrast to other types of options, a
yield curve option is based on the difference between the yields of designated
securities rather than the actual prices of the individual securities, and is
settled through cash payments. Accordingly, a yield curve option is profitable
to the holder if this differential widens (in the case of a call) or narrows (in
the case of a put), regardless of whether the yields of the underlying
securities increase or decrease. Yield curve options written by the Fund will be
covered as described in the Statement of Additional Information. The trading of
yield curve options is subject to all the risks associated with trading other
types of options, as discussed below under "Risks of investment in Options,
Futures Contracts and Options on Futures Contracts" and in the Statement of
Additional Information. In addition, such options present risks of loss even if
the yield on one of the underlying securities remains constant, if the spread
moves in a direction or to an extent which was not anticipated.
In certain instances, the Fund may enter into options on Treasury Securities
which may be referred to as "reset" options or "adjustable strike" options.
These options provide for periodic adjustment of the strike price and may also
provide for the periodic adjustment of the premium during the term of the
option.
The Fund may purchase and sell options that are traded on U.S. exchanges, and
options traded over-the-counter, with broker-dealers who deal in these options.
The ability to terminate over-the-counter options is more limited than with
exchange-traded options and may involve the risk that broker-dealers
participating in such transactions will not fulfill their obligations. The Fund
will treat assets used to cover over-the-counter options as illiquid unless the
dealer is a primary dealer in U.S. Government securities and has given the Fund
the unconditional right to close such options at a formula price, in which event
only an amount of the cover determined with reference to the formula will be
considered illiquid. The Fund may also write over-the-counter options with
non-primary dealers and will treat the assets used to cover these options as
illiquid. See "Investment Objectives, Policies and Restrictions--Options on
Fixed Income Securities" in the Statement of Additional Information for further
discussion of Options on Fixed Income Securities, as well as the associated
risks.
Futures Contracts: The Fund may enter into futures contracts on fixed income
securities ("Futures Contracts"). Such transactions may be used to hedge against
anticipated future changes in interest rates which otherwise might either
adversely affect the value of the Fund's portfolio securities or adversely
affect the prices of Government Securities which the Fund intends to purchase at
a later date. Should interest rates move in an unexpected manner, the Fund may
not achieve the anticipated benefits of Futures Contracts or may realize a loss.
8
<PAGE>
The Fund may also enter into Futures Contracts for non-hedging purposes, to the
extent permitted by applicable law, which involves greater risks. See
"Investment Objectives, Policies and Restrictions--Futures Contracts" in the
Statement of Additional Information for further discussion of Futures Contracts,
as well as the associated risks.
Options on Futures Contracts: The Fund may also purchase and write options on
Futures Contracts ("Options on Futures Contracts") for the purpose of protecting
against declines in the value of fixed income portfolio securities or against
increases in the cost of such securities to be acquired, as well as for
non-hedging purposes to the extent permitted by applicable law. Purchases of
Options on Futures Contracts may present less risk in hedging the portfolio of
the Fund than the purchase or sale of the underlying Futures Contracts, since
the potential loss is limited to the amount of the premium paid for the option,
plus related transaction costs. The writing of such options, however, does not
present less risk than the trading of Futures Contracts, and will constitute
only a partial hedge, up to the amount of the premium received, less related
transaction costs. In addition, if an option is exercised, the Fund may suffer a
loss on the transaction. See "Investment Objectives, Policies and
Restrictions--Options on Futures Contracts" in the Statement of Additional
Information for further discussion of Options on Futures Contracts, as well as
the associated risks.
Risks of investment in Options, Futures Contracts and Options on Futures
Contracts: The Fund's use of options, Futures Contracts and Options on Futures
Contracts involves certain risks. For example, a lack of correlation between the
instrument underlying an option or Futures Contract and the assets being hedged,
or unexpected adverse price movements, could render the Fund's hedging strategy
unsuccessful and could result in losses. The Fund also may enter into
transactions in such instruments for non-hedging purposes to the extent
permitted by applicable law, which involves greater risk. In particular, such
transactions may result in losses for the Fund which are not offset by gains on
other portfolio positions, thereby reducing gross income. There also can be no
assurance that a liquid secondary market will exist for any contract purchased
or sold, and the Fund may be required to maintain a position until exercise or
expiration, which could result in losses. The Statement of Additional
Information contains a description of the nature and trading mechanics of
options, Futures Contracts and Options on Futures Contracts and includes a
discussion of the risks related to transactions therein.
The investment objective and the policies described above may be changed without
shareholder approval.
The Statement of Additional Information includes a discussion of other
investment policies and a listing of specific investment restrictions which
govern the Fund's investment policies. The specific investment restrictions
listed in the Statement of Additional Information may not be changed without
shareholder approval. The Fund's investment limitations 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.
5. MANAGEMENT OF THE FUND
Investment Adviser--The Adviser manages the assets of the Fund pursuant to an
Investment Advisory Agreement, dated December 19, 1985 (the "Advisory
Agreement"). The Adviser provides the Fund with overall investment advisory and
administrative services, as well as general office facilities. James J. Calmas,
a Vice President of the Adviser, is the Fund's portfolio manager. Mr. Calmas
became the portfolio manager of the Fund in January of 1993. Mr. Calmas joined
the Adviser in 1988 as an Investment Analyst. Subject to such policies as the
Trustees may determine, the Adviser makes investment decisions for the Fund. For
these services and facilities, the Adviser receives a management fee, computed
and paid monthly, equal to the lesser of (i) 0.65% of the Fund's average daily
net assets or (ii) 0.30% of the Fund's average daily net assets and 6.1% of the
Fund's gross income (i.e., income other than from the sale of securities,
short-term gains from options and futures transactions and premium income from
options written), in each case on an annualized basis for the Fund's
then-current fiscal year. Prior to February 1, 1994, the Adviser received a
management fee equal to 0.30% of the Fund's average daily net assets and 6.1% of
the Fund's gross income, which was voluntarily reduced to 0.65% of the Fund's
average daily net assets.
9
<PAGE>
MFS also serves as investment adviser to each of the other funds in the MFS
Family of Funds (the "MFS Funds"), to MFS Municipal Income Trust, MFS
Multimarket Income Trust, MFS Government Markets Income Trust, MFS Intermediate
Income Trust, MFS Charter Income Trust, MFS Special Value Trust, MFS
Institutional Trust, MFS Union Standard Trust, MFS Variable Insurance Trust,
MFS/Sun Life Series Trust, Sun Growth Variable Annuity Fund, Inc. and seven
variable accounts, each of which is a registered investment company established
by Sun Life Assurance Company of Canada (U.S.) ("Sun Life of Canada (U.S.)") in
connection with the sale of Compass-2 and Compass-3 combination fixed/variable
annuity contracts. MFS and its wholly owned subsidiary, MFS Asset Management,
Inc., provide investment advice to substantial private clients.
MFS is America's oldest mutual fund organization. MFS and its predecessor
organizations have a history of money management dating from 1924 and the
founding of the first mutual fund in the United States, Massachusetts Investors
Trust. Net assets under the management of the MFS organization were
approximately $34.5 billion on behalf of over 1.6 million investor accounts as
of February 28, 1995. As of such date, the MFS organization managed
approximately $19.5 billion of assets in fixed income securities and $11.5
billion of assets in equity securities. MFS is a wholly owned subsidiary of Sun
Life of Canada (U.S.), which in turn is a wholly owned subsidiary of Sun Life
Assurance Company of Canada ("Sun Life"). The Directors of MFS are A. Keith
Brodkin, Jeffrey L. Shames, Arnold D. Scott, John R. Gardner and John D. McNeil.
Mr. Brodkin is the Chairman, Mr. Shames is the President and Mr. Scott is the
Secretary and a Senior Executive Vice President of MFS. Messrs. McNeil and
Gardner are the Chairman and President, respectively, of Sun Life. Sun Life, a
mutual life insurance company, is one of the largest international life
insurance companies and has been operating in the U.S. since 1895, establishing
a headquarters office here in 1973. The executive officers of MFS report to the
Chairman of Sun Life. A. Keith Brodkin, the Chairman and a Director of MFS, is
also the Chairman, President and a Trustee of the Fund. W. Thomas London,
Stephen E. Cavan, James R. Bordewick, Jr., and James O. Yost, who are officers
of MFS, are also officers of the Fund.
Distributor--MFD, a wholly owned subsidiary of MFS, is the distributor of shares
of the Fund and serves as distributor for each of the other MFS Funds.
Shareholder Servicing Agent--MFS Service Center, Inc. (the "Shareholder
Servicing Agent"), a wholly owned subsidiary of MFS, performs transfer agency,
certain dividend disbursing agency and other services for the Fund.
6. INFORMATION CONCERNING SHARES OF THE FUND
Purchases
Shares of the Fund may be purchased at the public offering price through any
securities dealer, certain banks and other financial institutions having selling
agreements with MFD. Non-securities dealer financial institutions will receive
transaction fees that are the same as commission fees to dealers. Securities
dealers and other financial institutions may also charge their customers fees
relating to investments in the Fund.
The Fund offers two classes of shares which bear sales charges and distribution
fees in different forms and amounts:
Class A shares: Class A shares are offered at net asset value plus an initial
sales charge (or CDSC in the case of certain purchases of $1 million or more) as
follows:
10
<PAGE>
<TABLE>
<CAPTION>
Sales Charge* Sales Charge*
as percentage of: as percentage of:
Dealer Dealer
Allowance Allowance
as a as a
Net Percentage Net Percentage
Offering Amount of Offering Offering Amount of Offering
Amount of Purchase Price Invested Price Amount of Purchase Price Invested Price
<S> <C> <C> <C> <C> <C> <C> <C>
$500,000 but less
Less than $100,000 4.75% 4.99% 4.00% than $1,000,000 2.20% 2.25% 1.70%
$100,000 but less than
$250,000 4.00 4.17 3.20 $1,000,000 or more None** None** See Below**
$250,000 but less than
$500,000 2.95 3.04 2.25
</TABLE>
* Because of rounding in the calculation of offering price, actual sales
charges may be more or less than those calculated using the percentages above.
** A CDSC may apply in certain circumstances. MFD will pay a commission on
purchases of $1 million or more.
No sales charge is payable at the time of purchase of Class A shares on
investments of $1 million or more. However, a CDSC shall be imposed on such
investments in the event of a share redemption within 12 months following the
share purchase, at the rate of 1% of the lesser of the value of the shares
redeemed (exclusive of reinvested dividends and capital gain distributions) or
the total cost of such shares.
In determining whether a CDSC on such Class A shares is payable, and, if so, the
amount of the charge, it is assumed that shares not subject to the CDSC are the
first redeemed followed by other shares held for the longest period of time. All
investments made during a calendar month, regardless of when during the month
the investment occurred, will age one month on the last day of the month and
each subsequent month. Except as noted below, the CDSC on Class A shares will be
waived in the case of: (i) exchanges (except that if the shares acquired by
exchange were then redeemed within 12 months of the initial purchase (other than
in connection with subsequent exchanges to other MFS Funds), the charge would
not be waived); (ii) distributions to participants from a retirement plan
qualified under section 401(a) of the Internal Revenue Code of 1986, as amended
(the "Code") (a "Retirement Plan"), due to: (a) a loan from the plan (repayments
of loans, however, will constitute new sales for purposes of assessing the CDSC,
or (b) "financial hardship" of the participant in the plan, as that term is
defined in Treasury Regulation Section 1.401(k)-1(d)(2), as amended from time to
time, or due to death of a participant in such a plan; (iii) distributions from
a 403(b) plan or an Individual Retirement Account ("IRA") due to death,
disability, or attainment of age 59-1/2; (iv) tax-free returns of excess
contributions to an IRA; (v) distributions by other employee benefit plans to
pay benefits; and (vi) certain involuntary redemptions and redemptions in
connection with certain automatic withdrawals from a qualified retirement plan.
The CDSC on Class A shares will not be waived, however, if the Retirement Plan
withdraws from the Fund except if the Retirement Plan has invested its assets in
Class A shares of 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 Retirement Plan
first invests its assets in Class A shares of one or more of the MFS Funds, the
CDSC on Class A shares will be waived in the case of a redemption of all of the
Retirement Plan's shares (including shares of any other class) in all MFS Funds
(i.e., all the assets of the Retirement Plan invested in the MFS Funds are
withdrawn), except that if, immediately prior to the redemption, the aggregate
amount invested by the Retirement Plan in Class A shares of the MFS Funds
(excluding the reinvestment of distributions) during the prior four year period
equals 50% or more of the total value of the Retirement Plan's assets in the MFS
Funds, then the CDSC will not be waived. The CDSC on Class A shares will be
waived upon redemption by a Retirement Plan where the redemption proceeds are
used to pay expenses of the Retirement Plan or certain expenses of participants
under the Retirement Plan (e.g., participant account fees), provided that the
Retirement Plan's sponsor subscribes to the MFS Fundamental 401(k) Plan((sm)) or
another similar recordkeeping system made available by the Shareholder Servicing
Agent. The CDSC on Class A shares will be waived upon the transfer of
registration from shares held by a Retirement Plan through a single account
maintained by the Shareholder Servicing Agent to multiple Class A share accounts
maintained by the Shareholder Servicing Agent on behalf of individual
participants in the Retirement Plan, provided that the Retirement Plan's sponsor
subscribes to the MFS Fundamental 401(k) Plan((sm)) or another similar
recordkeeping system made available by the Shareholder Servicing Agent. Any
applicable CDSC will be deferred upon an exchange of Class A shares of the Fund
for units of participation of the MFS Fixed Fund (a bank collective investment
fund) (the "Units"), and the CDSC will be deducted from the redemption proceeds
when such Units are subsequently redeemed (assuming the CDSC is then payable).
No CDSC will be assessed upon an exchange of Units for Class A shares of the
Fund. For purposes of calculating the CDSC payable upon redemption of Class A
shares of the Fund or Units acquired pur-
11
<PAGE>
suant to one or more exchanges, the period during which the Units are held will
be aggregated with the period during which the Class A shares are held. MFD
shall receive all CSDCs which it intends to apply for the benefit of the Fund.
MFD allows discounts to dealers (which are alike for all dealers) from the
applicable public offering price, as shown in the above table. In the case of
the maximum sales charge, the dealer retains 4% and MFD retains approximately
3/4 of 1% of the public offering price. The sales charge may vary depending on
the number of shares of the Fund as well as certain other MFS Funds and other
funds owned or being purchased, the existence of an agreement to purchase
additional shares during a 13-month period (or a 36-month period for purchases
of $1 million or more), or special purchase programs. A description of the Right
of Accumulation, Letter of Intent and Group Purchase privileges by which the
sales charge may also be reduced is set forth in the Statement of Additional
Information. In addition, MFD pays a commission to dealers who initiate and are
responsible for purchases of $1 million or more as follows: 1.00% on sales up to
$5 million; plus 0.25% on the amount in excess of $5 million. Purchases of $1
million or more for each shareholder account will be aggregated over a 12-month
period (commencing from the date of the first such purchase) for purposes of
determining the level of commissions to be paid during that period with respect
to such account.
Class A shares of the Fund may be sold at their net asset value to the officers
of the Fund, to any of the subsidiary companies of Sun Life, to eligible
Directors, officers, employees (including retired employees) and agents of MFS,
Sun Life or any of their subsidiary companies, to any trust, pension,
profit-sharing or any other benefit plan for such persons, to any trustees and
retired trustees of any investment company for which MFD serves as distributor
or principal underwriter, and to certain family members of such individuals and
their spouses, provided the shares will not be resold except to the Fund. Class
A shares of the Fund may be sold at net asset value to any employee, partner,
officer or trustee of any sub-adviser to any MFS Fund and to certain family
members of such individuals and their spouses, or to any trust, pensions,
profit-sharing or other retirement plan for the sole benefit of such employee or
representative, provided such shares will not be resold except to the Fund.
Class A shares of the Fund may be sold at their net asset value to any employee
or registered representative of any dealer or other financial institution which
has a sales agreement with MFD or its affiliate, to certain family members of
such employee or representative and their spouses, or to any trust, pension,
profit-sharing or other retirement plan for the sole benefit of such employee or
representative, as well as to clients of the MFS Asset Management, Inc.
Class A shares may be sold at net asset value, subject to appropriate
documentation, through a dealer where the amount invested represents redemption
proceeds from a registered open-end management investment company not
distributed or managed by MFD or its affiliates if: (i) the redeemed shares were
subject to an initial sales charge or a deferred sales charge (whether or not
actually imposed); (ii) such redemption has occurred no more than 90 days prior
to the purchase of Class A shares of the Fund; and (iii) the Fund, MFD or its
affiliates have not agreed with such company or its affiliates, formally or
informally, to sell Class A shares at net asset value or provide any other
incentive with respect to such redemption and sale. Class A shares of the Fund
may also be sold at net asset value where the amount invested represents
redemption proceeds from the MFS Fixed Fund. In addition, Class A shares of the
Fund may also be sold at net asset value in connection with the acquisition or
liquidation of the assets of other investment companies or personal holding
companies. Insurance company separate accounts may purchase Class A shares of
the Fund at their net asset value per share. Class A shares of the Fund may be
purchased at net asset value by retirement plans whose third party
administrators have entered into an administrative services agreement with MFD
or one or more of its affiliates to perform certain administrative services,
subject to certain operational requirements specified from time to time by MFD
or one or more of its affiliates. Class A shares of the Fund may be purchased at
net asset value through certain broker-dealers and other financial institutions
which have entered into an agreement with MFD, which includes a requirement that
such shares be sold for the benefit of clients participating in a "wrap account"
or a similar program under which such clients pay a fee to such broker-dealer or
other financial institution.
Class A shares of the Fund may be purchased at net asset value by certain
retirement plans subject to the Employee Retirement Income Security Act of 1974,
as amended, subject to the following:
12
<PAGE>
(i) The sponsoring organization must demonstrate to the satisfaction of MFD
that either (a) the employer has at least 25 employees or (b) the aggregate
purchases by the retirement plan of Class A shares of the MFS Funds will be in
an amount of at least $250,000 within a reasonable period of time, as determined
by MFD in its sole discretion; and
(ii) a CDSC of 1% will be imposed on such purchases in the event of certain
redemption transactions within 12 months following such purchases.
Dealers who initiate and are responsible for purchases of Class A shares of the
Fund in this manner will be paid a commission by MFD, as follows: 1.00% on sales
up to $5 million, plus 0.25% on the amount in excess of $5 million; provided,
however, that MFD may pay a commission, on sales in excess of $5 million to
certain retirement plans, of 1.00% to certain dealers which, at MFD's
invitation, enter into an agreement with MFD in which the dealer agrees to
return any commission paid to it on the sale (or on a pro rata portion thereof)
if the shareholder redeems his or her shares within a period of time after
purchase as specified by MFD. Purchases of $1 million or more for each
shareholder account will be aggregated over a 12-month period (commencing from
the date of the first such purchase) for purposes of determining the level of
commissions to be paid during that period with respect to such account.
Class A shares of the Fund may be purchased at net asset value by retirement
plans qualified under Section 401(k) of the Code through certain broker-dealers
and other financial institutions which have entered into an agreement with MFD
which includes certain minimum size qualifications for such retirement plans and
provides that the broker-dealer or other financial institution will perform
certain administrative services with respect to the plan's account. Class A
shares of the Fund may be sold at net asset value through the automatic
reinvestment of Class A and Class B distributions which constitute required
withdrawals from qualified retirement plans. Furthermore, Class A shares of the
Fund may be sold at net asset value through the automatic reinvestment of
distributions of dividends and capital gains of Class A shares of other MFS
Funds pursuant to the Distribution Investment Program (see "Shareholder
Services" in the Statement of Additional Information).
Class B shares: Class B shares are offered at net asset value without an initial
sales charge but subject to a CDSC as follows:
<TABLE>
<CAPTION>
Year of Contingent
Redemption Deferred Sales
After Purchase Charge
<S> <C>
First 4%
Second 4%
Third 3%
Fourth 3%
Fifth 2%
Sixth 1%
Seventh and following 0%
</TABLE>
For Class B shares purchased prior to January 1, 1993, the Fund imposes a CDSC
as a percentage of redemption proceeds as follows:
<TABLE>
<CAPTION>
Year of Contingent
Redemption Deferred Sales
After Purchase Charge
<S> <C>
First 6%
Second 5%
Third 4%
Fourth 3%
Fifth 2%
Sixth 1%
Seventh and following 0%
</TABLE>
No CDSC is paid upon an exchange of shares. For purposes of calculating the CDSC
upon redemption of shares acquired in an exchange, the purchase of shares
acquired in one or more exchanges is deemed to have occurred at the time of the
original
13
<PAGE>
purchase of the exchanged shares. See "Redemptions and Repurchases--Contingent
Deferred Sales Charge" for further discussion of the CDSC.
The CDSC on Class B shares will be waived upon the death or disability (as
defined in section 72(m)(7) of the Code) of any investor, provided the account
is registered (i) in the case of a deceased individual, solely in the deceased
individual's name, (ii) in the case of a disabled individual, solely or jointly
in the disabled individual's name or (iii) in the name of a living trust for the
benefit of the deceased or disabled individual. The CDSC on Class B shares will
also be waived in the case of redemptions of shares of the Fund pursuant to a
systematic withdrawal plan. In addition, the CDSC on Class B shares will be
waived in the case of distributions from an IRA, SAR-SEP or any other retirement
plan qualified under sections 401(a) or 403(b) of the Code due to death or
disability, or in the case of required minimum distributions from any such
Retirement Plan due to attainment of age 70-1/2. The CDSC on Class B shares will
be waived in the case of distributions from a Retirement Plan due to (i) returns
of excess contribution to the plan, (ii) retirement of a participant in the
plan, (iii) a loan from the plan (repayments of loans, however, will constitute
new sales for purposes of assessing the CDSC), (iv) "financial hardship" of the
participant in the plan, as that term is defined in Treasury Regulation Section
1.401(k)-1(d)(2), as amended from time to time, and (v) termination of
employment of the participant in the plan (excluding, however, a partial or
other termination of the plan). The CDSC on Class B shares will also be waived
upon redemptions by (i) officers of the Trust, (ii) any of the subsidiary
companies of Sun Life, (iii) eligible Directors, officers, employees (including
retired employees) and agents of MFS, Sun Life or any of their subsidiary
companies, (iv) any trust, pension, profit-sharing or any other benefit plan for
such persons, (v) any trustees and retired trustees of any investment company
for which MFD serves as distributor or principal underwriter, and (vi) certain
family members of such individuals and their spouses, provided in each case that
the shares will not be resold except to the Fund. The CDSC on Class B shares
will also be waived in the case of redemptions by any employee or registered
representative of any dealer or other financial institution which has a sales
agreement with MFD, by certain family members of any such employee or
representative and their spouses, by any trust, pension, profit-sharing or other
retirement plan for the sole benefit of such employee or representative and by
clients of MFS Asset Management, Inc. A Retirement Plan that has invested its
assets in Class B shares of 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 the Retirement
Plan first invests its assets in Class B shares of one or more of the funds in
the MFS Funds will have the CDSC on Class B shares waived in the case of a
redemption of all the Retirement Plan's shares (including shares of any other
class) in all MFS Funds (i.e., all the assets of the Retirement Plan invested in
the MFS Funds are withdrawn), except that if, immediately prior to the
redemption, the aggregate amount invested by the Retirement Plan in Class B
shares of the MFS Funds (excluding the reinvestment of distributions) during the
prior four year period equals 50% or more of the total value of the Retirement
Plan's assets in the MFS Funds, then the CDSC will not be waived. The CDSC on
Class B shares will be waived upon redemption by a Retirement Plan where the
redemption proceeds are used to pay expenses of the Retirement Plan or certain
expenses of participants under the Retirement Plan (e.g., participant account
fees), provided that the Retirement Plan's sponsor subscribes to the MFS
Fundamental 401(k) Plan((sm)) or another similar recordkeeping system made
available by the Shareholder Servicing Agent. The CDSC on Class B shares will be
waived upon the transfer of registration from shares held by a Retirement Plan
through a single account maintained by the Shareholder Servicing Agent to
multiple Class B share accounts provided that the Retirement Plan's sponsor
subscribes to the MFS Fundamental (401(k) Plan((sm)) or another similar
recordkeeping system made available by the Shareholder Servicing Agent. The CDSC
on Class B shares may also be waived in connection with the acquisition or
liquidation of the assets of other investment companies or personal holding
companies.
Conversion of Class B Shares: Class B shares of the Fund will convert to Class A
shares of the Fund approximately eight years after the purchase date. Shares
purchased through the reinvestment of distributions paid in respect of Class B
shares will be treated as Class B shares for purposes of the payment of the
distribution and service fees under the Distribution Plan applicable to Class B
shares. However, for purposes of conversion to Class A shares, all shares in a
shareholder's account that were purchased through the reinvestment of dividends
and distributions paid in respect of Class B shares (and which have not
converted to Class A shares as provided in the following sentence) will be held
in a separate sub-account. Each time any Class B shares in the shareholder's
account (other than those in the sub-account) convert to Class A shares, a
portion of the Class B shares
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then in the sub-account will also convert to Class A shares. The portion will be
determined by the ratio that the shareholder's Class B shares not acquired
through reinvestment of dividends and distributions that are converting to Class
A bear to the shareholder's total Class B shares not acquired through such
reinvestment. The conversion of Class B shares to Class A shares is subject to
the continuing availability of a ruling from the Internal Revenue Service or an
opinion of counsel that such conversion will not constitute a taxable event for
Federal tax purposes. There can be no assurance that such ruling or opinion will
be available, and the conversion of Class B shares to Class A shares will not
occur if such ruling or opinion is not available. In that event, Class B shares
would continue to be subject to higher expenses than Class A shares for an
indefinite period.
General: Except as described below, the minimum initial investment is $1,000 per
account and the minimum additional investment is $50 per account. Accounts being
established for monthly automatic investments and under payroll savings programs
and tax-deferred retirement programs (other than IRAs) involving the submission
of investments by means of group remittal statements are subject to a $50
minimum on initial and additional investments per account. The minimum initial
investment for IRAs is $250 per account and the minimum additional investment is
$50 per account. Accounts being established for participation in the Automatic
Exchange Plan are subject to a $50 minimum on initial and additional investments
per account. There are also other limited exceptions to these minimums for
certain tax-deferred retirement programs. Any minimums may be changed at any
time at the discretion of MFD. The Fund reserves the right to cease offering its
shares for sale at any time.
A shareholder whose shares are held in the name of, or controlled by, an
investment dealer, may not receive many of the privileges and services from the
Fund (such as Right of Accumulation, Letter of Intent and certain recordkeeping
services) that the Fund ordinarily provides.
Purchases and exchanges should be made for investment purposes only. The Fund
and MFD each reserve the right to reject any specific purchase order or to
restrict purchases by a particular purchaser (or group of related purchasers).
The Fund or MFD may reject or restrict any purchases by a particular purchaser
or group, for example, when such purchase is contrary to the best interests of
the Fund's other shareholders or otherwise would disrupt the management of the
Fund.
MFD may enter into an agreement with shareholders who intend to make exchanges
among certain classes of certain MFS Funds (as determined by MFD) which follow a
timing pattern, and with individuals or entities acting on such shareholders'
behalf (collectively, "market timers"), setting forth the terms, procedures and
restrictions with respect to such exchanges. In the absence of such an
agreement, it is the policy of the Fund and MFD to reject or restrict purchases
by market timers if (i) more than two exchange purchases are effected in an
timed account in the same calendar quarter or (ii) a purchase would result in
shares being held in timed accounts by market timers representing more than (x)
one percent of the Fund's net assets or (y) specified dollar amounts in the case
of certain MFS Funds which may include the Fund and which may change from time
to time. The Fund and MFD each reserve the right to request market timers to
redeem their shares at net asset value, less any applicable CDSC, if either of
these restrictions is violated.
Securities dealers and other financial institutions may receive different
compensation with respect to sales of Class A and Class B shares. In some
instances, promotional incentives to dealers may be offered only to certain
dealers who have sold or may sell significant amounts of Fund shares. From time
to time, MFD may pay dealers 100% of the applicable sales charge on sales of
Class A shares of certain specified MFS Funds sold by such dealer during a
specified sales period. In addition, MFD or its affiliates may, from time to
time, pay dealers an additional commission equal to 0.50% of the net asset value
of all of the Class B shares of certain specified MFS Funds sold by such dealer
during a specified sales period. In addition, from time to time, MFD, at its
expense, may provide additional commissions, compensation or promotional
incentives ("concessions") to dealers which sell shares of the Fund. The staff
of the SEC has indicated that dealers who receive more than 90% of the sales
charge may be considered underwriters. Such concessions provided by MFD may
include financial assistance to dealers in connection with preapprroved
conferences or seminars, sales or training programs for invited registered
representatives, payment for travel expenses, including lodging, incurred by
registered representatives and members of their families or other invited guests
to various locations for such seminars or training programs, seminars for the
public, advertising and sales campaigns regarding one or more MFS Funds, and/or
other dealer-sponsored events. From time to time, MFD may make expense
reimbursements
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for special training of a dealer's registered representatives in group meetings
or to help pay the expenses of sales contests. Other concessions may be offered
to the extent not prohibited by the laws of the state or any self-regulatory
agency, such as the National Association of Securities Dealers, Inc. (the
"NASD").
The Glass-Steagall Act prohibits national banks from engaging in the business of
underwriting, selling or distributing securities. Although the scope of the
prohibition has not been clearly defined, MFD believes that such Act should not
preclude banks from entering into agency agreements with MFD (as described
above). If, however, a bank were prohibited from so acting, the Trustees would
consider what actions, if any, would be necessary to continue to provide
efficient and effective shareholder services. It is not expected that
shareholders would suffer any adverse financial consequence as a result of these
occurrences. In addition, state securities laws on this issue may differ from
the interpretation of federal law expressed herein and banks and financial
institutions may be required to register pursuant to state law.
Exchanges
Redemptions and Repurchases
A shareholder may withdraw all or any portion of the amount in his account on
any date on which the Fund is open for business by redeeming shares at their net
asset value or by selling such shares to the Fund through a dealer (a
repurchase). Since the net asset value of shares of the account fluctuates,
redemptions or repurchases, which are taxable transactions, are likely to result
in gains or losses to the shareholder. When a shareholder withdraws an amount
from his account, the shareholder is deemed to have tendered for redemption a
sufficient number of full and fractional shares in his account to cover the
amount withdrawn. The proceeds of a redemption or repurchase (except, in certain
cases, redemptions of Class A shares made by check, as provided below) will
normally be available within seven days, except that for shares purchased, or
received in exchange for shares purchased, by check (including certified checks
or cashier's checks) payment of redemption proceeds may be delayed for up to 15
days from the purchase date in an effort to assure that such check has cleared.
Payment of redemption proceeds may be delayed for up to seven days from the
redemption date if the Fund determines that such a delay would be in the best
interest of all its shareholders.
A. Redemption By Mail--Each shareholder has the right to redeem all or any
portion of the shares in his account by mailing or delivering to the Shareholder
Servicing Agent (see back cover for address) a stock power with a written
request for redemption
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<PAGE>
or a letter of instruction, together with his share certificates (if any were
issued), all in "good order" for transfer. "Good order" generally means that a
stock power, written request for redemption, letter of instruction or
certificate must be endorsed by the record owner(s) exactly as the shares are
registered and the signature(s) must be guaranteed in the manner set forth below
under the caption "Signature Guarantee." In addition, in some cases, "good
order" may require the furnishing of additional documents. The Shareholder
Servicing Agent may make certain de minimis exceptions to the above requirements
for redemption. Within seven days after receipt of a redemption request in "good
order" by the Shareholder Servicing Agent, the Fund will make payment in cash of
the net asset value of the shares next determined after such redemption request
was received, reduced by the amount of any applicable CDSC and the amount of any
income tax required to be withheld, except during any period in which the right
of redemption is suspended or date of payment is postponed because the Exchange
is closed or trading on such Exchange is restricted, or, to the extent otherwise
permitted by the 1940 Act, if an emergency exists (see "Tax Status").
B. Redemption By Telephone--Each shareholder may redeem an amount from his
account by telephoning the Shareholder Servicing Agent toll-free at (800)
225-2606. Shareholders wishing to avail themselves of this telephone redemption
privilege must so elect on their Account Application, designate thereon a
commercial bank and account number to receive the proceeds of such redemption,
and sign the Account Application Form with the signature(s) guaranteed in the
manner set forth below under the caption "Signature Guarantee." The proceeds of
such a redemption, reduced by the amount of any applicable CDSC described above
and the amount of any income tax required to be withheld, are mailed by check to
the designated account, without charge. As a special service, investors may
arrange to have proceeds in excess of $1,000 wired in federal funds to the
designated account. If a telephone redemption request is received by the
Shareholder Servicing Agent by the close of regular trading on the Exchange on
any business day, shares will be redeemed at the closing net asset value of the
Fund on that day. Subject to the conditions described in this section, proceeds
of a redemption are normally mailed or wired on the next business day following
the date of receipt of the order for redemption. The Shareholder Servicing Agent
will not be responsible for any losses resulting from unauthorized telephone
transactions if it follows reasonable procedures designed to verify the identity
of the caller. The Shareholder Servicing Agent will request personal or other
information from the caller, and will normally also record calls. Shareholders
should verify the accuracy of confirmation statements immediately after their
receipt.
C. Repurchase Through a Dealer--If a shareholder desires to sell his shares at
their net asset value through his securities dealer (a repurchase), the
shareholder can place a repurchase order with his dealer, who may charge the
shareholder a fee. If the dealer receives the shareholder's order prior to the
close of regular trading on the Exchange and communicates it to MFD before the
close of business on the same day the shareholder will receive the net asset
value calculated on that day.
D. Redemption By Check--Only Class A shares may be redeemed by check. A
shareholder owning Class A shares of the Fund may elect to have a special
account with State Street Bank and Trust Company (the "Bank") for the purpose of
redeeming Class A shares from his or her account by check. The Bank will provide
each Class A shareholder, upon request, with forms of checks drawn on the Bank.
Only shareholders having accounts in which no share certificates have been
issued will be permitted to redeem shares by check. Checks may be made payable
in any amount not less than $500. Shareholders wishing to avail themselves of
this redemption by check privilege should so request on their Account
Application, must execute signature cards (for additional information, see the
Account Application) with signature guaranteed in the manner set forth under the
caption "Signature Guarantee", and must return any Class A share certificates
issued to them. Additional documentation will be required from corporations,
partnerships, fiduciaries or other such institutional investors. All checks must
be signed by the shareholder(s) of record exactly as the account is registered
before the Bank will honor them. The shareholders of joint accounts may
authorize each shareholder to redeem by check. The check may not draw on monthly
dividends which have been declared but not distributed. Shareholders who
purchase Class A shares by check (including certified checks or cashier's
checks) may write checks against those shares only after they have been on the
Fund's books for 15 days. When such a check is presented to the Bank for
payment, a sufficient number of full and fractional shares will be redeemed to
cover the amount of the check, any applicable CDSC and the amount of any income
tax required to be withheld. If the amount of the check plus any applicable CDSC
and the amount of any income tax required to be withheld, is greater than the
value of the Class A shares held in the shareholder's account, the check will be
returned unpaid, and the shareholder may be
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<PAGE>
subject to extra charges. To avoid dishonor of checks due to fluctuation in
account value, shareholders are advised against redeeming all or most of their
account by check. Checks should not be used to close a Fund account because when
the check is written, the shareholder will not know the exact total value of the
account on the day the check clears. There is presently no charge to the
shareholder for the maintenance of this special account or for the clearance of
any checks, but the Fund and the bank reserve the right to impose such charges
or to modify or terminate the redemption by check privilege at any time.
Signature Guarantee: In order to protect shareholders to the greatest extent
possible against fraud, the Fund requires in certain instances as indicated
above that the shareholder's signature be guaranteed. In these cases the
shareholder's signature must be guaranteed by an eligible bank, broker, dealer,
credit union, national securities exchange, registered securities association,
clearing agency or savings association. Signature guarantee shall be accepted in
accordance with policies established by the Shareholder Servicing Agent.
General: Shareholders of the Fund who have redeemed their shares have a one-time
right to reinvest the redemption proceeds at net asset value (with a credit for
any CDSC paid) in the same class of shares of any of the MFS Funds (if shares of
such Fund are available for sale) within 90 days of the redemption pursuant to
the Reinstatement Privilege. If the shares credited for any CDSC paid are then
redeemed within six years of the initial purchase in the case of Class B shares,
or within twelve months of the initial purchase for certain Class A share
purchases, a CDSC will be imposed upon redemption. Such purchases under the
Reinstatement Privilege are subject to all limitations in the Statement of
Additional Information regarding this privilege.
Subject to the Fund's compliance with applicable regulations, the Fund has
reserved the right to pay the redemption or repurchase price of shares of the
Fund, either totally or partially, by a distribution in kind of portfolio
securities (instead of cash). The securities so distributed would be valued at
the same amount as that assigned to them in calculating the net asset value for
the shares being sold. If a shareholder received a distribution in kind, the
shareholder could incur transaction, tax or other charges when converting the
securities to cash.
Due to the relatively high cost of maintaining small accounts, the Fund reserves
the right to redeem shares in any account for their then-current value (which
will be promptly paid to the shareholder) if at any time the total investment in
such account drops below $500 because of redemptions, except in the case of
accounts being established for monthly automatic investments and certain payroll
savings programs, Automatic Exchange Plan accounts and tax-deferred retirement
plans, for which there is a lower minimum investment requirement. See
"Information Concerning Shares of the Fund--Purchases". Shareholders will be
notified that the value of their account is less than the minimum investment
requirement and allowed 60 days to make an additional investment before the
redemption is processed. No CDSC will be imposed with respect to such
involuntary redemptions.
Contingent Deferred Sales Charge--Investments ("Direct Purchases") in Class A
and B shares will be subject to a CDSC for a period of 12 months (in the case of
purchases of $1 million or more of Class A shares) or six years (in the case of
purchases of Class B shares). Purchases of Class A shares made during a calendar
month, regardless of when during the month the investment occurred, will age one
month on the last day of the month and each subsequent month. Class B shares
purchased will be aggregated on a calendar month basis--all transactions made
during a calendar month, regardless of when during the month they have occurred,
will age one year at the close of business on the last day of such month in the
following calendar year and each subsequent year. For Class B shares
attributable to shareholders of MFS Lifetime Government Fund (which was merged
into the Fund on September 7, 1993), which were purchased prior to January 1,
1993, transactions will be aggregated on a calendar year basis--all transactions
made during a calendar year, regardless of when during the year they have
occurred, will age one year at the close of business on December 31 of that year
and each subsequent year. At the time of a redemption, the amount by which the
value of a shareholder's account for a particular class represented by Direct
Purchases exceeds the sum of the six calendar year aggregations (twelve months
in the case of purchases of $1 million or more of Class A shares) of Direct
Purchases may be redeemed without charge ("Free Amount"). Moreover, no CDSC is
ever assessed on additional shares acquired through the automatic reinvestment
of dividends or capital gain distributions ("Reinvested Shares").
Therefore, at the time of redemption of shares of a particular class, (i) any
Free Amount is not subject to the CDSC, and (ii) the amount of redemption equal
to the then-current value of Reinvested Shares is not subject to the CDSC, but
(iii) any amount of the redemption
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<PAGE>
in excess of the aggregate of the then-current value of Reinvested Shares and
the Free Amount is subject to a CDSC. The CDSC will first be applied against the
amount of Direct Purchases which will result in any such charge being imposed at
the lowest possible rate. The CDSC to be imposed upon redemptions will be
calculated as set forth in "Purchases" above.
The applicability of a CDSC will be unaffected by exchanges or transfers of
registration, except that, with respect to transfers of registration to an IRA
rollover account, the CDSC will be waived if the shares being reregistered would
have been eligible for a CDSC waiver had they been redeemed.
Distribution Plans
The Trustees have adopted separate distribution plans for Class A and Class B
shares 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
plans would benefit the Fund and its shareholders.
Class A Distribution Plan. The Class A Distribution Plan provides that the Fund
will pay MFD a distribution/service fee aggregating up to (but not necessarily
all of) 0.35% of the average daily net assets attributable to Class A shares
annually in order that MFD may pay expenses on behalf of the Fund related to the
distribution and servicing of Class A shares. The expenses to be paid by MFD on
behalf of the Fund include a service fee to securities dealers which enter 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 that are owned by investors for whom
such securities dealer is the dealer of record. This fee is intended to be
partial consideration for all personal services and/or account maintenance
services rendered by the holder or dealer with respect to Class A shares. MFD
may from time to time reduce the amount of the service fee paid for shares sold
prior to a certain date. Service fees may be reduced for a securities 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 Class A 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. MFD will also retain
a distribution fee of 0.10% per annum of the Fund's average daily net assets
attributable to Class A shares as partial consideration for services performed
and expenses incurred in the performance of MFD's obligations under its
distribution agreement with the Fund. In addition, to the extent that the
aggregate of the foregoing fees does not exceed 0.35% per annum of the average
daily net assets of the Fund attributable to Class A shares, the Fund is
permitted to pay other distribution-related expenses, including commissions to
dealers and payments to wholesalers employed by MFD for sales at or above a
certain dollar level. Fees payable under the Class A Distribution Plan are
charged to, and therefore reduce, income allocated to Class A shares. Certain
banks and other financial institutions that have agency agreements with MFD will
receive service fees that are the same as service fees to dealers.
Class B Distribution Plan. The Class B Distribution Plan provides that the Fund
will pay MFD a daily distribution fee payable equal on an annual basis to 0.75%
of the Fund's average daily net assets attributable to Class B shares and will
pay MFD a service fee of up to 0.25% per annum of the Fund's average daily net
assets attributable to Class B shares (which MFD will in turn pay to securities
dealers which enter into a sales agreement with MFD at a rate of up to 0.25% per
annum of the Fund's average daily net assets attributable to Class B shares
owned by investors for whom that securities dealer is the holder or dealer of
record). This service fee is intended to be additional consideration for all
personal services and/or account maintenance services rendered by the dealer
with respect to Class B shares. The Class B Distribution Plan also provides that
MFD will receive all CDSCs attributable to Class B shares (see "Redemptions and
Repurchases" above), which do not reduce the distribution fee. 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 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. Therefore, the total
amount paid to a dealer upon the sale of shares is 4.00% of the purchase price
of the shares (commission rate of 3.75% plus service fee equal to 0.25% of the
purchase price). Dealers will become eligible for additional service fees with
respect to such shares commencing in the thirteenth month fol-
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<PAGE>
lowing purchase. 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 Class B 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. The purpose
of the distribution payments to MFD under the Class B Distribution Plan is to
compensate MFD for its distribution services to the Fund. Since MFD's
compensation is not directly tied to its expenses, the amount of compensation
received by MFD during any year may be more or less than its actual expenses.
For this reason, this type of distribution fee arrangement is characterized by
the staff of the SEC as being of the "compensation" variety. However, the Fund
is not liable for any expenses incurred by MFD in excess of the amount of
compensation it receives. The expenses incurred by MFD, including commissions to
dealers, are likely to be greater than the distribution fees for the next
several years, but thereafter such expenses may be less than the amount of the
distribution fees. Fees payable under the Class B Distribution Plan are charged
to, and therefore reduce, income allocated to Class B shares. Certain banks and
other financial institutions that have agency agreements with MFD will receive
agency transaction and service fees that are the same as commissions and service
fees to dealers.
Distributions
The Fund intends to pay substantially all of its net investment income as
dividends on a monthly basis. In determining the net investment income available
for distributions, the Fund may rely on projections of its anticipated net
investment income over a longer term, rather than its actual net investment
income for the period. If the Fund earns less than projected, or otherwise
distributes more than its earnings for the year, a portion of the distributions
may constitute a return of capital. The Fund may make one or more distributions
during the calendar year to its shareholders from any long-term capital gains,
and may also make one or more distributions during the calendar year to its
shareholders from short-term capital gains. Shareholders may elect to receive
dividends and capital gain distributions in either cash or additional shares of
the class with respect to which the distribution is made. See "Tax Status" and
"Shareholder Services--Distribution Options" below. Distributions paid by the
Fund with respect to Class A shares will generally be greater than those paid
with respect to Class B shares because expenses attributable to Class B shares
will generally be higher.
Tax Status
In order to minimize the taxes the Fund would otherwise be required to pay, the
Fund intends to qualify each year as a "regulated investment company" under
Subchapter M of the Code, and to make distributions to its shareholders in
accordance with the timing requirements imposed by the Code. It is expected that
the Fund will not be required to pay entity level federal income or excise
taxes. Shareholders of the Fund normally will have to pay federal income taxes
(and any state or local taxes), on the dividends and capital gain distributions
they receive from the Fund, whether paid in cash or additional shares.
Shareholders may not have to pay state or local taxes on dividends derived from
interest on U.S. Government obligations. Shareholders should consult with their
tax advisers in this regard.
A statement setting forth the federal income tax status of all dividends and
distributions for each calendar year, including the portion taxable as ordinary
income, the portion taxable as long-term capital gain, the portion representing
interest on U.S. Government obligations, the portion, if any, representing a
return of capital (which is free of current taxes but results in a basis
reduction), and the amount, if any, of federal income tax withheld will be sent
to each shareholder promptly after the end of such year.
Fund distributions will reduce the Fund's net asset value per share.
Shareholders who buy shares shortly before the Fund makes a distribution may
thus pay the full price for the shares and then effectively receive a portion of
the purchase price back as a taxable distribution.
The Fund intends to withhold U.S. federal income tax at a rate of 30% on
dividends and other payments that are subject to such withholding and that are
made to persons who are neither citizens nor residents of the U.S., regardless
of whether a lower rate may be permitted under an applicable law or treaty. The
Fund is also required in certain circumstances to apply backup
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<PAGE>
withholding 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. However,
backup withholding will not be applied to payments which have had 30%
withholding taken. Prospective investors should read the Account Application for
information regarding backup withholding of federal income tax and should
consult their own tax advisers as to the tax consequences of an investment in
the Fund.
Dividends of the Fund that are derived from interest on obligations of the U.S.
Government and certain of its agencies and instrumentalities (but generally not
from capital gains realized upon a disposition of such obligations) may be
exempt from state and local taxes in certain states. Shareholders should consult
their tax advisers regarding the possible exclusion of such portion of their
dividends for state and local income tax purposes. Residents of certain states
may be subject to an intangibles tax or a personal property tax on all or a
portion of the value of their shares.
Net Asset Value
The net asset value per share of each class of the Fund is determined each day
during which the Exchange is open for trading. This determination is made once
during each day as of the close of regular trading on the Exchange by deducting
the amount of the Fund's liabilities attributable to the class from the value of
the Fund's assets attributable to the class and dividing the difference by the
number of shares of the class outstanding. Assets in the Fund's portfolio are
valued on the basis of their market or other fair value, as described in the
Statement of Additional Information. The net asset value of each class of shares
is effective for orders received by the dealer prior to its calculation and
received by MFD prior to the close of that business day.
Description of Shares, Voting Rights and Liabilities
The Fund has two classes of shares, entitled Class A and Class B Shares of
Beneficial Interest (without par value). The Fund has reserved the right to
create and issue additional classes and series of shares, in which case each
class of shares of a series would participate equally in the earnings, dividends
and assets attributable to that class of shares of that particular series.
Shareholders are entitled to one vote for each share held and shares of each
series would be entitled to vote separately to approve investment advisory
agreements or changes in investment restrictions, but shares of all series would
vote together in the election of Trustees and selection of accountants.
Additionally, each class of shares of a series will vote separately on any
material increases in the fees under its Distribution Plan or on any other
matter that affects solely that class of shares, but will otherwise vote
together with all other classes of shares of the series on all other matters.
The Fund does not intend to hold annual shareholder meetings. The Declaration of
Trust provides that a Trustee may be removed from office in certain instances
(see "Description of Shares, Voting Rights and Liabilities" in the Statement of
Additional Information).
Each share of a class of the Fund represents an equal proportionate interest in
the Fund with each other class share, subject to the liabilities of the
particular class. Shares have no pre-emptive or conversion rights (except as
described above in "Information Concerning Shares of the
Fund--Purchases--Conversion of Class B Shares"). Shares are fully paid and non-
assessable. Should the Fund be liquidated, shareholders of each class are
entitled to share pro rata in the net assets of the Fund attributable to that
class available for distribution to shareholders. Shares will remain on deposit
with the Shareholder Servicing Agent and certificates will not be issued except
in connection with pledges and assignments and in certain other limited
circumstances.
The Fund is an entity of the type commonly known as a "Massachusetts business
trust". Under Massachusetts law, shareholders of such a trust may, under certain
circumstances, be held personally liable as partners for its obligations.
However, the risk of a shareholder incurring financial loss on account of
shareholder liability is limited to circumstances in which both inadequate
insurance existed (e.g., fidelity bonding and omission insurance) and the Fund
itself was unable to meet its obligations.
Performance Information
From time to time, the Fund will provide yield, current distribution rate and
total rate of return quotations for each class of shares and may also quote fund
rankings in the relevant fund category from various sources, such as the Lipper
Analytical
21
<PAGE>
Services, Inc. and Weisenberger Investment Companies Service.
Yield quotations will be based on the annualized net investment income per share
of a class of the Fund over a 30 day period stated as a percent of the maximum
public offering price of shares of that class on the last day of that period.
The current distribution rate for each class is generally based upon the total
amount of dividends per share paid by the Fund to shareholders of that class
during the past twelve months and is computed by dividing the amount of such
dividends by the maximum public offering price of that class at the end of such
period. Current distribution rate calculations for Class B shares assume no CDSC
is paid. The current distribution rate differs from the yield calculation
because it may include distributions to shareholders from sources other than
dividends and interest, such as premium income from option writing, short-term
capital gains, and return of invested capital, and is calculated over a
different period of time. Total rate of return quotations will reflect the
average annual percentage change over stated periods in the value of an
investment in a class of the Fund made at the maximum public offering price of
shares of that class with all distributions reinvested and which, if quoted for
periods of six years or less, will give effect to the imposition of the CDSC
assessed upon redemption of the Fund's Class B shares. Such total rate of return
quotations may be accompanied by quotations which do not reflect the reduction
in the value of the initial investment due to the sales charge or the deduction
of a CDSC, and which will thus be higher. All performance quotations are based
on historical performance and are not intended to indicate future performance.
Yield reflects only net portfolio income as of a stated time and current
distribution rate reflects only the rate of distributions paid by the Fund over
a stated period of time, while total rate of return reflects all components of
investment return over a stated period of time. The Fund's quotations may from
time to time be used in advertisements, shareholder reports or other
communications to shareholders. For a discussion of the manner in which the Fund
will calculate its yield, current distribution rate and total rate of return,
see the Statement of Additional Information. For further information about the
Fund's performance for the fiscal year ended July 31, 1994, please refer to the
Fund's Annual Report. A copy of the Annual Report may be obtained without charge
by contacting the Shareholder Servicing Agent (see back cover for address and
phone number). In addition to information provided in shareholder reports, the
Fund may, in its discretion, from time to time, make a list of all or a portion
of its holdings available to investors upon request.
7. SHAREHOLDER SERVICES
Shareholders with questions concerning the shareholder services described below
or concerning other aspects of the Fund should contact the Shareholder Servicing
Agent (see back cover for address and phone number).
Account and Confirmation Statements--Each shareholder will receive confirmation
statements showing the transaction activity in his account. At the end of each
calendar year, each shareholder will receive income tax information regarding
reportable dividends and capital gain distributions for that year (see "Tax
Status").
Distribution Options--The following options are available to all accounts
(except Systematic Withdrawal Plan accounts) and may be changed as often as
desired by notifying the Shareholder Servicing Agent:
--Dividends and capital gain distributions reinvested in additional shares.
This option will be assigned if no other option is specified;
--Dividends in cash; capital gain distributions (except as provided below)
reinvested in additional shares;
--Dividends and capital gain distributions in cash.
With respect to the second option, the Fund may from time to time make
distributions from short-term capital gains on a monthly basis, and to the
extent such gains are distributed monthly, they shall be paid in cash; any
remaining short-term capital gains not so distributed shall be reinvested in
additional shares.
Reinvestments (net of any tax withholding) will be made in additional full and
fractional shares at the net asset value in effect at the close of business on
the record date. Checks for dividends and capital gain distributions in amounts
less than $10 will automatically be reinvested in additional shares of the Fund.
If a shareholder has elected to receive dividends and/or capital gain
distributions in cash and the postal or other delivery service is unable to
deliver checks to the shareholder's address of
22
<PAGE>
record, such shareholder's distribution option will automatically
be converted to having all dividends and other distributions reinvested in
additional shares. Any request to change a distribution option must be received
by the Shareholder Servicing Agent by the record date for a dividend or
distribution in order to be effective for that dividend or distribution. No
interest will accrue on amounts represented by uncashed distribution or
redemption checks.
Investment and Withdrawal Programs --For the convenience of shareholders, the
Fund makes available the following programs designed to enable shareholders to
add to their investment in an account with the Fund or withdraw from it with a
minimum of paper work. The programs involve no extra charge to shareholders
(other than a sales charge in the case of certain Class A share purchases) and
may be changed or discontinued at any time by a shareholder or the Fund.
Letter of Intent: If a shareholder (other than a group purchaser as described in
the Statement of Additional Information) anticipates purchasing $100,000 or more
of Class A shares of the Fund alone or in combination with the total value of
all shares of all classes of other MFS Funds or the MFS Fixed Fund within a
13-month period (or 36-month period for purchases of $1 million or more), the
shareholder may obtain such shares of the Fund at the same reduced sales charge
as though the total quantity were invested in one lump sum, subject to escrow
agreements and the appointment of an attorney for redemptions from the escrow
amount, if the intended purchases are not completed, by completing the Letter of
Intent section of the Account Application.
Right of Accumulation: A shareholder qualifies for cumulative quantity discounts
on purchases of Class A shares when his new investment, together with the
current offering price value of all holdings of all classes of shares of that
shareholder in the MFS Funds or the MFS Fixed Fund (a bank collective investment
fund) reaches a discount level.
Distribution Investment Program: Shares of a particular class of the Fund may be
sold at net asset value (and without any applicable CDSC) through the automatic
reinvestment of dividend and capital gain distributions from the same class of
another MFS Fund. Furthermore, distributions made by the Fund may be
automatically invested at net asset value (and without any applicable CDSC) in
shares of the same class of another MFS Fund, if shares of such Fund are
available for sale.
Systematic Withdrawal Plan: A shareholder may direct the Shareholder Servicing
Agent to send him (or anyone he designates) regular periodic payments, as
designated on the Account Application and based upon the value of his account.
Each payment under a Systematic Withdrawal Plan must be at least $100, except in
certain limited circumstances. The aggregate withdrawals of Class B shares in
any year pursuant to a SWP will not be subject to a CDSC and are generally
limited to 10% of the value of the account at the establishment of the SWP. The
CDSC will not be waived in the case of SWP redemptions of Class A shares which
are subject to a CDSC.
Dollar Cost Averaging Programs--
Automatic Investment Plan: Cash investments of $50 or more may be made through a
shareholder's checking account twice monthly, monthly or quarterly. Required
forms are available from the Shareholder Servicing Agent or investment dealers.
Automatic Exchange Plan: Shareholders having account balances of at least $5,000
in any MFS Fund may exchange their shares for the same class of shares of other
MFS Funds under the Automatic Exchange Plan, a dollar cost averaging program.
The Automatic Exchange Plan provides for automatic monthly or quarterly
exchanges of funds from the shareholder's account in an MFS Fund for investment
in the same class of shares in other MFS Funds selected by the shareholder.
Under the Automatic Exchange Plan, exchanges of at least $50 each may be made to
up to four different funds. A shareholder should consider the objectives and
policies of a fund and review its prospectus before electing to exchange money
into such fund through the Automatic Exchange Plan. No transaction fee is
imposed in connection with exchange transactions under the Automatic Exchange
Plan. However, exchanges of shares of MFS Money Market Fund, MFS Government
Money Market Fund and Class A shares of MFS Cash Reserve Fund will be subject to
any applicable sales charge. For federal and (generally) state income tax
purposes, an exchange is treated as a sale of the shares exchanged and,
therefore, could result in a capital gain or loss to the shareholder
23
<PAGE>
making the exchange. See the Statement of Additional Information for further
information concerning the Automatic Exchange Plan. Investors should consult
their tax advisers for information regarding the potential capital gain and loss
consequences of transactions under the Automatic Exchange Plan.
Because a dollar cost averaging program involves periodic purchases of shares
regardless of fluctuating share offering prices, a shareholder should consider
his financial ability to continue his purchases through periods of low price
levels. Maintaining a dollar cost averaging program concurrently with a
withdrawal program could be disadvantageous because of the sales charges
included in share purchases in the case of Class A shares, and because of the
assessment of the CDSC for certain share redemptions in the case of Class A
shares.
Tax-Deferred Retirement Plans--Shares of the Fund may be purchased by all types
of tax-deferred retirement plans, including IRAs, SEP-IRA plans, 401(k) plans,
403(b) plans and other corporate pension and profit-sharing plans. Investors
should consult with their tax advisers before establishing any of the
tax-deferred retirement plans described above.
The Fund's Statement of Additional Information, dated April 1, 1995, contains
more detailed information about the Fund, including, but not limited to,
information related to (i) investment objective, policies and restrictions, (ii)
its Trustees, officers and investment adviser, (iii) portfolio transactions and
brokerage commissions, (iv) the method used to calculate yield, distribution
rate and total rate of return quotations of the Fund, (v) the Class A and Class
B Distribution Plans, and (vi) various services and privileges provided by the
Fund for the benefit of its shareholders, including additional information with
respect to the exchange privilege.
24
<PAGE>
APPENDIX A
Description of Obligations Issued or Guaranteed by
U.S. Government Agencies, Authorities or Instrumentalities
GNMA Certificates--are mortgage-backed securities which represent a partial
ownership interest in a pool of mortgage loans issued by lenders such as
mortgage bankers, commercial banks and savings and loan associations. Each
mortgage loan included in the pool is either insured by the Federal Housing
Administration or guaranteed by the Veterans Administration.
The Fund will purchase only GNMA Certificates of the "modified pass-through"
type, which entitle the holder to receive its proportionate share of all
interest and principal payments owed on the mortgage pool, net of fees paid to
the issuer and GNMA. Payment of principal of and interest on GNMA Certificates
of the "modified pass-through" type is guaranteed by GNMA.
The average life of a GNMA Certificate is likely to be substantially less than
the original maturity of the mortgage pools underlying the securities.
Prepayments of principal by mortgagors and mortgage foreclosures will usually
result in the return of the greater part of principal invested far in advance of
the maturity of the mortgages in the pool. Foreclosures impose no risk to
principal investment because of the GNMA guarantee.
As the prepayment rates of individual mortgage pools will vary widely, it is not
possible to accurately predict the average life of a particular issue of GNMA
Certificates. However, statistics published by the FHA indicate that the average
life of a single-family dwelling mortgage with a 25- 30-year maturity, the type
of mortgage which backs the vast majority of GNMA Certificates, is approximately
12 years. It is therefore customary practice to treat GNMA Certificates as
30-year mortgage-backed securities which prepay fully in the twelfth year.
As a consequence of the fees paid to GNMA and the issuer of GNMA Certificates,
the coupon rate of interest of GNMA Certificates is lower than the interest paid
on the VA-guaranteed or FHA-insured mortgages underlying the GNMA Certificates.
The yield which will be earned on GNMA Certificates may vary from their coupon
rates for the following reasons: (i) Certificates may be issued at a premium or
discount, rather than at par; (ii) Certificates may trade in the secondary
market at a premium or discount after issuance; (iii) interest is earned and
compounded monthly which has the effect of raising the effective yield earned on
the Certificates; and (iv) the actual yield of each Certificate is affected by
the prepayment of mortgages included in the mortgage pool underlying the
Certificates and the rate at which principal so prepaid is reinvested. In
addition, prepayment of mortgages included in the mortgage pool underlying a
GNMA Certificate purchased at a premium may result in a loss to the Fund.
Due to the large amount of GNMA Certificates outstanding and active
participation in the secondary market by securities dealers and investors, GNMA
Certificates are highly liquid instruments. Prices of GNMA Certificates are
readily available from securities dealers and depend on, among other things, the
level of market rates, the Certificate's coupon rate and the prepayment
experience of the pool of mortgages backing each Certificate.
FNMA Bonds--are bonds issued and guaranteed by the Federal National Mortgage
Association and are not guaranteed by the U.S. Government.
FHLMC Bonds--are bonds issued and guaranteed by the Federal Home Loan Mortgage
Corporation and are not guaranteed by the U.S. Government.
Export-Import
Bank Certificates--are certificates of beneficial interest and participation
certificates issued and guaranteed by the Export-Import Bank of the United
States.
Federal Agricultural Mortgage Corporation Certificates--are certificates of
beneficial interest guaranteed by the Federal Agricultural Mortgage Corporation.
A-1
<PAGE>
Federal Agricultural Mortgage Corporation Bonds and Notes--are bonds and notes
guaranteed by the Federal Agricultural Mortgage Corporation.
Federal Farm Credit Banks Consolidated Systemwide Notes and Bonds--are bonds
issued and guaranteed by a cooperatively owned nationwide system of banks and
associations supervised by the Farm Credit Administration.
Federal Home Loan Bank Notes and Bonds--are notes and bonds issued by the
Federal Home Loan Bank System.
Federal Home Loan Bank Certificates--are certificates of beneficial interest and
participation certificates issued and guaranteed by the Federal Home Loan Bank
System.
FHA Debentures--are debentures issued by the Federal Housing Authority of the
U.S. Government.
FICO Bonds and Notes--are bonds and notes issued and guaranteed by the Financing
Corporation.
GSA Participation Certificates--are participation certificates issued by the
General Services Administration of the U.S. Government.
Maritime Administration Bonds--are bonds issued by the Department of
Transportation of the U.S. Government.
New Communities Debentures--are debentures issued in accordance with the
provisions of Title IV of the Housing and Urban Development Act of 1968, as
supplemented and extended by Title VII of the Housing and Urban Development Act
of 1970, the payment of which is guaranteed by the U.S. Government.
REFCORP Bonds and Notes--are bonds and notes issued and guaranteed by the
Resolution Funding Corporation.
SBA Debentures--are debentures fully guaranteed as to principal and interest by
the Small Business Administration of the U.S. Government.
SLMA Debentures--are debentures backed by the Student Loan Marketing
Association.
Title XI Bonds--are bonds issued in accordance with the provisions of Title XI
of the Merchant Marine Act of 1936, as amended, the payment of which is
guaranteed by the U.S. Government.
TVA Bonds and Notes--are bonds and notes issued and guaranteed by the Tennessee
Valley Authority.
U.S. Department of Veteran Affairs Certificates--are certificates of beneficial
interest guaranteed by the U.S. Department of Veteran Affairs.
Washington Metropolitan Area Transit Authority Bonds-- are bonds issued by the
Washington Metropolitan Area Transit Authority and guaranteed by the Secretary
of Transportation of the U.S. Government.
Although this list includes the primary types of Government Securities in which
the Fund invests (other than U.S. Treasury obligations), the Fund may also
invest in Government Securities other than those listed above.
A-2
<PAGE>
The MFS Family of Funds ((r)) -- America's Oldest Mutual Fund Group
The members of the MFS Family of Funds are grouped below according to the types
of securities in their portfolios. For free prospectuses containing more
complete information, including the exchange privilege and all charges and
expenses, please contact your financial adviser or call the MFS Service Center
at 1-800-225-2606 any business day from 8 a.m. to 8 p.m. Eastern time. This
material should be read carefully before investing or sending money.
Stock
Massachusetts Investors Trust
Massachusetts Investors Growth Stock Fund
MFS((r)) Capital Growth Fund
MFS((r)) Emerging Growth Fund
MFS((r)) Gold & Natural Resources Fund
MFS((r)) Growth Opportunities Fund
MFS((r)) Managed Sectors Fund
MFS((r)) OTC Fund
MFS((r)) Resesarch Fund
MFS((r)) Value Fund
Stock and Bond
MFS((r)) Total Return Fund
MFS((r)) Utilities Fund
Bond
MFS((r)) Bond Fund
MFS((r)) Government Mortgage Fund
MFS((r)) Government Securities Fund
MFS((r)) High Income Fund
MFS((r)) Intermediate Income Fund
MFS((r)) Strategic Income Fund
(formerly MFS((r)) Income & Opportunity Fund)
Limited Maturity Bond
MFS((r)) Government Limited Maturity Fund
MFS((r)) Limited Maturity Fund
MFS((r)) Municipal Limited Maturity Fund
World
MFS((r)) World Asset Allocation Fund
MFS((r)) World Equity Fund
MFS((r)) World Governments Fund
MFS((r)) World Growth Fund
MFS((r)) World Total Return Fund
National Tax-Free Bond
MFS((r)) Municipal Bond Fund
MFS((r)) Municipal High Income Fund
(closed to new investors)
MFS((r)) Municipal Income Fund
State Tax-Free Bond
Alabama, Arkansas, California, Florida,
Georgia, Louisiana, Maryland, Massachusetts,
Mississippi, New York, North Carolina,
Pennsylvania, South Carolina, Tennessee, Texas,
Virginia, Washington, West Virginia
Money Market
MFS((r)) Cash Reserve Fund
MFS((r)) Government Money Market Fund
MFS((r)) Money Market Fund
<PAGE>
Investment Adviser
Massachusetts Financial Services Company
500 Boylston Street
Boston, MA 02116
(617) 954-5000
Distributor
MFS Fund Distributors, Inc.
500 Boylston Street
Boston, MA 02116
(617) 954-5000
Custodian and Dividend Disbursing Agent
State Street Bank and Trust Company
225 Franklin Street
Boston, MA 02110
Shareholder Servicing Agent
MFS Service Center, Inc.
500 Boylston Street
Boston, MA 02116
Toll-free: (800) 225-2606
Mailing Address:
P.O. Box 2281
Boston, MA 02107-9906
Independent Accountants
Deloitte & Touche LLP
125 Summer Street
Boston, MA 02110
[MFS LOGO] MFS
THE FIRST NAME IN MUTUAL FUNDS
MFS((R)) Government Mortgage Fund
500 Boylston Street
Boston, MA 02116
MGM-1 4/95/169M 31/231
[MFS LOGO] MFS
THE FIRST NAME IN MUTUAL FUNDS
MFS((R)) Government Mortgage Fund
Prospectus
April 1, 1995
[Background photo of 2 people talking]
[LOGO] MFS LOGO
THE FIRST NAME IN MUTUAL FUNDS
MFS(R) GOVERNMENT
MORTGAGE FUND
(A member of the MFS Family of Funds(R))
STATEMENT OF
ADDITIONAL INFORMATION
April 1, 1995
<TABLE>
<CAPTION>
Page
<S> <C> <C>
1. Definitions 2
2. Investment Objectives, Policies and
Restrictions 2
3. Management of the Fund 10
Trustees 11
Officers 11
Investment Adviser 12
Custodian 13
Shareholder Servicing Agent 13
Distributor 13
4. Portfolio Transactions and Brokerage
Commissions 14
5. Shareholder Services 14
Investment and Withdrawal Programs 14
Exchange Privilege 16
Tax-Deferred Retirement Plans 17
6. Tax Status 17
7. Determination of Net Asset Value and
Performance 19
8. Distribution Plans 21
9. Description of Shares, Voting Rights and
Liabilities 22
10. Independent Accountants and Financial
Statements 23
Appendix A 24
</TABLE>
MFS GOVERNMENT MORTGAGE FUND
500 Boylston Street, Boston, Massachusetts 02116
(617) 954-5000
This Statement of Additional Information (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, 1995. This SAI should be read in
conjunction with the Prospectus, a copy of which may be obtained without charge
by contacting the Shareholder Servicing Agent (see back cover for address and
phone number).
This SAI is NOT a prospectus and is authorized for distribution to prospective
investors only if preceded or accompanied by a current prospectus.
<PAGE>
1. DEFINITIONS
<TABLE>
<CAPTION>
<S> <C>
"Fund" -- MFS Government Mortgage Fund, a
Massachusetts business trust. (The Fund
was known as "MFS Government Securities
High Yield Trust" until its name was
changed on October 10, 1989 and "MFS
Government Income Plus Trust" until its
name was changed again on August 3, 1992.
On March 1, 1993 the Funds name was
changed from MFS(R) Government Income Plus
Fund).
"MFS" or the -- Massachusetts Financial Services
"Adviser" Company, a Delaware corporation.
"MFD" -- MFS Fund Distributors Inc., a Delaware
corporation.
"Prospectus" -- The Prospectus, dated April 1, 1995, of
the Fund.
</TABLE>
2. INVESTMENT OBJECTIVE, POLICIES AND RESTRICTIONS
Investment Objective. The Fund's primary investment objective is to provide a
high level of current income. The secondary objective of the Fund is to protect
shareholders' capital. Any investment involves risk and there can be no
assurance that the Fund will achieve this objective.
Investment Policies. The investment policies of the Fund are described in the
Prospectus. In addition, certain of the Fund's investment policies are described
in greater detail below.
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 (the "Exchange") or members of the Federal Reserve System, recognized
primary U.S. Government securities dealers or institutions which the Adviser has
determined to be of comparable creditworthiness. The securities that the Fund
purchases and holds through its agent are U.S. Government securities, the values
of which are equal to or greater than the repurchase price agreed to be paid by
the seller. The repurchase price may be higher than the purchase price, the
difference being income to the Fund, or the purchase and repurchase prices may
be the same, with interest at a standard rate due to the Fund together with the
repurchase price on repurchase. In either case, the income to the Fund is
unrelated to the interest rate on the U.S. Government securities.
The repurchase agreement provides that in the event the seller fails to pay the
price agreed upon on the agreed upon delivery date or upon demand, as the case
may be, the Fund will have the right to liquidate the securities. If at the time
the Fund is contractually entitled to exercise its right to liquidate the
securities, the seller is subject to a proceeding under the bankruptcy laws or
its assets are otherwise subject to a stay order, the Fund's exercise of its
right to liquidate the securities may be delayed and result in certain losses
and costs to the Fund. The Fund has adopted and follows procedures which are
intended to minimize the risks of repurchase agreements. For example, the Fund
only enters into repurchase agreements after the Adviser has determined that the
seller is creditworthy, and the Adviser monitors that seller's creditworthiness
on an ongoing basis. Moreover, under such agreements, the value of the
securities (which are marked to market every business day) is required to be
greater than the repurchase price, and the Fund has the right to make margin
calls at any time if the value of the securities falls below the agreed upon
margin.
Mortgage Pass-Through Securities. The Fund may invest in mortgage pass-through
securities as described in the Prospectus. Interests in pools of
mortgage-related securities differ from other forms of debt securities, which
normally provide for periodic payment of interest in fixed amounts with
principal payments at maturity or specified call dates. Instead, these
securities provide a monthly payment which consists of both interest and
principal payments. In effect, these payments are a "pass-through" of the
monthly payments made by the individual borrowers on their mortgage loans, net
of any fees paid to the issuer or guarantor of such securities. Additional
payments are caused by prepayments of principal resulting from the sale,
refinancing or foreclosure of the underlying property, net of fees or costs
which may be incurred. Some mortgage pass-through securities (such as securities
issued by the 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 the
GNMA. GNMA is a wholly owned U.S. Government corporation within the Department
of Housing and Urban Development. GNMA is authorized to guarantee, with the full
faith and credit of the U.S. Government, the timely payment of principal and
interest on securities issued by institutions approved by GNMA (such as savings
and loan institutions, commercial banks and mortgage bankers) and backed by
pools of FHA-insured or VA-guaranteed mortgages. These guarantees, however, do
not apply to the market value or yield of mortgage pass-though securities. GNMA
securities are often purchased at a premium over the maturity value of the
underlying mortgages. This premium is not guaranteed and will be lost if
prepayment occurs.
Government-related guarantors (i.e., whose guarantees are not backed by the full
faith and credit of the U.S. Government) include the Federal National Mortgage
Association ("FNMA") and the Federal Home Loan Mortgage Corporation ("FHLMC").
FNMA is a government-sponsored corporation owned entirely by private
stockholders. It is subject to general regulation by the Secretary of Housing
and Urban Development. FNMA purchases conventional residential mortgages (i.e.,
mortgages not insured or guaranteed by any governmental agency) from a list of
approved seller/servicers which include state and federally-chartered savings
and loan associations, mutual savings banks, commercial banks, credit unions and
mortgage bankers. Pass-through securities issued by FNMA are guaranteed as to
timely payment by FNMA of principal and interest.
2
<PAGE>
FHLMC was created by Congress in 1970 as a corporate instrumentality of the U.S.
Government for the purpose of increasing the availability of mortgage credit for
residential housing. FHLMC issues Participation Certificates ("PCs") which
represent interests in conventional mortgages (i.e., not federally insured or
guaranteed) from FHLMC's national portfolio. FHLMC guarantees timely payment of
interest and ultimate collection of principal regardless of the status of the
underlying mortgage loans.
"When-Issued" Securities: The Fund may purchase securities on a "when-issued" or
on a "forward delivery" basis. When the Fund commits to purchase Government
Securities on a "when- issued" or "forward delivery" basis, it will set up
procedures consistent with policies promulgated by the Securities and Exchange
Commission (the "SEC"). Since those policies currently recommend that an amount
of the Fund's assets equal to the amount of the purchase be held aside or
segregated to be used to pay for the commitment, the Fund will always have cash,
short-term money market instruments or Government Securities sufficient to cover
any commitments or to limit any potential risk. The Fund does not intend to make
such purchases for speculative purposes. The Fund will only make commitments to
purchase securities on a when-issued or delayed-delivery basis with the
intention of actually acquiring the securities. However, the Fund may sell these
securities before the settlement date if it is deemed advisable as a matter of
investment strategy. When the time comes to pay for when-issued or
delayed-delivery securities, the Fund will meet its obligations from then
available cash flow or the sale of securities, or, although it would not
normally expect to do so, from the sale of the "when-issued" or delayed-delivery
securities themselves (which may have a value greater or less than the Fund's
payment obligation).
Mortgage "Dollar Roll" Transactions: As described in the Prospectus, the Fund
may enter into mortgage "dollar roll" transactions pursuant to which it sells
mortgage-backed securities for delivery in the future and simultaneously
contracts to repurchase substantially similar securities on a specified future
date. During the roll period, the Fund foregoes principal and interest paid on
the mortgage-backed securities. The Fund is compensated for the lost interest by
the difference between the current sales price and the lower price for the
future purchase (often referred to as the "drop") as well as by the interest
earned on the cash proceeds of the initial sale. The Fund may also be
compensated by receipt of a commitment fee.
Collateralized Mortgage Obligations and Multiclass Pass- Through Securities: The
Fund may invest a portion of its assets in collateralized mortgage obligations
("CMOs") which are debt obligations collateralized by mortgage loans or mortgage
pass- through securities. Collateral underlying CMOs purchased by the Fund must
be issued or guaranteed by the U.S. Government, its agencies, authorities or
instrumentalities. Typically, CMOs are collateralized by certificates issued by
the GNMA, FNMA or FHLMC (such collateral collectively hereinafter referred to as
"Mortgage Assets"). The Fund may also invest a portion of its assets in
multiclass pass-through securities which are interests in a trust composed of
Mortgage Assets. These Mortgage Assets must be issued or guaranteed by the U.S.
Government, its agencies, authorities or instrumentalities. Unless the context
indicates otherwise, all references herein to CMOs include multiclass pass-
through securities. Payments of principal of and interest on the Mortgage
Assets, and any reinvestment income thereon, provide the funds to pay debt
service on the CMOs or make scheduled distributions on the multiclass
pass-through securities.
In a CMO, a series of bonds or certificates is usually issued in multiple
classes. Each class of CMOs, often referred to as a "tranche", is issued at a
specific fixed or floating coupon rate and has a stated maturity or final
distribution date. Principal prepayments on the Mortgage Assets may cause the
CMOs to be retired substantially earlier than their stated maturities or final
distribution dates resulting in a loss of all or part of the premium if any has
been paid. Interest is paid or accrues on all classes of the CMOs on a monthly,
quarterly or semiannual basis. The principal of and interest on the Mortgage
Assets may be allocated among the several classes of a series of a CMO in
innumerable ways. In a common structure, payments of principal, including any
principal prepayments, on the Mortgage Assets are applied to the classes of the
series of a CMO in the order of their respective stated maturities or final
distribution dates, so that no payment of principal will be made on any class of
CMOs until all other classes having an earlier stated maturity or final
distribution date have been paid in full. Certain CMOs may be stripped
(securities which provide only the principal or interest factor of the
underlying security). See "Stripped Mortgage-Backed Securities" below for a
discussion of the risks of investing in these stripped securities and of
investing in classes consisting primarily 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. PAC Bonds generally require payments of a specified amount of
principal on each payment date. PAC Bonds are always parallel pay CMOs with the
required principal payment on such securities having the highest priority after
interest has been paid to all classes.
Stripped Mortgage-Backed Securities: The Fund may invest a portion of its assets
in stripped mortgage-backed securities ("SMBS"), which are derivative multiclass
mortgage securities.
SMBS are usually structured with two classes that receive different proportions
of the interest and principal distributions from a pool of mortgage assets. The
Fund will only invest in SMBS whose mortgage assets are issued or guaranteed by
the U.S. Government, its agencies, authorities or instrumentalities. A common
type of SMBS will have one class receiving some of the interest and most of the
principal from the Mortgage Assets, while the other class will receive most of
the interest and the remainder of the principal. In the most extreme case, one
class will receive all of the interest (the interest-only or "IO" class) while
the other class will receive all of the principal (the principal-only or "PO"
class). The yield to maturity on an IO is extremely sen-
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sitive 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.
Swaps and Related Transactions: The Fund may enter into interest rate swaps and
other types of available swap agreements. Swaps involve the exchange by the Fund
with another party of cash payments based upon different interest rate indexes
and other prices or rates, such as the value of mortgage prepayment rates. For
example, in the typical interest rate swap, the Fund might exchange a sequence
of cash payments based on a floating rate index for cash payments based on a
fixed rate. Payments made by both parties to a swap transaction are based on a
principal amount determined by the parties.
The Fund may also purchase and sell caps, floors and collars. In a typical cap
or floor agreement, one party agrees to make payments only under specified
circumstances, usually in return for payment of a fee by the counterparty. For
example, the purchase of an interest rate cap entitles the buyer, to the extent
that a specified index exceeds a predetermined interest rate, to receive
payments of interest on a contractually-based principal amount from the
counterparty selling such interest rate cap. The sale of an interest rate floor
obligates the seller to make payments to the extent that a specified interest
rate falls below an agreed-upon level. A collar arrangement combines elements of
buying a cap and selling a floor.
The Fund will maintain cash or appropriate liquid assets with its custodian to
cover its current obligations under swap transactions and cap, floor and collar
arrangements. If the Fund enters into a swap agreement on a net basis (i.e., the
two payment streams are netted out, with the Fund receiving or paying, as the
case may be, only the net amount of the two payments), the Fund will maintain
cash or liquid assets with its Custodian with a daily value at least equal to
the excess, if any, of the Fund's accrued obligations under the swap agreement
over the accrued amount the Fund is entitled to receive under the agreement. If
the Fund enters into a swap agreement on other than a net basis, it will
maintain cash or liquid assets with a value equal to the full amount of the
Fund's accrued obligations under the agreement.
The most significant factor in the performance of swaps, caps, floors and
collars is the change in the specific interest rate or other factor 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 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.
Options on Fixed Income Securities: The Fund may write (sell) covered call and
put options on fixed income securities and purchase call and put options. An
option provides the purchaser, or "holder," with the right, but not the
obligation, to purchase, in the case of a "call" option, or sell, in the case of
a "put" option, the fixed income security or securities in connection with which
the option was written, for a fixed exercise price up to a stated expiration
date or, in the case of certain options, on such date. The holder pays a
non-refundable purchase price for the option, known as the "premium." The
maximum amount of risk the purchaser of the option assumes is equal to the
premium plus related transaction costs, although this entire amount may be lost.
The risk of the seller, or "writer," however, is potentially unlimited, unless
the option is "covered". 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 held in a segregated account by its custodian)
upon conversion or exchange of other securities held in its portfolio. A call
option is also covered if the Fund holds a call on the same fixed income
security and in the same principal amount as the call written where the exercise
price of the call held (a) is equal to or less than the exercise price of the
call written or (b) is greater than the exercise price of the call written if
the difference is maintained by the Fund in cash, short-term money market
instruments or high quality government securities in a segregated account with
its custodian. A put option written by the Fund is "covered" if the Fund
maintains cash, short-term money market instruments or high quality government
securities with a value equal to the exercise price in a segregated account with
its custodian, or else holds a put on the same security and in the same
principal amount as the put written where the exercise price of the put held is
(a) equal to or greater than the exercise price of the put written or (b) is
less than the exercise price of the put written if the difference is maintained
by the Fund in cash or short-term money market instruments in a segregated
account with its custodian. Put and call options written by the Fund may also be
covered in such other manner as may be in accordance with the requirements of
the exchange on which, or the counter party with which, the option is traded,
and applicable laws and regulations. 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.
The Fund may write options for hedging purposes. In particular, if the Fund
writes an option which expires unexercised or is closed out by the Fund at a
profit, the Fund retains the premium paid for the option less related
transaction costs, which increases its gross income and offsets in part the
reduced value of the portfolio security in connection with which the option is
written, or the increased cost of portfolio securities to be acquired. In
contrast, however, if the price of the security underlying the option moves
adversely to the Fund's position, the option may be exercised and the Fund will
then be required to purchase or sell the
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security at a disadvantageous price, which might only partially be offset by the
amount of the premium.
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
depends 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.
The writing of covered put options is similar in terms of risk/return
characteristics to buy-and-write transactions. Put options may be used by the
Fund in the same market environments in which call options are used in
equivalent buy-and-write transactions.
In certain instances, the Fund may enter into Options on 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 and series 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 to
the Fund 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 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.
The Fund may also write combinations of put and call options on the same
security, a practice known as a "straddle." By writing a straddle, the Fund
undertakes a simultaneous obligation to sell or purchase the same security in
the event that one of the options is exercised. If the price of the security
subsequently rises sufficiently above the exercise price to cover the amount of
the premium and transaction costs, the call will likely be exercised and the
Fund will be required to sell the underlying security at a below market price.
This loss may be offset, however, in whole or in part, by the premiums received
on the writing of the two options. Conversely, if the price of the security
declines by a sufficient amount, the put will likely be exercised. The writing
of straddles will likely be effective, therefore, only where the price of a
security remains stable and neither the call nor the put is exercised. In an
instance where one of the options is exercised, the loss on the purchase or sale
of the underlying security may exceed the amount of the premiums received.
By writing a call option on a portfolio security, 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 loss unless the security subsequently appreciates in value. The writing of
options will not be undertaken by the Fund for speculative purposes, but rather
for hedging purposes. Where options are written for hedging purposes, such
transactions will constitute only a partial hedge against declines in the value
of portfolio securities or against increases in the value of securities to be
acquired, up to the amount of the premium.
The Fund may also purchase put and call options on securities. Put options are
purchased to hedge against a decline in the value of securities held in the
Fund's portfolio. If such a decline occurs, the put options will permit the Fund
to sell the securities underlying such options at the exercise price, or to
close out the options at a profit. The Fund will purchase call options to hedge
against an increase in the price of securities that the Fund anticipates
purchasing in the future. If such an increase occurs, the call option will
permit the Fund to purchase the securities underlying such option at the
exercise price or to close out the option at a profit. The premium paid for a
call or put option plus any transaction costs will reduce the benefit, if any,
realized by the Fund upon exercise of the option, and, unless the price of the
underlying security rises or declines sufficiently, the option may expire
worthless to the Fund. In addition, in the event that the price of the security
in connection with which an option was purchased moves in a direction favorable
to the Fund, the benefits realized by the Fund as a result of such favorable
movement will be reduced by the amount of the premium paid for the option and
related transaction costs.
The staff of the SEC has taken the position that purchased over- the-counter
options and assets used to cover written over-the- counter options are illiquid
and, therefore, together with other illiquid securities, cannot exceed a certain
percentage of the Fund's assets (the "SEC illiquidity ceiling"). Although the
Adviser disagrees with this position, the Adviser intends to limit the Fund's
writing of over-the-counter options in accordance with the following procedure.
Except as provided below, the Fund intends to write over-the-counter options
only with primary U.S. Government securities dealers recognized by the Federal
Reserve Bank of New York. Also, the contracts the Fund has in place with such
primary dealers will provide that the Fund has the absolute right to repurchase
an option it writes at any time at a price which represents the fair market
value, as determined in good faith through negotiation between the parties, but
which in no event will exceed a price determined pursuant to a formula in the
contract. Although the specific formula may vary between contracts with
different primary dealers, the formula will generally be based on a multiple of
the premium received by the Fund for writing the option, plus the amount, if
any, of the option's intrinsic value (i.e.,
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the amount that the option is in-the-money). The formula may also include a
factor to account for the difference between the price of the security and the
strike price of the option if the option is written out-of-the-money. The Fund
will treat all or a portion of the formula as illiquid for purposes of the SEC
illiquidity ceiling. The Fund may also write over-the-counter options with non-
primary dealers and will treat the assets used to cover these options as
illiquid for purposes of such SEC illiquidity ceiling.
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 trading of yield curve options
is subject to all of the risks associated with the trading of other types of
options. In addition, however, such options present risk of loss even if the
yield of one of the underlying securities remains constant, if the spread moves
in a direction or to an extent which was not anticipated. Yield curve options
written by the Fund will be "covered." A call (or put) option is covered if the
Fund holds another call (or put) option on the spread between the same two
securities and maintains in a segregated account with its custodian cash or cash
equivalents sufficient to cover the Fund's net liability under the two options.
Therefore, the Fund's liability for such a covered option is generally limited
to the difference between the amount of the Fund's liability under the option
written by the Fund less the value of the option held by the Fund. Yield curve
options may also be covered in such other manner as may be in accordance with
the requirements of the counterparty with which the option is traded and
applicable laws and regulations. Yield curve options are traded over-the-
counter and because they have been only recently introduced, established trading
markets for these securities have not yet developed.
Futures Contracts: The Fund may enter into contracts for the purchase or sale
for future delivery of fixed income securities ("Futures Contracts"). Such
transactions will be used to hedge (i.e., protect) against anticipated changes
in interest rates which otherwise might either adversely affect the value of the
Fund's portfolio securities or adversely affect the prices of long-term
Government Securities which the Fund intends to purchase at a later date. The
Fund may also enter into such transactions for non-hedging purposes to the
extent permitted by applicable law.
When a Futures Contract is sold, the Fund incurs a contractual obligation to
deliver the securities underlying the contract at a specified price on a
specified date during a specified future month or, in the case of Futures
Contracts on an index of securities, to make or receive a cash settlement. A
"purchase" of a Futures Contract means a contractual obligation by the Fund to
receive delivery of the securities called for by the contract at a specified
price during a specific future month or, in the case of Futures Contracts on an
index of securities, to make or receive cash settlements.
Futures Contracts have been designed by exchanges which have been designated
"contract markets" by the Commodity Futures Trading Commission ("CFTC"), and
must be executed through a futures commission merchant, or brokerage firm, which
is a member of the relevant contract market. Futures Contracts trade on these
markets, and the exchanges, through their clearing organizations, guarantee that
the contracts will be performed as between the clearing members of the exchange.
The Fund will only enter into Futures Contracts which are based on Government
Securities, including any index of Government Securities.
While Futures Contracts based on debt securities provide for the delivery of
securities, deliveries are very seldom made. Generally, a Futures Contract is
terminated by entering into an offsetting transaction. The Fund will incur
brokerage fees when it purchases and sells Futures Contracts. At the same time
such a purchase or sale is made, the Fund must provide cash or securities as a
deposit ("initial deposit") known as "margin." The initial deposit varies but
may be as low as 5% or less of the value of the contract. Daily thereafter, the
Futures Contract is valued on a marked-to- market basis and the Fund may be
required to pay or receive additional "variation margin", based on the decline
or increase in the value of the contract. At the time of delivery of securities
pursuant to such a contract, adjustments are made to recognize differences in
value arising from the delivery of securities with a different interest rate
than the specific security that provides the standard for the contract. In some
(but not many) cases, securities called for by a Futures Contract may not have
been issued when the contract was written. A Futures Contract on an index of
Government Securities provides for the payment and receipt of a cash settlement
based on changes in the value of the index. The index underlying such a Contract
is comprised of a broad based portfolio of Government Securities designed to
reflect movements in the market as a whole.
The purpose of the purchase or sale of a Futures Contract for hedging purposes,
in the case of a portfolio such as the Fund's portfolio, which holds or intends
to acquire long-term debt securities, is to protect the Fund against the adverse
effects of fluctuations in interest rates without actually buying or selling
long-term debt securities. For example, since the Fund owns long-term bonds, if
interest rates were expected to increase the Fund might enter into Futures
Contracts for the sale of debt securities. If interest rates did increase, the
value of the debt securities in the portfolio would decline, but the value of
the Fund's Futures Contracts would increase at approximately the same rate
thereby keeping the net asset value of the Fund from declining, or declining as
much as it otherwise would have.
Similarly, when it is expected that interest rates may decline, Futures
Contracts may be purchased to hedge in anticipation of subsequent purchases of
long-term bonds at higher prices. Since
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the fluctuations in the value of 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 Futures Contracts could be liquidated and the Fund could buy
long-term bonds on the cash market. Due to changing market conditions, however,
and interest rate forecasts, a futures position may be terminated without a
corresponding purchase of securities. To the extent the Fund purchases a Futures
Contract, it will maintain a segregated asset account consisting of cash, cash
equivalents or short-term money market instruments in an amount equal to the
difference between the fluctuating market value of such Futures Contracts and
the aggregate value of the initial deposit and variation margin payments made by
the Fund with respect to such Futures Contracts, thereby assuring that the
position is unleveraged.
The liquidity of a market in a futures contract may be adversely affected by
"daily price fluctuation limits" established by commodity exchanges, which limit
the amount of fluctuation in a futures contract price 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 positions. Prices have in the past exceeded the daily limit on a
number of consecutive trading days. On any day or days when the price
fluctuation limits have been reached, the Fund may be unable to liquidate
existing futures positions or to implement a hedging strategy through the
purchase or sale of particular futures.
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 portfolio of the Fund. The
trading of Futures Contracts is also subject to the illiquidity risks described
above with respect to options on securities.
Options on Futures Contracts: The Fund may write and purchase options to buy or
sell Futures Contracts ("Options on Futures Contracts"). The writing of a call
Option on a Futures Contract may constitute a partial hedge against declining
prices of the fixed income security underlying 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 may constitute a partial hedge against increasing prices of the
security underlying the Futures Contract. If the futures price at expiration of
the option is higher than the exercise price, the Fund will retain the full
amount of the option premium, less related transaction costs, which provides a
partial hedge against any increase in the price of securities which the Fund
intends to purchase. If a put or call option the Fund has written is exercised,
the Fund will incur a loss which will be reduced by the amount of the premium it
receives. Depending on the degree of correlation between changes in the value of
its portfolio securities and changes in the value of its futures positions, the
Fund's losses from existing Options on Futures Contracts may to some extent be
reduced or increased by changes in the value of portfolio securities. The Fund
may also enter into such transactions for non-hedging purposes, to the extent
permitted by applicable law, which involves greater risk.
The Fund may purchase Options on Futures Contracts for hedging purposes as an
alternative to purchasing or selling the underlying Futures Contracts. For
example, where a decrease in the value of portfolio securities is anticipated as
a result of a projected market-wide decline or a rise in interest rates, the
Fund may, in lieu of selling Futures Contracts, purchase put options thereon. In
the event that such decrease in portfolio value occurs, it may be offset, in
whole or part, by a profit on the option. Conversely, where it is projected that
the value of securities to be acquired by the Fund will increase prior to
acquisition, due to a market advance or a decline in interest rates, the Fund
may purchase call Options on Futures Contracts, rather than purchasing the
underlying Futures Contracts. As in the case of Options, the writing of Options
on Futures Contracts may require the Fund to forego all or a portion of the
benefits of favorable movements in the price of portfolio securities, and the
purchase of Options on Futures Contracts may require the Fund to forego all or a
portion of such benefits up to the amount of the premium paid and related
transaction costs. The Fund may also enter into transactions in Options on
Futures Contracts for non-hedging purposes to the extent permitted by applicable
law.
The Fund may cover the writing of call Options on Futures Contracts (a)
through purchases of the underlying Futures Contract, (b) through ownership of
the instrument, or instruments included in the index, underlying the Futures
Contract, or (c) through the holding of a call on the same Futures Contract and
in the same principal amount as the call written where the exercise price of the
call held (i) is equal to or less than the exercise price of the call written or
(ii) is greater than the exercise price of the call written if the difference is
maintained by the Fund in cash, short-term money market instruments or high
quality government securities in a segregated account with its custodian. The
Fund may cover the writing of put Options on Futures Contracts (a) through sales
of the underlying Futures Contract, (b) through segregation of cash, short-term
money market instruments or high quality government securities in an amount
equal to the value of the security or index underlying the Futures Contract, or
(c) through the holding of a put on the same Futures Contract and in the same
principal amount as the put written where the exercise price of the put held is
equal to or greater than the exercise price of the put written, or is less than
the exercise price of the put written if the difference is maintained by the
Fund in cash, short-term money market instruments or high quality government
securities in a segregated account with its custodian. 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
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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. An
Option on a Futures Contract is traded on the same contract market as the
underlying Futures Contract, subject to regulation by the Commodity Futures
Trading Commission ("CFTC") and the performance guarantee of the exchange
clearing house.
Risk Factors: Imperfect Correlation of Hedging Instruments with the Fund's
Portfolio--The Fund's ability effectively to hedge all or a portion of its
portfolio through transactions in options and Futures Contracts will depend on
the degree to which price movements in the underlying instruments correlate with
price movements in the relevant portion of the Fund's portfolio. If the values
of fixed income portfolio securities being hedged do not move in the same amount
or direction as the instruments underlying options or Futures Contracts, the
Fund's hedging strategy may not be successful and the Fund could sustain losses
on its hedging strategy which would not be offset by gains on its portfolio. It
is also possible that there may be a negative correlation between the instrument
underlying an option or Futures Contract and the portfolio securities being
hedged, which could result in losses both on the hedging transaction and the
portfolio securities. In such instances, the Fund's overall return could be less
than if the hedging transaction had not been undertaken. In the case of Futures
and options on fixed income securities, the portfolio securities which are being
hedged may not be the same type of obligation underlying such contract. As a
result, the correlation probably will not be exact. Consequently, the Fund bears
the risk that the price of the fixed income portfolio securities being hedged
will not move in the same amount or direction as the underlying index or
obligation.
The correlation between prices of fixed income securities and prices of options
or Futures Contracts may be distorted due to 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 option and Futures Contract
markets. Due to the possibility of distortion, a correct forecast of general
interest rate trends by the Adviser may still not result in a successful
transaction. The trading of Options on Futures Contracts also entails the risk
that changes in the value of the underlying Futures Contract will not be fully
reflected in the value of the option. The risk of imperfect correlation,
however, generally tends to diminish as the maturity or termination date of the
option or Futures Contract approaches.
The trading of options and Futures Contracts also entails the risk that, if the
Adviser's judgment as to the general direction of interest or exchange rates is
incorrect, the Fund's overall performance may be poorer than if it had not
entered into any such contract. For example, if the Fund has hedged against the
possibility of an increase in interest rates, and rates instead decline, the
Fund will lose part or all of the benefit of the increased value of the fixed
income securities being hedged, and may be required to meet ongoing daily
variation margin payments.
It should be noted that the Fund may purchase and write Options, Futures
Contracts and Options on Futures Contracts not only for hedging purposes, but
also for non-hedging purposes to the extent permitted by applicable law. As a
result, the Fund will incur the risk that losses on such transactions will not
be offset by corresponding increases in the value of fixed income portfolio
securities or decreases in the cost of fixed income securities to be acquired.
Risk Factors: Potential Lack of a Liquid Secondary Market-- Prior to exercise or
expiration, a position in an exchange-traded option, Futures Contract or Option
on a Futures Contract can only be terminated by entering into a closing purchase
or sale transaction, which requires a secondary market for such instruments on
the exchange on which the initial transaction was entered. If no such market
exists, it may not be possible to close out a position, and the Fund could be
required to purchase or sell the underlying instrument or meet ongoing variation
margin requirements. The inability to close out option or futures positions also
could have an adverse effect on the Fund's ability effectively to hedge its
portfolio.
The liquidity of a secondary market in an option or Futures Contract may be
adversely affected by "daily price fluctuation limits," established by the
exchanges, which limit the amount of fluctuation in the price of a contract
during a single trading day and prohibit trading beyond such limits once they
have been reached. Such limits could prevent the Fund from liquidating open
positions, which could render its hedging strategy unsuccessful and result in
trading losses. The exchanges on which options and Futures Contracts are traded
have also established a number of limitations governing the maximum number of
positions which may be traded by a trader, whether acting alone or in concert
with others. Further, the purchase and sale of exchange-traded options and
Futures Contracts is subject to the risk of trading halts, suspensions, exchange
or clearing corporation equipment failures, government intervention, insolvency
of a brokerage firm, intervening broker or clearing corporation or other
disruptions of normal trading activity, which could make it difficult or
impossible to liquidate existing positions or to recover excess variation margin
payments.
Risk Factors: Options on Futures Contracts--In order to profit from the purchase
of an Option on a Futures Contract, it may be necessary to exercise the option
and liquidate the underlying Futures Contract, subject to all of the risks of
futures trading. The writer of an Option on a Futures Contract is subject to the
risks of futures trading, including the requirement of initial and variation
margin deposits.
Additional Policies on the Use of Options and Futures: In order to assure that
the Fund will not be deemed to be a "commodity pool" for purposes of the
Commodity Exchange Act, regulations of the CFTC require that the Fund enter into
transactions in Futures Contracts and Options on Futures Contracts only (i) for
bona fide hedging purposes (as defined in CFTC regulations), or
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<PAGE>
(ii) for non-hedging purposes, provided that the aggregate initial margin and
premiums on such non-hedging positions does not exceed 5% of the liquidation
value of the Fund's assets. In addition, the Fund must comply with the
requirements of various state securities laws in connection with such
transactions.
The Fund has adopted the additional policy that it will not enter into a Futures
Contract if, immediately thereafter, the value of securities and other
obligations underlying all such Futures Contracts would exceed 50% of the value
of the Fund's total assets. Moreover, the Fund will not purchase put and call
Options if, as a result, more than 5% of its total assets would be invested in
such Options.
When the Fund purchases a Futures Contract, an amount of cash and cash
equivalents will be deposited in a segregated account with the Fund's custodian
so that the amount so segregated will at all times equal the value of the
Futures Contract, thereby insuring that the use of such Futures is unleveraged.
Lending of Portfolio Securities: The Fund may seek to increase its income by
lending portfolio securities. Such loans will usually be made to member banks of
the Federal Reserve System and to member firms of the New York Stock Exchange
(and subsidiaries thereof), and would be required to be secured continuously by
collateral in cash, cash equivalents or U.S. Government 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 days). During the existence of a loan, the Fund
would continue to receive the equivalent of the interest paid by the issuer on
the securities loaned and would also receive compensation based on investment of
the collateral. As with other extensions of credit, there are risks of delay in
recovery or even loss of rights in the collateral should the borrower of the
securities fail financially. However, the loans would be made only to firms
deemed by the Adviser to be of good standing, and when, in the judgment of the
Adviser, the consideration which could be earned currently from securities loans
of this type justifies the attendant risk. If the Adviser determines to make
securities loans, it is not intended that the value of the securities loaned
would exceed 30% of the value of the Fund's total assets.
Portfolio Trading: The Fund intends to fully manage its portfolio by buying and
selling U.S. Government obligations, as well as holding selected obligations to
maturity, and by engaging in transactions involving related options, futures and
options on futures. In managing its portfolio the Fund seeks to maximize the
return on its portfolio by taking advantage of market developments and yield
disparities, which may include use of the following strategies:
(1) selling one type of Government Security (e.g., Treasury bonds) and
buying another (e.g., GNMA direct pass- through certificates) when disparities
arise in the relative values of each; and
(2) changing from one U.S. Government obligation to an essentially similar
U.S. Government obligation when their respective yields are distorted due to
market factors.
The Fund will also use the techniques described above under "Repurchase
Agreements," "'When-Issued' Securities," "Options" and "Futures Contracts" to
manage its portfolio.
These strategies may result in increases or decreases in the Fund's current
income available for distribution to the Fund's shareholders and in the holding
by the Fund of obligations which sell at moderate to substantial premiums or
discounts from face value. Moreover, if the Fund's expectations of changes in
interest rates or its evaluation of the normal yield relationship between two
obligations proves to be incorrect, the Fund's income, net asset value per share
and potential capital gain may be decreased or its potential capital loss may be
increased.
The Fund will engage in portfolio trading if it believes a transaction net of
costs (including custodian charges) will help in attaining its investment
objective. See "Portfolio Transactions and Brokerage Commissions".
The objective and the policies described above and the policies with respect to
portfolio trading described above may be changed without shareholder approval.
Investment Restrictions. The Fund has adopted the following restrictions which
cannot be changed without the approval of the holders of a majority of its
shares (which, as used in this Statement of Additional Information, means the
lesser of (i) more than 50% of the outstanding shares of the Fund or of a class,
as applicable, or (ii) 67% or more of the outstanding shares of the Fund or of a
class, as applicable, present at a meeting at which holders of more than 50% of
the outstanding shares of the Fund or of a class, as applicable, are represented
at such meeting in person or by proxy):
The Fund may not:
(1) borrow money or pledge its assets except as a temporary measure for
extraordinary or emergency purposes (the Fund intends to borrow money only from
banks and only to accommodate requests for the repurchase of shares of the Fund
while effecting an orderly liquidation of portfolio securities) (for the purpose
of this restriction, collateral arrangements with respect to options, Futures
Contracts, options on futures contracts and collateral arrangements with respect
to initial and variation margins are not considered a pledge of assets); for
additional related restrictions, see paragraphs (i) and (ii) under the caption
"State and Federal Restrictions";
(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 Futures Contracts and related options;
(3) write, purchase or sell any put or call option or any combination
thereof, provided that this shall not prevent the writing, purchasing and
selling of puts, calls or combinations thereof with respect to Government
Securities and with respect to Futures Contracts or the purchase, ownership,
holding or sale of contracts for the future delivery of fixed income securities;
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<PAGE>
(4) 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;
(5) purchase or sell commodities or commodity contracts, except that the
Fund may purchase and sell Futures Contracts and related options;
(6) 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, 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 present intention of management 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);
(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 and provided that not more than
10% of the Fund's assets will be invested in repurchase agreements maturing in
more than seven days (for these purposes the purchase of all or a portion of an
issue of debt securities in accordance with the Fund's investment objective and
policies shall not be considered the making of a loan);
(8) knowingly invest in securities which are restricted securities under the
Securities Act of 1933 if, as a result thereof, more than 10% of the Fund's
total assets (taken at market value) would be so invested;
(9) 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;
(10) purchase securities of any issuer if such purchase at the time thereof
would cause more than 5% of the Fund's assets (taken at market value) to be
invested in the securities of such issuer (other than securities or obligations
issued or guaranteed by the United States, any state or political subdivision
thereof, or any political subdivision of any such state, or any agency or
instrumentality of the United States or of any state or of any political
subdivision of any state or the United States); or
(11) 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 and collateral arrangements with respect to initial and
variation margin are not deemed to be the issuance of a senior security).
The Fund has also adopted a policy which is fundamental and which provides that
the Fund's assets will be invested in Government Securities and related options,
futures, options on futures and repurchase agreements.
State and Federal Restrictions: In order to comply with certain state and
federal statutes and policies, the Fund will not, as a matter of operating
policy, (i) borrow money for any purpose in excess of 10% of its assets (taken
at market value) (moreover, the Fund will not purchase any securities for its
portfolio at any time at which borrowings exceed 5% of its assets (taken at
market value), (ii) pledge for any purpose in excess of 15% of its assets (taken
at market value) (for the purpose of this restriction, collateral arrangements
with respect to the writing of options, futures contracts, options on futures
contracts and collateral arrangements with respect to initial and variation
margins are not considered a pledge of assets), (iii) invest more than 5% of its
total assets at the time of investment in companies which, including
predecessors, have a record of less than three years' continuous operation, (iv)
purchase or retain in its portfolio any securities issued by an issuer any of
whose officers, directors, trustees or security holders is an officer or Trustee
of the Fund. 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,
(v) invest for the purpose of exercising control or management, (vi) purchase
securities issued by any registered investment company except by purchase in the
open market where no commission or profit to a sponsor or dealer results from
such purchase other than the customary broker's commission, or except when such
purchase, though not made in the open market, is part of a plan of merger or
consolidation; provided, however, that the Fund shall not purchase the
securities of any registered investment company if such purchase at the time
thereof would cause more than 10% of the net assets of the Fund (taken at market
value) to be invested in the securities of such issuers or would cause more than
3% of the outstanding voting securities of any such issuer to be held by the
Fund and, provided further, that the Fund shall not purchase securities issued
by any open-end investment company, or (vii) invest more than 10% of its assets
(taken at market value) in securities (including repurchase agreements maturing
in more than seven days) for which there are no readily available market
quotations. These policies are not fundamental and may be changed by the Fund
without shareholder approval in response to changes in the various state and
federal requirements.
Percentage Restriction: These investment restrictions are adhered to at the time
of purchase or utilization of assets; a subsequent change in circumstances will
not be considered to result in a violation of policy.
3. MANAGEMENT OF THE FUND
The Fund's Board of Trustees provides broad supervision over the affairs of the
Fund. The Adviser is responsible for the manage-
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<PAGE>
ment of the Fund's assets, and the officers of the Fund are responsible for its
operations. The Trustees and officers are listed below, together with their
principal occupations during the past five years. (Their titles may have varied
during that period.)
Trustees
A. KEITH BRODKIN, Chairman and President*
Massachusetts Financial Services Company, Chairman and Director
RICHARD B. BAILEY*
Private investor; Massachusetts Financial Services Company, former Chairman and
Director (until September 30, 1991)
PETER G. HARWOOD
Loomis, Sayles & Co., Inc., (investment counsel firm) Financial Vice President
Treasurer and Director (retired October 1988) Address: 211 Lindsay Pond Road,
Concord, Massachusetts
J. ATWOOD IVES
Eastern Enterprises (diversified holding company), Chairman and Chief Executive
Officer (since December 1991); General Cinema Corporation, Vice Chairman and
Chief Financial Officer (until December 1991); The Neiman Marcus Group, Inc.,
Vice Chairman and Chief Financial Officer (from August 1987 to December 1991);
United States Filter Corporation, Director
Address: 9 Riverside Road, Weston, Massachusetts
LAWRENCE T. PERERA
Hemenway & Barnes (attorneys), Partner
Address: 60 State Street, Boston, Massachusetts
WILLIAM J. POORVU
Harvard University Graduate School of Business Administration, Adjunct
Professor; CBL & Associates Properties, Inc. (a real estate investment trust).
Director; The Baupost Fund (a registered investment company), Vice Chairman
(since November 1993), Chairman and Trustee (from June 1990 until November
1993),
Address: Harvard Business School, Soldiers Field Road, Cambridge, Massachusetts
CHARLES W. SCHMIDT
Private investor; Raytheon Company (diversified electronics manufacturer),
Senior Vice President and Group Executive (until December 1990); OHM
Corporation, Director; The Boston Company, Director; Boston Safe Deposit and
Trust Company, Director
Address: 30 Colpitts Road, Weston, Massachusetts
ARNOLD D. SCOTT*
Massachusetts Financial Services Company, Senior Executive Vice President and
Secretary
JEFFREY L. SHAMES*
Massachusetts Financial Services Company, President
ELAINE R. SMITH
Independent consultant; Brigham and Women's Hospital, Executive Vice President
and Chief Operating Officer (from August 1990 to September 1992); Ernst & Young
(accountants), Consultant (from February to July 1990)
Address: Weston, Massachusetts
DAVID B. STONE
North American Management Corp. (investment advisers), Chairman
Address: Ten Post Office Square, Suite 300, Boston, Massachusetts
Officers
W. THOMAS LONDON,* Treasurer
Massachusetts Financial Services Company, Senior Vice President
STEPHEN E. CAVAN,* Secretary and Clerk
Massachusetts Financial Services Company, Senior Vice President, Assistant
Secretary and General Counsel
JAMES R. BORDEWICK, JR.,* Assistant Secretary
Massachusetts Financial Services Company, Vice President and Associate General
Counsel (since September 1990); associated with major law firm (prior to August
1990)
JAMES O. YOST,* Assistant Treasurer
Massachusetts Financial Services Company, Vice President
*"Interested persons" (as defined in the 1940 Act) of the Adviser, whose address
is 500 Boylston Street, Boston, Massachusetts 02116.
Each Trustee and officer holds comparable positions with certain MFS affiliates
or with certain other funds of which MFS or a subsidiary of MFS is the
investment adviser or distributor. Messrs. Brodkin, Scott and Cavan are the
Chairman, a Director and the Secretary, respectively, of MFD and hold similar
positions with certain other MFS affiliates. Mr. Bailey is a director of Sun
Life Assurance Company of Canada (U.S.) ("Sun Life of Canada (U.S.)"), the
corporate parent of MFS.
The Fund pays the compensation of non-interested Trustees (who currently receive
a fee of $4,000 per year plus $180 per meeting and $150 per committee meeting
attended, together with such Trustee's out-of-pocket expenses) and has adopted a
retirement plan for non-interested Trustees. Under this plan, a Trustee will
retire upon reaching age 73 and if the Trustee has completed at least 5 years of
service, he would be entitled to annual payments during his lifetime of up to
50% of such Trustee's average annual compensation (based on the three years
prior to his retirement) depending on his length of service. A Trustee may also
retire prior to age 73 and receive reduced payments if he has completed at least
5 years of service. Under the plan, a Trustee (or his beneficiaries) will also
receive benefits for a period of time in the event the Trustee is disabled or
dies. These benefits will also be based on the Trustee's average annual
compensation and length of service. There is no retirement plan provided by the
Fund for the interested Trustees. However, Mr. Bailey retired as Chairman and
Director of MFS as of September 30, 1991 and will eventually become eligible for
retirement benefits. The Fund will accrue compensation expenses each year to
cover current years service and amortize past service cost.
Set forth in Appendix A hereto is certain information concerning the cash
compensation paid to non-interested Trustees and Mr. Bailey and benefits
accrued, and estimated benefits payable under the retirement plan.
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<PAGE>
As of July 31, 1994, all Trustees and officers as a group owned less than 1% of
the outstanding shares of the Fund. As of February 28, 1995, Merrill Lynch,
Pierce, Fenner & Smith, P.O. Box 45286, Jacksonville, FL 32232-5286 was the
record owner of approximately 12.55% of the outstanding Class B shares of the
Fund.
xxxxxxxxxxxxX
The Fund's Declaration of Trust provides that it will indemnify its Trustees and
officers against liabilities and expenses incurred in connection with litigation
in which they may be involved because of their offices with the Fund, unless, as
to liabilities to the Fund or its shareholders, it is finally adjudicated that
they engaged in willful misfeasance, bad faith, gross negligence or reckless
disregard of the duties involved in their offices, or with respect to any
matter, unless it is adjudicated that they did not act in good faith in the
reasonable belief that their actions were in the best interest of the Fund. In
the case of settlement, such indemnification will not be provided unless it has
been determined by a court or other body approving the settlement or other
disposition or by reasonable determination by non-interested Trustees or in a
written opinion of independent counsel based upon a review of readily available
facts, that such officers or Trustees have not engaged in willful misfeasance,
bad faith, gross negligence or reckless disregard of their duties.
Investment Adviser
MFS and its predecessor organizations have a history of money management dating
from 1924. MFS is a wholly owned subsidiary of Sun Life of Canada (U.S.), which
is a wholly owned subsidiary of Sun Life Assurance Company of Canada ("Sun
Life").
The Adviser manages the Fund pursuant to an Investment Advisory Agreement, dated
December 19, 1985 (the "Advisory Agreement"). The Adviser provides the Fund with
overall investment advisory and administrative services, as well as general
office facilities. Subject to such policies as the Trustees may determine, the
Adviser makes investment decisions for the Fund. For its services and
facilities, the Adviser receives a management fee, computed and paid monthly,
equal to the lesser of (i) 0.65% of the Fund's average daily net assets or (ii)
0.30% of the Fund's average daily net assets and 6.1% of the Fund's gross income
(i.e., income other than gains from the sale of securities, short-term gains
from options and futures transactions and premium income from options written),
in each case on an annualized basis for the Fund's then-current fiscal year.
Prior to February 1, 1994, the Adviser received a management fee equal to 0.30%
of the Fund's average daily net assets and 6.1% of the Fund's gross income,
which was voluntarily reduced to 0.65% of the Fund's average daily net assets.
For the Fund's fiscal year ended November 30, 1992, MFS received management fees
of $6,101,872 (of which $2,391,448 was based on average daily net assets and
$3,710,424 on gross income), equivalent, on an annualized basis to 0.76% of the
Fund's average daily net assets. For the Fund's fiscal year ended November 30,
1993, MFS received management fees of $7,174,766, equivalent, on an annualized
basis, to 0.65% of the Fund's average daily net assets. If MFS had not reduced
its management fee for the Fund's fiscal year ended November 30, 1993, MFS would
have received management fees under the Advisory Agreement of $7,932,214 (of
which $3,188,777 would have been based on average daily net assets and
$4,743,437 on gross income), equivalent, on an annualized basis, to 0.72% of the
Fund's average daily net assets. For the Fund's fiscal year ended July 31, 1994,
MFS received management fees of $8,155,351, equivalent on an annualized basis,
to 0.65% of the Fund's average daily net assets. If MFS had not reduced its
management fees for the Fund's fiscal year ended July 31, 1994, MFS could have
received management fees under the Advisory Agreement of $8,248,819 (of which
$2,351,580 was based on average daily net assets and $5,897,239 in gross
income), equivalent, or an annualized basis to 0.66% of the Fund's average daily
net assets.
In order to comply with the expense limitations of certain state securities
commissions, the Adviser will reduce its management fee or otherwise reimburse
the Fund for any expenses, exclusive of interest, taxes and brokerage
commissions, incurred by the Fund in any fiscal year to the extent such expenses
exceed the most restrictive of such state expense limitations. The Adviser will
make appropriate adjustments to such reimbursements in response to any amendment
or rescission of the various state requirements. Any such adjustment would not
become effective until the beginning of the Fund's next fiscal year following
the date of such amendments or the date on which such requirements become no
longer applicable.
The Fund pays all of its expenses (other than those assumed by MFS or MFD),
including: Trustees fees discussed above; governmental fees; interest charges;
taxes; membership dues in the Investment Company Institute allocable to the
Fund; fees and expenses of independent auditors, of legal counsel, and of any
transfer agent, registrar and dividend disbursing agent of the Fund; expenses of
repurchasing and redeeming shares and servicing shareholder accounts; expenses
of preparing, printing and mailing share certificates, shareholder reports,
notices, proxy statements to shareholders and reports to governmental officers
and commissions; brokerage and other expenses connected with the execution,
recording and settlement of portfolio security transactions; insurance premiums;
fees and expenses of State Street Bank and Trust Company, the Fund's custodian,
for all services to the Fund, including safekeeping of funds and securities and
maintaining required books and accounts; expenses of calculating the net asset
value of 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 for such purposes are
borne by the Fund except that the Fund's Distribution Agreement with MFD
requires MFD to pay for prospectuses that are to be used for sales purposes. For
a list of the Fund's expenses, including the compensation paid to the Trustees
who are not officers of the Adviser, during its fiscal year ended July 31, 1994,
see "Financial Statements-- Statement of Operations" in the Annual Report to
shareholders incorporated by reference into this Statement of Additional
Information. Payment by the Fund of brokerage commissions for brokerage and
research services of value to the Adviser in serving its clients is discussed
under the caption "Portfolio Transactions and Brokerage Commissions" below.
12
<PAGE>
The Adviser pays the compensation of the Fund's officers and of any Trustee who
is an officer of MFS. The Adviser also furnishes at its own expense all
necessary administrative services, including office space, equipment, clerical
personnel, investment advisory facilities, and all executive and supervisory
personnel necessary for managing the Fund's investments, effecting the Fund's
portfolio transactions and, in general, administering the Fund's affairs.
The Advisory Agreement will remain in effect until August 1, 1995, and will
continue in effect thereafter only if such continuance is specifically approved
at least annually by the Board of Trustees or by vote of a majority of the
Fund's outstanding voting securities and, in either case, by a majority of the
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 outstanding voting securities or by either party on not more than 60
days' nor less than 30 days' written notice. The Advisory Agreement provides
that if MFS ceases to serve as the Adviser to the Fund, the Fund will change its
name so as to delete the initials "MFS". The Advisory Agreement further provides
that MFS may render services to others and may permit fund clients in addition
to the Fund to use the initials "MFS" in their names. The Advisory Agreement
also provides that neither the Adviser nor its personnel shall be liable for any
error of judgment or mistake of law or for any loss arising out of any
investment or for any act or omission in the execution and management of the
Fund. Except for willful misfeasance, bad faith or gross negligence in the
performance of its or their duties or by reason of reckless disregard of its or
their obligations and duties under the Advisory Agreement.
Custodian
State Street Bank and Trust Company (the "Custodian") is the custodian of the
Fund's assets. The Custodian's responsibilities include safekeeping and
controlling the Fund's cash and securities, handling the receipt and delivery of
securities, determining income and collecting interest and dividends on the
Fund's investments, maintaining books of original entry for portfolio and fund
accounting and other required books and accounts, and calculating the daily net
asset value of each class of shares of the Fund. The Custodian does not
determine the investment policies of the Fund or decide which securities the
Fund will buy or sell. The Fund may, however, invest in securities, including
repurchase agreements, issued by the Custodian and may deal with the Custodian
as principal in securities transactions. The Custodian also acts as the dividend
disbursing agent of the Fund. The Custodian has contracted with the Adviser for
the Adviser to perform certain accounting functions related to options
transactions for which the Adviser receives remuneration on a cost basis.
Shareholder Servicing Agent
MFS Service Center, Inc. (the "Shareholder Servicing Agent"), a wholly-owned
subsidiary of MFS, is the Fund's shareholder servicing agent, pursuant to a
Shareholder Servicing Agent Agreement, dated December 19, 1985 (the "Agency
Agreement") with the Fund. 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, the
Shareholder Servicing Agent will receive a fee based on the net assets of each
class of shares of the Fund computed and paid monthly. In addition, the
Shareholder Servicing Agent is reimbursed by the Fund for certain expenses
incurred by the Shareholder Servicing Agent on behalf of the Fund. State Street
Bank and Trust Company, the dividend and distribution disbursing agent of the
Fund has contracted with the Shareholder Servicing Agent to administer and
perform certain dividend and distribution disbursing functions for the Fund.
Distributor
MFD, a wholly owned subsidiary of MFS, serves as the distributor for the
continuous offering of shares of the Fund pursuant to a Distribution Agreement,
as amended and restated April 21, 1993 (the "Distribution Agreement"), with the
Fund. Prior to January 1, 1995, MFS Financial Services, Inc. ("FSI") another
wholly owned subsidiary of MFS, was the Fund's distributor. Where this SAI
refers to MFD in relation to the receipt or payment of money with respect to a
period or periods prior to January 1, 1995, such reference shall be deemed to
include FSI, as the predecessor in interest to MFD.
Class A Shares: MFD acts as agent in selling Class A shares of the Fund to
dealers. The public offering price of Class A shares of the Fund is their net
asset value next computed after the sale plus a sales charge which varies based
upon the quantity purchased. The public offering price of a Class A share of the
Fund is calculated by dividing the net asset value of a Class A share by the
difference (expressed as a decimal) between 100% and the sales charge percentage
of offering price applicable to the purchase (see "Purchases" in the
Prospectus). The sales charge scale set forth in the Prospectus applies to
purchases of Class A shares of the Fund alone or in combination with shares of
all classes of certain other funds in the MFS Family of Funds (the "MFS Funds")
and other Funds (as noted under Right of Accumulation). A group might qualify to
obtain quantity sales charge discounts (see "Investment and Withdrawal Programs"
in this Statement of Additional Information).
Class A shares of the Fund may be sold at their net asset value to certain
persons or in certain instances as described in the Prospectus. Such sales are
made without a sales charge to promote good will with employees and others with
whom MFS, MFD and/or the Fund have business relationships, and because the sales
effort, if any, involved in making such sales is negligible.
MFD allows discounts to dealers (which are alike for all dealers) from the
applicable public offering price of the Class A shares. Dealer allowances
expressed as a percentage of offering price for all offering prices are set
forth in the Prospectus (see "Purchases"). The commission paid to the
underwriter is the difference between the total amount invested and the sum of
(a) the net proceeds to the Fund and (b) the dealer commission. Because of
rounding in the computation of offering price, the portion of the sales charge
paid to the underwriter may vary and the total sales charge may be more or less
than the sales charge calculated
13
<PAGE>
using the sales charge expressed as a percentage of offering price or as a
percentage of the net amount invested as listed in the Prospectus. In the case
of the maximum sales charge, the dealer retains 4% and MFD retains approximately
3/4 of 1% of the public offering price. In addition, MFD pays a commission to
dealers who initiate and are responsible for purchases of $1 million or more as
described in the Prospectus.
Class B Shares: MFD acts as agent in selling Class B shares of the Fund. The
public offering price of Class B shares is their net asset value next computed
after the sale (see "Purchases" in the Prospectus).
General: Neither MFD nor dealers are permitted to delay placing orders to
benefit themselves by a price change. On occasion, MFD may obtain brokers loans
from various banks, including the custodian banks for the MFS Funds, to
facilitate the settlement of sales of shares of the Fund to dealers. MFD may
benefit from its temporary holding of funds paid to it by investment dealers for
the purchase of Fund shares.
During the Fund's fiscal year ended July 31, 1994, MFD and certain other
financial institutions received net commissions of $23,519 and $115,433,
respectively (as their concession on gross commissions of $138,952). The Fund
received $14,129,666, representing the aggregate net asset value of such shares.
During the Fund's fiscal year ended November 30, 1993, MFD and certain other
financial institutions received net commissions of $58,847 and $291,008,
respectively (as their concession on gross commissions of $349,855). The Fund
received $29,744,427, representing the aggregate net asset value of such shares.
During the Fund's fiscal year ended November 30, 1992, MFD and certain other
financial institutions received net commissions of $190,939 and $929,800,
respectively (as their concession on gross commissions of $1,120,739). The Fund
received $56,463,241, representing the aggregate net asset value of such shares.
The Distribution Agreement will remain in effect until August 1, 1995, and will
continue in effect thereafter only if such continuance is specifically approved
at least annually by the Board of Trustees or by vote of a majority of the
Fund's shares (as defined in "Investment Restrictions") and, in either case, by
a majority of the Trustees who are not parties to the Distribution Agreement or
interested persons of any such party. The Distribution Agreement terminates
automatically if it is assigned and may be terminated without penalty by either
party on not more than 60 days' nor less than 30 days' notice.
4. PORTFOLIO TRANSACTIONS AND
BROKERAGE COMMISSIONS
Specific decisions to purchase or sell securities for the Fund are made by a
portfolio manager who is an employee of the Adviser and who is appointed and
supervised by its senior officers. Changes in the Fund's investments are
reviewed by the Board of Trustees. The Fund's portfolio manager may serve other
clients of the Adviser or any subsidiary of the Adviser in a similar capacity.
The primary consideration in placing portfolio security transactions is
execution at the most favorable prices. The Adviser has complete freedom as to
the markets in and broker-dealers through which it seeks this result. Government
Securities are traded principally in the over-the-counter market on a net basis
through dealers acting for their own account and not as brokers. The cost of
securities purchased from underwriters includes an underwriter's commission or
concession, and the prices at which securities are purchased and sold from and
to dealers include a dealer's mark-up or mark-down. The Adviser attempts to
negotiate with underwriters to decrease the commission or concession for the
benefit of the Fund. The Adviser normally seeks to deal directly with the
primary market makers unless, in its opinion, better prices are available
elsewhere. Subject to the requirement of seeking execution at the most favorable
price, securities may, as authorized by the Advisory Agreement, be bought from
or sold to dealers who have furnished statistical, research and other
information or services to the Adviser. At present no arrangements for the
recapture of commission payments are in effect.
Consistent with the foregoing primary consideration, the Rules of Fair Practice
of the NASD and such other policies as the Trustees may determine, the Adviser
may consider sales of shares of the Fund and of the other investment company
clients of MFD as a factor in the selection of broker-dealers to execute the
Fund's portfolio transactions.
For the Fund's fiscal year ended July 31, 1994 total brokerage commissions of $0
were paid on total transactions of $1,337,880,418.
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 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 some cases, however, the Fund believes that its ability to participate in
volume transactions will produce better executions for the Fund.
5. SHAREHOLDER SERVICES Investment and Withdrawal Programs -- The Fund makes
available the following programs designed to enable shareholders to add to their
investment or withdraw from it with a minimum of paper work. These are described
below and, in certain cases, in the Fund's prospectus. The programs involve no
extra charge to shareholders (other than a sales charge in the case of certain
Class A share purchases) and may be changed or discontinued at any time by a
shareholder or the Fund.
Letter of Intent: If a shareholder (other than a group purchaser described
below) anticipates purchasing $100,000 or more of
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Class A shares of the Fund alone or in combination with the current offering
price value of all holdings of all classes of shares of other MFS Funds or the
MFS Fixed Fund (a bank collective investment fund) within a 13-month period (or
36-month period, in the case of purchases of $1 million or more), the
shareholder may obtain Class A shares of the Fund at the same reduced sales
charge as though the total quantity were invested in one lump sum by completing
the Letter of Intent section of the Fund's Account Application or filing a
separate Letter of Intent application (available from the Shareholder Servicing
Agent) within 90 days of the commencement of purchases. Subject to acceptance by
MFD and the conditions mentioned below, each purchase will be made at a public
offering price applicable to a single transaction of the dollar amount specified
in the Letter of Intent application. The shareholder or his dealer must inform
MFD that the Letter of Intent is in effect each time shares are purchased. The
shareholder makes no commitment to purchase additional shares, but if his
purchases within 13 months (or 36-months in the case of purchases of $1 million
or more) plus the value of shares credited toward completion of the Letter of
Intent do not total the sum specified, he will pay the increased amount of the
sales charge as described below. Instructions for issuance of shares in the name
of a person other than the person signing the Letter of Intent application must
be accompanied by a written statement from the dealer stating that the shares
were paid for by the person signing such Letter. Neither income dividends nor
capital gain distributions taken in additional shares will apply toward the
completion of the Letter of Intent. Dividends and distributions of other MFS
Funds automatically reinvested in shares of the Fund pursuant to the
Distribution Investment Program will also not apply toward completion of the
Letter of Intent.
Out of the shareholder's initial purchase (or subsequent purchases if
necessary), 5% of the dollar amount specified in the Letter of Intent
application shall be held in escrow by the Shareholder Servicing Agent in the
form of shares registered in the shareholder's name. All income dividends and
capital gain distributions on escrowed shares will be paid to the shareholder or
to his order. When the minimum investment so specified is completed (either
prior to or by the end of the 13-month period or 36-month period, as
applicable), the shareholder will be notified and the escrowed shares will be
released.
If the intended investment is not completed, the Shareholder Servicing Agent
will redeem an appropriate number of the escrowed shares in order to realize
such difference. Shares remaining after any such redemption will be released by
the Shareholder Servicing Agent. By completing and signing the Account
Application or separate Letter of Intent application, the shareholder
irrevocably appoints the Shareholder Servicing Agent his attorney to surrender
for redemption any or all escrowed shares with full power of substitution in the
premises.
Right of Accumulation: A shareholder qualifies for cumulative quantity discounts
on the purchase of Class A shares when the shareholder's new investment,
together with the current offering price value of all holdings of all classes of
shares of that shareholder in the MFS Funds or the MFS Fixed Fund (a bank
collective investment fund) reaches a discount level. See "Purchases" in the
Prospectus for the sales charges on quantity discounts. For example, if a
shareholder owns shares valued at $75,000 and purchases an additional $25,000 of
Class A shares of the Fund, the sales charge for the $25,000 purchase would be
at the rate of 4% (the rate applicable to single transactions of $100,000). A
shareholder must provide the Shareholder Servicing Agent (or his investment
dealer must provide MFD) with information to verify that the quantity sales
charge discount is applicable at the time the investment is made.
Distribution Investment Program: Distributions of dividends and capital gains
made by the Fund with respect to a particular class of shares may be
automatically invested in shares of the same class of one of the other MFS Funds
if shares of the fund are available for sale. Such investments will be subject
to additional purchase minimums. Distributions invested in shares of one of the
other MFS Funds will be invested at net asset value (exclusive of any sales
charge) and will not be subject to any CDSC. Distributions will be invested at
the close of business on the payable date for the distribution. A shareholder
considering the Distribution Investment Program should obtain and read the
prospectus of the other fund and consider the differences in objectives and
policies before making any investment.
Systematic Withdrawal Plan: A shareholder may direct the Shareholder
Servicing Agent to send him (or anyone he designates) regular periodic payments,
as designated on the Account Application and based upon the value of his
account. Each payment under a Systematic Withdrawal Plan ("SWP") must be at
least $100, except in certain limited circumstances. The aggregate withdrawals
of Class B shares in any year pursuant to a SWP generally are limited to 10% of
the value of the account at the time of the establishment of the SWP. SWP are
drawn from the proceeds of the redemption of shares held in the shareholder's
account (which would be a return of principal and, if reflecting a gain, would
be taxable). Redemptions of Class B shares will be made in the following order:
(i) to the extent necessary, any "Free Amount"; (ii) any "Reinvested Shares";
and (iii) to the extent necessary, the "Direct Purchase" subject to the lowest
CDSC (as such terms are defined in "Contingent Deferred Sales Charge" in the
Prospectus). The CDSC will be waived in the case of redemptions of Class B
shares pursuant to a SWP but will not be waived in the case of SWP redemptions
of Class A shares which are subject to a CDSC. To the extent that redemptions
for such periodic withdrawals exceed dividend income reinvested in the account,
such redemptions will reduce and may eventually exhaust the number of shares in
the shareholder's account. All dividend and capital gain distributions for an
account with a SWP will be reinvested in additional full 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 $10,000 either must be held on deposit by, or
certificates for such shares must be deposited with, the Shareholder Servicing
Agent. With respect to Class A shares, maintaining a withdrawal plan
concurrently with an investment program would be disadvantageous because of the
sales charges included in share purchases and the imposition of a CDSC on
certain redemptions. The shareholder by written instruction to the Shareholder
Servicing Agent may deposit into the account additional
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shares of the Fund, change the payee or change the dollar amount of each
payment. The Shareholder Servicing Agent may charge the account for services
rendered and expenses incurred beyond those normally assumed by the Fund with
respect to the liquidation of shares. No charge is currently assessed against
the account, but one could be instituted by the Shareholder Servicing Agent on
60 days' notice in writing to the shareholder in the event that the Fund ceases
to assume the cost of these services. The Fund may terminate any SWP for an
account if the value of the account falls below $5,000 as a result of share
redemptions (other than as a result of a SWP) or an exchange of shares of the
Fund for shares of another MFS Fund. Any SWP may be terminated at any time by
either the shareholder or the Fund.
Invest by Mail: Additional investments of $50 or more may be made at any time
by mailing a check payable to the Fund directly to the Shareholder Servicing
Agent. The shareholder's account number and the name of his investment dealer
must be included with each investment.
Group Purchases: A bona fide group and all its members may be treated as a
single purchaser and, under the Right of Accumulation (but not a Letter of
Intent), obtain quantity sales charge discounts on the purchase of Class A
shares if the group (1) gives its endorsement or authorization to the investment
program so it may be used by the investment dealer to facilitate solicitation of
the membership, thus effecting economies of sales effort; (2) has been in
existence for at least six months and has a legitimate purpose other than to
purchase mutual fund shares at a discount; (3) is not a group of individuals
whose sole organizational nexus is as credit cardholders of a company,
policyholders of an insurance company, customers of a bank or broker-dealer,
clients of an investment adviser or other similar groups; and (4) agrees to
provide certification of membership of those members investing money in the MFS
Funds upon the request of MFD.
Automatic Exchange Plan: Shareholders having account balances of at least $5,000
in any MFS Fund may exchange their shares for the same class of other MFS Funds
under the Automatic Exchange Plan. The Automatic Exchange Plan provides for
automatic exchanges of funds from the shareholder's account in an MFS Fund for
investment in the same class of shares of other MFS Funds selected by the
shareholder. Under the Automatic Exchange Plan, exchanges of at least $50 each
may be made to up to four different funds effective on the seventh day of each
month or of every third month, depending whether monthly or quarterly exchanges
are elected by the shareholder. If the seventh day of the month is not a
business day, the transaction will be processed on the next business day.
Generally, the initial exchange will occur after receipt and processing by the
Shareholder Servicing Agent of an application in good order. Exchanges will
continue to be made from a shareholder's account from any MFS Fund as long as
the balance of the account is sufficient to complete the exchanges. Additional
payments made to a shareholder's account will extend the period that exchanges
will continue to be made under the Automatic Exchange Plan. However, if
additional payments are added to an account subject to the Automatic Exchange
Plan shortly before an exchange is scheduled, such funds may not be available
for exchanges until the following month; therefore, care should be used to avoid
inadvertently terminating the Automatic Exchange Plan through exhaustion of the
account balance.
No transaction fee for exchanges will be charged in connection with the
Automatic Exchange Plan. However, exchanges of shares of MFS Money Market Fund,
MFS Government Money Market Fund and Class A shares of MFS Cash Reserve Fund
will be subject to any applicable sales charge. Changes in amounts to be
exchanged to each fund, the funds to which exchanges are to be made and the
timing of transfers (monthly or quarterly), or termination of a shareholder's
participation in the Automatic Exchange Plan will be made after instructions in
writing or by telephone (an "Exchange Change Request") are received by the
Shareholder Servicing Agent in proper form (i.e., if in writing-- signed by the
record owner(s) exactly as shares are registered; if by telephone-- proper
account identification is given by the dealer or shareholder of record). Each
Exchange Change Request (other than termination of participation in the program)
must involve at least $50. Generally, if an Exchange Change Request is received
by telephone or in writing before the close of business on the last business day
of a month, the Exchange Change Request will be effective for the following
month's exchange.
A shareholder's right to make additional investments in any of the MFS Funds, to
make exchanges of shares from one MFS Fund to another and to withdraw from an
MFS Fund, as well as a shareholder's other rights and privileges are not
affected by a shareholder's participation in the Automatic Exchange Plan.
The Automatic Exchange Plan is part of the Exchange Privilege. For additional
information regarding the Automatic Exchange Plan, including the treatment of
any CDSC, see "Exchange Privilege" below.
Reinstatement Privilege: Shareholders of the Fund and shareholders of the other
MFS Funds (except MFS Money Market Fund, MFS Government Money Market Fund and
Class A shares of MFS Cash Reserve Fund in the case where such shares of the
money market 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 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
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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 in an account with the Fund for which payment has been received by
the Fund (i.e., an established account) may be exchanged for shares of the same
class of any of the other MFS Funds (if available for sale) at their net asset
value. Exchanges will be made only after instructions in writing or by telephone
(an "Exchange Request") are received for an established account by the
Shareholder Servicing Agent.
Each Exchange Request must be in proper form (i.e., if in writing-- signed by
the record owner(s) exactly as the shares are registered; if by
telephone--proper account identification is given by the dealer or shareholder
of record), and each exchange must involve either shares having an aggregate
value of at least $1,000 or all the shares in the account (except that the
minimum is $50 for accounts of retirement plan participants whose sponsoring
organizations subscribe to the MFS FUNDamental 401(k) Plan or another similar
401(k) recordkeeping system made available by the Shareholder Servicing Agent).
Each exchange involves the redemption of the shares of the Fund to be exchanged
and the purchase at net asset value (i.e., without a sales charge) of the shares
of the other MFS Fund. Any gain or loss on the redemption of the shares
exchanged is reportable on the shareholder's federal income tax return, unless
such shares were and the shares received in the exchange are held in a
tax-deferred retirement plan. If the Exchange Request is received by the
Shareholder Servicing Agent prior to the close of regular trading on the
Exchange, the exchange usually will occur on that day if all the requirements
set forth above have been complied with at that time. However, payment of the
redemption proceeds by the Fund, and thus the purchase of shares of the other
MFS Fund, may be delayed for up to seven days if the Fund determines that such a
delay would be in the best interest of all its shareholders. Investment dealers
which have satisfied criteria established by MFD may also communicate a
shareholder's Exchange Request to MFD by facsimile subject to the requirements
set forth above.
No CDSC is imposed on exchanges among the MFS Funds, although liability for the
CDSC is carried forward to the exchanged shares. For purposes of calculating the
CDSC upon redemption of shares acquired in an exchange, the purchase of shares
acquired in one or more exchanges is deemed to have occurred at the time of the
original purchase of the exchanged shares.
Additional information with respect to any of the MFS Funds, including a copy of
its current prospectus, may be obtained from investment dealers or the
Shareholder Servicing Agent. A shareholder considering an exchange should obtain
and read the prospectus of the other MFS Fund and consider the differences in
objectives and policies before making any exchange. Shareholders of the other
MFS Funds (except shares of MFS Money Market Fund, MFS Government Money Market
Fund and Class A shares of MFS Cash Reserve Fund acquired through direct
purchase and dividends reinvested prior to June 1, 1992) have the right to
exchange their shares for shares of the MFS Funds, subject to the conditions, if
any, set forth in their respective prospectuses. In addition, unitholders of the
MFS Fixed Fund have the right to exchange their units (except units acquired
through direct purchases) for shares of the Fund, subject to the conditions, if
any, imposed upon such unitholders by the MFS Fixed Fund.
Any state income tax advantages for investment in shares of each state-specific
series of MFS Municipal Series Trust may only benefit residents of such states.
Investors should consult with their own tax advisers to be sure this is an
appropriate investment, based on their residency and each state's income tax
laws.
The exchange privilege (or any aspect of it) may be changed or discontinued and
is subject to certain limitations (see "Purchases" in the Prospectus).
Tax-Deferred Retirement Plans -- Shares of the Fund may be purchased by all
types of tax-deferred retirement plans. MFD makes available through investment
dealers plans and/or custody agreements for the following:
Individual Retirement Accounts (IRA) (for individuals and their non-employed
spouses who desire to make limited contributions to a tax-deferred retirement
program and, if eligible, to receive a federal income tax deduction for amounts
contributed);
Simplified Employee Pension (SEP-IRA) Plans;
Retirement Plans Qualified under Section 401(k) of the Internal Revenue Code
of 1986, as amended;
403(b) Plans (deferred compensation arrangements for employees of public
school systems and certain non-profit organizations); and Certain other
qualified pension and profit-sharing plans.
The plan documents provided by MFD designate a trustee or custodian (unless
another trustee or custodian is designated by the individual or group
establishing the plan) and contain specific information about the plans. Each
plan provides that dividends and distributions will be reinvested automatically.
For further details with respect to any plan, including fees charged by the
trustee, custodian or MFD, tax consequences and redemption information, see the
specific documents for that plan. Plan documents other than those provided by
MFD may be used to establish any of the plans described above. Third party
administrative services, available for some corporate plans, may limit or delay
the processing of transactions.
Investors should consult with their tax advisers before establishing any of the
tax-deferred retirement plans described above.
6. TAX STATUS
Federal Taxes
The Fund has elected to be treated and intends to qualify each year as a
"regulated investment company" under Subchapter M of the Internal Revenue Code
of 1986, as amended (the "Code") by meeting all applicable requirements of
Subchapter M, including requirements as to the nature of the Fund's gross
income, the amount of Fund distributions, and the composition and holding period
of the Fund's portfolio assets. Because the Fund intends to distribute all of
its net investment income and net realized capital gains to shareholders in
accordance with the timing requirements imposed by the Code, it is not expected
that the Fund will be required to pay any federal income or excise taxes. If the
Fund
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<PAGE>
should fail to qualify as a "regulated investment company" in any year, the Fund
would incur a regular corporate federal income tax upon its taxable income and
Fund distributions would generally be taxable as ordinary dividend income to the
shareholders.
Shareholders of the Fund normally will have to pay federal income taxes, and any
state or local taxes, on the dividends and capital gain distributions they
receive from the Fund. Dividends from income and any distributions from net
short-term capital gains, (whether received in cash or reinvested in additional
shares), are taxable to the Fund's shareholders as ordinary income for federal
income tax purposes. Because the Fund expects to earn primarily interest income,
it is expected that no Fund dividends will qualify for the dividends received
deduction for corporations. Distributions of net capital gains (i.e., the excess
of the net long-term capital gains over the short-term capital losses), whether
received in cash or invested in additional shares, are taxable to the Fund's
shareholders as long-term capital gains for federal income tax purposes
regardless of how long they have owned shares in the Fund. Fund dividends
declared in October, November, or December and paid the following January, will
be taxable to shareholders as if received on December 31 of the year in which
they are declared.
The Fund's current dividend and accounting policies will affect the amount,
timing, and character of distributions to shareholders, and may, under certain
circumstances, make an economic return of capital taxable to shareholders. In
general, any gain or loss realized upon a taxable disposition of shares of the
Fund by a shareholder that holds such shares as a capital asset will be treated
as long-term capital gain or loss if the shares have been held for more than
twelve months and otherwise as a short-term capital gain or loss. However, any
loss realized upon a disposition of shares in the Fund held for six months or
less will be treated as a long-term capital loss to the extent of any
distributions of net capital gain made with respect to those shares. Any loss
realized upon a redemption of shares may also be disallowed under rules relating
to wash sales. Gain may be increased (or loss reduced) upon a redemption of
Class A shares of the Fund within ninety days after their purchase followed by
any purchase (including purchases by exchange or by reinvestment) of the Fund or
of another MFS Fund (or any other shares of an MFS Fund generally sold subject
to a sales charge) without payment of an additional sales charge of Class A
shares.
The Fund's investment in zero coupon securities, certain stripped securities and
certain securities purchased at a market discount will cause it to realize
income prior to the receipt of cash payments with respect to those securities.
In order to distribute this income and avoid a tax on the Fund, the Fund may be
required to liquidate portfolio securities that it might otherwise have
continued to hold, potentially resulting in additional taxable gain or loss to
the Fund.
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 investors.
The Fund's transactions in options and Futures Contracts will be subject to
special tax rules that may affect the amount, timing and character of Fund
income and distributions to shareholders. For example, certain positions held by
the Fund on the last business day of each taxable year will be marked to market
(i.e., treated as if closed out) on such 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, swaps and related
transactions, to the extent necessary to meet the requirements of Subchapter M
of the Code.
Any dividend or distribution will have the effect of reducing the per share net
asset value of shares in the Fund by the amount of the dividend or distribution.
Shareholders purchasing shares shortly before the record date of any taxable
dividend or other distribution may thus pay the full price for the shares and
then effectively receive a portion of the purchase price back as a taxable
distribution.
At the end of each calendar year, each shareholder receives income tax
information regarding the dividends and capital gain distributions for that
year, including the portion taxable as ordinary income, the portion taxable as
long-term capital gains, and the portion, if any, representing a return of
capital (which is generally free of current taxes but results in a basis
reduction), and the amount of federal income tax withheld.
Dividends and certain other payments to persons who are not citizens or
residents of the United States or U.S. entities ("Non-U.S. Persons") are
generally subject to U.S. tax withholding at a rate of 30%. The Fund intends to
withhold U.S. federal income at the rate of 30% on taxable dividends and other
payments to Non-U.S. Persons that are subject to such withholding, regardless of
whether a lower treaty rate may be permitted. 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.
The Fund is also required in certain circumstances to apply backup withholding
of 31% on taxable dividends and redemption proceeds paid to any shareholder 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. Distributions
received from the Fund by Non-U.S. Persons also may be subject to tax under the
laws of their own jurisdiction.
As long as it qualifies as a regulated investment company under the Code, the
Fund will not be required to pay Massachusetts income or excise taxes.
Distributions of the Fund that are derived from interest on obligations of the
U.S. Government and certain of its agencies and
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<PAGE>
instrumentalities (but generally not from capital gains realized upon the
disposition of such obligations) may be exempt from state and local taxes in
certain states. The Fund intends to advise shareholders of the extent, if any,
to which its distributions consist of such interest. Shareholders are urged to
consult their tax advisers regarding the possible exclusion of such portion of
their dividends for state and local income tax purposes, as well as regarding
the tax consequences of an investment in the Fund.
7. DETERMINATION OF NET ASSET VALUE AND PERFORMANCE
Net Asset Value: The net asset value per share of each class of the Fund is
determined each day during which the Exchange is open for trading. As of the
date of this SAI, the Exchange is open for trading every weekday except for the
following holidays or the days on which they are observed: New Year's Day,
Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day and Christmas Day. This determination is made once during each
such day as of the close of regular trading on the Exchange by deducting the
amount of the liabilities attributable to the class from the value of the Fund's
assets attributable to the class and dividing the difference by the number of
shares of the class outstanding. Debt securities (other than short-term
obligations) 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 exchange or over-
the-counter prices, since such valuations are believed to reflect the fair value
of such securities. Use of the pricing service has been approved by the Board of
Trustees. Positions in listed options, Future Contracts and Options on Futures
Contracts will normally be valued at the settlement price on the exchange on
which they are primarily traded. Positions in over-the-counter options will be
valued using dealer supplied valuations. Short- term obligations with a
remaining maturity in excess of 60 days will be valued based upon dealer
supplied valuations. Other short- term obligations in the Fund's portfolio are
valued at amortized cost, which constitutes fair value as determined by the
Board of Trustees. Portfolio securities and other assets 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. A share's net asset value
is effective for orders received by the dealer prior to its calculation and
received by MFD, the Fund's principal underwriter or its agent, the Shareholder
Servicing Agent, prior to the close of that business day.
Total Rate of Return: The Fund will calculate its total rate of return for each
class of shares for certain periods by determining the average annual compounded
rates of return over those periods that would cause an investment of $1,000
(made with all distributions reinvested and reflecting the CDSC or the maximum
public offering price) to reach the value of that investment at the end of the
periods. The Fund may also calculate (i) a total rate of return, which is not
reduced by the CDSC (4% maximum for Class B shares purchased on and after
September 1, 1993) and therefore may result in a higher rate of return, (ii)
with respect to Class A shares, a total rate of return assuming an initial
account value of $1,000, which will result in a higher rate of return since the
value of the initial account will not be reduced by the sales charge (4.75%
maximum), 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. Effective March
1, 1993, the Fund revised its investment policy of investing in securities
issued or guaranteed by the U.S. Government and its agencies, authorities and
instrumentalities and engaging in transactions involving related options, to its
current policy of investing at least 65% of its assets, under normal
circumstances, in GNMA securities and obligations fully collateralized by GNMAs.
The average annual total rate of return for Class A shares, reflecting the
initial investment at the maximum public offering price, for the one-year and
five-year periods ended July 31, 1994 and for the period from January 9, 1986
(the Fund's commencement of investment operations) to July 31, 1994 was,
respectively, -4.39%, 5.98%, and 6.79%. The average annual total rate of return
for Class A shares, not giving effect to the initial sales charge, for the
one-year and five-year periods ended July 31, 1994 and for the period from
January 9, 1986 (the Fund's commencement of investment operations) to July 31,
1994 was, respectively, -0.67%, 6.30% and 6.79%. The Fund's aggregate total rate
of return for Class B shares, reflecting the CDSC, for the period September 7,
1993 through the Fund's fiscal year ended July 31, 1994 was -6.60%. The Fund's
aggregate total rate of return for Class B shares, not giving effect to the
CDSC, for the period September 7, 1993 through the Fund's fiscal year ended July
31, 1994 was -2.46%. The figures presented for Class B shares are not calculated
on an annualized basis. The aggregate total rate of return represents a limited
time frame and, like the total rates of return presented above for Class A
shares, may not be indicative of future performance. Total rate of return
figures would have been lower if fee waivers were not in place.
Performance Results: The performance results for Class A shares below, based on
an assumed initial investment of $10,000, cover the period from January 9, 1986
to December 31, 1994. It has been assumed that capital gain distributions and
income dividends were reinvested in additional shares. These performance
results, as well as any yield or total rate of return quotation provided by the
Fund, should not be considered as representative of the performance of the Fund
in the future since the net asset value and public offering price of shares of
the Fund will vary based not only on the type, quality and maturities of the
securities held in the Fund's portfolio, but also on changes in the current
value of such securities and on changes in the expenses of the Fund. These
factors and possible differences in the methods used to calculate yields and
total rates of return should be considered when comparing the yield and total
rate of return of the Fund to yields and total rates of return published for
other investment companies or other investment vehicles. Total rate of return
reflects the performance of both principal and income. Current net asset value
and account balance information may be obtained by calling 1-800-MFS-TALK
(637-8255).
19
<PAGE>
MFS Government Mortgage Fund
<TABLE>
<CAPTION>
Value of Value of
Initial Reinvested Value of
Period ended $10,000 Capital Gains Reinvested Total
December 31 Investment Distributions Dividends Value
<S> <C> <C> <C> <C>
1986* $9,750 $0 $ 1,001 $10,751
1987 8,261 0 2,214 10,475
1988 7,762 0 3,499 11,261
1989 7,792 0 4,968 12,760
1990 7,052 0 6,159 13,211
1991 7,142 0 7,823 14,965
1992 6,873 0 8,992 15,865
1993 6,853 0 10,137 16,990
1994 6,233 0 10,386 16,619
</TABLE>
*For the period from the start of business, January 9, 1986, to December 31,
1986.
Explanatory notes: The results in the table assume that the initial investment
has been reduced by the current maximum sales charge (4.75%) and take into
account the annual Rule 12b-1 fees. No adjustment has been made for any income
taxes payable by shareholders.
Yield: Any yield quotation for a class of shares of the Fund is based on the
annualized net investment income per share of that class over a 30-day period.
The yield is calculated by dividing the net investment income per share
allocated to a particular class of the Fund earned during the period by the
maximum offering price per share of such class on the last day of that period.
The resulting figure is then annualized. Net investment income per share of a
class is determined by dividing (i) the dividends and interest earned by the
Fund allocated to the class during the period, minus accrued expenses of such
class for the period, by (ii) the average number of shares of such class
entitled to receive dividends during the period multiplied by the maximum
offering price per share of such class on the last day of the period. The Fund's
yield calculations assume a maximum sales charge of 4.75% in the case of Class A
shares and no payment of any CDSC in the case of Class B shares. The yield
calculation for Class A shares for the 30-day period ended July 31, 1994 was
6.01%. The yield calculation for Class B shares for the 30-day period ended July
31, 1994 was 5.68%.
Current Distribution Rate: Yield, which is calculated according to a formula
prescribed by the Securities and Exchange Commission, is not indicative of the
amounts which were or will be paid to the Fund's shareholders. Amounts paid to
shareholders of each class are reflected in the quoted "current distribution
rate" for that class. The current distribution rate for a class is computed by
dividing the total amount of dividends per share paid by the Fund to
shareholders of that class during the past twelve months by the maximum public
offering price of that class at the end of such period. Under certain
circumstances, such as when there has been a change in the amount of dividend
payout, or a fundamental change in investment policies, it might be appropriate
to annualize the dividends paid over the period such policies were in effect,
rather than using the dividends during the past twelve months. The current
distribution rate differs from the yield computation because it may include
distributions to shareholders from sources other than dividends and interest,
such as premium income for option writing, short-term capital gains and return
of invested capital, and is calculated over a different period of time. The
Fund's current distribution rate calculation for Class A shares assumes a
maximum sales charge of 4.75%. The Fund's current distribution rate calculation
for Class B shares assumes no CDSC is paid. The current distribution rate for
Class A shares of the Fund for the twelve-month period ended on July 31, 1994
was 6.53%. The current distribution rate for Class B shares of the Fund was
5.04%.
From time to time the Fund may, as appropriate, quote Fund rankings or reprint
all or a portion of evaluations of fund performance and operations appearing in
various independent publications, including but not limited to the following:
Money, Fortune, U.S. News and World Report, Kiplinger's Personal Finance, The
Wall Street Journal, Barron's, Investors Business Daily, Newsweek, Financial
World, Financial Planning, Investment Advisor, USA Today, Pensions and
Investments, SmartMoney, Forbes, Global Finance, Registered Representative,
Institutional Investor, the Investment Company Institute, Johnson's Charts,
Morningstar, Lipper Analytical Services, Inc., CDA Wiesenberger, Shearson Lehman
and Salomon Bros. Indices, Ibbotson, Business Week, Lowry Associates, Media
General, Investment Company Data, The New York Times, Your Money, Strangers
Investment Advisor, Financial Planning on Wall Street, Standard and Poor's,
Individual Investor, The 100 Best Mutual Funds You Can Buy, by Gordon K.
Williamson, Consumer Price Index, and Sanford C. Bernstein & Co. Fund
performance may also be compared to the performance of other mutual funds
tracked by financial or business publications or periodicals.
The Fund may also quote evaluations mentioned in independent radio or television
broadcasts.
From time to time the Fund may use charts and graphs to illustrate the past
performance of various indices such as those mentioned above and illustrations
using hypothetical rates of return to illustrate the effects of compounding and
tax-deferral.
The Fund may advertise examples of the effects of periodic investment plans,
including the principle of dollar cost averaging. In such a program, an investor
invests a fixed dollar amount in a fund at periodic intervals, thereby
purchasing fewer shares when prices are high and more shares when prices are
low. While such a strategy does not assure a profit or guard against a loss in a
declining market, the investor's average cost per share can be lower than if
fixed numbers of shares are purchased at the same intervals.
MFS Firsts: MFS has a long history of innovations.
-- 1924 -- Massachusetts Investors Trust is established as the first open-end
mutual fund in America.
-- 1924 -- Massachusetts Investors Trust is the first mutual fund to make full
public disclosure of its operations in shareholder reports.
-- 1932 -- One of the first internal research departments is established to
provide in-house analytical capability for an investment management firm.
20
<PAGE>
-- 1933 -- Massachusetts Investors Trust is the first mutual fund to register
under the Securities Act of 1933 ("Truth in Securities Act" or "Full Disclosure
Act").
-- 1936 -- Massachusetts Investors Trust is the first mutual fund to allow
shareholders to take capital gain distributions either in additional shares or
in cash.
-- 1976 -- MFS Municipal Bond Fund is among the first municipal bond funds
established.
-- 1979 -- Spectrum becomes the first combination fixed/ variable annuity with
no initial sales charge.
-- 1981 -- MFS World Governments Fund is established as America's first
globally diversified fixed-income mutual fund.
-- 1984 -- MFS Municipal High Income Fund is the first open end mutual fund to
seek high tax-free income from lower-rated municipal securities.
-- 1986 -- MFS Managed Sectors Fund becomes the first mutual fund to target and
shift investments among industry sectors for shareholders.
-- 1986 -- MFS Municipal Income Trust is the first closed- end, high-yield
municipal bond fund traded on the New York Stock Exchange.
-- 1987 -- MFS Multimarket Income Trust is the first closed-end, multimarket
high income fund listed on the New York Stock Exchange.
-- 1989 -- MFS Regatta becomes America's first non- qualified
market-value-adjusted fixed/variable annuity.
-- 1990 -- MFS World Total Return Fund is the first global balanced fund.
-- 1993 -- MFS World Growth Fund is the first global emerging markets fund to
offer the expertise of two sub- advisers
-- 1993 -- MFS becomes money manager of MFS Union Standard Trust, the first
Trust to invest solely in companies deemed to be union-friendly by an advisory
board of senior labor officials, senior managers of companies with significant
labor contracts, academics and other national labor leaders or experts.
8. DISTRIBUTION PLANS
Class A Distribution Plan: The Trustees have adopted a Distribution Plan
relating to Class A shares (the "Class A DistributionPlan") pursuant to Section
12(b) of the 1940 Act and Rule 12b-1 thereunder (the "Rule") after having
concluded that there was a reasonable likelihood that the Class A Distribution
Plan would benefit the Fund and its Class A shareholders. The Class A
Distribution Plan is designed to promote sales, thereby increasing the net
assets of the Fund. Such an increase may reduce the expense ratio to the extent
the Fund's fixed costs are spread over a larger net asset base. Also, an
increase in net assets may lessen the adverse effects that could result were the
Fund required to liquidate portfolio securities to meet redemptions.
The Class A Distribution Plan provides that the Fund will pay MFD up to (but not
necessarily all of) an aggregate of 0.35% of the average daily net assets
attributable to the Class A shares annually in order that MFD may pay expenses
on behalf of the Fund related to the distribution of its Class A shares. The
expenses to be paid by MFD on behalf of the Fund include a service fee to
securities dealers which enter into a sales agreement with MFD of up to 0.25%
per annum of the portion of the Fund's average daily net assets attributable to
the Class A shares owned by investors for whom such dealer is the holder or
dealer of record. These payments are partial consideration for all personal
services and/or account maintenance services rendered by such dealers with
respect to Class A shares. MFD may from time to time reduce the amount of the
service fee paid for shares sold prior to a certain date. Service fees may be
reduced for a securities dealer that is the holder or dealer of record for an
investor who owns shares of the Fund having a net asset value at or above a
certain dollar level. No service fee will be paid (i) to any securities dealer
who is the holder or dealer of record for investors who own 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 if the dealer satisfies certain criteria), or (ii)
to any insurance company which has entered into an agreement with the Fund and
MFD that permits such insurance company to purchase shares from the Fund at
their net asset value in connection with annuity agreements issued in connection
with the insurance company's separate accounts. Dealers may from time to time be
required to meet certain other criteria in order to receive service fees. MFD or
its affiliates are entitled to retain all service fees payable under the Class A
Distribution Plan for which there is no dealer of record or for which
qualification standards have not been met as partial consideration for personal
services and/or account maintenance services performed by MFD or its affiliates
for shareholder accounts. MFD will also retain a distribution fee of 0.10% per
annum of the Fund's average daily net assets attributable to Class A shares as
partial consideration for services performed and expenses incurred in the
performance of MFD's obligations as to Class A shares under the distribution
agreement with the Fund. Any remaining funds may be used to pay for other
distribution related expenses as described in the Prospectus. Certain banks and
other financial institutions that have agency agreements with MFD will receive
agency transaction and service fees that are the same as commissions and service
fees to dealers. During the fiscal year ended July 31, 1994, the Fund incurred
expenses of $1,103,659 (equal to 0.35% of its average daily net assets) relating
to the distribution of its Class A shares, of which MFD retained $97,724.
The Class A Distribution Plan will remain in effect until August 1, 1995, and
will continue in effect thereafter only if such continuance is specifically
approved at least annually by vote of both a majority of the Trustees and a
majority of the Trustees who are not "interested persons" of the Fund or
financially interested parties to the Class A Distribution Plan ("Class A
Distribution Plan Qualified Trustees"). The Class A Distribution Plan requires
that the Fund shall provide to the Trustees, and the Trustees shall review, at
least quarterly, a written report of the amounts
21
<PAGE>
expended (and purposes therefor) under the Class A Distribution Plan. The Class
A Distribution Plan may be terminated at any time by vote of a majority of the
Class A Distribution Plan Qualified Trustees or by vote of the holders of a
majority of the Fund's Class A shares (as defined in Investment Restrictions").
Distribution agreements between the Fund and Distributors 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 Class A
Distribution Plan Qualified Trustees or by vote of the holders of a majority of
the Fund's Class A shares. The Class A Rule Distribution Plan may not be amended
to increase materially the amount of permitted distribution expenses without the
approval of Class A shareholders and may not be materially amended in any case
without a vote of the majority of both the Trustees and the Class A Distribution
Plan Qualified Trustees. No Trustee who is not an "interested person" of the
Fund has any financial interest in the Class A Distribution Plan.
Class B Distribution Plan: The Trustees of the Fund have adopted a Distribution
Plan relating to Class B shares (the "Class B Distribution Plan") pursuant to
Section 12(b) of the 1940 Act and Rule 12b-1 thereunder, after having concluded
that there was a reasonable likelihood that the Distribution Plan would benefit
the Fund and the Class B shareholders of the Fund. The Class B Distribution Plan
is designed to promote sales, thereby increasing the net assets of the Fund.
Such an increase may reduce the expense ratio to the extent the Fund's fixed
costs are spread over a larger net asset base. Also, an increase in net assets
may lessen the adverse effects that could result were the Fund required to
liquidate portfolio securities to meet redemptions. There is, however, no
assurance that the net assets of the Fund will increase or that the other
benefits referred to above will be realized.
The Class B Distribution Plan provides that the Fund shall pay MFD, as the
Fund's distributor for its Class B shares, a daily distribution fee equal on an
annual basis to 0.75% of the Fund's average daily net assets attributable to
Class B shares and will pay MFD a service fee of up to 0.25% per annum of the
Fund's average daily net assets attributable to Class B shares (which MFD will
in turn pay to securities dealers which enter into a sales agreement with MFD at
a rate of up to 0.25% per annum of the Fund's average daily net assets
attributable to Class B shares owned by investors for whom that securities
dealer is the holder or dealer of record). This service fee is intended to be
additional consideration for all personal services and/or account maintenance
services rendered by the dealer with respect to Class B shares. MFD will advance
to dealers the first-year service fee at a rate equal to 0.25% of the amount
invested. 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 for additional service fees with respect to such shares
commencing in the thirteenth month following purchase. Except in the case of the
first year service fee, no service fee 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 from time to time by MFD. MFD, however, may waive this minimum amount
requirement from time to time if the dealer satisfies certain criteria. Dealers
may from time to time be required to meet certain other criteria in order to
receive service fees. MFD or its affiliates are entitled to retain all service
fees payable under the Class B Distribution Plan for which there is no dealer of
record or for which qualification standards have not been met as partial
consideration for personal services and/or account maintenance services
performed by MFD or its affiliates for shareholder accounts.
The purpose of distribution payments to MFD under the Class B Distribution Plan
is to compensate MFD for its distribution services to the Fund. MFD pays
commissions to dealers as well as expenses of printing prospectuses and reports
used for sales purposes, expenses of the preparation and printing of sales
literature and other distribution related expenses, including, without
limitation, the cost necessary to provide distribution-related services, or
personnel, travel office expenses and equipment. The Class B Distribution Plan
also provides that MFD will receive all CDSCs relating to Class B shares (see
"Distribution Plans" and "-- Purchases" in the Prospectus). For the period
commencing September 7, 1993 and ending July 31, 1994, the Fund paid Class B
distribution and service fees of $9,291,485 (of which MFD retained $162,592).
In accordance with the Rule, all agreements relating to the Class B 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 Trustees who are
not "interested persons" (as defined in the 1940 Act) and who have no direct or
indirect financial interest in the operation of the Class B Distribution Plan or
in any agreement related to such Plan ("Class B Distribution Plan Qualified
Trustees"). The Class B Distribution Plan further provides that the selection
and nomination of Class B Distribution Plan Qualified Trustees shall be
committed to the discretion of the non-interested Trustees then in office.
The Class B Distribution Plan will remain in effect until August 1, 1995, and
will continue in effect thereafter only if such continuance is specifically
approved at least annually by vote of the Trustees and a majority of the Class B
Distribution Plan Qualified Trustees. The Class B Distribution Plan requires
that the Fund shall provide to the Trustees, and the Trustees shall review, at
least quarterly, a written report of the amounts expended (and purposes
therefor) under such Plan. The Class B Distribution Plan may be terminated at
any time by vote of a majority of the Class B Distribution Plan Qualified
Trustees or by vote of the holders of a majority of the Class B shares of the
Fund (as defined in "Investment Restrictions" above). The Class B Distribution
Plan may not be amended to increase materially the amount of permitted
distribution expenses without the approval of Class B shareholders and may not
be materially amended in any case without a vote of the majority of both the
Trustees and the Class B Distribution Plan Qualified Trustees. No Trustee who is
not an interested person of the Fund has any financial interest in the Class B
Distribution Plan or in any related agreement.
9. DESCRIPTION OF SHARES, VOTING RIGHTS AND LIABILITIES
The Fund's Declaration of Trust permits the Trustees to issue an unlimited
number of full and fractional Shares of Beneficial Inter-
22
<PAGE>
est (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
the shares of the Fund into one or more classes. Pursuant thereto, the Trustees
have authorized the issuance of two classes of shares of the Fund, Class A
shares and Class B shares. Each share of a class of the Fund represents an equal
proportionate interest in the assets of the Fund allocable to that class. Upon
liquidation of the Fund, shareholders of each class are entitled to share pro
rata in the net assets of the Fund allocable to such class available for
distribution to shareholders. The Fund has reserved the right to create and
issue series and additional classes of shares, in which case the shares of each
class would participate equally in the earnings, dividends and assets allocable
to that class of the particular series.
Shareholders are entitled to one vote for each share held and may vote in the
election of Trustees and on other matters submitted to meetings of shareholders.
Although Trustees are not elected annually by the shareholders, 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 Fund. 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 Fund. No material amendment may be made to the Fund's
Declaration of Trust without the affirmative vote of a majority of the Fund's
outstanding shares (as defined in "Investment Objective, Policies and
Restrictions-- Investment Restrictions"). Shares have no pre- emptive or
conversion rights (except as described in "Purchases-- Conversion of Class B
Shares" in the Prospectus). Shares when issued are fully paid and
non-assessable. The Trust may enter into a merger or consolidation, or sell all
or substantially all of its assets (or all or substantially all of the assets
belonging to any series of the Trust), if approved by the vote of the holders of
two-thirds of the Trust's outstanding shares voting as a single class, or of the
affected series of the Trust, as the case may be, except that if the Trustees of
the Trust recommend such merger, consolidation or sale, the approval by vote of
the holders of a majority of the Trust's or the affected series' outstanding
shares (as defined in "Investment Restrictions") will be sufficient. The Trust
or any series of the Trust may also be terminated (i) upon liquidation and
distribution of its assets, if approved by the vote of the holders of two-thirds
of its outstanding shares, or (ii) by the Trustees by written notice to the
shareholders of the Trust or the affected series. If not so terminated the Trust
will continue indefinitely.
The Fund 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 Fund's Declaration of Trust contains an express disclaimer of
shareholder liability for acts or obligations of the Fund and provides for
indemnification and reimbursement of expenses out of Fund property for any
shareholder held personally liable for the obligations of the Fund. The Fund's
Declaration of Trust also provides that it shall maintain appropriate insurance
(for example, fidelity bonding and errors and omissions insurance) for the
protection of the Fund. Its shareholders, Trustees, officers, employees and
agents covering possible tort and other liabilities. Thus, the risk of a
shareholder incurring financial loss on account of shareholder liability is
limited to circumstances in which both inadequate insurance existed and the Fund
itself was unable to meet its obligations.
The Fund's Declaration of Trust further provides that obligations of the Fund
are not binding upon the Trustees individually but only upon the property of the
Fund and that the Trustees will not be liable for errors of judgment or mistakes
of fact or law, but nothing in the Declaration of Trust protects a Trustee
against any liability to which he would otherwise be subject by reason of
willful misfeasance, bad faith, gross negligence or reckless disregard of the
duties involved in the conduct of his office.
10. INDEPENDENT ACCOUNTANTS AND FINANCIAL STATEMENTS
Deloitte & Touche LLP are the Fund's independent certified public accountants.
The Portfolio of Investments at July 31, 1994, the Statement of Assets and
Liabilities at July 31, 1994, the Statement of Operations for the eight months
ended July 31, 1994 and the year ended November 30, 1993, the Statement of
Changes in Net Assets for the eight months ended July 31, 1994 and for each of
the years in the two year period ended November 30, 1993, the Financial
Highlights table for the eight months ended July 31, 1994 and for each of the
years in the eight year period ended November 30, 1993, the Notes to Financial
Statements and the Independent Auditors' Report, each of which is included in
the Annual Report to shareholders of the Fund, are incorporated by reference
into this SAI and have been so incorporated in reliance upon the report of
Deloitte & Touche LLP, independent certified public accountants, as experts in
accounting and auditing. A copy of the Annual Report accompanies this SAI.
23
<PAGE>
Appendix A
TRUSTEE COMPENSATION TABLE
<TABLE>
<CAPTION>
Retirement
Benefit
Accrued as part Estimated Total Trustee
Trustee Fees of Fund Credited Years Fees from Fund
Trustee from Fund (1) Expense (1) of Service (2) and Fund Complex (3)
<S> <C> <C> <C> <C>
Richard B. Bailey $3,932 $ 987 8 $226,221
Lawrence T. Perera 3,932 2,592 22 96,592
William Poorvu 4,027 2,607 22 106,482
Charles W. Schmidt 3,932 2,477 15 98,397
David B. Stone 4,162 1,516 11 104,007
Elaine R. Smith 3,932 964 27 98,397
J. Atwood Ives 4,162 1,009 17 106,482
Peter G. Harwood 4,162 650 5 105,812
</TABLE>
(1) For fiscal year ended July 31, 1994.
(2) Based on normal retirement age of 73.
(3) Information provided for calendar year 1994. All Trustees served as Trustees
of 20 funds within the MFS fund complex (having aggregate net assets at December
31, 1994, of approximately $14,727,659,069) except Mr. Bailey, who served as
Trustee of 56 funds within the MFS fund complex (having aggregate net assets at
December 31, 1994, of approximately $24,474,119,825).
Estimated Annual Benefits Payable by fund upon Retirement ((4))
<TABLE>
<CAPTION>
Average Years of Service
Trustee Fees 3 5 7 10 or more
<S> <C> <C> <C> <C>
$3,600 $540 $ 900 $1,260 $1,800
3,800 570 950 1,330 1,900
4,000 600 1,000 1,400 2,000
4,200 630 1,050 1,470 2,100
4,400 660 1,100 1,540 2,200
4,600 690 1,150 1,610 2,300
</TABLE>
(4) Other funds in the MFS fund complex provide similar retirement benefits to
the Trustees.
24
<PAGE>
Investment Adviser
Massachusetts Financial Services Company
500 Boylston Street, Boston, MA 02116
(617) 954-5000
Distributor
MFS Fund Distributors, Inc.
500 Boylston Street, Boston, MA 02116
(617) 954-5000
Custodian and Dividend Disbursing Agent
State Street Bank and Trust Company
225 Franklin Street, Boston, MA 02110
Shareholder Servicing Agent
MFS Service Center, Inc.
500 Boylston Street, Boston, MA 02116
Toll free: 800-225-2606
Mailing Address
P.O. Box 2281, Boston, MA 02107-9906
Independent Accountants
Deloitte & Touche LLP
125 Summer Street, Boston, MA 02110
MFS(R)
Government
Mortgage Fund
500 Boylston Street
Boston, MA 02116
[LOGO] MFS LOGO
THE FIRST NAME IN MUTUAL FUNDS
MGM-13-4/95/.5M 31/231
<PAGE>
[Logo] Annual Report for
THE FIRST NAME IN MUTUAL FUNDS Year Ended
July 31, 1994
MFS(R) GOVERNMENT MORTGAGE FUND
A 6 1/8" by 7 5/8" photo of a house.
<PAGE>
<TABLE>
<S> <C>
MFS(R) GOVERNMENT MORTGAGE FUND
TRUSTEES INVESTMENT ADVISER
A. Keith Brodkin* Massachusetts Financial Services Company
Chairman and President 500 Boylston Street
Richard B. Bailey Boston, Massachusetts 02116-3741
Private Investor; PORTFOLIO MANAGER
Former Chairman and Director (until 1991), James J. Calmas*
Massachusetts Financial Services Company TREASURER
Peter G. Harwood W. Thomas London*
Former Financial Vice President, ASSISTANT TREASURER
Treasurer and Director (until 1988), James O. Yost*
Loomis, Sayles & Co., Inc. SECRETARY
J. Atwood Ives Stephen E. Cavan*
Chairman and Chief Executive Officer, ASSISTANT SECRETARY
Eastern Enterprises James R. Bordewick, Jr.*
Lawrence T. Perera SHAREHOLDER SERVICE CENTER
Partner, Hemenway & Barnes MFS Service Center, Inc.
William J. Poorvu P.O. Box 2281
Adjunct Professor, Harvard University Boston, MA 02107-9906
Graduate School of Business Administration For general information, call toll free:
Charles W. Schmidt 1-800-225-2606 any business day from
Private Investor; 8 a.m. to 8 p.m. Eastern time.
Former Senior Vice President and For service to speech- or hearing-impaired,
Group Executive (until 1990), call toll free: 1-800-637-6576 any business
Raytheon Company day from 9 a.m. to 5 p.m. Eastern time.
Arnold D. Scott* (To use this service, your phone must be
Senior Executive Vice President, equipped with a Telecommunications Device
Massachusetts Financial Services Company for the Deaf.)
Jeffrey L. Shames* For share prices, account balances and
President and Chief Equity Officer, exchanges, call toll free: 1-800-MFS-TALK
Massachusetts Financial Services Company (1-800-637-8255) anytime from a touch-tone
Elaine R. Smith telephone.
Independent Consultant CUSTODIAN
David B. Stone State Street Bank and Trust Company
Chairman, North American AUDITORS
Management Corp. (Investment Advisers) Deloitte & Touche LLP
Cover photo: Through their wide range of
investments, MFS mutual funds help you share in
*Affiliated with the Investment Adviser America's growth.
</TABLE>
<PAGE>
LETTER TO SHAREHOLDERS
Dear Shareholders:
Because the Fund's fiscal year end changed from November 30 to July 31, this
annual report will cover the eight-month period ended July 31, 1994. During this
period, bond markets reacted negatively to the emergence of a more robust
economy in the United States. As a result, interest rates have risen and bond
prices, in general, have fallen. The mortgage market has closely followed the
Treasury market and, with the income derived from mortgages nearly offsetting
the price declines, the Fund had slightly negative total returns. For the eight
months ended July 31, 1994, Class A shares of the Fund provided a total return
of -1.00%, while Class B shares had a total return of -1.31%. Both of these
returns, which include the reinvestment of distributions but exclude the effects
of any sales charges, slightly underperformed the Lehman Brothers Government
National Mortgage Association Index (GNMA Index), an unmanaged index of GNMA
issues with more than $50 million outstanding, which returned -0.21% in the same
period. A discussion of the Fund's performance relative to the GNMA Index may be
found below in the Portfolio Performance and Strategy section of this letter.
Performance information for the Fund is provided on pages three and four of this
report.
Economic Environment
The economic expansion, now in its fourth year, has established firmer
underpinnings as employers finally have begun to step up hiring levels.
Increased employment, along with continued strong capital spending by businesses
and strengthening overseas economies, particularly in Europe, should ensure at
least trend-line real (adjusted for inflation) U.S. economic growth (2 1/2% to
3% as measured by gross domestic product). While the economy, particularly
housing, benefited from unusually low interest rates late last year, yields have
risen significantly this year which should help restrain, but not curtail, the
economic expansion. Other continuing moderating influences are higher personal
income taxes, high consumer debt levels, and the impact on employment of
corporate restructurings and concerns over the cost of health care reform.
Interest Rates
While the economy is clearly stronger than it was earlier in this expansion, the
outlook for inflation remains favorable. Due to a prolonged period of
below-trend-line growth and continued pressure on corporations to emphasize
effective cost controls, wage growth and unit labor costs have remained subdued.
Given our favorable inflation outlook and the substantial backup in interest
rates this year, we believe yields could moderate later in 1994. We view the
Federal Reserve Board's decision to raise both the federal funds and discount
rates by 1/2% on August 16 as a positive indication of its willingness to
attempt to curtail any increase in inflation. Should the economy enter an
extended period of stronger growth, however, rising credit demands and increased
inflation expectations could put upward pressure on both short- and long-term
interest rates later in the year.
Portfolio Performance and Strategy
The slight underperformance of Class A and Class B shares of the Fund, relative
to the GNMA Index, during the eight months ended July 31, 1994 was the result of
our not foreseeing the sharp backup in interest rates at the beginning of this
calendar year and the fact that the Fund's interest-rate exposure was somewhat
greater than that of the GNMA Index. Because of the massive amount of home
mortgage refinancings which occurred during 1993, the GNMA market is not as
susceptible to prepayment risk as it has been in the past. Thus, during the past
eight months, mortgage returns were roughly comparable to the returns from other
U.S. government securities.
<PAGE>
LETTER TO SHAREHOLDERS -- continued
Although interest rates have already risen, we remain somewhat concerned
that stronger economic growth in the U.S., coupled with economic recoveries
overseas, could cause greater concern over inflation. With this uncertainty
hanging over the markets, we are maintaining the portfolio with less
interest-rate risk than the GNMA Index. With the changes that have occurred over
the past year, we are comfortable with the Fund's mortgage holdings and believe
that returns from mortgages should compare favorably with those of other
fixed-income instruments during the year ahead.
We appreciate your support and welcome any questions or comments you may
have.
Respectfully,
(A 1 1/2" by 1 5/8" photo of (A 1 1/2" by 1 5/8" photo of
A. Keith Brodkin, James J. Calmas,
Chairman and President) Portfolio Manager)
(SIGNATURE (SIGNATURE)
A. Keith Brodkin James J. Calmas
Chairman and President Portfolio Manager
August 18, 1994
PORTFOLIO MANAGER PROFILE
James Calmas has been a member of the MFS investment staff for six years. A
graduate of Dartmouth College and the Amos Tuck School of Business
Administration of Dartmouth College, he began his career at MFS as a member of
the Fixed Income Department and was named an Assistant Vice President -
Investments in 1991. In 1993, he was named a Vice President - Investments and
the Portfolio Manager of the MFS Government Mortgage Fund.
<PAGE>
OBJECTIVE AND POLICIES
Objective: The Fund's primary investment objective is to provide a high level of
current income. The Fund's secondary objective is to protect shareholders'
capital. Any investment involves risk and there can be no assurance that the
Fund will achieve its objective.
Policies: The Fund seeks to achieve its investment objective by investing, under
normal circumstances, at least 65% of its total assets in obligations issued or
guaranteed by the Government National Mortgage Association (GNMA). The Fund may
also invest in other securities issued by the U.S. government, its agencies,
authorities or instrumentalities. Depending on market conditions, the Fund may
invest a substantial portion of its assets in cash, short-term government
securities and related repurchase agreements.
TAX FORM SUMMARY
In January 1995, shareholders will be mailed a Tax Form Summary reporting the
federal tax status of all distributions paid during the calendar year 1994.
FEDERAL INCOME TAX INFORMATION ON DISTRIBUTIONS
For the eight-month period ended July 31, 1994, the distributions from ordinary
income of Class A and Class B shares were $0.29100 and $0.26066, respectively.
PERFORMANCE
The information on the following page illustrates the historical performance of
MFS Government Mortgage Fund (Class A) in comparison to various market
indicators. Fund results reflect the deduction of the 4.75% maximum sales
charge; benchmark comparisons are unmanaged and do not reflect any fees or
expenses. You cannot invest in an index. All results reflect the reinvestment of
all dividends and capital gains.
Please note that effective September 7, 1993, Class B shares were offered.
Information on Class B share performance appears on the next page.
<PAGE>
GROWTH OF A HYPOTHETICAL $10,000 INVESTMENT
(For the period from January 9, 1986 to July 31, 1994)
Line graph representing the growth of a $10,000 investment for the life-of-class
period ended July 31, 1994. The graph is scaled from $5,000 to $30,000 in $5,000
segments. The years are marked from 1986 to 1994. There are three lines drawn to
scale. One is a solid line representing Government Mortgage Fund Class A, a
second line of short dashes represents the Lehman Brothers GNMA Index, and a
third line of long dashes represents the Consumer Price Index.
Government Mortgage Fund Class A.............. $16,710
Lehman Brothers GNMA Index .................. $21,472
Consumer Price Index ......................... $13,578
<TABLE>
AVERAGE ANNUAL TOTAL RETURNS
<CAPTION>
1/09/86-
1 Year 3 Years 5 Years 7/31/94
--------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
MFS Government Mortgage Fund (Class A) including
4.75% sales charge -5.41% +5.08% +5.26% +6.18%
--------------------------------------------------------------------------------------------------------------------------
MFS Government Mortgage Fund (Class A) at net asset value -0.67% +6.79% +6.30% +6.79%
--------------------------------------------------------------------------------------------------------------------------
MFS Government Mortgage Fund (Class B) with CDSC -5.94% -- -- --
--------------------------------------------------------------------------------------------------------------------------
MFS Government Mortgage Fund (Class B) without CDSC -2.21% -- -- --
--------------------------------------------------------------------------------------------------------------------------
Average GNMA fund -0.80% +6.53% +7.59% +7.96%
--------------------------------------------------------------------------------------------------------------------------
Lehman Brothers GNMA Index +0.22% +7.13% +8.52% +9.31%
--------------------------------------------------------------------------------------------------------------------------
Consumer Price Index +2.77% +2.90% +3.59% +3.63%
--------------------------------------------------------------------------------------------------------------------------
</TABLE>
In the above table, we have included the average annual total returns of all
GNMA funds (including the Fund for the one-, three- and five-year periods)
tracked by Lipper Analytical Services, Inc. (an independent firm which reports
mutual fund performance) for the applicable time periods (42, 36, 31 and 19
funds for the one-, three- and five-year periods ended July 31, 1994, and for
the period from January 1, 1986 through July 31, 1994, respectively). Because
these returns do not reflect any applicable sales charges, we have also included
the Fund's results at net asset value (no sales charge) for comparison.
All results are historical and, therefore, are not an indication of future
results. The principal value and income return of an investment in a mutual fund
will vary with changes in market conditions, and shares, when redeemed, may be
worth more or less than their original cost.
Commencement of offering of this class of shares. Benchmark comparisons
begin on January 1, 1986.
Aggregate total return from September 7, 1993 (commencement of offering of
Class B shares).
The return reflects the current maximum Class B CDSC of 4%.
The Consumer Price Index is a popular measure of change in prices.
Effective March 1, 1993, the Fund revised its investment policy of investing in
securities issued or guaranteed by the U.S. government and its agencies and
engaging in transactions involving related options, to its current policy of
investing at least 65% of its assets, under normal circumstances, in GNMA
securities and obligations fully collateralized by GNMAs.
<PAGE>
<TABLE>
PORTFOLIO OF INVESTMENTS - July 31, 1994
Bonds - 96.7%
---------------------------------------------------------------------------------------------------------------------
<CAPTION>
Principal Amount
Issuer (000 Omitted) Value
---------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Federal Home Loan Mortgage Corporation - 3.8%
FHLMC, 7s, 2024 $ 30,500 $ 28,984,455
FHLMC, 8.5s, 2007 - 2016 80 80,861
FHLMC, 9s, 1999 - 2021 31,310 32,612,752
FHLMC, 9.5s, 2009 - 2020 507 530,752
--------------
$ 62,208,820
---------------------------------------------------------------------------------------------------------------------
Federal Housing Authority - 1.4%
FHA, Centennial, "A", 8.25s, 2028<F1> $ 24,035 $ 23,843,672
---------------------------------------------------------------------------------------------------------------------
Federal National Mortgage Association - 0.3%
FNMA, 7.5s, 2022 $ 52 $ 50,290
FNMA, 8s, 2017 - 2023 1,770 1,768,493
FNMA, 8.5s, 2004 - 2022 3,130 3,201,239
FNMA, 9s, 2008 - 2016 80 83,206
--------------
$ 5,103,228
---------------------------------------------------------------------------------------------------------------------
Financing Corporation - 3.8%
FICO, 10.7s, 2017 $ 11,305 $ 14,668,238
FICO, 9.8s, 2018 31,000 37,403,360
FICO, 10.35s, 2018 8,250 10,436,250
--------------
$ 62,507,848
---------------------------------------------------------------------------------------------------------------------
Government National Mortgage Association - 71.3%
GNMA, 7s, 2022 - 2023 $229,101 $ 215,281,565
GNMA, 7.5s, 2008 - 2023 223,720 217,817,254
GNMA, 8s, 2001 - 2024 110,811 111,285,212
GNMA, 8.5s, 2017 - 2023 30,005 30,643,020
GNMA, 9s, 2008 - 2023 372,842 388,802,876
GNMA, 9.5s, 2009 - 2022 103,103 109,417,869
GNMA, 10s, 2009 - 2021 84,759 91,274,690
GNMA, 10.5s, 2013 - 2020 12,780 13,986,460
GNMA, 12.5s, 2011 734 844,032
--------------
$1,179,352,978
---------------------------------------------------------------------------------------------------------------------
Small Business Administration - 4.0%
SBA, 8.75s, 2006 $ 207 $ 212,587
SBA, 10s, 2009 4,342 4,677,585
SBA, 10.1s, 2009 8,725 9,385,108
SBA, 9.3s, 2010 4,209 4,440,967
SBA, 9.45s, 2010 10,418 11,064,463
SBA, 9.55s, 2010 11,112 11,796,179
SBA, 9.7s, 2010 3,543 3,801,176
SBA, 8.8s, 2011 3,610 3,739,467
SBA, 8.85s, 2011 13,683 14,184,599
SBA, 8.05s, 2012 2,787 2,775,394
--------------
$ 66,077,525
---------------------------------------------------------------------------------------------------------------------
U.S. Federal Agencies - 0.2%
Federal Agricultural Mortgage Corp., 8.07s, 2006 $ 3,000 $ 2,874,360
---------------------------------------------------------------------------------------------------------------------
<PAGE>
PORTFOLIO OF INVESTMENTS - continued
Bonds - continued
---------------------------------------------------------------------------------------------------------------------
Principal Amount
Issuer (000 Omitted) Value
---------------------------------------------------------------------------------------------------------------------
U.S. Treasury Obligations - 11.9%
U.S. Treasury Notes, 11.625s, 1994<F2> $ 20,000 $ 20,393,800
U.S. Treasury Notes, 9.375s, 1996<F2> 70,000 73,926,300
U.S. Treasury Bonds, 13.125s, 2001 25,000 33,312,500
U.S. Treasury Bonds, 10.75s, 2003 4,085 5,049,428
U.S. Treasury Bonds, 10.75s, 2005 20,800 26,324,896
U.S. Treasury Bonds, 9.25s, 2016<F2> 1,200 1,424,808
Principal Stripped Interest Payments, 0s, 2017 - 2021 236,535 36,976,357
--------------
$ 197,408,089
---------------------------------------------------------------------------------------------------------------------
Total Bonds (Identified Cost, $1,663,864,311) $1,599,376,520
---------------------------------------------------------------------------------------------------------------------
Repurchase Agreement - 4.4%
---------------------------------------------------------------------------------------------------------------------
Morgan, J.P., dated 7/29/94, due 8/01/94, total to be received
$72,464,354 (secured by U.S. Treasury Notes, 6.875s,
due 3/31/97, market value, $51,934,896 and U.S. Treasury Notes,
5.125s, due 6/30/98, market value, $22,445,485), at Cost $ 72,439 $ 72,439,000
---------------------------------------------------------------------------------------------------------------------
Total Investments (Identified Cost, $1,736,303,311) $1,671,815,520
Other Assets, Less Liabilities - (1.1)% (18,832,164)
---------------------------------------------------------------------------------------------------------------------
Net Assets - 100.0% $1,652,983,356
---------------------------------------------------------------------------------------------------------------------
<FN>
<F1>Restricted security.
<F2>Denotes all or a portion of a security segregated as collateral for open futures contracts.
</FN>
</TABLE>
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS
<TABLE>
Statement of Assets and Liabilities
------------------------------------------------------------------------------------------
July 31, 1994
------------------------------------------------------------------------------------------
<S> <C>
Assets:
Investments, at value (identified cost, $1,736,303,311) $1,671,815,520
Cash 290
Receivable for Fund shares sold 265,553
Interest receivable 17,095,336
Other assets 29,456
--------------
Total assets $1,689,206,155
--------------
Liabilities:
Payable for investments purchased $ 28,746,250
Payable for Fund shares reacquired 4,739,180
Payable for daily variation margin on open futures contracts 1,783,500
Payable to affiliates -
Management fee 87,717
Shareholder servicing agent fee 23,988
Distribution fee 438,541
Accrued expenses and other liabilities 403,623
--------------
Total liabilities $ 36,222,799
--------------
Net assets $1,652,983,356
==============
Net assets consist of:
Paid-in capital $1,808,617,523
Unrealized depreciation on investments (66,593,708)
Accumulated net realized loss on investments (88,989,835)
Accumulated distributions in excess of net investment income (50,624)
--------------
Total $1,652,983,356
==============
Shares of beneficial interest outstanding 254,781,485
===========
Class A shares:
Net asset value and redemption price per share
(net assets of $423,796,523 / 65,284,398 shares of
beneficial interest outstanding) $6.49
=====
Offering price per share (100/95.25) $6.81
=====
Class B shares:
Net asset value, redemption price and offering price per share
(net assets of $1,229,186,833 / 189,497,087 shares of
beneficial interest outstanding) $6.49
=====
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.
</TABLE>
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS - continued
<TABLE>
Statement of Operations
------------------------------------------------------------------------------------------------
<CAPTION>
Eight Months Ended Year Ended
July 31, 1994 November 30, 1993
------------------------------------------------------------------------------------------------
<S> <C> <C>
Net investment income:
Interest income $ 96,676,046 $ 77,761,269
------------- ------------
Expenses -
Management fee $ 8,248,819 $ 7,932,214
Trustees' compensation 52,687 48,356
Shareholder servicing agent fee (Class A) 472,997 897,717
Shareholder servicing agent fee (Class B) 1,670,746 671,592
Distribution and service fee (Class A) 1,103,659 2,150,851
Distribution and service fee (Class B) 9,291,485 3,926,892
Postage 265,633 275,448
Custodian fee 125,418 232,673
Printing 116,871 113,505
Auditing fees 75,898 54,768
Legal fees 639 40,700
Miscellaneous 795,691 252,252
------------- ------------
Total expenses $ 22,220,543 $ 16,596,968
Reduction of expenses by investment adviser (93,468) (757,448)
------------- ------------
Net expenses $ 22,127,075 $ 15,839,520
------------- ------------
Net investment income $ 74,548,971 $ 61,921,749
------------- ------------
Realized and unrealized gain (loss) on investments:
Realized gain (loss) (identified cost basis)--
Investment transactions $ (33,375,031) $ 3,568,365
Written option transactions -- 963,281
Futures contracts 8,309,868 (634,950)
------------- ------------
Net realized gain (loss) on investments $ (25,065,163) $ 3,896,696
------------- ------------
Change in unrealized appreciation (depreciation) --
Investments $ (73,595,537) $(28,938,366)
Written options -- (404,688)
Futures contracts (1,698,621) (407,296)
------------- ------------
Net unrealized gain (loss) on investments $ (75,294,158) $(29,750,350)
------------- ------------
Net realized and unrealized gain
(loss) on investments $(100,359,321) $(25,853,654)
------------- ------------
Increase (decrease) in net assets from operations $ (25,810,350) $ 36,068,095
============= ============
</TABLE>
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS - continued
<TABLE>
Statement of Changes in Net Assets
---------------------------------------------------------------------------------------------------------
<CAPTION>
Year Ended November 30,
Eight Months Ended ------------------------------------
July 31, 1994 1993 1992
---------------------------------------------------------------------------------------------------------
<S> <C> <C>
Increase (decrease) in net assets:
From operations -
Net investment income $ 74,548,971 $ 61,921,749 $ 52,406,598
Net realized gain (loss) on investments (25,065,163) 3,896,696 15,662,686
Net unrealized gain (loss)
on investments (75,294,158) (29,750,350) (4,433,146)
-------------- -------------- --------------
Increase (decrease) in net assets
from operations $ (25,810,350) $ 36,068,095 $ 63,636,138
-------------- -------------- --------------
Equalization $ -- $ -- $ (2,190,075)
-------------- -------------- --------------
Distributions declared to shareholders -
From net investment income (Class A) $ (14,372,080) $ (41,366,228) $ (48,438,786)
From net investment income (Class B) (38,804,832) (16,456,135) --
In excess of net realized gain on
investments (Class A) -- (4,790,820) --
From paid-in capital (Class A) (6,354,345) -- (30,488,053)
From paid-in capital (Class B) (17,156,825) -- --
-------------- -------------- --------------
Total distributions declared to
shareholders $ (76,688,082) $ (62,613,183) $ (78,926,839)
-------------- -------------- --------------
Fund share (principal) transactions
(exclusive of amounts allocated to net
investment income) - Net proceeds from
sale of shares $ 55,960,166 $ 29,918,411 $ 31,955,021
Net asset value of shares issued to
shareholders in reinvestment of
distributions 31,831,973 24,936,586 28,948,132
Cost of shares reacquired (482,278,453) (367,519,075) (214,450,856)
Net asset value of shares issued to
shareholders in connection with merger
of MFS Lifetime Government Mortgage Fund -- 1,774,003,938 --
-------------- -------------- --------------
Increase (decrease) in net assets from
Fund share transactions $ (394,486,314) $1,461,339,860 $ (153,547,703)
-------------- -------------- --------------
Total increase (decrease) in net assets $ (496,984,746) $1,434,794,772 $ (171,028,479)
Net assets:
At beginning of period 2,149,968,102 715,173,330 886,201,809
-------------- -------------- --------------
At end of period (including undistributed
(distributions in excess of) net
investment income of ($50,624),
($11,856,473) and $13,364,660,
respectively) $1,652,983,356 $2,149,968,102 $ 715,173,330
============== ============== ==============
</TABLE>
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS - continued
<TABLE>
Financial Highlights
--------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
For the Eight
Months Ended For the Year Ended November 30,
July 31, --------------------------------------------------------
1994 1993 1992 1991 1990 1989
--------------------------------------------------------------------------------------------------------------------------------
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 $ 6.85 $ 6.82 $ 6.95 $ 7.01 $ 7.86 $ 7.82
------- ------- ------- ------- ------- -------
Income from investment operations -
Net investment income $ 0.29 $ 0.34 $ 0.46 $ 0.48 $ 0.53 $ 0.59
Net realized and unrealized gain (loss)
on investments (0.36) 0.20 0.09 0.25 (0.40) 0.48
------- ------- ------- ------- ------- -------
Total from investment operations $ (0.07) $ 0.54 $ 0.55 $ 0.73 $ 0.13 $ 1.07
------- ------- ------- ------- ------- -------
Less distributions declared to shareholders -
From net investment income (0.20) $ (0.47) (0.42) (0.44) (0.49) (0.58)
From paid-in capital (0.09) -- (0.26) (0.35) (0.49) (0.45)
In excess of net realized gains -- (0.04) -- -- -- --
------- ------- ------- ------- ------- -------
Total distributions declared to shareholders $ (0.29) $ (0.51) $ (0.68) $ (0.79) $ (0.98) $ (1.03)
------- ------- ------- ------- ------- -------
Net asset value - end of period $ 6.49 $ 6.85 $ 6.82 $ 6.95 $ 7.01 $ 7.86
------- ------- ------- ------- ------- -------
Total return (1.51)% 8.11% 8.25% 11.00% 2.05% 14.72%
Ratios (to average net assets)/Supplemental data:
Expenses 1.27% 1.38% 1.42% 1.44% 1.40% 1.37%
Net investment income 6.46% 6.30% 6.57% 6.91% 7.29% 7.57%
Portfolio turnover 37% 167% 484% 731% 507% 489%
Net assets at end of period (000,000s omitted) $ 424 $ 522 $ 715 $ 886 $1,068 $1,380
</TABLE>
Annualized.
Total returns for Class A shares do not include the applicable sales
charge. If the sales charge had been included, the results would have been
lower.
The investment adviser did not impose a portion of its management fee for
the periods indicated. If this fee had been incurred by the Fund, the Class
A net investment income per share and ratios would have been:
Net investment income $ 0.29 $ 0.34
Ratios (to average net assets):
Expenses 1.28% 1.46%
Net investment income 6.45% 6.22%
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS - continued
Financial Highlights - continued
<TABLE>
--------------------------------------------------------------------------------------------------------
<CAPTION>
For the Eight For the
For the Year Ended November 30, Months Ended Period Ended
------------------------------------ July 31, November 30,
1988 1987 1986 1994 1993
---------------------------------------------------------------------------------------------------------
Class A Class B
---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per share data (for a share
outstanding throughout each period):
Net asset value - beginning of
period $ 8.34 $ 9.82 $ 9.53 $ 6.84 $ 6.97
------ ------ ------ ------ ------
Income from investment operations -
Net investment income $ 0.64 $ 0.75 $ 0.72 $ 0.26 $ 0.38
Net realized and unrealized
gain (loss) on investments (0.06) (1.08) 0.43 (0.35) (0.44)
------ ------ ------ ------ ------
Total from investment operations $ 0.58 (0.33) $ 1.15 (0.09) (0.06)
------ ------ ------ ------ ------
Less distributions declared to
shareholders -
From net investment income $(0.64) $(0.82) $(0.65) $(0.18) $(0.07)
From paid-in capital (0.46) (0.32) -- (0.08) --
From net realized gain on
investments -- (0.01) (0.21) -- --
------ ------ ------ ------ ------
Total distributions declared
to shareholders $(1.10) $(1.15) $(0.86) $(0.26) $(0.07)
------ ------ ------ ------ ------
Net asset value - end of period $ 7.82 $ 8.34 $ 9.82 $ 6.49 $ 6.84
====== ====== ====== ====== ======
Total return 7.39% (3.37)% 13.75% (1.97)% (3.91)%
Ratios (to average net
assets)/Supplemental data:
Expenses 1.38% 1.34% 1.00% 1.94% 1.87%
Net investment income 7.88% 8.34% 9.54% 5.80% 5.92%
Portfolio turnover 285% 212% 169% 37% 167%
Net assets at end of period
(000,000s omitted) $1,295 $1,129 $ 593 $1,229 $1,628
</TABLE>
Total returns for Class A shares do not include the applicable sales
charge. If the sales charge had been included, the results would have been
lower.
For the period from the date of issue of Class B shares, September 7, 1993
to November 30, 1993.
For the period from January 9, 1986 (commencement of investment operations)
to November 30, 1986.
Annualized.
The investment adviser did not impose a portion of its management fee for
the periods indicated. If this fee had been incurred by the Fund, the Class
B net investment income per share and ratios would have been:
Net investment income $ 0.26 $ 0.38
Ratios (to average net assets):
Expenses 1.94% 1.94%
Net investment income 5.80% 5.85%
See notes to financial statements
<PAGE>
NOTES TO FINANCIAL STATEMENTS
(1) Business and Organization MFS Government Mortgage Fund (the Fund) is
organized as a Massachusetts business trust and is registered under the
Investment Company Act of 1940, as amended, as an open-end diversified
management investment company. During the period the Fund changed its year end
from November 30 to July 31, and financial statements are thus being presented
for the eight-month period ended July 31, 1994.
(2) Significant Accounting Policies
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 value. Futures contracts
listed on commodities exchanges are valued at closing settlement prices.
Securities for which there are no such quotations or valuations are valued at
fair value as determined in good faith by or at the direction of the Trustees.
Repurchase Agreements - The Fund may enter into repurchase agreements with
institutions that the Fund's investment adviser has determined are creditworthy.
Each repurchase agreement is recorded at cost. The Fund requires that the
securities purchased in a repurchase transaction be transferred to the custodian
in a manner sufficient to enable the Fund to obtain those securities in the
event of a default under the repurchase agreement. The Fund monitors, on a daily
basis, the value of the securities transferred to ensure that the value,
including accrued interest, of the securities under each repurchase agreement is
greater than amounts owed to the Fund under each such repurchase agreement.
Futures Contracts - The Fund may enter into financial futures contracts for the
delayed delivery of securities at a fixed price on a future date. The Fund is
required to deposit either in cash or securities an amount equal to a certain
percentage of the contract amount. Subsequent payments are made or received by
the Fund each day, dependent on the daily fluctuations in the value of the
underlying security, and are recorded for financial statement purposes as
unrealized gains or losses by the Fund. The Fund's investment in financial
futures contracts is designed to hedge against anticipated future changes in
interest rates or securities prices and for non-hedging purposes. Should
interest rates or securities prices move unexpectedly, the Fund may not achieve
the anticipated benefits of the financial futures contracts and may realize a
loss.
Security Loans - The Fund may lend its securities to member banks of the Federal
Reserve System and to member firms of the New York Stock Exchange or
subsidiaries thereof. The loans are collateralized at all times by cash or
securities with a market value at least equal to the market value of securities
loaned. As with other extensions of credit, the Fund may bear the risk of delay
in recovery or even loss of rights in the collateral should the borrower of the
securities fail financially. The Fund receives compensation for lending its
securities in the form of fees or from all or a portion of the income from
investment of the collateral. The Fund also continues to earn income on the
securities loaned. At July 31, 1994, the Fund had no securities on loan.
Investment Transactions and Income - Investment transactions are recorded on the
trade date. Interest income is recorded on the accrual basis. All premium and
original issue discount are amortized or accreted for both financial statement
and tax reporting purposes as required by federal income tax regulations.
Tax Matters and Distributions - The Fund's policy is to comply with the
provisions of the Internal Revenue Code (the Code) applicable to regulated
investment companies and to distribute to shareholders all of its net taxable
income, including any net realized gain on investments. Accordingly, no
provision for federal income or excise tax is provided. The Fund files a tax
return annually using tax accounting methods required under provisions of the
Code which may differ from generally accepted accounting principles, the basis
on which these financial statements are prepared. Accordingly, the amount of net
investment income and net realized gain reported on these financial statements
may differ from that reported on the Fund's tax return, and consequently, the
character of distributions to shareholders reported in the financial highlights
may differ from that reported to shareholders on Form 1099-DIV. Distributions to
shareholders are recorded on the ex-dividend date.
The Fund distinguishes between distributions on a tax basis and a financial
reporting basis and requires that only distributions in excess of tax basis
earnings and profits are reported in the financial statements as a return of
capital. Differences in the recognition or classification of income between the
financial statements and tax earnings and profits which result in temporary
over-distributions for financial statement purposes, are classified as
distributions in excess of net investment income or accumulated net realized
gains. During the eight-month period ended July 31, 1994, ($9,566,210) and
$21,386,256 was reclassified from paid-in capital to accumulated distributions
in excess of net investment income and accumulated net realized loss on
investments, respectively, due to differences between book and tax accounting
for mortgage-backed securities, tax-basis return of capital, and distributions
in excess of taxable income. This change had no effect on the net assets or net
asset value per share.
Prior to December 1, 1992, the Fund followed the accounting practice known as
equalization by which a portion of the proceeds from sales and costs of
reacquisitions of Fund shares is allocated to undistributed net investment
income. As a result, undistributed net investment income per share was
unaffected by sales or reacquisitions of Fund shares. Effective December 1,
1992, the Fund discontinued equalization accounting. The new method of
accounting was adopted because management believes it results in a simpler and
more understandable financial statement presentation. This change had no effect
on the Fund's net assets, net asset value per share or distributions. The
cumulative effect of the change decreased undistributed net investment income
and increased paid-in capital previously reported through November 30, 1992 for
financial statement reporting purposes by $4,684,384.
Multiple Classes of Shares of Beneficial Interest - The Fund offers Class A and
Class B shares. Class B shares were first offered to the public on September 7,
1993. The two classes of shares differ in their shareholder servicing agent,
distribution and service fees. Shareholders of each class also bear certain
expenses that pertain only to that particular class. All shareholders bear the
common expenses of the Fund pro rata, based on the average daily net assets of
each class, without distinction between share classes. Dividends are declared
separately for each class. Neither class has preferential dividend rights;
differences in per share dividend rates are generally due to differences in
separate class expenses, including shareholder servicing and distribution fees.
(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, which is computed daily and paid monthly at an annual rate equal
to the lesser of (i) 0.65% of the Fund's average daily net assets or (ii) 0.30%
of the Fund's average daily net assets and 6.1% of the Fund's gross income,
amounted to $8,248,819 and $7,932,214 for the eight-month period ended July 31,
1994 and the year ended November 30, 1993, respectively. The investment adviser
did not impose a portion of its fee for the eight months ended July 31, 1994 and
the year ended November 30, 1993 ($93,468 and $757,448, respectively) which is
reflected 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 of the officers and Trustees of the Fund
are officers or directors of MFS, MFS Financial Services, Inc. (FSI) and MFS
Service Center, Inc. (MFSC). The Fund has an unfunded defined benefit plan for
all of its independent Trustees. Included in Trustees' compensation is a net
periodic pension expense of $20,106 and $11,959 for the eight months ended July
31, 1994 and the year ended November 30, 1993, respectively.
Distributor - FSI, a wholly owned subsidiary of MFS, as distributor received
$23,519 and $58,847, for the eight-month period ended July 31, 1994 and the year
ended November 30, 1993, respectively, as its portion of the sales charge on
sales of Class A shares of the Fund. The Trustees have adopted separate
distribution plans for Class A and Class B shares pursuant to Rule 12b-1 of the
Investment Company Act of 1940 as follows:
The Class A Distribution Plan provides that the Fund will pay FSI up to 0.35% of
its average daily net assets attributable to Class A shares annually in order
that FSI may pay expenses on behalf of the Fund related to the distribution and
servicing of its shares. These expenses include a service fee to each securities
dealer that enters into a sales agreement with FSI of up to 0.25% of the Fund's
average daily net assets attributable to Class A shares which are attributable
to that securities dealer, a distribution fee to FSI of up to 0.10% of the
Fund's average daily net assets attributable to Class A shares, commissions to
dealers and payments to FSI wholesalers for sales at or above a certain dollar
level and other such distribution-related expenses that are approved by the
Fund. Fees incurred under the Distribution Plan during the eight-month period
ended July 31, 1994 and the year ended November 30, 1993 were 0.35% of average
daily net assets attributable to Class A shares on an annualized basis and
amounted to $1,103,659 and $2,150,851 (of which FSI retained $97,724 and
$77,152), respectively.
The Class B Distribution Plan provides that the Fund will pay FSI a monthly
distribution fee, equal to 0.75% annually, and a quarterly service fee of up to
0.25%, of the Fund's average daily net assets attributable to Class B shares
which FSI will pay to securities dealers that enter into a sales agreement with
FSI at a rate of up to 0.25% of the Fund's average daily net assets attributable
to Class B shares. The service fee is intended to be additional consideration
for services rendered by the dealer with respect to Class B shares. Fees
incurred under the distribution plan during the eight-month period ended July
31, 1994 and the year ended November 30, 1993 were 1.00% of average daily net
assets attributable to Class B shares on an annualized basis and amounted to
$9,291,485 and $3,926,892, respectively.
A contingent deferred sales charge is imposed on shareholder redemptions of
Class A shares, on purchases of $1 million or more, in the event of a
shareholder redemption within twelve months following the share purchase. A
contingent deferred sales charge is imposed on shareholder redemptions of Class
B shares in the event of a share redemption within six years of purchase. FSI
receives all contingent deferred sales charges. Contingent deferred sales
charges imposed during the eight-month period ended July 31, 1994 and the year
ended November 30, 1993 were $1,933 and $0 for Class A shares, respectively, and
$1,865,409 and $1,199,731 for Class B shares, respectively.
Shareholder Servicing Agent - MFSC, a wholly owned subsidiary of MFS, for the
eight months ended July 31, 1994 and the year ended November 30, 1993 earned
$472,997 and $897,717 for Class A shares and $1,670,746 and $671,592 for Class B
shares, respectively, for its services as shareholder servicing agent. The fee
is calculated as a percentage of the average daily net assets of each class of
shares at an effective annual rate of up to 0.15% and up to 0.22%, attributable
to Class A and Class B shares, respectively.
(4) Portfolio Securities
Purchases and sales of investments, other than purchased option transactions and
short-term obligations, were as follows:
Purchases Sales
------------------------------------------------------------------------------
U.S. government securities
$680,275,818 $657,604,600
============ ============
The cost and unrealized appreciation or depreciation in value of the investments
owned by the Fund, as computed on a federal income tax basis, are as follows:
Aggregate cost $1,736,405,113
==============
Gross unrealized depreciation $ 68,125,842
Gross unrealized appreciation 3,536,249
--------------
Net unrealized depreciation $ 64,589,593
==============
At July 31, 1994, the Fund, for federal income tax purposes, had a capital loss
carryforward of $90,993,950, which may be applied against any net taxable
realized gains of each succeeding year until the earlier of its utilization or
expiration on July 31, 1996 ($3,630,686), July 31, 1998 ($81,836,532) and July
31, 2002 ($5,526,732).
(5) Shares of Beneficial Interest
The Fund's Declaration of Trust permits the Trustees to issue an unlimited
number of full and fractional shares of beneficial interest (without par value).
Transactions in Fund shares were as follows:
<TABLE>
Class A Shares
<CAPTION>
For the Eight Months Ended For the Year Ended For the Year Ended
July 31, 1994 November 30, 1993 November 30, 1992
----------------------------- ------------------------------ -------------------------------
Shares Amount Shares Amount Shares Amount
----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Shares sold 4,203,202 $ 27,515,113 2,146,686 $ 19,558,553 4,709,504 $ 31,955,021
Shares issued to shareholders
in reinvestment of
distributions 1,321,312 8,740,816 2,663,943 18,391,733 4,257,212 28,948,132
Shares reacquired (16,516,662) (109,058,350) (33,340,955) (235,950,665) (31,588,307) (214,450,856)
---------- ------------- ---------- -------------- ---------- -----------
Net decrease (10,992,148) $ (72,802,421) (28,530,326) $ (198,000,379) (22,621,591) $(153,547,703)
========== ============= ========== ============== ========== =============
</TABLE>
<TABLE>
Class B Shares
<CAPTION>
For the Eight Months Ended For the Period Ended
July 31, 1994 November 30, 1993
------------------------------ -------------------------------
Shares Amount Shares Amount
--------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Shares sold 4,217,881 $ 28,445,053 1,496,862 $ 10,359,858
Shares issued to shareholders
in reinvestment of
distributions 3,488,783 23,091,157 949,148 6,544,853
Shares reacquired (56,121,433) (373,220,103) (19,034,865) (131,568,410)
Shares issued in connection
with merger with MFS
Lifetime Government Mortgage
Fund -- -- 254,500,711 1,774,003,938
---------- ------------- ----------- --------------
Net increase (decrease) (48,414,769) $(321,683,893) 237,911,856 $1,659,340,239
========== ============= =========== ==============
<FN>
For the period from the commencement of offering of Class B shares, September 7, 1993 to November 30, 1993.
</FN>
</TABLE>
(6) Line of Credit
The Fund entered into an agreement which enables it to participate with other
funds managed by MFS, or an affiliate of MFS, in an unsecured line of credit
with a bank which permits borrowings up to $300 million, collectively.
Borrowings may be made to temporarily finance the repurchase of Fund shares.
Interest is charged to each fund, based on its borrowings, at a rate equal to
the bank's base rate. In addition, a commitment fee, based on the average daily
unused portion of the line of credit, is allocated among the participating funds
at the end of each quarter. The commitment fee allocated to the Fund for the
eight months ended July 31, 1994 and the year ended November 30, 1993 was
$21,356 and $20,256, respectively.
(7) Financial Instruments
The Fund regularly 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. A summary of
obligations under these financial instruments at July 31, 1994, is as follows:
<PAGE>
Unrealized
Futures Contracts Expiration Contracts Position Depreciation
--------------------------------------------------------------------------------
U.S. Treasury Notes September 1994 1,392 Short $2,105,917
==========
At July 31, 1994, the Fund had sufficient cash and/or securities to cover margin
requirements on open futures contracts.
(8) Restricted Securities
The Fund may not invest more than 10% of its total assets in securities which
are subject to legal or contractual restrictions on resale. At July 31, 1994,
the Fund owned the following restricted security (constituting 1.4% of net
assets) which may not be publicly sold without registration under the Securities
Act of 1933. The Fund does not have the right to demand that such security be
registered. The value of such securities are determined by valuations supplied
by a pricing service or brokers.
<TABLE>
<CAPTION>
Date of
Description Acquisition Par Amount Cost Value
----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
FHA, Centennial, "A", 8.25s, 2028 3/23/93 $24,035,000 $24,755,791 $23,843,672
===========
</TABLE>
(9) Acquisitions
At the close of business on September 6, 1993, the Fund acquired all of the
assets and liabilities of MFS Lifetime Government Mortgage Fund (LGM). The
acquisition was accomplished by a tax-free exchange of 254,500,711 Class B
shares of the Fund (valued at $1,774,003,938) for the 250,123,424 shares of LGM.
LGM's net assets on that date ($1,774,003,938), including $45,387,402 of
unrealized appreciation, were combined with those of the Fund. The aggregate net
assets of the Fund and LGM immediately before the acquisition were $562,603,182,
and $1,774,003,938, respectively. The aggregate net assets of the Fund
immediately after the acquisition were $2,336,607,120.
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Trustees and Shareholders of MFS Government Mortgage Fund:
We have audited the accompanying statement of assets and liabilities, including
the portfolio of investments, of MFS Government Mortgage Fund as of July 31,
1994, the related statement of operations for the eight months then ended and
the year ended November 30, 1993, the statement of changes in net assets for the
eight months ended July 31, 1994 and the years ended November 30, 1993 and 1992,
and the financial highlights for the eight months ended July 31, 1994 and for
each of the years in the eight-year period ended November 30, 1993. These
financial statements and financial highlights are the responsibility of the
Fund's management. Our responsibility is to express an opinion on these
financial statements and financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of the securities owned at July
31, 1994 by correspondence with the custodian and brokers. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of MFS Government
Mortgage Fund at July 31, 1994, 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
September 9, 1994
---------------------------------------
This report is prepared for the general information of shareholders. It is
authorized for distribution to prospective investors only when preceded or
accompanied by a current prospectus.
<PAGE>
MFS(R) GOVERNMENT BULK RATE
MORTGAGE FUND U.S. POSTAGE
P A I D
500 Boylston Street PERMIT #55638
Boston, MA 02116 BOSTON, MA
[LOGO]
MGM-2 9/94 137M 31/231
<PAGE>
PART C
Item 24 Financial Statements and Exhibits
(a) Financial Statements Included in Part A:
For the period from the start of business, January 9, 1986, to
November 30, 1993 and for the period from November 30, 1993 to
July 31, 1994:
Financial Highlights.
Financial Statements Included in Part B:
At July 31, 1994:
Portfolio of Investments.*
Statement of Assets and Liabilities.*
For the year ended November 30, 1993 and for the eight months
ended July 31, 1994:
Statement of Operations.*
For the two years ended November 30, 1993 and for the eight
months ended July 31, 1994:
Statement of Changes in Net Assets.*
-----------------------------
* Incorporated herein by reference to the Fund's Annual Report to
Shareholders dated July 31, 1994 filed with the SEC on October 6, 1994.
(b) Exhibits
1 Amended and Restated Declaration of Trust, dated
January 19, 1995; filed herewith.
2 Amended and Restated By-Laws, dated December 21,
1994; filed herewith.
3 Not Applicable.
4 (a) Form of Share Certificate (for certificates produced
prior to DST system). (1)
(b) Form of Share Certificate (for certificates produced
after DST
system). (3)
(c) Form of Share Certificate for Class A shares of the
Fund. (7)
(d) Form of Share Certificate for Class B shares of the
Fund. (7)
5 Investment Advisory Agreement, dated December 19,
1985. (1)
6 (a) Distribution Agreement between MFS Government
Mortgage Fund and MFS Fund Distributors, Inc., dated
January 1, 1995; filed herewith.
(b) Dealer Agreement between MFS Fund Distributors, Inc.
and a dealer, dated December 28, 1994 and the Mutual
Fund Agreement between MFD and a bank or NASD
affiliate, dated December 28, 1994. (8)
7 Retirement Plan for Non-Interested Person Trustees,
dated January 1, 1991. (5)
8 (a) Custodian Agreement, dated February 19, 1988. (2)
(b) Amendment No. 1 to Custodian Agreement, dated
February 29,
1988. (4)
(c) Amendment No. 2 to Custodian Agreement, dated
October 1, 1989. (3)
(d) Amendment No. 3 to Custodian Agreement, dated
September 17,
1991. (5)
9 (a) Shareholder Servicing Agent Agreement, dated
December 19, 1985. (1)
(b) Amendment to Shareholder Servicing Agent Agreement,
dated December 31, 1992. (6)
(c) Amendment to Shareholder Servicing Agent Agreement,
dated September 7, 1993. (7)
(d) Exchange Privilege Agreement, dated September 1,
1993. (7)
(e) Loan Agreement by and among the Banks named therein,
the MFS Funds named therein, and the First National
Bank of Boston dated as of February 21, 1995. (9)
(f) Dividend Disbursing Agency Agreement, dated February
1, 1986. (4)
10 Opinion and Consent of Counsel; filed herewith.
11 Consent of Deloitte & Touche; filed herewith.
12 Not Applicable.
13 Investment Representation Letter. (1)
14 (a) Forms for Individual Retirement Account Disclosure
Statement as currently in effect. (4)
(b) Forms for MFS 403(b) Custodial Account Agreement as
currently in effect. (4)
(c) Forms for MFS Prototype Paired Defined Contribution
Plans and Fund Agreement as currently in effect. (4)
15 (a) Amended and Restated Distribution Plan for Class A
shares, dated December 21, 1994; filed herewith.
(b) Distribution Plan for Class B shares, dated December
21, 1994; filed herewith.
16 Schedule for Computation of Performance Quotations -
Average Annual Total Rate of Return and Standardized
Yield; filed herewith.
17 Financial Data Schedules for each class; filed
herewith.
Power of Attorney, dated September 21, 1994; filed herewith.
-----------------------------
(1) Incorporated by reference to Pre-Effective Amendment No. 1 filed with
the SEC on December 20, 1985.
(2) Incorporated by reference to Post-Effective Amendment No. 4 filed with
the SEC on January 27, 1989.
(3) Incorporated by reference to Post-Effective Amendment No. 5 filed with
the SEC on January 29, 1990.
(4) Incorporated by reference to Post-Effective Amendment No. 6 filed with
the SEC on January 28, 1991.
(5) Incorporated by reference to Post-Effective Amendment No. 8 filed with
the SEC on January 29, 1993.
(6) Incorporated by reference to Post-Effective Amendment No. 9 filed with
the SEC on June 2, 1993.
(7) Incorporated by reference to Post-Effective Amendment No. 10 filed with
the SEC on January 28, 1994.
(8) Incorporated by reference to MFS Municipal Series Trust (File Nos.
2-92915 and 811-4096) Post-Effective Amendment No. 26 filed with the
SEC on February 22, 1995.
(9) Incorporated by reference to Amendment No. 8 on Form N-2 for MFS
Municipal Income Trust (File No. 811-4841) filed with the SEC on
February 28, 1995.
Item 25. Persons Controlled by or under Common Control with Registrant
Not Applicable.
Item 26. Number of Holders of Securities
(1) (2)
Title of Class Number of Record Holders
Class A Shares of Beneficial Interest 27,273
(without par value) (as of February 28, 1995)
Class B Shares of Beneficial Interest 58,451
(without par value) (as of February 28, 1995)
Item 27. Indemnification
Reference is hereby made to (a) Article V of Registrant's
Declaration of Trust, filed herewith; and (b) Section 4 of the Distribution
Agreement between Registrant and MFS Fund Distributors, Inc., filed herewith.
The Trustees and officers of the Registrant and the personnel of the
Registrant's investment adviser and distributor are insured under an errors and
omissions liability insurance policy. The Registrant and its officers are also
insured under the fidelity bond required by Rule 17g-1 under the Investment
Company Act of 1940.
Item 28. Business and Other Connections of Investment Adviser
Massachusetts Financial Services Company ("MFS") serves as
investment adviser to the following open-end funds comprising the MFS Family of
Funds: Massachusetts Investors Trust, Massachusetts Investors Growth Stock Fund,
MFS Growth Opportunities Fund, MFS Government Securities Fund, MFS Government
Mortgage Fund, MFS Government Limited Maturity Fund, MFS Series Trust I (which
has three series: MFS Managed Sectors Fund, MFS Cash Reserve Fund and MFS World
Asset Allocation Fund), MFS Series Trust II (which has four series: MFS Emerging
Growth Fund, MFS Capital Growth Fund, MFS Intermediate Income Fund and MFS Gold
& Natural Resources Fund), MFS Series Trust III (which has two series: MFS High
Income Fund and MFS Municipal High Income Fund), MFS Series Trust IV (which has
four series: MFS Money Market Fund, MFS Government Money Market Fund, MFS
Municipal Bond Fund and MFS OTC Fund), MFS Series Trust V (which has two series:
MFS Total Return Fund and MFS Research Fund), MFS Series Trust VI (which has
three series: MFS World Total Return Fund, MFS Utilities Fund and MFS World
Equity Fund), MFS Series Trust VII (which has two series: MFS World Governments
Fund and MFS Value Fund), MFS Series Trust VIII (which has two series: MFS
Strategic Income Fund and MFS World Growth Fund), MFS Municipal Series Trust
(which has 19 series: MFS Alabama Municipal Bond Fund, MFS Arkansas Municipal
Bond Fund, MFS California Municipal Bond Fund, MFS Florida Municipal Bond Fund,
MFS Georgia Municipal Bond Fund, MFS Louisiana Municipal Bond Fund, MFS Maryland
Municipal Bond Fund, MFS Massachusetts Municipal Bond Fund, MFS Mississippi
Municipal Bond Fund, MFS New York Municipal Bond Fund, MFS North Carolina
Municipal Bond Fund, MFS Pennsylvania Municipal Bond Fund, MFS South Carolina
Municipal Bond Fund, MFS Tennessee Municipal Bond Fund, MFS Texas Municipal Bond
Fund, MFS Virginia Municipal Bond Fund, MFS Washington Municipal Bond Fund, MFS
West Virginia Municipal Bond Fund and MFS Municipal Income Fund) and MFS Series
Trust IX (which has three series: MFS Bond Fund, MFS Limited Maturity Fund and
MFS Municipal Limited Maturity Fund) (the "MFS Funds"). The principal business
address of each of the aforementioned funds is 500 Boylston Street, Boston,
Massachusetts 02116.
MFS also serves as investment adviser of the following no-load,
open-end funds: MFS Institutional Trust ("MFSIT") (which has two series), MFS
Variable Insurance Trust ("MVI") (which has twelve series) and MFS Union
Standard Trust ("UST") (which has two series). The principal business address of
each of the aforementioned funds is 500 Boylston Street, Boston, Massachusetts
02116.
In addition, MFS serves as investment adviser to the following
closed-end funds: MFS Municipal Income Trust, MFS Multimarket Income Trust, MFS
Government Markets Income Trust, MFS Intermediate Income Trust, MFS Charter
Income Trust and MFS Special Value Trust (the "MFS Closed-End Funds"). The
principal business address of each of the aforementioned funds is 500 Boylston
Street, Boston, Massachusetts 02116.
Lastly, MFS serves as investment adviser to MFS/Sun Life Series
Trust ("MFS/SL"), Sun Growth Variable Annuity Fund, Inc. ("SGVAF"), Money Market
Variable Account, High Yield Variable Account, Capital Appreciation Variable
Account, Government Securities Variable Account, World Governments Variable
Account, Total Return Variable Account and Managed Sectors Variable Account. The
principal business address of each is One Sun Life Executive Park, Wellesley
Hills, Massachusetts 02181.
MFS International Ltd. ("MIL"), a limited liability company
organized under the laws of the Republic of Ireland and a subsidiary of MFS,
whose principal business address is 41-45 St. Stephen's Green, Dublin 2,
Ireland, serves as investment adviser to and distributor for MFS International
Funds (which has four portfolios: MFS International Funds-U.S. Equity Fund, MFS
International Funds-U.S. Emerging Growth Fund, MFS International
Funds-International Governments Fund and MFS International Fund-Charter Income
Fund) (the "MIL Funds"). The MIL Funds are organized in Luxembourg and qualify
as an undertaking for collective investments in transferable securities (UCITS).
The principal business address of the MIL Funds is 47, Boulevard Royal, L-2449
Luxembourg.
MIL also serves as investment adviser to and distributor for MFS
Meridian U.S. Government Bond Fund, MFS Meridian Charter Income Fund, MFS
Meridian Global Government Fund, MFS Meridian U.S. Emerging Growth Fund, MFS
Meridian Global Equity Fund, MFS Meridian Limited Maturity Fund, MFS Meridian
World Growth Fund, MFS Meridian Money Market Fund and MFS Meridian U.S. Equity
Fund (collectively the "MFS Meridian Funds"). Each of the MFS Meridian Funds is
organized as an exempt company under the laws of the Cayman Islands. The
principal business address of each of the MFS Meridian Funds is P.O. Box 309,
Grand Cayman, Cayman Islands, British West Indies.
MFS Fund Distributors, Inc. ("MFD"), a wholly owned subsidiary of
MFS, serves as distributor for the MFS Funds, MVI, UST and MFSIT.
Clarendon Insurance Agency, Inc. ("CIAI"), a wholly owned
subsidiary of MFS, serves as distributor for certain life insurance and
annuity contracts issued by Sun Life Assurance Company of Canada (U.S.).
MFS Service Center, Inc. ("MFSC"), a wholly owned subsidiary of MFS,
serves as shareholder servicing agent to the MFS Funds, the MFS Closed-End
Funds, MFS Institutional Trust, MFS Variable Insurance Trust and MFS Union
Standard Trust.
MFS Asset Management, Inc. ("AMI"), a wholly owned subsidiary of
MFS, provides investment advice to substantial private clients.
MFS Retirement Services, Inc. ("RSI"), a wholly owned subsidiary
of MFS, markets MFS products to retirement plans and provides administrative
and record keeping services for retirement plans.
MFS
The Directors of MFS are A. Keith Brodkin, Jeffrey L. Shames,
Arnold D. Scott, John R. Gardner and John D. McNeil. Mr. Brodkin is the
Chairman, Mr. Shames is the President, Mr. Scott is a Senior Executive Vice
President and Secretary, James E. Russell is a Senior Vice President and the
Treasurer, Stephen E. Cavan is a Senior Vice President, General Counsel and
an Assistant Secretary, and Robert T. Burns is a Vice President and an
Assistant Secretary of MFS.
Massachusetts Investors Trust
Massachusetts Investors Growth Stock Fund
MFS Growth Opportunities Fund
MFS Government Securities Fund
MFS Government Mortgage Fund
MFS Series Trust I
MFS Series Trust V
MFS Government Limited Maturity Fund
MFS Series Trust VI
A. Keith Brodkin is the Chairman and President, Stephen E. Cavan
is the Secretary, W. Thomas London is the Treasurer, James O. Yost, Vice
President of MFS, is Assistant Treasurer, James R. Bordewick, Jr., Vice
President and Associate General Counsel of MFS, is Assistant Secretary.
MFS Series Trust II
A. Keith Brodkin is the Chairman and President, Leslie J.
Nanberg, Senior Vice President of MFS, is a Vice President, Stephen E. Cavan
is the Secretary, W. Thomas London is the Treasurer, James O. Yost is
Assistant Treasurer, and James R. Bordewick, Jr., is Assistant Secretary.
MFS Government Markets Income Trust
MFS Intermediate Income Trust
A. Keith Brodkin is the Chairman and President, Patricia A.
Zlotin, Executive Vice President of MFS and Leslie J. Nanberg, Senior Vice
President of MFS, are Vice Presidents, Stephen E. Cavan is the Secretary, W.
Thomas London is the Treasurer, James O. Yost is Assistant Treasurer, and
James R. Bordewick, Jr., is the Assistant Secretary.
MFS Series Trust III
A. Keith Brodkin is the Chairman and President, James T. Swanson,
Robert J. Manning, Cynthia M. Brown and Joan S. Batchelder, Senior Vice
Presidents of MFS, Bernard Scozzafava, Vice President of MFS, and Matthew
Fontaine, Assistant Vice President of MFS, are Vice Presidents, Sheila
Burns-Magnan and Daniel E. McManus, Assistant Vice Presidents of MFS, are
Assistant Vice Presidents, Stephen E. Cavan is the Secretary, W. Thomas
London is the Treasurer, James O. Yost is Assistant Treasurer, and James R.
Bordewick, Jr., is Assistant Secretary.
MFS Series Trust IV
MFS Series Trust IX
A. Keith Brodkin is the Chairman and President, Robert A. Dennis
and Geoffrey L. Kurinsky, Senior Vice Presidents of MFS, are Vice Presidents,
Stephen E. Cavan is the Secretary, W. Thomas London is the Treasurer, James
O. Yost is Assistant Treasurer and James R. Bordewick, Jr., is Assistant
Secretary.
MFS Series Trust VII
A. Keith Brodkin is the Chairman and President, Leslie J. Nanberg
and Stephen C. Bryant, Senior Vice Presidents of MFS, are Vice Presidents,
Stephen E. Cavan is the Secretary, W. Thomas London is the Treasurer, James
O. Yost is Assistant Treasurer and James R. Bordewick, Jr., is Assistant
Secretary.
MFS Series Trust VIII
A. Keith Brodkin is the Chairman and President, Jeffrey L.
Shames, Leslie J. Nanberg, Patricia A. Zlotin, James T. Swanson and John D.
Laupheimer, Jr., Vice President of MFS, are Vice Presidents, Stephen E. Cavan
is the Secretary, W. Thomas London is the Treasurer, James O. Yost is
Assistant Treasurer and James R. Bordewick, Jr., is Assistant Secretary.
MFS Municipal Series Trust
A. Keith Brodkin is the Chairman and President, Cynthia M. Brown
and Robert A. Dennis are Vice Presidents, David B. Smith, Geoffrey L.
Schechter and David R. King, Vice Presidents of MFS, are Vice Presidents,
Stephen E. Cavan is the Secretary, W. Thomas London is the Treasurer, James
O. Yost is Assistant Treasurer and James R. Bordewick, Jr., is Assistant
Secretary.
MFS Variable Insurance Trust
MFS Institutional Trust
A. Keith Brodkin is the Chairman and President, Stephen E. Cavan
is the Secretary, W. Thomas London is the Treasurer, James O. Yost is the
Assistant Treasurer and James R. Bordewick, Jr., is the Assistant Secretary.
MFS Union Standard Trust
A. Keith Brodkin is the Chairman and President, Stephen E. Cavan
is the Secretary, W. Thomas London is the Treasurer, James O. Yost and Karen
C. Jordan are Assistant Treasurers and James R. Bordewick, Jr., is the
Assistant Secretary.
MFS Municipal Income Trust
A. Keith Brodkin is the Chairman and President, Cynthia M. Brown
and Robert J. Manning are Vice Presidents, Stephen E. Cavan is the Secretary,
W. Thomas London is the Treasurer, James O. Yost, is Assistant Treasurer and
James R. Bordewick, Jr., is Assistant Secretary.
MFS Multimarket Income Trust
MFS Charter Income Trust
A. Keith Brodkin is the Chairman and President, Patricia A.
Zlotin, Leslie J. Nanberg and James T. Swanson are Vice Presidents, Stephen
E. Cavan is the Secretary, W. Thomas London is the Treasurer, James O. Yost,
Vice President of MFS, is Assistant Treasurer and James R. Bordewick, Jr., is
Assistant Secretary.
MFS Special Value Trust
A. Keith Brodkin is the Chairman and President, Jeffrey L.
Shames, Patricia A. Zlotin and Robert J. Manning are Vice Presidents, Stephen
E. Cavan is the Secretary, W. Thomas London is the Treasurer, and James O.
Yost, is Assistant Treasurer and James R. Bordewick, Jr., is Assistant
Secretary.
SGVAF
W. Thomas London is the Treasurer.
MIL
A. Keith Brodkin is a Director and the President, Arnold D.
Scott, Jeffrey L. Shames are Directors, Ziad Malek, Senior Vice President of
MFS, is a Senior Vice President and Managing Director, Thomas J. Cashman,
Jr., a Vice President of MFS, is a Senior Vice President, Stanley T. Kwok is
a Vice President, Anthony F. Clarizio is an Assistant Vice President, Stephen
E. Cavan is a Director, Senior Vice President and the Clerk, James R.
Bordewick, Jr. is a Director, Senior Vice President and an Assistant Clerk,
Robert T. Burns is an Assistant Clerk and James E. Russell is the Treasurer.
MIL Funds
A. Keith Brodkin is the Chairman, President and a Director,
Arnold D. Scott and Jeffrey L. Shames are Directors, Stephen E. Cavan is the
Secretary, W. Thomas London is the Treasurer, James O. Yost is the Assistant
Treasurer and James R. Bordewick, Jr., is the Assistant Secretary, and Ziad
Malek is a Senior Vice President.
MFS Meridian Funds
A. Keith Brodkin is the Chairman, President and a Director,
Arnold D. Scott and Jeffrey L. Shames are Directors, Stephen E. Cavan is the
Secretary, W. Thomas London is the Treasurer, James R. Bordewick, Jr., is the
Assistant Secretary and Ziad Malek is a Senior Vice President.
MFD
A. Keith Brodkin is the Chairman, Arnold D. Scott and Jeffrey L.
Shames are Directors, William W. Scott, Jr., an Executive Vice President of
MFS, is the President, Stephen E. Cavan is the Secretary, Robert T. Burns is
the Assistant Secretary, and James E. Russell is the Treasurer.
CIAI
A. Keith Brodkin is the Chairman, Arnold D. Scott and Jeffrey L.
Shames are Directors, Cynthia Orcott is President, Bruce C. Avery, Executive
Vice President of MFS, is the Vice President, James E. Russell is the
Treasurer, Stephen E. Cavan is the Secretary, and Robert T. Burns is the
Assistant Secretary.
MFSC
A. Keith Brodkin is the Chairman, Arnold D. Scott and Jeffrey L.
Shames are Directors, Joseph A. Recomendes, Senior Vice President of MFS, is
the President, James E. Russell is the Treasurer, Stephen E. Cavan is the
Secretary, and Robert T. Burns is the Assistant Secretary.
AMI
A. Keith Brodkin is the Chairman and a Director, Jeffrey L.
Shames, Leslie J. Nanberg and Arnold D. Scott are Directors, Thomas J.
Cashman is the President and a Director, James E. Russell is the Treasurer
and Robert T. Burns is the Secretary.
RSI
William W. Scott, Jr., Joseph A. Recomendes and Bruce C. Avery
are Directors, Arnold D. Scott is the Chairman, Douglas C. Grip, a Senior
Vice President of MFS, is the President, James E. Russell is the Treasurer,
Stephen E. Cavan is the Secretary, Robert T. Burns is the Assistant Secretary
and Henry A. Shea is an Executive Vice President.
In addition, the following persons, Directors or officers of MFS,
have the affiliations indicated:
A. Keith Brodkin Director, Sun Life Assurance Company
of Canada (U.S.), One Sun Life
Executive Park, Wellesley Hills,
Massachusetts
Director, Sun Life Insurance and
Annuity Company of New York, 67 Broad
Street, New York, New York
John R. Gardner President and a Director, Sun Life
Assurance Company of Canada, Sun Life
Centre, 150 King Street West,
Toronto, Ontario, Canada (Mr. Gardner
is also an officer and/or Director of
various subsidiaries and affiliates
of Sun Life)
John D. McNeil Chairman, Sun Life Assurance Company
of Canada, Sun Life Centre, 150 King
Street West, Toronto, Ontario, Canada
(Mr. McNeil is also an officer and/or
Director of various subsidiaries and
affiliates of Sun Life)
Item 29. Principal Underwriters
(a) Reference is made to Item 28 above.
(b) Reference is made to Item 28 above.
(c) Not applicable.
Item 30. Location of Accounts and Records
The accounts and records of the Registrant are located, in whole or
in part, at the office of the Registrant and the following locations:
NAME ADDRESS
Massachusetts Financial Services 500 Boylston Street
Company (investment adviser) Boston, MA 02116
MFS Fund Distributors, Inc. 500 Boylston Street
(principal underwriter) Boston, MA 02116
State Street Bank and Trust Company State Street South
(custodian) 5 - West
North Quincy, MA 02171
MFS Service Center, Inc. 500 Boylston Street
(transfer agent) Boston, MA 02116
Item 31. Management Services
Not Applicable.
Item 32. Undertakings
(a) Not applicable.
(b) Not applicable.
(c) Registrant undertakes to furnish each person to whom a
prospectus is delivered with a copy of its latest annual report
to shareholders upon request and without charge.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant certifies that it meets all of
the requirements for effectiveness of this Registration Statement pursuant to
Rule 485(b) under the Securities Act of 1933 and has duly caused this
Post-Effective Amendment to the Registration Statement to be signed on its
behalf by the undersigned, thereto duly authorized, in the City of Boston and
The Commonwealth of Massachusetts on the 27th day of March, 1995.
MFS GOVERNMENT MORTGAGE FUND
By: JAMES R. BORDEWICK, JR.
Name: James R. Bordewick, Jr.
Title: Assistant Secretary
Pursuant to the requirements of the Securities Act of 1933, this
Post-Effective Amendment to its Registration Statement has been signed below by
the following persons in the capacities indicated on March 27, 1995.
SIGNATURE TITLE
A. KEITH BRODKIN* Chairman, President (Principal
A. Keith Brodkin Executive Officer) and
Trustee
W. THOMAS LONDON* Treasurer (Principal Financial
W. Thomas London Officer and Principal Accounting
Officer)
RICHARD B. BAILEY* Trustee
Richard B. Bailey
PETER G. HARWOOD* Trustee
Peter G. Harwood
J. ATWOOD IVES* Trustee
J. Atwood Ives
<PAGE>
LAWRENCE T. PERERA* Trustee
Lawrence T. Perera
WILLIAM J. POORVU* Trustee
William J. Poorvu
CHARLES W. SCHMIDT* Trustee
Charles W. Schmidt
ARNOLD D. SCOTT* Trustee
Arnold D. Scott
JEFFREY L. SHAMES* Trustee
Jeffrey L. Shames
ELAINE R. SMITH* Trustee
Elaine R. Smith
DAVID B. STONE* Trustee
David B. Stone
* By: JAMES R. BORDEWICK, JR.
Name: James R. Bordewick, Jr.
as Attorney-in-fact
Executed by James R. Bordewick, Jr.
on behalf of those indicated pursuant
to a Power of Attorney dated
September 21, 1994; filed herewith.
<PAGE>
POWER OF ATTORNEY
MFS Government Mortgage Fund
The undersigned, Trustees and officers of MFS Government Mortgage Fund
(the "Registrant"), hereby severally constitute and appoint A. Keith Brodkin, W.
Thomas London, Stephen E. Cavan and James R. Bordewick, Jr., and each of them
singly, as true and lawful attorneys, with full power to them and each of them
to sign for each of the undersigned, in the names of, and in the capacities
indicated below, any Registration Statement and any and all amendments thereto
and to file the same with all exhibits thereto, and other documents in
connection therewith, with the Securities and Exchange Commission for the
purpose of registering the Registrant as a management investment company under
the Investment Company Act of 1940 and/or the shares issued by the Registrant
under the Securities Act of 1933 granting unto our said attorneys, and each of
them, acting alone, full power and authority to do and perform each and every
act and thing requisite or necessary or desirable to be done in the premises, as
fully to all intents and purposes as he or she might or could do in person,
hereby ratifying and confirming all that said attorneys or any of them may
lawfully do or cause to be done by virtue thereof.
In WITNESS WHEREOF, the undersigned have hereunto set their hand on this
21st day of September, 1994.
Signatures Title(s)
A. KEITH BRODKIN Chairman of the Board; Trustee;
A. Keith Brodkin and Principal Executive
Officer
RICHARD B. BAILEY Trustee
Richard B. Bailey
PETER G. HARWOOD Trustee
Peter G. Harwood
J. ATWOOD IVES Trustee
J. Atwood Ives
LAWRENCE T. PERERA Trustee
Lawrence T. Perera
<PAGE>
WILLIAM J. POORVU Trustee
William J. Poorvu
CHARLES W. SCHMIDT Trustee
Charles W. Schmidt
ARNOLD D. SCOTT Trustee
Arnold D. Scott
JEFFREY L. SHAMES Trustee
Jeffrey L. Shames
ELAINE R. SMITH Trustee
Elaine R. Smith
DAVID B. STONE Trustee
David B. Stone
W. THOMAS LONDON Principal Financial and
W. Thomas London Accounting Officer
<PAGE>
INDEX TO EXHIBITS
EXHIBIT NO. DESCRIPTION OF EXHIBIT PAGE NO.
1 Amended and Restated Declaration of
Trust, dated January 19, 1995.
2 Amended and Restated By-Laws, dated
December 21, 1994.
6 (a) Distribution Agreement between MFS
Government Mortgage Fund and MFS Fund
Distributors, Inc., dated January 1,
1995.
10 Opinion and Consent of Counsel.
11 Consent of Deloitte & Touche.
15 (a) Amended and Restated Distribution Plan
for Class A shares, dated December 21,
1994.
(b) Distribution Plan for Class B shares,
dated December 21, 1994.
16 Schedule for Computation of Performance
Quotations - Average Annual Total Rate
of Return and Standardized Yield.
27 Financial Data Schedules for each class.
EXHIBIT NO. 1
MFS GOVERNMENT MORTGAGE FUND
AMENDED AND RESTATED
DECLARATION OF TRUST
JANUARY 18, 1995
<PAGE>
<TABLE>
TABLE OF CONTENTS
<CAPTION>
PAGE
<S> <C>
ARTICLE I - Name and Definitions
Section 1.1 Name 1
Section 1.2 Definitions 2
ARTICLE II - Trustees
Section 2.1 Number of Trustees 3
Section 2.2 Term of Office of Trustees 3
Section 2.3 Resignation and Appointment of Trustees 4
Section 2.4 Vacancies 4
Section 2.5 Delegation of Power to Other Trustees 5
ARTICLE III - Powers of Trustees
Section 3.1 General 5
Section 3.2 Investments 5
Section 3.3 Legal Title 7
Section 3.4 Issuance and Repurchase of Securities 7
Section 3.5 Borrowing Money; Lending Trust Property 7
Section 3.6 Delegation; Committees 7
Section 3.7 Collection and Payment 7
Section 3.8 Expenses 8
Section 3.9 Manner of Acting; By-Laws 8
Section 3.10 Miscellaneous Powers 8
Section 3.11 Principal Transactions 9
Section 3.12 Trustees and Officers as Shareholders 9
ARTICLE IV - Investment Adviser, Distributor and Transfer Agent
Section 4.1 Investment Adviser 10
Section 4.2 Distributor 10
Section 4.3 Transfer Agent 11
Section 4.4 Parties to Contract 11
<PAGE>
TABLE OF CONTENTS
PAGE
ARTICLE V - Limitations of Liability of Shareholders, Trustees and Others
Section 5.1 No Personal Liability of Shareholders, Trustees, etc 11
Section 5.2 Non-Liability of Trustees, etc. 12
Section 5.3 Mandatory Indemnification 12
Section 5.4 No Bond Required of Trustees 14
Section 5.5 No Duty of Investigation; Notice in Trust Instruments, etc. 14
Section 5.6 Reliance on Experts, etc. 15
ARTICLE VI - Shares of Beneficial Interest
Section 6.1 Beneficial Interest 15
Section 6.2 Rights of Shareholders 15
Section 6.3 Trust Only 16
Section 6.4 Issuance of Shares 16
Section 6.5 Register of Shares 16
Section 6.6 Transfer of Shares 16
Section 6.7 Notices 17
Section 6.8 Voting Powers 17
Section 6.9 Series Designation 18
Section 6.10 Class Designation 20
ARTICLE VII - Redemptions
Section 7.1 Redemption of Shares 20
Section 7.2 Price 20
Section 7.3 Payment 21
Section 7.4 Effect of Suspension of Determination of
Net Asset Value 21
Section 7.5 Redemption of Shares in order to Qualify
as Regulated Investment Company; Disclosure of Holding 21
Section 7.6 Suspension of Right to Redemption 22
ARTICLE VIII - Determination of Net Asset Value, Net Income
and Distributions 22
<PAGE>
TABLE OF CONTENTS
PAGE
ARTICLE IX - Duration; Termination of Trust; Amendment; Mergers, Etc.
Section 9.1 Duration 23
Section 9.2 Termination of Trust 23
Section 9.3 Amendment Procedure 24
Section 9.4 Merger, Consolidation and Sale of Assets 25
Section 9.5 Incorporation, Reorganization 25
Section 9.6 Incorporation or Reorganization of Series 26
ARTICLE X - Reports to Shareholders and Shareholder Communications 26
ARTICLE XI - Miscellaneous
Section 11.1 Filing 27
Section 11.2 Governing Law 27
Section 11.3 Counterparts 27
Section 11.4 Reliance by Third Parties 27
Section 11.5 Provisions in Conflict with Law or Regulations 28
ANNEX A 29
SIGNATURE PAGE 30
</TABLE>
<PAGE>
AMENDED AND RESTATED
DECLARATION OF TRUST
OF
MFS GOVERNMENT MORTGAGE FUND
500 Boylston Street
Boston, Massachusetts
AMENDED AND RESTATED DECLARATION OF TRUST, made this 18th day of
January, 1995 by the Trustees;
WHEREAS, the Trust was established pursuant to a Declaration of Trust
dated November 18, 1985 for the investment and reinvestment of funds contributed
thereto; and
WHEREAS, the Trustees desire that the beneficial interest in the trust
assets continue to be divided into transferable Shares of Beneficial Interest
(without par value) issued in one or more series, as hereinafter provided; and
WHEREAS, the Declaration of Trust has been, from time to time, amended
in accordance with the provisions of the Declaration; and
WHEREAS, the Trustees now desire further to amend and to restate the
Declaration of Trust and hereby certify, as provided in Section 11.1 of the
Declaration, that this Amended and Restated Declaration of Trust has been
further amended and restated in accordance with the provisions of the
Declaration;
NOW THEREFORE, the Trustees hereby declare that all money and property
contributed to the trust established hereunder shall be held and managed in
trust for the benefit of holders, from time to time, of the Shares of Beneficial
Interest (without par value) issued hereunder and subject to the provisions
hereof.
ARTICLE I
NAME AND DEFINITIONS
Section 1.1 - Name. The name of the trust created hereby is the MFS
Government Mortgage Fund, the current address of which is 500 Boylston Street,
Boston, Massachusetts 02116.
<PAGE>
Section 1.2 - Definitions. Wherever they are used herein, the following
terms have the following respective meanings:
(a) "By-Laws" means the By-Laws referred to in Section 3.9 hereof, as
from time to time amended.
(b) "Commission" has the meaning given that term in the 1940 Act.
(c) "Declaration" means this Declaration of Trust as amended from time
to time. Reference in this Declaration of Trust to "Declaration," "hereof,"
"herein" and "hereunder" shall be deemed to refer to this Declaration rather
than the article or section in which such words appear.
(d) "Distributor" means the party, other than the Trust, to the contract
described in Section 4.2 hereof.
(e) "Interested Person" has the meaning given that term in the 1940 Act.
(f) "Investment Adviser" means a party furnishing services to the Trust
pursuant to any contract described in Section 4.1 hereof.
(g) "Majority Shareholder Vote" has the same meaning as the phrase "vote
of a majority of the outstanding voting securities" as defined in the 1940 Act,
except that such term may be used herein with respect to the Shares of the Trust
as a whole or the Shares of any particular series, as the context may require.
(h) "1940 Act" means the Investment Company Act of 1940 and the Rules
and Regulations thereunder, as amended from time to time.
(i) "Person" means and includes individuals, corporations, partnerships,
trusts, associations, joint ventures and other entities, whether or not legal
entities, and governments and agencies and political subdivisions thereof,
whether domestic or foreign.
(j) "Shareholder" means a record owner of outstanding Shares.
<PAGE>
(k) "Shares" means the Shares of Beneficial Interest into which the
beneficial interest in the Trust shall be divided from time to time or, when
used in relation to any particular series of Shares established by the Trustees
pursuant to Section 6.9 hereof, equal proportionate transferable units into
which such series of Shares shall be divided from time to time. The term
"Shares" includes fractions of Shares as well as whole Shares.
(1) "Transfer Agent" means the party, other than the Trust, to a
contract described in Section 4.3 hereof.
(m) "Trust" means the trust created hereby.
(n) "Trust Property" means any and all property, real or personal,
tangible or intangible, which is owned or held by or for the account of the
Trust or the Trustees, including, without limitation, any and all property
allocated or belonging to any series of Shares pursuant to Section 6.9 hereof.
(o) "Trustees" means the persons who have signed the Declaration, so
long as they shall continue in office in accordance with the terms hereof, and
all other persons who may from time to time be duly elected or appointed,
qualified and serving as Trustees in accordance with the provisions hereof, and
reference herein to a Trustee or the Trustees shall refer to such person or
persons in their capacity as trustees hereunder.
ARTICLE II
TRUSTEES
Section 2.1 - Number of Trustees. The number of Trustees shall be such
number as shall be fixed from time to time by a written instrument signed by a
majority of the Trustees, provided, however, that the number of Trustees shall
in no event be less than three (3) nor more than fifteen (15).
Section 2.2 - Term of Office of Trustees. Subject to the provisions of
Section 16(a) of the 1940 Act, the Trustees shall hold office during the
lifetime of this Trust and until its termination as hereinafter provided;
except:
(a) that any Trustee may resign his trust (without need for prior or
subsequent accounting) by an instrument in writing signed by him and delivered
to the other Trustees, which shall take effect upon such delivery or upon such
later date as is specified therein;
<PAGE>
(b) that any Trustee may be removed with cause, at any time by written
instrument, signed by at least two-thirds of the remaining Trustees, specifying
the date when such removal shall become effective;
(c) that any Trustee who requests in writing to be retired or who has
become incapacitated by illness or injury may be retired by written instrument
signed by a majority of the other Trustees, specifying the date of his
retirement; and
(d) a Trustee may be removed at any meeting of Shareholders by a vote of
two-thirds of the outstanding Shares of each series. Upon the resignation or
removal of a Trustee, or his otherwise ceasing to be a Trustee, he shall execute
and deliver such documents as the remaining Trustees shall require for the
purpose of conveying to the Trust or the remaining Trustees any Trust Property
held in the name of the resigning or removed Trustee. Upon the incapacity or
death of any Trustee, his legal representative shall execute and deliver on his
behalf such documents as the remaining Trustees shall require as provided in the
preceding sentence.
Section 2.3 - Resignation and Appointment of Trustees. In case of the
declination, death, resignation, retirement, removal or inability of any of the
Trustees, or in case a vacancy shall, by reason of an increase in number, or for
any other reason, exist, the remaining Trustees shall fill such vacancy by
appointing such other person as they in their discretion shall see fit. Such
appointment shall be evidenced by a written instrument signed by a majority of
the Trustees in office. Any such appointment shall not become effective,
however, until the person named in the written instrument of appointment shall
have accepted in writing such appointment and agreed in writing to be bound by
the terms of the Declaration. Within twelve months of such appointment, the
Trustees shall cause notice of such appointment to be mailed to each Shareholder
at his address as recorded on the books of the Trustees. An appointment of a
Trustee may be made by the Trustees then in office and notice thereof mailed to
Shareholders as aforesaid in anticipation of a vacancy to occur by reason of
retirement, resignation or increase in number of Trustees effective at a later
date, provided that said appointment shall become effective only at or after the
effective date of said retirement, resignation or increase in number of
Trustees. The power of appointment is subject to the provisions of Section 16(a)
of the 1940 Act.
Section 2.4 - Vacancies. The death, declination, resignation,
retirement, removal or incapacity of the Trustees, or any one of them, shall not
operate to annul the Trust or to revoke any existing agency created pursuant to
the terms of this Declaration. Whenever a vacancy in the number of Trustees
shall occur, until such vacancy is filled as provided in Section 2.3, the
Trustees in office, regardless of their number, shall have all the powers
granted to the Trustees
<PAGE>
and shall discharge all the duties imposed upon the Trustees by the Declaration.
A written instrument certifying the existence of such vacancy signed by a
majority of the Trustees shall be conclusive evidence of the existence of such
vacancy.
Section 2.5 - Delegation of Power to Other Trustees. Any Trustee may, by
power of attorney, delegate his power for a period not exceeding six months at
any one time to any other Trustee or Trustees; provided that in no case shall
less than two Trustees personally exercise the powers granted to the Trustees
under the Declaration except as herein otherwise expressly provided.
ARTICLE III
POWERS OF TRUSTEES
Section 3.1 - General. The Trustees shall have exclusive and absolute
control over the Trust Property and over the business of the Trust to the same
extent as if the Trustees were the sole owners of the Trust Property and
business in their own right, but with such powers of delegation as may be
permitted by the Declaration. The Trustees shall have power to conduct the
business of the Trust and carry on its operations in any and all of its branches
and maintain offices both within and without The Commonwealth of Massachusetts,
in any and all states of the United States of America, in the District of
Columbia, and in any and all commonwealths, territories, dependencies, colonies,
possessions, agencies or instrumentalities of the United States of America and
of foreign governments, and to do all such other things and execute all such
instruments as the Trustees deem necessary, proper or desirable in order to
promote the interests of the Trust although such things are not herein
specifically mentioned. Any determination as to what is in the interests of the
Trust made by the Trustees in good faith shall be conclusive. In construing the
provisions of the Declaration, the presumption shall be in favor of a grant of
power to the Trustees.
The enumeration of any specific power herein shall not be construed as
limiting the aforesaid power. Such powers of the Trustees may be exercised
without order of or resort to any court.
Section 3.2 - Investments.
(a) The Trustees shall have the power:
(i) to conduct, operate and carry on the business of an investment
company;
<PAGE>
(ii) to subscribe for, invest in, reinvest in, purchase or otherwise
acquire, own, hold, pledge, sell, assign, transfer, exchange, distribute, lend
or otherwise deal in or dispose of U.S. and foreign currencies, any form of gold
and other precious metals, commodity contracts, options, contracts for the
future acquisition or delivery of fixed income or other securities, and
securities of every nature and kind, including, without limitation, all types of
bonds, debentures, stocks, negotiable or non-negotiable instruments,
obligations, evidences of indebtedness, certificates of deposit or indebtedness,
commercial paper, repurchase agreements, bankers' acceptances, and other
securities of any kind, issued, created, guaranteed or sponsored by any and all
Persons, including, without limitation, states, territories and possessions of
the United States and the District of Columbia and any political subdivision,
agency or instrumentality of any such Person, or by the U.S. Government, any
foreign government, any political subdivision or any agency or instrumentality
of the U.S. Government, any foreign government or any political subdivision of
the U.S. Government or any foreign government, or any international
instrumentality, or by any bank or savings institution, or by any corporation or
organization organized under the laws of the United States or of any state,
territory or possession thereof, or by any corporation or organization organized
under any foreign law, or in "when issued" contracts for any such securities, to
retain Trust assets in cash and from time to time change the investments of the
assets of the Trust; and to exercise any and all rights, powers and privileges
of ownership or interest in respect of any and all such investments of every
kind and description, including, without limitation, the right to consent and
otherwise act with respect thereto, with power to designate one or more persons,
firms, associations or corporations to exercise any of said rights, powers and
privileges in respect of any of said instruments; and
(iii) to carry on any other business in connection with or incidental to
any of the foregoing powers, to do everything necessary, suitable or proper for
the accomplishment of any purpose or the attainment of any object or the
furtherance of any power hereinbefore set forth and to do every other act or
thing incidental or appurtenant to or connected with the aforesaid purposes,
objects or powers.
(b) The Trustees shall not be limited to investing in obligations
maturing before the possible termination of the Trust, nor shall the Trustees be
limited by any law limiting the investments which may be made by fiduciaries.
<PAGE>
Section 3.3 - Legal Title. Legal title to all the Trust Property shall
be vested in the Trustees as joint tenants except that the Trustees shall have
power to cause legal title to any Trust Property to be held by or in the name of
one or more of the Trustees, or in the name of the Trust, or in the name of any
other Person or nominee, on such terms as the Trustees may determine. The right,
title and interest of the Trustees in the Trust Property shall vest
automatically in each Person who may hereafter become a Trustee. Upon the
resignation, removal or death of a Trustee he shall automatically cease to have
any right, title or interest in any of the Trust Property, and the right, title
and interest of such Trustee in the Trust Property shall vest automatically in
the remaining Trustees. Such vesting and cessation of title shall be effective
whether or not conveyancing documents have been executed and delivered.
Section 3.4 - Issuance and Repurchase of Securities. The Trustees shall
have the power to issue, sell, repurchase, redeem, retire, cancel, acquire,
hold, resell, reissue, dispose of, transfer, and otherwise deal in Shares and,
subject to the provisions set forth in Articles VII, VIII and IX and Section 6.9
hereof, to apply to any such repurchase, redemption, retirement, cancellation or
acquisition of Shares any funds of the Trust or other Trust Property whether
capital or surplus or otherwise, to the full extent now or hereafter permitted
by the laws of The Commonwealth of Massachusetts governing business
corporations.
Section 3.5 - Borrowing Money; Lending Trust Property. The Trustees
shall have power to borrow money or otherwise obtain credit and to secure the
same by mortgaging, pledging or otherwise subjecting as security the Trust
Property, to endorse, guarantee, or undertake the performance of any obligation,
contract or engagement of any other Person and to lend Trust Property.
Section 3.6 - Delegation; Committees. The Trustees shall have power to
delegate from time to time to such of their number or to officers, employees or
agents of the Trust the doing of such things and the execution of such
instruments either in the name of the Trust or the names of the Trustees or
otherwise as the Trustees may deem expedient.
Section 3.7 - Collection and Payment. Subject to Section 6.9 hereof, the
Trustees shall have power to collect all property due to the Trust; to pay all
claims, including taxes, against the Trust Property; to prosecute, defend,
compromise or abandon any claims relating to the Trust Property; to foreclose
any security interest securing any obligations, by virtue of which any property
is owed to the Trust; and to enter into releases, agreements and other
instruments.
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Section 3.8 - Expenses. Subject to Section 6.9 hereof, the Trustees
shall have the power to incur and pay any expenses which in the opinion of the
Trustees are necessary or incidental to carry out any of the purposes of the
Declaration, and to pay reasonable compensation from the funds of the Trust to
themselves as Trustees. The Trustees shall fix the compensation of all officers,
employees and Trustees.
Section 3.9 - Manner of Acting; By-Laws. Except as otherwise provided
herein or in the By-Laws, any action to be taken by the Trustees may be taken by
a majority of the Trustees present at a meeting of Trustees (a quorum being
present), including any meeting held by means of a conference telephone circuit
or similar communications equipment by means of which all persons participating
in the meeting can hear each other, or by written consents of all the Trustees.
The Trustees may adopt By-Laws not inconsistent with this Declaration to provide
for the conduct of the business of the Trust and may amend or repeal such
By-Laws to the extent such power is not reserved to the Shareholders.
Section 3.10 - Miscellaneous Powers. The Trustees shall have the power
to:
(a) employ or contract with such Persons as the Trustees may deem
desirable for the transaction of the business of the Trust;
(b) enter into joint ventures, partnerships and any other combinations
or associations;
(c) remove Trustees or fill vacancies in or add to their number, elect
and remove such officers and appoint and terminate such agents or employees as
they consider appropriate, and appoint from their own number, and terminate, any
one or more committees which may exercise some or all of the power and authority
of the Trustees as the Trustees may determine;
(d) purchase, and pay for out of Trust Property, insurance policies
insuring the Shareholders, Trustees, officers, employees, agents, investment
advisers, distributors, selected dealers or independent contractors of the Trust
against all claims arising by reason of holding any such position or by reason
of any action taken or omitted by any such Person in such capacity, whether or
not constituting negligence, or whether or not the Trust would have the power to
indemnify such Person against such liability;
(e) establish pension, profit-sharing, Share purchase, and other
retirement, incentive and benefit plans for any Trustees, officers, employees or
agents of the Trust;
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(f) to the extent permitted by law, indemnify any person with whom the
Trust has dealings, including the Investment Adviser, Distributor, Transfer
Agent, and any dealer, to such extent as the Trustees shall determine;
(g) determine and change the fiscal year of the Trust and the method by
which its accounts shall be kept; and
(h) adopt a seal for the Trust, provided, that the absence of such seal
shall not impair the validity of any instrument executed on behalf of the Trust.
Section 3.11 - Principal Transactions. Except in transactions permitted
by the 1940 Act, or any order of exemption issued by the Commission, the
Trustees shall not, on behalf of the Trust, buy any securities (other than
Shares) from or sell any securities (other than Shares) to, or lend any assets
of the Trust to, any Trustee or officer of the Trust or any firm of which any
such Trustee or officer is a member acting as principal, or have any such
dealings with the Investment Adviser, Distributor, or Transfer Agent or with any
Interested Person of such Person; but the Trust may employ any such Person, or
firm or company in which such Person is an Interested Person, as broker, legal
counsel, registrar, transfer agent, dividend disbursing agent or custodian upon
customary terms.
Section 3.12 - Trustees and Officers as Shareholders. Except as
hereinafter provided, no officer, Trustee or Member of the Advisory Board of the
Trust, and no member, partner, officer, director or trustee of the Investment
Adviser or of the Distributor and no Investment Adviser or Distributor of the
Trust, shall take long or short positions in the securities issued by the Trust.
The foregoing provision shall not prevent:
(a) The Distributor from purchasing Shares from the Trust if such
purchases are limited (except for reasonable allowances for clerical errors,
delays and errors of transmission and cancellation of orders) to purchases for
the purpose of filling orders for Shares received by the Distributor and
provided that orders to purchase from the Trust are entered with the Trust or
the Custodian promptly upon receipt by the Distributor of purchase orders for
Shares, unless the Distributor is otherwise instructed by its customer;
(b) The Distributor from purchasing Shares as agent for the account of
the Trust;
<PAGE>
(c) The purchase from the Trust or from the Distributor of Shares by any
officer, Trustee or member of the Advisory Board of the Trust or by any member,
partner, officer, director or trustee of the Investment Adviser or of the
Distributor at a price not lower than the net asset value of the Shares at the
moment of such purchase, provided that any such sales are only to be made
pursuant to a uniform offer described in the Trust's current prospectus; or
(d) The Investment Adviser, the Distributor or any of their officers,
partners, directors or trustees from purchasing Shares prior to the effective
date of the Registration Statement relating to the Shares under the Securities
Act of 1933, as amended.
ARTICLE IV
INVESTMENT ADVISER, DISTRIBUTOR AND TRANSFER AGENT
Section 4.1 - Investment Adviser. Subject to a Majority Shareholder Vote
of the Shares of each series affected thereby, the Trustees may in their
discretion from time to time enter into one or more investment advisory or
management contracts whereby a party to such contract shall undertake to furnish
the Trust such management, investment advisory, statistical and research
facilities and services, promotional activities, and such other facilities and
services, if any, with respect to one or more series of Shares, as the Trustees
shall from time to time consider desirable and all upon such terms and
conditions as the Trustees may in their discretion determine. Notwithstanding
any provision of the Declaration, the Trustees may delegate to the Investment
Adviser authority (subject to such general or specific instructions as the
Trustees may from time to time adopt) to effect purchases, sales, loans or
exchanges of assets of the Trust on behalf of the Trustees or may authorize any
officer, employee or Trustee to effect such purchases, sales, loans or exchanges
pursuant to recommendations of the Investment Adviser (and all without further
action by the Trustees). Any such purchases, sales, loans or exchanges shall be
deemed to have been authorized by all the Trustees.
Section 4.2 - Distributor. The Trustees may in their discretion from
time to time enter into a contract, providing for the sale of Shares whereby the
Trust may either agree to sell the Shares to the other party to the contract or
appoint such other party its sales agent for such Shares. In either case, the
contract shall be on such terms and conditions as the Trustees may in their
discretion determine not inconsistent with the provisions of this Article IV or
the By-Laws; and such contract may also provide for the repurchase or sale of
Shares by such other party as principal or as agent of the Trust and may provide
that such other party may enter into selected dealer agreements with registered
securities dealers to further the purpose of the distribution or repurchase of
the Shares.
<PAGE>
Section 4.3 - Transfer Agent. The Trustees may in their discretion from
time to time enter into a transfer agency and shareholder service contract or
contracts whereby the other party or parties to such contract or contracts shall
undertake to furnish transfer agency and/or shareholder services. The contract
or contracts shall have such terms and conditions as the Trustees may in their
discretion determine not inconsistent with the Declaration or the By-Laws. Such
services may be provided by one or more Persons.
Section 4.4 - Parties to Contract. Any contract of the character
described in Sections 4.1, 4.2 or 4.3 of this Article IV or any Custodian
contract, as described in the By-Laws, may be entered into with any Person,
although one or more of the Trustees or officers of the Trust may be an officer,
partner, director, trustee, shareholder, or member of such other party to the
contract, and no such contract shall be invalidated or rendered voidable by
reason of the existence of any such relationship; nor shall any Person holding
such relationship be liable merely by reason of such relationship for any loss
or expense to the Trust under or by reason of said contract or accountable for
any profit realized directly or indirectly therefrom, provided that the contract
when entered into was not inconsistent with the provisions of this Article IV or
the By-Laws. The same Person may be the other party to contracts entered into
pursuant to Sections 4.1, 4.2 and 4.3 above or Custodian contracts, and any
individual may be financially interested or otherwise affiliated with Persons
who are parties to any or all of the contracts mentioned in this Section 4.4.
ARTICLE V
LIMITATIONS OF LIABILITY OF SHAREHOLDERS,
TRUSTEES AND OTHERS
Section 5.1 - No Personal Liability of Shareholders, Trustees, etc. No
Shareholder shall be subject to any personal liability whatsoever to any Person
in connection with Trust Property or the acts, obligations or affairs of the
Trust. No Trustee, officer, employee or agent of the Trust shall be subject to
any personal liability whatsoever to any Person, other than the Trust or its
Shareholders, in connection with Trust Property or the affairs of the Trust,
save only that arising from bad faith, willful misfeasance, gross negligence or
reckless disregard for his duty to such Person; and all such Persons shall look
solely to the Trust Property for satisfaction of claims of any nature arising in
connection with the affairs of the Trust. If any Shareholder, Trustee, officer,
employee, or agent, as such, of the Trust, is made a party to any suit or
proceeding to enforce any such liability, he shall not, on account thereof, be
held to any personal liability. The Trust shall indemnify and hold each
Shareholder harmless from and against all claims and
<PAGE>
liabilities to which such Shareholder may become subject by reason of his being
or having been a Shareholder, and shall reimburse such Shareholder for all legal
and other expenses reasonably incurred by him in connection with any such claim
or liability. The rights accruing to a Shareholder under this Section 5.1 shall
not exclude any other right to which such Shareholder may be lawfully entitled,
nor shall anything herein contained restrict the right of the Trust to indemnify
or reimburse a Shareholder in any appropriate situation even though not
specifically provided herein. Notwithstanding any other provision of this
Declaration to the contrary, no Trust Property shall be used to indemnify or
reimburse any Shareholder of any Shares of any series other than Trust Property
allocated or belonging to such series.
Section 5.2 - Non-Liability of Trustees, etc. No Trustee, officer,
employee or agent of the Trust shall be liable to the Trust, its Shareholders,
or to any Shareholder, Trustee, officer, employee, or agent thereof for any
action or failure to act (including without limitation the failure to compel in
any way any former or acting Trustee to redress any breach of trust) except for
his own bad faith, willful misfeasance, gross negligence or reckless disregard
of his duties.
Section 5.3 Mandatory Indemnification.
(a) Subject to the exceptions and limitations contained in paragraph
(b) below:
(i) every person who is or has been a Trustee or officer of the Trust
shall be indemnified by the Trust against all liability and against all expenses
reasonably incurred or paid by him in connection with any claim, action, suit or
proceeding in which he becomes involved as a party or otherwise by virtue of his
being or having been a Trustee or officer and against amounts paid or incurred
by him in the settlement thereof;
(ii) the words "claim," "action," "suit," or "proceeding" shall apply to
all claims, actions, suits or proceedings (civil, criminal, administrative or
other, including appeals), actual or threatened; and the words "liability" and
"expenses" shall include, without limitation, attorneys' fees, costs, judgments,
amounts paid in settlement, fines, penalties and other liabilities.
(b) No indemnification shall be provided hereunder to a Trustee or
officer:
<PAGE>
(i) against any liability to the Trust or the Shareholders by reason of
a final adjudication by the court or other body before which the proceeding was
brought that he engaged in willful misfeasance, bad faith, gross negligence or
reckless disregard of the duties involved in the conduct of his office;
(ii) with respect to any matter as to which he shall have been finally
adjudicated not to have acted in good faith in the reasonable belief that his
action was in the best interest of the Trust; or
(iii) in the event of a settlement involving a payment by a Trustee or
officer or other disposition not involving a final adjudication as provided in
paragraph (b) (i) or (b) (ii) above resulting in a payment by a Trustee or
officer, unless there has been either a determination that such Trustee or
officer did not engage in willful misfeasance, bad faith, gross negligence or
reckless disregard of the duties involved in the conduct of his office by the
court or other body approving the settlement or other disposition or by a
reasonable determination, based upon a review of readily available facts (as
opposed to a full trial-type inquiry) that he did not engage in such conduct:
(A) by vote of a majority of the Disinterested Trustees acting on the
matter (provided that a majority of the Disinterested Trustees then
in office act on the matter); or
(B) by written opinion of independent legal counsel.
(c) The rights of indemnification herein provided may be insured against
by policies maintained by the Trust, shall be severable, shall not affect any
other rights to which any Trustee or officer may now or hereafter be entitled,
shall continue as to a Person who has ceased to be such Trustee or officer and
shall inure to the benefit of the heirs, executors and administrators of such
Person. Nothing contained herein shall affect any rights to indemnification to
which personnel other than Trustees and officers may be entitled by contract or
otherwise under law.
(d) Expenses of preparation and presentation of a defense to any claim,
action, suit, or proceeding of the character described in paragraph (a) of this
Section 5.3 shall be advanced by the Trust prior to final disposition thereof
upon receipt of an undertaking by or on behalf of the recipient to repay such
amount if it is ultimately determined that he is not entitled to indemnification
under this Section 5.3, provided that either:
<PAGE>
(i) such undertaking is secured by a surety bond or some other
appropriate security or the Trust shall be insured against losses arising out of
any such advances; or
(ii) a majority of the Disinterested Trustees acting on the matter
(provided that a majority of the Disinterested Trustees then in office act on
the matter) or an independent legal counsel in a written opinion, shall
determine, based upon a review of readily available facts (as opposed to a full
trial-type inquiry), that there is reason to believe that the recipient
ultimately will be found entitled to indemnification.
As used in this Section 5.3, a "Disinterested Trustee" is one (i) who is
not an "Interested Person" of the Trust (including anyone who has been exempted
from being an "Interested Person" by any rule, regulation or order of the
Commission), and (ii) against whom none of such actions, suits or other
proceedings or another action, suit or other proceeding on the same or similar
grounds is then or had been pending.
Section 5.4 - No Bond Required of Trustees. No Trustee shall be
obligated to give any bond or other security for the performance of any of his
duties hereunder.
Section 5.5 - No duty of Investigation; Notice in Trust Instruments,
etc. No purchaser, lender, Transfer Agent or other Person dealing with the
Trustees or any officer, employee or agent of the Trust shall be bound to make
any inquiry concerning the validity of any transaction purporting to be made by
the Trustees or by said officer, employee or agent or be liable for the
application of money or property paid, loaned, or delivered to or on the order
of the Trustees or of said officer, employee or agent. Every obligation,
contract, instrument, certificate, Share, other security of the Trust or
undertaking, and every other act or thing whatsoever executed in connection with
the Trust shall be conclusively presumed to have been executed or done by the
executors thereof only in their capacity as Trustees under the Declaration or in
their capacity as officers, employees or agents of the Trust. Every written
obligation, contract, instrument, certificate, Share, other security of the
Trust or undertaking made or issued by the Trustees shall recite that the same
is executed or made by them not individually, but as Trustees under the
Declaration, and that the obligations of any such instrument are not binding
upon any of the Trustees or Shareholders individually, but bind only the trust
estate, and may contain any further recital which they or he may deem
appropriate, but the omission of such recital shall not operate to bind any of
the Trustees or Shareholders individually. The Trustees shall at all times
maintain
<PAGE>
insurance for the protection of the Trust Property, the Trust's Shareholders,
Trustees, officers, employees and agents in such amount as the Trustees shall
deem adequate to cover possible tort liability, and such other insurance as the
Trustees in their sole judgment shall deem advisable.
Section 5.6 - Reliance on Experts, etc. Each Trustee and officer or
employee of the Trust shall, in the performance of his duties, be fully and
completely justified and protected with regard to any act or any failure to act
resulting from reliance in good faith upon the books of account or other records
of the Trust, upon an opinion of counsel, or upon reports made to the Trust by
any of its officers or employees or by the Investment Adviser, the Distributor,
Transfer Agent, selected dealers, accountants, appraisers or other experts or
consultants selected with reasonable care by the Trustees, officers or employees
of the Trust, regardless of whether such counsel or expert may also be a
Trustee.
ARTICLE VI
SHARES OF BENEFICIAL INTEREST
Section 6.1 - Beneficial Interest. The interest of the beneficiaries
hereunder shall be divided into transferable Shares of Beneficial Interest
(without par value) which shall be divided into one or more series as provided
in Section 6.9 hereof. The number of Shares authorized hereunder is unlimited.
All Shares issued hereunder including, without limitation, Shares issued in
connection with a dividend in Shares or a split of Shares, shall be fully paid
and non-assessable.
Section 6.2 - Rights of Shareholders. The ownership of the Trust
Property of every description and the right to conduct any business hereinbefore
described are vested exclusively in the Trustees, and the Shareholders shall
have no interest therein other than the beneficial interest conferred by their
Shares, and they shall have no right to call for any partition or division of
any property, profits, rights or interests of the Trust nor can they be called
upon to assume any losses of the Trust or suffer an assessment of any kind by
virtue of their ownership of Shares. The Shares shall be personal property
giving only the rights specifically set forth in the Declaration. The Shares
shall not entitle the holder to preference, preemptive, appraisal, conversion or
exchange rights, except as the Trustees may determine with respect to any series
or class of Shares.
<PAGE>
Section 6.3 - Trust Only. It is the intention of the Trustees to create
only the relationship of Trustee and beneficiary between the Trustees and each
Shareholder from time to time. It is not the intention of the Trustees to create
a general partnership, limited partnership, joint stock association,
corporation, bailment or any form of legal relationship other than a trust.
Nothing in the Declaration shall be construed to make the Shareholders, either
by themselves or with the Trustees, partners or members of a joint stock
association.
Section 6.4 - Issuance of Shares. The Trustees, in their discretion may,
from time to time without vote of the Shareholders, issue Shares, in addition to
the then issued and outstanding Shares and Shares held in the treasury, to such
party or parties and for such amount and type of consideration, including cash
or property, at such time or times, and on such terms as the Trustees may deem
best, and may in such manner acquire other assets (including the acquisition of
assets subject to, and in connection with the assumption of liabilities) and
businesses. In connection with any issuance of Shares, the Trustees may issue
fractional Shares. The Trustees may from time to time divide or combine the
Shares of any series into a greater or lesser number without thereby changing
their proportionate beneficial interests in Trust Property allocated or
belonging to such series. Contributions to the Trust may be accepted for, and
Shares shall be redeemed as, whole Shares and/or l/l,000ths of a Share or
integral multiples thereof.
Section 6.5 - Register of Shares. A register shall be kept at the
principal office of the Trust or at an office of the Transfer Agent which shall
contain the names and addresses of the Shareholders and the number of Shares
held by them respectively and a record of all transfers thereof. Such register
shall be conclusive as to who are the holders of the Shares and who shall be
entitled to receive dividends or distributions or otherwise to exercise or enjoy
the rights of Shareholders. No Shareholder shall be entitled to receive payment
of any dividend or distribution, nor to have notice given to him as herein or in
the By-Laws provided, until he has given his address to the Transfer Agent or
such other officer or agent of the Trustees as shall keep the said register for
entry thereon. It is not contemplated that certificates will be issued for the
Shares; however, the Trustees, in their discretion, may authorize the issuance
of Share certificates and promulgate appropriate rules and regulations as to
their use.
Section 6.6 - Transfer of Shares. Shares shall be transferable on the
records of the Trust only by the record holder thereof or by his agent thereunto
duly authorized in writing, upon delivery to the Trustees or the Transfer Agent
of a duly executed instrument of transfer, together with any certificate or
certificates (if issued) for such Shares and such evidence of the genuineness of
each such execution and authorization and of other matters as may reasonably be
<PAGE>
required. Upon such delivery the transfer shall be recorded on the register of
the Trust. Until such record is made, the Shareholder of record shall be deemed
to be the holder of such Shares for all purposes hereunder and neither the
Trustees nor any Transfer Agent or registrar nor any officer, employee or agent
of the Trust shall be affected by any notice of the proposed transfer.
Any person becoming entitled to any Shares in consequence of the death,
bankruptcy, or incompetence of any Shareholder, or otherwise by operation of
law, shall be recorded on the register of Shares as the holder of such Shares
upon production of the proper evidence thereof to the Trustees or the Transfer
Agent; but until such record is made, the Shareholder of record shall be deemed
to be the holder of such Shares for all purposes hereunder and neither the
Trustees nor any Transfer Agent or registrar nor any officer or agent of the
Trust shall be affected by any notice of such death, bankruptcy or incompetence,
or other operation of law.
Section 6.7 - Notices. Any and all notices to which any Shareholder may
be entitled and any and all communications shall be deemed duly served or given
if mailed, postage prepaid, addressed to any Shareholder of record at his last
known address as recorded on the register of the Trust.
Section 6.8 - Voting Powers. The Shareholders shall have power to vote
only (i) for the removal of Trustees as provided in Section 2.2 hereof, (ii)
with respect to any investment advisory or management contract as provided in
Section 4.1 hereof, (iii) with respect to termination of the Trust as provided
in Section 9.2 hereof, (iv) with respect to any amendment of this Declaration to
the extent and as provided in Section 9.3 hereof, (v) with respect to any
merger, consolidation or sale of assets as provided in Sections 9.4 and 9.6
hereof, (vi) with respect to incorporation of the Trust or any series to the
extent and as provided in Sections 9.5 and 9.6 hereof, (vii) to the same extent
as the stockholders of a Massachusetts business corporation as to whether or not
a court action, proceeding or claim should or should not be brought or
maintained derivatively or as a class action on behalf of the Trust or the
Shareholders, and (viii) with respect to such additional matters relating to the
Trust as may be required by the Declaration, the By-Laws or any registration of
the Trust with the Commission (or any successor agency) or any state, or as the
Trustees may consider necessary or desirable. Each whole Share shall be entitled
to one vote as to any matter on which it is entitled to vote and each fractional
Share shall be entitled to a proportionate fractional vote, except that Shares
held in the treasury of the Trust shall not be voted. There shall be no
cumulative voting in the election of Trustees. Until Shares are issued, the
Trustees may exercise all rights of Shareholders and may take any action
required by law, the Declaration or the By-Laws to be taken by Shareholders. The
By-Laws may include further provisions for Shareholder votes and meetings and
related matters.
<PAGE>
Section 6.9 - Series Designation. Shares of the Trust may be divided
into series, the number and relative rights, privileges and preferences of which
shall be established and designated by the Trustees, in their discretion, in
accordance with the terms of this Section 6.9. The Trustees may from time to
time exercise their power to authorize the division of Shares into one or more
series by establishing and designating one or more series of Shares upon and
subject to the following provisions:
(a) All Shares shall be identical except that there may be such
variations as shall be fixed and determined by the Trustees between different
series as to purchase price, right of redemption and the price, terms and manner
of redemption, and special and relative rights as to dividends and on
liquidation.
(b) The number of authorized Shares and the number of Shares of each
series that may be issued shall be unlimited. The Trustees may classify or
reclassify any unissued Shares or any Shares previously issued and reacquired of
any series into one or more series that may be established and designated from
time to time. The Trustees may hold as treasury shares (of the same or some
other series), reissue for such consideration and on such terms as they may
determine, or cancel any Shares of any series reacquired by the Trust at their
discretion from time to time.
(c) All consideration received by the Trust for the issue or sale of
Shares of a particular series, together with all assets in which such
consideration is invested or reinvested, all income, earnings, profits, and
proceeds thereof, including any proceeds derived from the sale, exchange or
liquidation of such assets, and any funds or payments derived from any
reinvestment of such proceeds in whatever form the same may be, shall
irrevocably belong to that series for all purposes, subject only to the rights
of creditors of such series, and shall be so recorded upon the books of account
of the Trust. In the event that there are any assets, income, earnings, profits,
and proceeds thereof, funds, or payments which are not readily identifiable as
belonging to any particular series, the Trustees shall allocate them among any
one or more of the series established and designated from time to time in such
manner and on such basis as they, in their sole discretion, deem fair and
equitable. Each such allocation by the Trustees shall be conclusive and binding
upon the Shareholders of all series for all purposes. No holder of Shares of any
particular series shall have any claim on or right to any assets allocated or
belonging to any other series of Shares.
(d) The assets belonging to each particular series shall be charged with
the liabilities of the Trust in respect of that series and all expenses, costs,
charges and reserves attributable to that series, and any general liabilities,
expenses, costs, charges or reserves of the Trust which are not
<PAGE>
readily identifiable as belonging to any particular series shall be allocated
and charged by the Trustees to and among any one or more of the series
established and designated from time to time in such manner and on such basis as
the Trustees in their sole discretion deem fair and equitable. Each allocation
of liabilities, expenses, costs, charges and reserves by the Trustees shall be
conclusive and binding upon the holders of all series for all purposes. The
Trustees shall have full discretion, to the extent not inconsistent with the
1940 Act, to determine which items shall be treated as income and which items as
capital; and each such determination and allocation shall be conclusive and
binding upon the Shareholders. Under no circumstances shall the assets allocated
or belonging to any particular series be charged with liabilities attributable
to any other series. All Persons who have extended credit which has been
allocated to a particular series, or who have a claim or contract which has been
allocated to any particular series, shall look only to the assets of that
particular series for payment of such credit, claim or contract.
(e) The power of the Trustees to invest and reinvest the Trust Property
allocated or belonging to any particular series shall be governed by Section 3.2
hereof unless otherwise provided in the instrument of the Trustees establishing
such series which is hereinafter described.
(f) Each Share of a series shall represent a beneficial interest in the
net assets allocated or belonging to such series only, and such interest shall
not extend to the assets of the Trust generally. Dividends and distributions on
Shares of a particular series may be paid with such frequency as the Trustees
may determine, which may be daily or otherwise, pursuant to a standing
resolution or resolutions adopted only once or with such frequency as the
Trustees may determine, to the holders of Shares of that series, only from such
of the income and capital gains, accrued or realized, from the assets belonging
to that series, as the Trustees may determine, after providing for actual and
accrued liabilities belonging to that series. All dividends and distributions on
Shares of a particular series shall be distributed pro rata to the holders of
that series in proportion to the number of Shares of that series held by such
holders at the date and time of record established for the payment of such
dividends or distributions. Shares of any particular series of the Trust may be
redeemed solely out of Trust Property allocated or belonging to that series.
Upon liquidation or termination of a series of the Trust, Shareholders of such
series shall be entitled to receive a pro rata share of the net assets of such
series only. A Shareholder of a particular series of the Trust shall not be
entitled to participate in a derivative or class action on behalf of any other
series or the Shareholders of any other series of the Trust.
(g) Notwithstanding any provision hereof to the contrary, on any matter
submitted to a vote of the Shareholders of the Trust, all Shares then entitled
to vote shall be voted in the aggregate, except that (i) when required by the
1940 Act to be voted by individual series, Shares
<PAGE>
shall not be voted in the aggregate, and (ii) when the Trustees have determined
that the matter affects only the interests of Shareholders of one or more
series, only Shareholders of such series shall be entitled to vote thereon.
(h) The establishment and designation of any series of Shares shall be
effective upon the execution by a majority of the then Trustees of an instrument
setting forth such establishment and designation and the relative rights and
preferences of such series, or as otherwise provided in such instrument. At any
time that there are no Shares outstanding of any particular series previously
established and designated, the Trustees may by an instrument executed by a
majority of their number abolish that series and the establishment and
designation thereof. Each instrument referred to in this paragraph shall have
the status of an amendment to this Declaration.
Section 6.10 - Class Designation. The Trustees may, in their discretion,
authorize the division of Shares of the Trust (or any series of the Trust) into
one or more classes. All Shares of a class shall be identical with each other
and with the Shares of each other class of the Trust or the same series of the
Trust (as applicable), except for such variations between classes as may be
approved by the Board of Trustees and permitted by the 1940 Act or pursuant to
any exemptive order issued by the Securities and Exchange Commission. The
classes of Shares established pursuant to this Section 6.10 and existing as of
the date hereof are set forth in Annex A hereto.
ARTICLE VII
REDEMPTIONS
Section 7.1 - Redemption of Shares. All Shares of the Trust shall be
redeemable, at the redemption price determined in the manner set out in this
Declaration. Redeemed Shares may be resold by the Trust.
The Trust shall redeem the Shares at the price determined as hereinafter
set forth, upon the appropriately verified written application of the record
holder thereof (or upon such other form of request as the Trustees may
determine) at such office or agency as may be designated from time to time for
that purpose in the Trust's then effective prospectus under the Securities Act
of 1933. The Trustees may from time to time specify additional conditions, not
inconsistent with the 1940 Act, regarding the redemption of Shares in the
Trust's then effective prospectus under the Securities Act of 1933.
Section 7.2 - Price. Shares shall be redeemed at their net asset value
determined as set forth in Article VIII hereof as of such time as the Trustees
shall have theretofore prescribed by
<PAGE>
resolution. In the absence of such resolution, the redemption price of Shares
deposited shall be the net asset value of such Shares next determined as set
forth in Article VIII hereof after receipt of such application.
Section 7.3 - Payment. Payment of the redemption price of Shares of any
series shall be made in cash or in property out of the assets of such series to
the Shareholder of record at such time and in the manner, not inconsistent with
the 1940 Act or other applicable laws, as may be specified from time to time in
the Trust's then effective prospectus under the Securities Act of 1933, subject
to the provisions of Section 7.4 hereof.
Section 7.4 - Effect of Suspension of Determination of Net Asset Value.
If, pursuant to Section 7.6 hereof, the Trustees shall declare a suspension of
the determination of net asset value, the rights of Shareholders (including
those who shall have applied for redemption pursuant to Section 7.1 hereof but
who shall not yet have received payment) to have Shares redeemed and paid for by
the Trust shall be suspended until the termination of such suspension is
declared. Any record holder who shall have his redemption right so suspended
may, during the period of such suspension, by appropriate written notice of
revocation at the office or agency where application was made, revoke any
application for redemption not honored and withdraw any certificates on
deposits. The redemption price of Shares for which redemption applications have
not been revoked shall be the net asset value of such Shares next determined as
set forth in Article VIII after the termination of such suspension, and payment
shall be made within seven days after the date upon which the application was
made plus the period after such applications during which the determination of
net asset value was suspended.
Section 7.5 - Redemption of Shares in Order to Qualify as Regulated
Investment Company; Disclosure of Holding. If the Trustees shall, at any time
and in good faith, be of the opinion that direct or indirect ownership of Shares
or other securities of the Trust has or may become concentrated in any Person to
an extent which would disqualify the Trust or any series of the Trust as a
regulated investment company under the Internal Revenue Code, then the Trustees
shall have the power by lot or other means deemed equitable by them (i) to call
for redemption by any such Person a number, or principal amount, of Shares or
other securities of the Trust sufficient to maintain or bring the direct or
indirect ownership of Shares or other securities of the Trust into conformity
with the requirements for such qualification and (ii) to refuse to transfer or
issue Shares or other securities of the Trust to any Person whose acquisition of
the Shares or other securities of the Trust in question would result in such
disqualification. The redemption shall be effected at the redemption price and
in the manner provided in Section 7.1.
<PAGE>
The holders of Shares of other securities of the Trust shall upon demand
disclose to the Trustees in writing such information with respect to direct and
indirect ownership of Shares or other securities of the Trust as the Trustees
deem necessary to comply with the provisions of the Internal Revenue Code, or to
comply with the requirements of any other taxing authority.
Section 7.6 - Suspension of Right of Redemption. The Trust may declare a
suspension of the right of redemption or postpone the date of payment or
redemption for the whole or any part of any period (i) during which the New York
Stock Exchange is closed other than customary weekend and holiday closings, (ii)
during which trading on the New York Stock Exchange is restricted, (iii) during
which an emergency exists as a result of which disposal by the Trust of
securities owned by it is not reasonably practicable or it is not reasonably
practicable for the Trust fairly to determine the value of its net assets, or
(iv) during any other period when the Commission may for the protection of
security holders of the Trust by order permit suspension of the right of
redemption or postponement of the date of payment or redemption; provided that
applicable rules and regulations of the commission shall govern as to whether
the conditions prescribed in (ii), (iii), or (iv) exist. Such suspension shall
take effect at such time as the Trust shall specify but not later than the close
of business on the business day next following the declaration of suspension,
and thereafter there shall be no right of redemption or payment on redemption
until the Trust shall declare the suspension at an end, except that the
suspension shall terminate in any event on the first day on which said stock
exchange shall have reopened or the period specified in (ii) or (iii) shall have
expired (as to which in the absence of an official ruling by the Commission, the
determination of the Trust shall be conclusive). In the case of a suspension of
the right of redemption a Shareholder may either withdraw his request for
redemption or receive payment based on the net asset value existing after the
termination of the suspension as provided in Section 7.4 hereof.
ARTICLE VIII
DETERMINATION OF NET ASSET VALUE,
NET INCOME AND DISTRIBUTIONS
Subject to Section 6.9 hereof, the Trustees, in their absolute
discretion, may prescribe and shall set forth in the By-Laws or in a duly
adopted vote of the Trustees such bases and times for determining the per Share
or net asset value of the Shares of any series or net income attributable to the
Shares of any series, or the declaration and payment of dividends and
distributions on the Shares of any series, as they may deem necessary or
desirable.
<PAGE>
ARTICLE IX
DURATION; TERMINATION OF TRUST; AMENDMENT; MERGERS, ETC.
Section 9.1 - Duration. The Trust shall continue without limitation of
time but subject to the provisions of this Article IX.
Section 9.2 - Termination of Trust.
(a) The Trust may be terminated (i) by the affirmative vote of the
holders of not less than two-thirds of the Shares outstanding and entitled to
vote its Shares, or (ii) by the Trustees by written notice to the Shareholders.
Any series of the Trust may be terminated (i) by the affirmative vote of the
holders of not less than two-thirds of the Shares outstanding and entitled to
vote of that series, or (ii) by the Trustees by written notice to the
Shareholders of that series. Upon the termination of the Trust or any series of
the Trust:
(i) The Trust or series of the Trust shall carry on no business
except for the purpose of winding up its affairs;
(ii) The Trustees shall proceed to wind up the affairs of the Trust
or series of the Trust and all the powers of the Trustees under this Declaration
shall continue until the affairs of the Trust or series of the Trust shall have
been wound up, including the power to fulfill or discharge the contracts of the
Trust or series of the Trust, collect its assets, sell, convey, assign,
exchange, transfer or otherwise dispose of all or any part of the remaining
Trust Property or Trust Property of the series to one or more persons at public
or private sale for consideration which may consist in whole or in part of cash,
securities or other property of any kind, discharge or pay its liabilities, and
to do all other acts appropriate to liquidate its business; provided, that any
sale, conveyance, assignment, exchange, transfer or other disposition of all or
substantially all the Trust Property shall require Shareholder approval in
accordance with Section 9.4 hereof, and any sale, conveyance, assignment,
exchange, transfer or other disposition of all or substantially all of the Trust
Property allocated or belonging to any series shall require the approval of the
Shareholders of such series as provided in Section 9.6 hereof; and
(iii) After paying or adequately providing for the payment of all
liabilities, and upon receipt of such releases, indemnities and refunding
agreements as they deem necessary for their protection, the Trustees may
distribute the remaining Trust Property or Trust Property of the series, in cash
or in kind or partly in cash and partly in kind, among the Shareholders of the
Trust or the series according to their respective rights.
<PAGE>
(b) After termination of the Trust or series and distribution to the
Shareholders of the Trust or series as herein provided, a majority of the
Trustees shall execute and lodge among the records of the Trust an instrument in
writing setting forth the fact of such termination, and the Trustees shall
thereupon be discharged from all further liabilities and duties hereunder with
respect to the Trust or series, and the rights and interests of all Shareholders
of the Trust or series shall thereupon cease.
Section 9.3 - Amendment Procedure.
(a) This Declaration may be amended by a Majority Shareholder Vote of
the Shareholders of the Trust or by any instrument in writing, without a
meeting, signed by a majority of the Trustees and consented to by the holders of
not less than a majority of the Shares of the Trust. The Trustees may also amend
this Declaration without the vote or consent of Shareholders to designate series
in accordance with Section 6.9 hereof, to change the name of the Trust, to
supply any omission, to cure, correct or supplement any ambiguous, defective or
inconsistent provision hereof, or if they deem it necessary or advisable to
conform this Declaration to the requirements of applicable federal laws or
regulations or the requirements of the regulated investment company provisions
of the Internal Revenue Code of 1986, as amended, but the Trustees shall not be
liable for failing so to do.
(b) No amendment which the Trustees shall have determined shall affect
the rights, privileges or interests of holders of a particular series of Shares,
but not the rights, privileges or interests of holders of Shares of the Trust
generally, may be made except with the vote or consent by a Majority Shareholder
Vote of such series.
(c) Notwithstanding any other provision hereof, no amendment may be made
under this Section 9.3 which would change any rights with respect to the Shares,
or any series of Shares, by reducing the amount payable thereon upon liquidation
of the Trust or by diminishing or eliminating any voting rights pertaining
thereto, except with a Majority Shareholder Vote of Shares or series of Shares.
Nothing contained in this Declaration shall permit the amendment of this
Declaration to impair the exemption from personal liability of the Shareholders,
Trustees, officers, employees and agents of the Trust or to permit assessments
upon Shareholders.
(d) A certificate signed by a majority of the Trustees setting forth an
amendment and reciting that it was duly adopted by the Shareholders or by the
Trustees as aforesaid or a copy of the Declaration, as amended, and executed by
a majority of the Trustees, shall be conclusive evidence of such amendment when
lodged among the records of the Trust.
<PAGE>
(e) Notwithstanding any other provision hereof, until such time as a
Registration Statement under the Securities Act of 1933, as amended, covering
the first public offering of securities of the Trust shall have become
effective, this Declaration may be amended in any respect by the affirmative
vote of a majority of the Trustees or by an instrument signed by a majority of
the Trustees.
Section 9.4 - Merger, Consolidation and Sale of Assets. The Trust may
merge or consolidate with any other corporation, association, trust or other
organization or may sell, lease or exchange all or substantially all of the
Trust Property, including its good will, upon such terms and conditions and for
such consideration when and as authorized at any meeting of Shareholders called
for such purpose by the holders of not less than two-thirds of the Shares
outstanding and entitled to vote of the Trust, or such other vote as may be
established in the Trustees with respect to any series of Shares, or by an
instrument or instruments in writing without a meeting, consented to by the
holders of not less than two-thirds of the Shares outstanding and entitled to
vote of the Trust; provided, however, that if such merger, consolidation, sale,
lease or exchange is recommended by the Trustees, the vote of the holders of a
majority of the Shares outstanding and entitled to vote, or such other vote as
may be established by the Trustees with respect to any series of Shares, shall
be sufficient authorization; and any such merger, consolidation, sale, lease or
exchange shall be deemed for all purposes to have been accomplished under and
pursuant to the statutes of The Commonwealth of Massachusetts. Nothing contained
herein shall be construed as requiring approval of shareholders for any sale of
assets in the ordinary course of the business of the Trust.
Section 9.5 - Incorporation, Reorganization. With the approval of the
holders of a majority of the Shares outstanding and entitled to vote, the
Trustees may cause to be organized or assist in organizing a corporation or
corporations under the laws of any jurisdiction, or any other trust, unit
investment trust, partnership, association or other organization to take over
all of the Trust Property or to carry on any business in which the Trust shall
directly or indirectly have any interest, and to sell, convey and transfer the
Trust Property to any such corporation, trust, partnership, association or
organization in exchange for the shares or securities thereof or otherwise, and
to lend money to, subscribe for the shares or securities of, and enter into any
contracts with any such corporation, trust, partnership, association or
organization in which the Trust holds or is about to acquire shares or any other
interest. Subject to Section 9.4 hereof, the Trustees may also cause a merger or
consolidation between the Trust or any successor thereto and any such
corporation, trust, partnership, association or other organization if and to the
extent permitted by law. Nothing contained in this Section 9.5 shall be
construed as requiring approval
<PAGE>
of Shareholders for the Trustees to organize or assist in organizing one or more
corporations, trusts, partnerships, associations or other organizations and
selling, conveying or transferring a portion of the Trust Property to such
organization or entities.
Section 9.6 - Incorporation or Reorganization of Series. With the
approval of a Majority Shareholder Vote of any series, the Trustees may sell,
lease or exchange all of the Trust Property allocated or belonging to that
series, or cause to be organized or assist in organizing a corporation or
corporations under the laws of any other jurisdiction, or any other trust, unit
investment trust, partnership, association or other organization, to take over
all of the Trust Property allocated or belonging to that series and to sell,
convey and transfer such Trust Property to any such corporation, trust, unit
investment trust, partnership, association, or other organization in exchange
for the shares or securities thereof or otherwise.
ARTICLE X
REPORTS TO SHAREHOLDERS AND SHAREHOLDER COMMUNICATIONS
The Trustees shall at least semi-annually submit to the Shareholders a
written financial report of the transactions of the Trust, including financial
statements which shall at least annually be certified by independent public
accountants.
Whenever ten or more Shareholders of record who have been such for at
least six months preceding the date of application, and who hold in the
aggregate either Shares having a net asset value of at least $25,000 or at least
1% of the Shares outstanding, whichever is less, shall apply to the Trustees in
writing, stating that they wish to communicate with other Shareholders with a
view to obtaining signatures to a request for a meeting of Shareholders for the
purpose of removing one or more Trustees pursuant to Section 2.2 hereof and
accompany such application with a form of communication and request which they
wish to transmit, the Trustees shall within five business days after receipt of
such application either (a) afford to such applicants access to a list of the
names and addresses of all Shareholders as recorded on the books of the Trust;
or (b) inform such applicants as to the approximate number of Shareholders of
record, and the approximate cost of mailing to them the proposed communication
and form of request. If the Trustees elect to follow the course specified in (b)
above, the Trustees, upon the written request of such applicants, accompanied by
a tender of the material to be mailed and of the reasonable expenses of mailing,
shall, with reasonable promptness, mail such material to all Shareholders of
record, unless within five business days after such tender the Trustees mail to
such applicants and file with the Commission, together with a copy of the
material to be mailed, a written statement
<PAGE>
signed by at least a majority of the Trustees to the effect that in their
opinion either such material contains untrue statements of fact or omits to
state facts necessary to make the statements contained therein not misleading,
or would be in violation of applicable law, and specifying the basis of such
opinion.
ARTICLE XI
MISCELLANEOUS
Section 11.1 - Filing. This Declaration, as amended, and any subsequent
amendment hereto shall be filed in the office of the Secretary of The
Commonwealth of Massachusetts and in such other place or places as may be
required under the laws of The Commonwealth of Massachusetts and may also be
filed or recorded in such other places as the Trustees deem appropriate. Each
amendment so filed shall be accompanied by a certificate signed and acknowledged
by a Trustee stating that such action was duly taken in a manner provided
herein, and unless such amendment or such certificate sets forth some later time
for the effectiveness of such amendment, such amendment shall be effective upon
its filing. A restated Declaration, integrating into a single instrument all of
the provisions of the Declaration which are then in effect and operative, may be
executed from time to time by a majority of the Trustees and shall, upon filing
with the Secretary of The Commonwealth of Massachusetts, be conclusive evidence
of all amendments contained therein and may thereafter be referred to in lieu of
the original Declaration and the various amendments thereto.
Section 11.2 - Governing Law. This Declaration is executed by the
Trustees and delivered in The Commonwealth of Massachusetts and with reference
to the laws thereof, and the rights of all parties and the validity and
construction of every provision hereof shall be subject to and construed
according to the laws of said Commonwealth.
Section 11.3 - Counterparts. This Declaration may be simultaneously
executed in several counterparts, each of which shall be deemed to be an
original, and such counterparts, together, shall constitute one and the same
instrument, which shall be sufficiently evidenced by any such original
counterpart.
Section 11.4 - Reliance by Third Parties. Any certificate executed by an
individual who, according to the records of the Trust appears to be a Trustee
hereunder, certifying to: (i) the number or identity of Trustees or
Shareholders, (ii) the due authorization of the execution of any instrument or
writing, (iii) the form of any vote passed at a meeting of Trustees or
Shareholders, (iv) the fact that the number of Trustees or Shareholders present
at any meeting or executing any
<PAGE>
written instrument satisfies the requirements of this Declaration, (v) the form
of any By-Laws adopted by or the identity of any officers elected by the
Trustees, or (vi) the existence of any fact or facts which in any manner relate
to the affairs of the Trust, shall be conclusive evidence as to the matters so
certified in favor of any Person dealing with the Trustees and their successors.
Section 11.5 - Provisions in Conflict with Law or Regulations.
(a) The provisions of the Declaration are severable, and if the Trustees
shall determine, with the advice of counsel, that any of such provisions is in
conflict with the 1940 Act, the regulated investment company provisions of the
Internal Revenue Code of 1986, as amended, or with other applicable laws and
regulations, the conflicting provision shall be deemed never to have constituted
a part of the Declaration; provided however, that such determination shall not
affect any of the remaining provisions of the Declaration or render invalid or
improper any action taken or omitted prior to such determination.
(b) If any provision of the Declaration shall be held invalid or
unenforceable in any jurisdiction, such invalidity or unenforceability shall
attach only to such provision in such jurisdiction and shall not in any manner
affect such provision in any other jurisdiction or any other provision of the
Declaration in any jurisdiction.
<PAGE>
ANNEX A
Pursuant to Section 6.10 of the Declaration of Trust, the Trustees have
divided the shares of MFS Government Mortgage Fund (the "Trust"), to create two
classes of shares, within the meaning of Section 6.10, as follows:
1. The two classes of shares are designated "Class A Shares" and "Class
B Shares;"
2. Class A Shares and Class B Shares shall be entitled to all the rights
and preferences accorded to shares under the Declaration;
3. The purchase price of Class A Shares and Class B Shares, the method
of determination of the net asset value of Class A Shares and Class B
Shares, the price, terms and manner of redemption of Class A Shares
and Class B Shares, any conversion feature of the Class B Shares, and
the relative dividend rights of holders of Class A Shares and Class B
Shares shall be established by the Trustees of the Trust in
accordance with the Declaration and shall be set forth in the current
prospectus and statement of additional information of the Trust or
any series thereof, as amended from time to time, contained in the
Trust's registration statement under the Securities Act of 1933, as
amended.
4. Class A Shares and Class B Shares shall vote together as a single
class except that shares of a class may vote separately on matters
affecting only that class and shares of a class not affected by a
matter will not vote on that matter.
5. A class of shares of the Trust may be terminated by the Trustees by
written notice to the Shareholders of the class.
<PAGE>
IN WITNESS WHEREOF, the undersigned have executed this instrument this 18th day
of January, 1995.
A. KEITH BRODKIN CHARLES W. SCHMIDT
A. Keith Brodkin Charles W. Schmidt
76 Farm Road 63 Claypit Hill Road
Sherborn, MA 01770 Wayland, MA 01778
RICHARD B. BAILEY ARNOLD D. SCOTT
Richard B. Bailey Arnold D. Scott
63 Atlantic Avenue 20 Rowes Wharf
Boston, MA 02110 Boston, MA 02110
PETER G. HARWOOD JEFFREY L. SHAMES
Peter G. Harwood Jeffrey L. Shames
211 Lindsay Pond Road 60 Brookside Road
Concord, MA 01742 Needham, MA 02192
J. ATWOOD IVES ELAINE R. SMITH
J. Atwood Ives Elaine R. Smith
1 Bennington Road 75 Scotch Pine Road
Lexington, MA 02173 Weston, MA 02193
LAWRENCE T. PERERA DAVID B. STONE
Lawrence T. Perera David B. Stone
18 Marlborough Street 50 Delano Road
Boston, MA 02116 Marion, MA 02736
WILLIAM J. POORVU
William J. Poorvu
975 Memorial Drive
Cambridge, MA 02138
EXHIBIT NO. 2
AMENDED AND RESTATED
BY-LAWS
OF
MFS GOVERNMENT MORTGAGE FUND
DECEMBER 21, 1994
<PAGE>
AMENDED AND RESTATED
BY-LAWS
OF
MFS GOVERNMENT MORTGAGE FUND
ARTICLE I
DEFINITIONS
The terms "Commission", "Declaration", "Distributor", "Investment
Adviser", "Majority Shareholder Vote", "1940 Act", "Shareholder", "Shares",
"Transfer Agent", "Trust", "Trust Property" and "Trustees" have the respective
meanings given them in the Declaration of Trust of MFS Government Mortgage Fund,
dated November 18, 1985, as amended from time to time.
ARTICLE II
OFFICES
SECTION 1. PRINCIPAL OFFICE. Until changed by the Trustees, the
principal office of the Trust in The Commonwealth of Massachusetts shall be in
the City of Boston, County of Suffolk.
SECTION 2. OTHER OFFICES. The Trust may have offices in such other
places without as well as within the Commonwealth as the Trustees may from time
to time determine.
ARTICLE III
SHAREHOLDERS
SECTION 1. MEETINGS. Meetings of the Shareholders may be called at any
time by a majority of the Trustees and shall be called by any Trustee upon
written request of Shareholders holding in the aggregate not less than ten
percent (10%) of the outstanding Shares
<PAGE>
of the Trust having voting rights, if shareholders of all series are required
under the Declaration to vote in the aggregate and not by individual series at
such meeting, or of any series or class if shareholders of such series or class
are entitled under the Declaration to vote by individual series or class, such
request specifying the purpose or purposes for which such meeting is to be
called. Any such meeting shall be held within or without The Commonwealth of
Massachusetts on such day and at such time as the Trustees shall designate.
SECTION 2. NOTICE OF MEETINGS. Notice of all meetings of Shareholders,
stating the time, place and purposes of the meeting, shall be given by the
Trustees by mail to each Shareholder entitled to vote at such meeting at his
address as recorded on the register of the Trust, mailed at least (ten) 10 days
and not more than (sixty) 60 days before the meeting. Only the business stated
in the notice of the meeting shall be considered at such meeting. Any adjourned
meeting may be held as adjourned without further notice. No notice need be given
to any Shareholder who shall have failed to inform the Trust of his current
address or if a written waiver of notice, executed before or after the meeting
by the Shareholder or his attorney thereunto authorized, is filed with the
records of the meeting.
SECTION 3. RECORD DATE FOR MEETINGS. For the purpose of determining the
Shareholders who are entitled to notice of and to vote at any meeting, or to
participate in any distribution, or for the purpose of any other action, the
Trustees may from time to time close the transfer books for such period, not
exceeding thirty (30) days, as the Trustees may determine; or without closing
the transfer books the Trustees may fix a date not more than sixty (60) days
prior to the date of any meeting of Shareholders or distribution or other action
as a record date for the determination of the persons to be treated as
Shareholders of record for such purpose.
SECTION 4. PROXIES. At any meeting of Shareholders, any holder of Shares
entitled to vote thereat may vote by proxy, provided that no proxy shall be
voted at any meeting unless it shall have been placed on file with the Clerk, or
with such other officer or agent of the Trust as the Clerk may direct, for
verification prior to the time at which such vote shall be taken. Pursuant to a
vote of a majority of the Trustees, proxies may be solicited in the name of one
or more Trustees or one or more of the officers of the Trust. When any Share is
held jointly by several persons, any one of them may vote at any meeting in
person or by proxy in respect of such Share, but if more than one of them shall
be present at such meeting in person or by proxy, and such joint owners or their
proxies so present disagree as to any vote to be cast, such vote shall not be
received in respect of such Share. A proxy purporting to be executed by or on
behalf of a Shareholder shall be deemed valid unless challenged at or prior to
its exercise, and the burden of proving invalidity shall rest on the challenger.
The placing of a Shareholder's name on a proxy pursuant to telephonic or
electronically transmitted instructions obtained pursuant to procedures
reasonably designed to verify that such instructions have been authorized by
such Shareholder shall constitute execution of such proxy by or on behalf of
such Shareholder. If the holder of any such Share is a minor or a person of
unsound mind, and subject to guardianship or to the legal control of any other
person as regards the charge or management of such Share, he
<PAGE>
may vote by his guardian or such other person appointed or having such control,
and such vote may be given in person or by proxy. Any copy, facsimile
telecommunication or other reliable reproduction of a proxy may be substituted
for or used in lieu of the original proxy for any and all purposes for which the
original proxy could be used, provided that such copy, facsimile
telecommunication or other reproduction shall be a complete reproduction of the
entire original proxy or the portion thereof to be returned by the Shareholder.
SECTION 5. QUORUM, ADJOURNMENT AND REQUIRED VOTE. A majority of
outstanding Shares entitled to vote shall constitute a quorum at any meeting of
Shareholders, except that where any provision of law, the Declaration or these
By-laws permits or requires that holders of any series or class shall vote as a
series or class, then a majority of the aggregate number of Shares of that
series or class entitled to vote shall be necessary to constitute a quorum for
the transaction of business by that series or class. In the absence of a quorum,
a majority of outstanding Shares entitled to vote present in person or by proxy,
or, where any provision of law, the Declaration or these By-laws permits or
requires that holders of any series or class shall vote as a series or class, a
majority of outstanding Shares of that series or class entitled to vote present
in person or by proxy, may adjourn the meeting from time to time until a quorum
shall be present. Only Shareholders of record shall be entitled to vote on any
matter. Each full Share shall be entitled to one vote and fractional Shares
shall be entitled to a vote of such fraction. Except as otherwise provided any
provision of law, the Declaration or these By-laws, Shares representing a
majority of the votes cast shall decide any matter (i.e., abstentions and broker
non-votes shall not be counted) and a plurality shall elect a Trustee, provided
that where any provision of law, the Declaration or these By-Laws permits or
requires that holders of any series or class shall vote as a series or class,
then a majority of the Shares of that series or class cast on the matter shall
decide the matter (i.e., abstentions and broker non-votes shall not be counted)
insofar as that series or class is concerned.
SECTION 6. INSPECTION OF RECORDS. The records of the Trust shall be open
to inspection by Shareholders to the same extent as is permitted shareholders of
a Massachusetts business corporation.
SECTION 7. ACTION WITHOUT MEETING. Any action which may be taken by
Shareholders may be taken without a meeting if a majority of Shareholders
entitled to vote on the matter (or such larger proportion thereof as shall be
required by law, the Declaration or these By-Laws for approval of such matter)
consent to the action in writing and the written consents are filed with the
records of the meetings of Shareholders. Such consent shall be treated for all
purposes as a vote taken at a meeting of Shareholders.
<PAGE>
ARTICLE IV
TRUSTEES
SECTION 1. MEETINGS OF THE TRUSTEES. The Trustees may in their
discretion provide for regular or stated meetings of the Trustees. Notice of
regular or stated meetings need not be given. Meetings of the Trustees other
than regular or stated meetings shall be held whenever called by the Chairman or
by any one of the Trustees at the time being in office. Notice of the time and
place of each meeting other than regular or stated meetings shall be given by
the Secretary or an Assistant Secretary, or the Clerk or an Assistant Clerk or
by the officer or Trustee calling the meeting and shall be mailed to each
Trustee at least two days before the meeting, or shall be telegraphed, cabled,
or wirelessed or sent by facsimile or other electronic means to each Trustee at
his business address, or personally delivered to him at least one day before the
meeting. Such notice may, however, be waived by any Trustee. Notice of a meeting
need not be given to any Trustee if a written waiver of notice, executed by him
before or after the meeting, is filed with the records of the meeting, or to any
Trustee who attends the meeting without protesting prior thereto or at its
commencement the lack of notice to him. A notice or waiver of notice need not
specify the purpose of any meeting. Except as provided by law the Trustees may
meet by means of a telephone conference circuit or similar communications
equipment by means of which all persons participating in the meeting can hear
each other, which telephone conference meeting shall be deemed to have been held
at a place designated by the Trustees at the meeting. Participation in a
telephone conference meeting shall constitute presence in person at such
meeting. Any action required or permitted to be taken at any meeting of the
Trustees may be taken by the Trustees without a meeting if all the Trustees
consent to the action in writing and the written consents are filed with the
records of the Trustees' meetings. Such consents shall be treated as a vote for
all purposes.
SECTION 2. QUORUM AND MANNER OF ACTING. A majority of the Trustees shall
be present at any regular or special meeting of the Trustees in order to
constitute a quorum for the transaction of business at such meeting and (except
as otherwise required by law, the Declaration or these By-Laws) the act of a
majority of the Trustees present at any such meeting, at which a quorum is
present, shall be the act of the Trustees. In the absence of a quorum, a
majority of the Trustees present may adjourn the meeting from time to time until
a quorum shall be present. Notice of an adjourned meeting need not be given.
ARTICLE V
COMMITTEES AND ADVISORY BOARD
SECTION 1. EXECUTIVE AND OTHER COMMITTEES. The Trustees by vote of a
majority of all the Trustees may elect from their own number an Executive
Committee to
<PAGE>
consist of not less than three (3) Trustees to hold office at the pleasure of
the Trustees which shall have the power to conduct the current and ordinary
business of the Trust while the Trustees are not in session, including the
purchase and sale of securities and the designation of securities to be
delivered upon redemption of Shares of the Trust, and such other powers of the
Trustees as the Trustees may, from time to time, delegate to the Executive
Committee except those powers which by law, the Declaration or these By-Laws
they are prohibited from delegating. The Trustees may also elect from their own
number other Committees from time to time, the number composing such Committees,
the powers conferred upon the same (subject to the same limitations as with
respect to the Executive Committee) and the term of membership on such
Committees to be determined by the Trustees. The Trustees may designate a
chairman of any such Committee. In the absence of such designation a Committee
may elect its own Chairman.
SECTION 2. MEETING, QUORUM AND MANNER OF ACTING. The Trustees may:
(i) provide for stated meetings of any Committee,
(ii) specify the manner of calling and notice required for
special meetings of any Committee,
(iii) specify the number of members of a Committee required to
constitute a quorum and the number of members of a
Committee required to exercise specified powers delegated
to such Committee,
(iv) authorize the making of decisions to exercise specified
powers by written assent of the requisite number of
members of a Committee without a meeting, and
(v) authorize the members of a Committee to meet by means of a
telephone conference circuit.
Each Committee shall keep regular minutes of its meetings and records of
decisions taken without a meeting and cause them to be recorded in a book
designated for that purpose and kept in the office of the Trust.
SECTION 3. ADVISORY BOARD. The Trustees may appoint an Advisory Board to
consist in the first instance of not less than three (3) members. Members of
such Advisory Board shall not be Trustees or officers and need not be
Shareholders. A member of such Advisory Board shall hold office for such period
as the Trustees may by resolution provide. Any member of such board may resign
therefrom by a written instrument signed by him which shall take effect upon
delivery to the Trustees. The Advisory Board shall have no legal powers and
shall not perform the functions of Trustees in any manner, such Advisory Board
being intended merely to
<PAGE>
act in an advisory capacity. Such Advisory Board shall meet at such times and
upon such notice as the Trustees may by resolution provide.
ARTICLE VI
OFFICERS
SECTION 1. GENERAL PROVISIONS. The officers of the Trust shall be a
Chairman, a President, a Treasurer and a Clerk, who shall be elected by the
Trustees. The Trustees may elect or appoint such other officers or agents as the
business of the Trust may require, including one or more Vice Presidents, a
Secretary and one or more Assistant Secretaries, one or more Assistant
Treasurers, and one or more Assistant Clerks. The Trustees may delegate to any
officer or Committee the power to appoint any subordinate officers or agents.
SECTION 2. TERM OF OFFICE AND QUALIFICATIONS. Except as otherwise
provided by law, the Declaration or these By-Laws, the Chairman, the President,
the Treasurer and the Clerk shall hold office until his resignation has been
accepted by the Trustees or until his respective successor shall have been duly
elected and qualified, and all other officers shall hold office at the pleasure
of the Trustees. Any two or more offices may be held by the same person. Any
officer may be, but none need be, a Trustee or Shareholder.
SECTION 3. REMOVAL. The Trustees, at any regular or special meeting of
the Trustees, may remove any officer with or without cause by a vote of a
majority of the Trustees. Any officer or agent appointed by any officer or
Committee may be removed with or without cause by such appointing officer or
Committee.
SECTION 4. POWERS AND DUTIES OF THE CHAIRMAN. The Chairman may call
meetings of the Trustees and of any Committee thereof when he deems it necessary
and shall preside at all meetings of the Shareholders. Subject to the control of
the Trustees and any Committees of the Trustees, the Chairman shall at all times
exercise a general supervision and direction over the affairs of the Trust. The
Chairman shall have the power to employ attorneys and counsel for the Trust and
to employ such subordinate officers, agents, clerks and employees as he may find
necessary to transact the business of the Trust. The Chairman shall also have
the power to grant, issue, execute or sign such powers of attorney, proxies or
other documents as may be deemed advisable or necessary in furtherance of the
interests of the Trust. The Chairman shall have such other powers and duties as,
from time to time, may be conferred upon or assigned to him by the Trustees.
SECTION 5. POWERS AND DUTIES OF THE PRESIDENT. In the absence or
disability of the Chairman, the President shall perform all the duties and may
exercise any of the powers
<PAGE>
of the Chairman, subject to the control of the Trustees. The President shall
perform such other duties as may be assigned to him from time to time by the
Trustees or the Chairman.
SECTION 6. POWERS AND DUTIES OF VICE PRESIDENTS. In the absence or
disability of the President, the Vice President or, if there be more than one
Vice President, any Vice President designated by the Trustees shall perform all
the duties and may exercise any of the powers of the President, subject to the
control of the Trustees. Each Vice President shall perform such other duties as
may be assigned to him from time to time by the Trustees or the President.
SECTION 7. POWERS AND DUTIES OF THE TREASURER. The Treasurer shall be
the principal financial and accounting officer of the Trust. The Treasurer shall
deliver all funds of the Trust which may come into his hands to such custodian
as the Trustees may employ pursuant to Article X hereof. The Treasurer shall
render a statement of condition of the finances of the Trust to the Trustees as
often as they shall require the same and shall in general perform all the duties
incident to the office of Treasurer and such other duties as from time to time
may be assigned to him by the Trustees. The Treasurer shall give a bond for the
faithful discharge of his duties, if required to do so by the Trustees, in such
sum and with such surety or sureties as the Trustees shall require.
SECTION 8. POWERS AND DUTIES OF THE CLERK. The Clerk shall keep the
minutes of all meetings of the Shareholders in proper books provided for that
purpose; he shall have custody of the seal of the Trust; he shall have charge of
the Share transfer books, lists and records unless the same are in the charge of
the Transfer Agent. He or the Secretary shall attend to the giving and serving
of all notices by the Trust in accordance with the provisions of these By-Laws
and as required by law; and subject to these By-Laws, he shall in general
perform all duties incident to the office of Clerk and such other duties as from
time to time may be assigned to him by the Trustees.
SECTION 9. POWERS AND DUTIES OF THE SECRETARY. The Secretary, if any,
shall keep the minutes of all meetings of the Trustees. He shall perform such
other duties and have such other powers in addition to those specified in these
By-Laws as the Trustees shall from time to time designate. If there be no
Secretary or Assistant Secretary, the Clerk shall perform the duties of
Secretary.
SECTION 10. POWERS AND DUTIES OF ASSISTANT TREASURERS. In the absence or
disability of the Treasurer, any Assistant Treasurer designated by the Trustees
shall perform all the duties, and may exercise any of the powers, of the
Treasurer. Each Assistant Treasurer shall perform such other duties as from time
to time may be assigned to him by the Trustees. Each Assistant Treasurer shall
give a bond for the faithful discharge of his duties, if required to do so by
the Trustees, in such sum and with such surety or sureties as the Trustees shall
require.
<PAGE>
SECTION 11. POWERS AND DUTIES OF ASSISTANT CLERKS. In the absence or
disability of the Clerk, any Assistant Clerk designated by the Trustees shall
perform all the duties, and may exercise any of the powers, of the Clerk. The
Assistant Clerks shall perform such other duties as from time to time may be
assigned to them by the Trustees.
SECTION 12. POWERS AND DUTIES OF ASSISTANT SECRETARIES. In the absence
or disability of the Secretary, any Assistant Secretary designated by the
Trustees shall perform all of the duties, and may exercise any of the powers, of
the Secretary. The Assistant Secretaries shall perform such other duties as from
time to time may be assigned to them by the Trustees.
SECTION 13. COMPENSATION OF OFFICERS AND TRUSTEES AND MEMBERS OF THE
ADVISORY BOARD. Subject to any applicable law or provision of the Declaration,
the compensation of the officers and Trustees and members of the Advisory Board
shall be fixed from time to time by the Trustees or, in the case of officers, by
any Committee or officer upon whom such power may be conferred by the Trustees.
No officer shall be prevented from receiving such compensation as such officer
by reason of the fact that he is also a Trustee.
ARTICLE VII
FISCAL YEAR
The fiscal year of the Trust shall begin on the first day of August in
each year and shall end on the last day of July in that year, provided, however,
that the Trustees may from time to time change the fiscal year.
ARTICLE VIII
SEAL
The Trustees shall adopt a seal which shall be in such form and shall
have such inscription thereon as the Trustees may from time to time prescribe.
<PAGE>
ARTICLE IX
WAIVERS OF NOTICE
Whenever any notice is required to be given by law, the Declaration or
these By-Laws, a waiver thereof in writing, signed by the person or persons
entitled to such notice, whether before or after the time stated therein, shall
be deemed equivalent thereto. A notice shall be deemed to have been telegraphed,
cabled or wirelessed or sent by facsimile or other electronic means for the
purposes of these By-Laws when it has been delivered to a representative of any
telegraph, cable or wireless company with instruction that it be telegraphed,
cabled or wirelessed or when a confirmation of such facsimile having been sent,
or a confirmation that such electronic means has sent the notice being
transmitted, is generated. Any notice shall be deemed to be given at the time
when the same shall be mailed, telegraphed, cabled or wirelessed or when sent by
facsimile or other electronic means.
ARTICLE X
CUSTODIAN
SECTION 1. APPOINTMENT AND DUTIES. The Trustees shall at all times
employ a bank or trust company having a capital, surplus and undivided profits
of at least five million dollars ($5,000,000) as custodian with authority as its
agent, but subject to such restrictions, limitations and other requirements, if
any, as may be contained in the Declaration, these By-Laws and the 1940 Act:
(1) to hold the securities owned by the Trust and deliver the
same upon written order;
(2) to receive and receipt for any monies due to the Trust and
deposit the same in its own banking department or
elsewhere as the Trustees may direct;
(3) to disburse such funds upon orders or vouchers;
(4) if authorized by the Trustees, to keep the books and
accounts of the Trust and furnish clerical and accounting
services; and
(5) if authorized to do so by the Trustees, to compute the net
income of the Trust;
<PAGE>
all upon such basis of compensation as may be agreed upon between the Trustees
and the custodian. If so directed by a Majority Shareholder Vote, the custodian
shall deliver and pay over all property of the Trust held by it as specified in
such vote.
The Trustees may also authorize the custodian to employ one or more
sub-custodians from time to time to perform such of the acts and services of the
custodian and upon such terms and conditions, as may be agreed upon between the
custodian and such sub-custodian and approved by the Trustees, provided that in
every case such sub-custodian shall be a bank or trust company organized under
the laws of the United States or one of the states thereof and having capital,
surplus and undivided profits of at least five million dollars ($5,000,000).
SECTION 2. CENTRAL CERTIFICATE SYSTEM. Subject to such rules,
regulations and orders as the Commission may adopt, the Trustees may direct the
custodian to deposit all or any part of the securities owned by the Trust in a
system for the central handling of securities established by a national
securities exchange or a national securities association registered with the
Commission under the Securities Exchange Act of 1934, or such other person as
may be permitted by the Commission, or otherwise in accordance with the 1940
Act, pursuant to which system all securities of any particular class or series
of any issuer deposited within the system are treated as fungible and may be
transferred or pledged by bookkeeping entry without physical delivery of such
securities, provided that all such deposits shall be subject to withdrawal only
upon the order of the Trust or its custodian.
SECTION 3. ACCEPTANCE OF RECEIPTS IN LIEU OF CERTIFICATES. Subject to
such rules, regulations and orders as the Commission may adopt, the Trustees may
direct the custodian to accept written receipts or other written evidences
indicating purchases of securities held in book-entry form in the Federal
Reserve System in accordance with regulations promulgated by the Board of
Governors of the Federal Reserve System and the local Federal Reserve Banks in
lieu of receipt of certificates representing such securities.
SECTION 4. PROVISIONS OF CUSTODIAN CONTRACT. The following provisions
shall apply to the employment of a custodian pursuant to this Article X and to
any contract entered into with the custodian so employed:
(a) The Trustees shall cause to be delivered to the custodian
all securities owned by the Trust or to which it may
become entitled, and shall order the same to be delivered
by the custodian only upon completion of a sale, exchange,
transfer, pledge, or other disposition thereof, and upon
receipt by the custodian of the consideration therefor or
a certificate of deposit or a receipt of an issuer or of
its Transfer Agent, all as the Trustees may generally or
from time to time require or approve, or to a successor
custodian; and the Trustees shall cause all funds owned by
the Trust or to which it may become entitled to be paid to
the custodian, and shall order
<PAGE>
the same disbursed only for investment against delivery of
the securities acquired, or in payment of expenses,
including management compensation, and liabilities of the
Trust, including distributions to Shareholders, or to a
successor custodian; provided, however, that nothing
herein shall prevent delivery of securities for
examination to the broker selling the same in accord with
the "street delivery" custom whereby such securities are
delivered to such broker in exchange for a delivery
receipt exchanged on the same day for an uncertified check
of such broker to be presented on the same day for
certification.
(b) In case of the resignation, removal or inability to serve
of any such custodian, the Trust shall promptly appoint
another bank or trust company meeting the requirements of
this Article X as successor custodian. The agreement with
the custodian shall provide that the retiring custodian
shall, upon receipt of notice of such appointment, deliver
the funds and property of the Trust in its possession to
and only to such successor, and that pending appointment
of a successor custodian, or a vote of the Shareholders to
function without a custodian, the custodian shall not
deliver funds and property of the Trust to the Trust, but
may deliver them to a bank or trust company doing business
in Boston, Massachusetts, of its own selection, having an
aggregate capital, surplus and undivided profits (as shown
in its last published report) of at least $5,000,000, as
the property of the Trust to be held under terms similar
to those on which they were held by the retiring
custodian.
ARTICLE XI
SALE OF SHARES OF THE TRUST
The Trustees may from time to time issue and sell or cause to be issued
and sold Shares for cash or other property, which shall in every case be paid or
delivered to the Custodian as agent of the Trust before the delivery of any
certificate for such shares. The Shares, including additional Shares which may
have been repurchased by the Trust (herein sometimes referred to as "treasury
shares"), may not be sold at a price less than the net asset value thereof (as
defined in Article XII hereof) determined by or on behalf of the Trustees next
after the sale is made or at some later time after such sale.
No Shares need be offered to existing Shareholders before being offered
to others. No Shares shall be sold by the Trust (although Shares previously
contracted to be sold may be issued upon payment therefor) during any period
when the determination of net asset value is suspended by declaration of the
Trustees pursuant to the provisions of Article XII hereof. In connection
<PAGE>
with the acquisition by merger or otherwise of all or substantially all the
assets of an investment company (whether a regulated or private investment
company or a personal holding company), the Trustees may issue or cause to be
issued Shares and accept in payment therefor such assets valued at not more than
market value thereof in lieu of cash, notwithstanding that the federal income
tax basis to the Trust of any assets so acquired may be less than the market
value, provided that such assets are of the character in which the Trustees are
permitted to invest the funds of the Trust.
The Trustees, in their sole discretion, may cause the Trust to redeem
all of the Shares of the Trust held by any Shareholder if the value of such
Shares is less than a minimum amount established from time to time by the
Trustees.
ARTICLE XII
NET ASSET VALUE OF SHARES
The term "net asset value" per Share of any class or series of Shares
shall mean: (i) the value of all assets of that series or class; (ii) less total
liabilities of such series or class; (iii) divided by the number of Shares of
such series or class outstanding, in each case at the time of such
determination, all as determine by or under the direction of the Trustees. Such
value shall be determined on such days and at such time as the Trustees may
determine. Such determination shall be made with respect to securities for which
market quotations are readily available, at the market value of such securities;
and with respect to other securities and assets, at the fair value as determined
in good faith by or pursuant to the direction of the Trustees, provided,
however, that the Trustees, without shareholder approval, may alter the method
of appraising portfolio securities insofar as permitted under the 1940 Act, and
the rules, regulations and interpretations thereof promulgated or issued by the
Securities and Exchange Commission or insofar as permitted by any order of the
Securities and Exchange commission. The Trustees may delegate any powers and
duties under this Article XII with respect to appraisal of assets and
liabilities. At any time the Trustees may cause the value per share last
determined to be determined again in a similar manner and may fix the time when
such predetermined value shall become effective.
ARTICLE XIII
DIVIDENDS AND DISTRIBUTIONS
SECTION 1. LIMITATIONS ON DISTRIBUTIONS. The total of distributions to
<PAGE>
Shareholders of a particular series or class paid in respect of any one fiscal
year, subject to the exceptions noted below, shall, when and as declared by the
Trustees, be approximately equal to the sum of:
(i) the net income, exclusive of the profits or losses
realized upon the sale of securities or other property, of
such series or class for such fiscal year, determined in
accordance with generally accepted accounting principles
(which, if the Trustees so determine, may be adjusted for
net amounts included as such accrued net income in the
price of Shares of such series or class issued or
repurchased), but if the net income of such series or
class exceeds the amount distributed by less than one cent
per share outstanding at the record date for the final
dividend, the excess shall be treated as distributable
income of such series or class for the following fiscal
year; and
(ii) in the discretion of the Trustees, an additional amount
which shall not substantially exceed the excess of profits
over losses on sales of securities or other property
allocated or belonging to such series or class for such
fiscal year.
The decision of the Trustees as to what, in accordance with generally accepted
accounting principles, is income and what is principal shall be final, and
except as specifically provided herein the decision of the Trustees as to what
expenses and charges of the Trust shall be charged against principal and what
against income shall be final, all subject to any applicable provisions of the
1940 Act and rules, regulations and orders of the Commission promulgated
thereunder. For the purposes of the limitation imposed by this Section 1, Shares
issued pursuant to Section 2 of this Article XIII shall be valued at the amount
of cash which the Shareholders would have received if they had elected to
receive cash in lieu of such Shares.
Inasmuch as the computation of net income and gains for federal income
tax purposes may vary from the computation thereof on the books, the above
provisions shall be interpreted to give to the Trustees the power in their
discretion to distribute for any fiscal year as ordinary dividends and as
capital gains distributions, respectively, additional amounts sufficient to
enable the Trust to avoid or reduce liability for taxes. Any payment made to
Shareholders pursuant to clause (ii) of this Section 1 shall be accompanied by a
written statement showing the source or sources of such payment, and the basis
of computation thereof.
SECTION 2. DISTRIBUTIONS PAYABLE IN CASH OR SHARES. The Trustees shall
have power, to the fullest extent permitted by the laws of The Commonwealth of
Massachusetts but subject to the limitation as to cash distributions imposed by
Section 1 of this Article XIII, at any time or from time to time to declare and
cause to be paid distributions payable at the election of any Shareholder of any
series or class (whether exercised before or
<PAGE>
after the declaration of the distribution) either in cash or in Shares of such
series, provided that the sum of:
(i) the cash distribution actually paid to any Shareholder,
and
(ii) the net asset value of the Shares which that Shareholder
elects to receive, in effect at such time at or after the
election as the Trustees may specify, shall not exceed the
full amount of cash to which that Shareholder would be
entitled if he elected to receive only cash.
In the case of a distribution payable in cash or Shares at the election of a
Shareholder, the Trustees may prescribe whether a Shareholder, failing to
express his election before a given time shall be deemed to have elected to take
Shares rather than cash, or to take cash rather then Shares, or to take Shares
with cash adjustment of fractions.
The Trustees, in their sole discretion, may cause the Trust to require
that all distributions payable to a shareholder in amounts less than such amount
or amounts determined from time to time by the Trustees be reinvested in
additional shares of the Trust rather than paid in cash, unless a shareholder
who, after notification that his distributions will be reinvested in additional
shares in accordance with the preceding phrase, elects to receive such
distributions in cash. Where a shareholder has elected to receive distributions
in cash and the postal or other delivery service is unable to deliver checks to
the shareholder's address of record, the Trustees, in their sole discretion, may
cause the Trust to require that such Shareholder's distribution option will be
converted to having all distributions reinvested in additional shares.
SECTION 3. STOCK DIVIDENDS. Anything in these By-Laws to the contrary
notwithstanding, the Trustees may at any time declare and distribute pro rata
among the Shareholders of any series or class a "stock dividend" out of either
authorized but unissued Shares of such series or class or treasury Shares of
such series or class or both.
ARTICLE XIV
DERIVATIVE CLAIMS
No Shareholder shall have the right to bring or maintain any court
action, proceeding or claim on behalf of the Trust or any series or class
thereof without first making demand on the Trustees requesting the Trustees to
bring or maintain such action, proceeding or claim. Such demand shall be excused
only when the plaintiff makes a specific showing that irreparable injury to the
Trust or any series or class thereof would otherwise result. Such demand shall
be mailed to the Clerk of the Trust at the Trust's principal office and shall
set forth in reasonable detail the nature of the proposed court action,
proceeding or claim and the essential facts relied upon by the
<PAGE>
Shareholder to support the allegations made in the demand. The Trustees shall
consider such demand within 45 days of its receipt by the Trust. In their sole
discretion, the Trustees may submit the matter to a vote of Shareholders of the
Trust or any series or class thereof, as appropriate. Any decision by the
Trustees to bring, maintain or settle (or not to bring, maintain or settle) such
court action, proceeding or claim, or to submit the matter to a vote of
Shareholders, shall be made by the Trustees in their business judgment and shall
be binding upon the Shareholders. Any decision by the Trustees to bring or
maintain a court action, proceeding or suit on behalf of the Trust or any series
or class thereof shall be subject to the right of the Shareholders under Article
VI, Section 6.8 of the Declaration to vote on whether or not such court action,
proceeding or suit should or should not be brought or maintained.
ARTICLE XV
AMENDMENTS
These By-Laws, or any of them, may be altered, amended or repealed, or
new By-Laws may be adopted
(a) by Majority Shareholder Vote, or
(b) by the Trustees,
provided, however, that no By-Law may be amended, adopted or repealed by the
Trustees if such amendment, adoption or repeal requires, pursuant to law, the
Declaration or these By-Laws, a vote of the Shareholders or if such amendment,
adoption or repeal changes or affects the provisions of Sections 1 and 4 of
Article X or the provisions of this Article XV.
EXHIBIT NO. 6(a)
DISTRIBUTION AGREEMENT
DISTRIBUTION AGREEMENT, made this first day of January, 1995, by and
between MFS GOVERNMENT MORTGAGE FUND, a Massachusetts business trust (the
"Trust"), and MFS FUND DISTRIBUTORS, INC., a Delaware corporation (the
"Distributor");
NOW, THEREFORE, in consideration of the mutual promises and undertakings
herein contained, the parties hereto agree as follows:
1. The Trust grants to the Distributor the right, as agent of the Trust,
to sell Shares of Beneficial Interest, without par value, of the Trust (the
"Shares") upon the terms herein below set forth during the term of this
Agreement. While this Agreement is in force, the Distributor agrees to use its
best efforts to find purchasers for Shares.
The Distributor shall have the right, as agent of the Trust, to
order from the Trust the Shares needed, but not more than the Shares needed
(except for clerical errors and errors of transmission) to fill unconditional
orders for Shares placed with the Distributor by dealers, banks or other
financial institutions or investors as set forth in the current Prospectus and
Statement of Additional Information (collectively, the "Prospectus") relating to
the Shares. The price which shall be paid to the Trust for the Shares so
purchased shall be the net asset value used in determining the public offering
price on which such orders were based. The Distributor shall notify the
Custodian of the Trust, at the end of each business day, or as soon thereafter
as the orders placed with it have been compiled, of the number of Shares and the
prices thereof which have been ordered through the Distributor since the end of
the previous day.
The right granted to the Distributor to place orders for Shares with
the Trust shall be exclusive, except that said exclusive right shall not apply
to Shares issued in the event that an investment company (whether a regulated or
private investment company or a personal holding company) is merged or
consolidated with the Trust or in the event that the Trust acquires by purchase
or otherwise, all (or substantially all) the assets or the outstanding shares of
any such company; nor shall it apply to Shares issued by the Trust as a stock
dividend or a stock split. The exclusive right to place orders for Shares
granted to the Distributor may be waived by the Distributor by notice to the
Trust in writing, either unconditionally or subject to such conditions and
limitations as may be set forth in the notice to the Trust. The Trust hereby
acknowledges that the Distributor may render distribution and other services to
other parties, including other investment companies. In connection with its
duties hereunder, the Distributor shall also arrange for computation of
performance statistics with respect to the Trust and arrange for publication of
current price information in newspapers and other publications.
2. The Shares may be sold through the Distributor to dealers, banks and
other financial institutions having sales agreements with the Distributor, upon
the following terms and conditions:
The public offering price, i.e., the price per Share at which the
Distributor or dealers, banks or other financial institutions purchasing Shares
through the Distributor may sell Shares to the public, shall be the public
offering price as set forth in the current Prospectus relating to the Shares,
including a sales charge (where applicable) not to exceed the amount permitted
by Article III, Section 26 of the National Association of Securities Dealers,
Inc.'s Rule of Fair Practice, as amended from time to time. The Distributor
shall retain the sales charge (where applicable) less any applicable dealer or
comparable discount. If the resulting public offering price does not come out to
an even cent, the public offering price shall be adjusted to the nearer cent. In
addition, the Trust agrees that the Distributor may impose certain contingent
deferred sales charges (where applicable) in connection with the redemption of
Shares, not to exceed 6% of the net asset value of Shares, and the Distributor
shall retain (or receive from the Trust, as the case may be) all such contingent
deferred sales charges.
The Distributor may place orders for Shares at the net asset value
for such Shares (as established pursuant to paragraph l above) on behalf of such
purchasers and under such circumstances as the Prospectus describes, provided
that such sales comply with Rule 22d-1 under the Investment Company Act of 1940
or any exemptive order granted by the Securities and Exchange Commission. The
Distributor may also place orders for Shares at net asset value on behalf of
persons reinvesting the proceeds of the redemption or resale of Shares or shares
of other investment companies for which the Distributor acts as Distributor or
as otherwise provided in the current Prospectus.
The net asset value of Shares shall be determined by the Trust or by
an agent of the Trust, as of the close of regular trading of the New York Stock
Exchange on each business day on which said Exchange is open, in accordance with
the method set forth in the governing instruments (as hereinafter defined) of
the Trust. The Trust may also cause the net asset value to be determined in
substantially the same manner or estimated in such manner and as of such other
hour or hours as may from time to time be agreed upon in writing by the Trust
and Distributor. The Trust shall have the right to suspend the sale of Shares
if, because of some extraordinary condition, the New York Stock Exchange shall
be closed, or if conditions obtaining during the hours when the Exchange is open
render such action advisable, or for any other reasons deemed adequate by the
Trust.
3. The Trust agrees that it will, from time to time, take all necessary
action to register the offering and sale of Shares under the Securities Act of
l933, as amended (the "Act"), and applicable state securities laws.
The Distributor shall be an independent contractor and neither the
Distributor nor any of its directors, officers or employees as such, is or shall
be an employee of the Trust. It is understood that Trustees, officers and
shareholders of the Trust are or may become interested in the Distributor, as
Directors, officers and employees, or otherwise and that Directors, officers and
employees of the Distributor are or may become similarly interested in the Trust
and that the Distributor may be or become interested in the Trust as a
shareholder or otherwise. The Distributor is responsible for its own conduct and
the employment, control and conduct of its agents and employees and for injury
to such agents or employees or to others through its agents or employees. The
Distributor assumes full responsibility for its agents and employees under
applicable statutes and agrees to pay all employer taxes thereunder.
4. The Distributor covenants and agrees that, in selling Shares, it will
use its best efforts in all respects duly to conform with the requirements of
all state and federal laws and the Rules of Fair Practice of the National
Association of Securities Dealers, Inc. (the "NASD") relating to the sale of
Shares, and will indemnify and hold harmless the Trust and each of its Trustees
and officers and each person, if any, who controls the Trust within the meaning
of Section 15 of the Act, against any loss, liability, damages, claim or expense
(including the reasonable cost of investigating or defending any alleged loss,
liability, damages, claim or expense and reasonable counsel fees incurred in
connection therewith), arising by reason of any person's acquiring any Shares,
which may be based upon the Act or any other statute or common law, on account
of any wrongful act of the Distributor or any of its employees (including any
failure to conform with any requirement of any state or federal law or the Rules
of Fair Practice of the NASD relating to the sale of Shares) or on the ground
that the registration statement or Prospectus as from time to time amended and
supplemented, includes an untrue statement of a material fact or omits to state
a material fact required to be stated therein or necessary in order to make the
statements therein not misleading, unless any such act, statement or omission
was made in reliance upon information furnished to the Distributor by or on
behalf of the Trust, provided, however, that in no case (i) is the indemnity of
the Distributor in favor of any person indemnified to be deemed to protect the
Trust or any such person against any liability to which the Trust or any such
person would otherwise be subject by reason of willful misfeasance, bad faith or
gross negligence in the performance of its or his duties or by reason of its or
his reckless disregard of its obligations and duties under this Agreement, or
(ii) is the Distributor to be liable under its indemnity agreement contained in
this paragraph with respect to any claim made against the Trust or any person
indemnified unless the Trust or such person, as the case may be, shall have
notified the Distributor in writing within a reasonable time after the summons
or other first legal process giving information of the nature of the claim shall
have been served upon the Trust or upon such person (or after the Trust or such
person shall have received notice of such service on any designated agent), but
failure to notify the Distributor of any such claim shall not relieve it from
any liability which it may have to the Trust or any person against whom such
action is brought otherwise than on account of its indemnity agreement contained
in this paragraph. The Distributor shall be entitled to participate, at its own
expense, in the defense, or, if it so elects, to assume the defense of any suit
brought to enforce any such liability, but, if the Distributor elects to assume
the defense, such defense shall be conducted by counsel chosen by it and
satisfactory to the Trust, or to its officers or Trustees, or to any controlling
person or persons, defendant or defendants in the suit. In the event that the
Distributor elects to assume the defense of any such suit and retain such
counsel, the Trust or such officers or Trustees or controlling person or
persons, defendant or defendants in the suit, shall bear the fees and expenses
of any additional counsel retained by them, but, in case the Distributor does
not elect to assume the defense of any such suit, it shall reimburse the Trust
and such officers and Trustees or controlling person or persons, defendant or
defendants in such suit, for the reasonable fees and expenses of any counsel
retained by them. The Distributor agrees promptly to notify the Trust of the
commencement of any litigation or proceedings against it in connection with the
issue and sale of any Shares.
Neither the Distributor nor any other person is authorized to give
any information or to make any representation on behalf of the Trust, other than
those contained in the registration statement or Prospectus filed with the
Securities and Exchange Commission under the Act (as said registration statement
or Prospectus may be amended or supplemented from time to time), covering the
Shares or other than those contained in periodic reports to shareholders of the
Trust.
5. The Trust will pay, or cause to be paid -
(i) all costs and expenses of the Trust, including fees and
disbursements of its counsel, in connection with the preparation and filing of
any required registration statement or Prospectus under the Act covering Shares
and all amendments and supplements thereto and any notices regarding the
registration of shares, and preparing and mailing to shareholders Prospectuses,
statements and confirmations and periodic reports (including the expense of
setting up in type any such registration statement, Prospectus or periodic
report);
(ii) the expenses (including auditing expenses) of
qualification of the Shares for sale, and, if necessary or advisable in
connection therewith, of qualifying the Trust as a dealer or broker, in such
states as shall be selected by the Distributor and the fees payable to each such
state with respect to shares sold and for continuing the qualification therein
until the Distributor notifies the Trust that it does not wish such
qualification continued;
(iii) the cost of preparing temporary or permanent
certificates for Shares;
(iv) all fees and disbursements of the transfer agent of the
Trust;
(v) the cost and expenses of delivering to the Distributor at
its office in Boston, Massachusetts, all Shares sold through it as Distributor
hereunder; and
(vi) all the federal and state issue and/or transfer taxes
payable upon the issue by or (in the case of treasury Shares) transfer from the
Trust of any and all Shares purchased through the Distributor hereunder.
The Distributor agrees that, after the Prospectus and periodic
reports have been set up in type, it will bear the expense (other than the cost
of mailing to shareholders of the Trust of printing and distributing any copies
thereof which are to be used in connection with the offering of Shares to
dealers, banks or other financial institutions or investors. The Distributor
further agrees that it will bear the expenses of preparing, printing and
distributing any other literature used by the Distributor or furnished by it for
use by dealers, banks or other financial institutions in connection with the
offering of the Shares for sale to the public and expenses of advertising in
connection with such offering. The Distributor will also bear the expense of
sending confirmations and statements to dealers, banks and other financial
institutions having sales agreements with the Distributor. Nothing in this
paragraph 5 shall be deemed to prohibit or conflict with any payment by the
Trust to the Distributor pursuant to any Distribution Plan adopted as in effect
pursuant to Rule 12b-1 under the Investment Company Act of 1940.
6. The Trust hereby authorizes the Distributor to repurchase, upon the
terms and conditions set forth in written instructions given by the Trust to the
Distributor from time to time, as agent of the Trust and for its account, such
Shares as may be offered for sale to the Trust from time to time; provided the
Distributor shall have the right, as stated above in paragraph 2 of this
Agreement, to retain (or to receive from the Trust, as the case may be) a
deferred sales charge not to exceed 6% of the net asset value of the Shares so
repurchased.
(a) The Distributor shall notify in writing the Custodian of
the Trust, at the end of each business day, or as soon thereafter as the
repurchases have been compiled, of the number of Shares repurchased for the
account of the Trust since the last previous report, together with the prices at
which such repurchases were made, and upon the request of any Officer or Trustee
of the Trust shall furnish similar information with respect to all repurchases
made up to the time of the request on any day.
(b) The Trust reserves the right to suspend or revoke the
foregoing authorization at any time. Unless otherwise stated, any such
suspension or revocation shall be effective forthwith upon receipt of notice
thereof by an officer of the Distributor, by telegraph or by written notice from
the Trust. In the event that the authorization of the Distributor is, by the
terms of such notice, suspended for more than twenty-four hours or until further
notice, the authorization given by this paragraph 6 shall not be revived except
by action of a majority of the members of the Board of Trustees of the Trust.
(c) The Distributor shall have the right to terminate the
operation of this paragraph 6 upon giving to the Trust thirty days' written
notice thereof.
(d) The Trust agrees to authorize and direct the Custodian to
pay, for the account of the Trust, the purchase price of any Shares so
repurchased against delivery of the certificates, if any, in proper form for
transfer to the Trust or for cancellation by the Trust.
(e) The Distributor shall receive no commission in respect of
any repurchase of Shares under the foregoing authorization and appointment as
agent, except in connection with contingent deferred sales charge as provided in
the current Prospectus relating to the Shares.
(f) The Trust agrees to reimburse the Distributor, from time
to time upon demand, for any reasonable expenses incurred in connection with the
repurchase of Shares pursuant to this paragraph 6.
7. If, at any time during the existence of this Agreement, the Trust
shall deem it necessary or advisable in the best interests of the Trust that any
amendment of this Agreement be made in order to comply with the recommendations
or requirements of the Securities and Exchange Commission or other governmental
authority or to obtain any advantage under Massachusetts, any state or federal
tax laws, it shall notify the Distributor of the form of amendment which it
deems necessary or advisable and the reasons therefore. If the Distributor
declines to assent to such amendment, the Trust may terminate this Agreement
forthwith by written notice to the Distributor without payment of any penalty.
If, at any time during the existence of this Agreement, upon request by the
Distributor, the Trust fails (after a reasonable time) to make any changes in
its governing instruments or in its methods of doing business which are
necessary in order to comply with any requirements of federal or state laws or
regulations, laws or regulations of the Securities and Exchange Commission or of
a national securities association of which the Distributor is or may be a
member, relating to the sale of Shares, the Distributor may terminate this
Agreement forthwith by written notice to the Trust without payment of any
penalty.
8. The Distributor agrees that it will not take any long or short
positions in the Shares except as permitted by paragraphs l and 6 hereof.
Whenever used in this Agreement, the term "governing instruments" shall mean the
Declaration of Trust and the By-Laws of the Trust, as from time to time amended.
9. This Agreement shall become effective on January 1, 1995 and shall
continue in force until August 1, 1996 on which date it will terminate unless
its continuance after August 1, 1996, is specifically approved at least annually
(i) by the vote of a majority of the Board of Trustees of the Trust who are not
interested persons of the Trust or of the Distributor at a meeting specifically
called for the purpose of voting on such approval, and (ii) by the Board of
Trustees of the Trust or by vote of a majority of the outstanding voting
securities of that Fund. The aforesaid requirement that continuance of this
Agreement be "specifically approved at least annually" shall be construed in a
manner consistent with the Investment Company Act of l940 and the Rules and
Regulations thereunder.
This Agreement may be terminated as to any Fund at any time by either
party without payment of any penalty on not more than sixty days' or less than
thirty days' written notice to the other party.
l0. This Agreement shall automatically terminate in the event of its
assignment.
11. The terms "vote of a majority of the outstanding voting securities",
"interested person" and "assignment" shall have the respective meanings
specified in the Investment Company Act of l940 and the Rules and Regulations
thereunder, subject, however, to such exemptions as may be granted by the
Securities and Exchange Commission under said Act.
12. This Agreement shall be governed by the laws of The Commonwealth of
Massachusetts.
13. A copy of the Declaration of Trust of the Trust is on file with the
Secretary of State of The Commonwealth of Massachusetts. The Distributor
acknowledges that the obligations of or arising out of this instrument are not
binding upon any of the Trust's trustees, officers, employees, agents or
shareholders individually, but are binding solely upon the assets and property
of the Trust. If this instrument is executed by the Trust on behalf of one or
more series of the Trust, the Distributor further acknowledges that the assets
and liabilities of each series of the Trust are separate and distinct and that
the obligations of or arising out of this instrument are binding solely upon the
assets or property of the series on whose behalf the Trust has executed this
instrument. If the Trust has executed this instrument on behalf of more than one
series of the Trust, the Distributor also agrees that the obligations of each
series hereunder shall be several and not joint, in accordance with its
proportionate interest hereunder, and the Distributor agrees not to proceed
against any series for the obligations of another series.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the day and year first above.
MFS GOVERNMENT MORTGAGE FUND
By: W. THOMAS LONDON
W. Thomas London as officer
and not individually
MFS FUND DISTRIBUTORS, INC.
By: WILLIAM W. SCOTT, JR.
William W. Scott, Jr.
President
EXHIBIT NO. 10
March 29, 1995
MFS Government Mortgage Fund
500 Boylston Street
Boston, MA 02116
Re: Post-Effective Amendment No. 11 to Registration Statement on Form
N-1A (File No. 33-1657) (the "Registration Statement")
Gentlemen:
I am Senior Counsel of Massachusetts Financial Services Company, which
serves as investment adviser to MFS Government Mortgage Fund (the "Fund") and
the Assistant Secretary Pro Tempore of the Fund. I am admitted to practice law
in The Commonwealth of Massachusetts. The Fund was created under a written
Declaration of Trust dated November 18, 1985, and executed and delivered in
Boston, Massachusetts, as amended and restated January 19, 1995 (the
"Declaration of Trust"). The beneficial interest thereunder is represented by
transferable shares without par value. The Trustees have the powers set forth in
the Declaration of Trust, subject to the terms, provisions and conditions
therein provided.
I am of the opinion that the legal requirements have been complied with
in the creation of the Fund, and that said Declaration of Trust is legal and
valid.
Under Article III, Section 3.4 and Article VI, Section 6.4 of the
Declaration of Trust, the Trustees are empowered, in their discretion, from time
to time to issue shares of the Fund for such amount and type of consideration,
at such time or times and on such terms as the Trustees may deem best. Under
Article VI, Section 6.1, it is provided that the number of Shares of Beneficial
Interest (without par value) ("Shares") authorized to be issued under the
Declaration of Trust is unlimited.
By vote adopted on November 18, 1985, the Trustees of the Fund
determined to sell to the public the authorized but unissued shares of
beneficial interest of the Fund for cash at a price which will net the Fund
(before taxes) not less than the net asset value thereof, as defined in the
Fund's By-Laws, determined next after the sale is made or at some later time
after such sale.
The Fund is about to register under the Securities Act of 1933, as
amended, 64,261,904 shares of beneficial interest by Post-Effective Amendment
No. 11 to the Fund's Registration Statement. W. Thomas London, Treasurer of the
Fund, has certified that the Fund received cash consideration for the issuance
of each of the Shares of the Fund sold during the Fund's fiscal year ended July
31, 1994, including the 8,421,083 Shares which were sold in reliance upon Rule
24f-2 of the General Rules and Regulations under the Investment Company Act of
1940, as amended, at a price which netted the Fund (before taxes) not less than
the net asset value per share, as defined in the Fund's Declaration of Trust,
determined next after the sale was made.
I am of the opinion that all necessary Fund action precedent to the
issue of the Shares of the Fund, comprising the shares covered by Post-Effective
Amendment No. 11 to the Registration Statement has been duly taken, and that all
such shares may legally and validly be issued for cash, and when sold will be
fully paid and nonassessable by the Fund upon receipt by the Fund or its agent
of consideration thereof in accordance with the terms described in the
Registration Statement, subject to compliance with the Securities Act of 1933,
the Investment Company Act of 1940 and applicable state laws regulating the sale
of securities.
I consent to your filing this opinion with the Securities and Exchange
Commission as an exhibit to Post-Effective Amendment No. 11 to the Registration
Statement.
Very truly yours,
JAMES F. DESMARAIS
James F. DesMarais
Assistant Secretary Pro Tempore
JFD/bjn
EXHIBIT NO. 11
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in this Post-Effective
Amendment No. 11 to Registration Statement No.33-1657 of MFS Government Mortgage
Fund of our report dated September 9, 1994 appearing in the annual report to
shareholders for the year ended July 31, 1994, of MFS Government Mortgage Fund,
and to the references to us under the headings "Condensed Financial Information"
in the Prospectus and "Independent Accountants and Financial Statements" in the
Statement of Additional Information, which are part of such Registration
Statement.
DELOITTE & TOUCHE LLP
Deloitte & Touche LLP
Boston, Massachusetts
March 27, 1995
EXHIBIT NO. 15(a)
MFS GOVERNMENT MORTGAGE FUND
AMENDED AND RESTATED DISTRIBUTION PLAN
AMENDED AND RESTATED DISTRIBUTION PLAN with respect to the shares of beneficial
interest to be designated "Class A" of the MFS Government Mortgage Fund (the
"Fund"), a business trust organized and existing under the laws of The
Commonwealth of Massachusetts, dated the 18th day of December, 1985, amended and
restated the 19th day of December, 1990, amended and restated the 1st day of
August, 1993 and amended this 21st day of December, 1994.
WITNESSETH:
WHEREAS, the Fund is engaged in business as an open-end management investment
company and is registered under the Investment Company Act of 1940 (the "Act");
and
WHEREAS, a plan of distribution pursuant to Rule 12b-1 of the Act was previously
adopted and approved by the Trustees of the Fund, including the Qualifying
Trustees (as defined below), and by the shareholders of the Fund; and
WHEREAS, the Fund intends to continue to distribute the Shares of Beneficial
Interest (without par value) of the Fund designated Class A Shares (the
"Shares") in part in accordance with Rule 12b-1 under the Act ("Rule 12b-1"),
and desires to adopt this amended and restated Distribution Plan (the "Plan") as
a plan of distribution pursuant to such Rule; and
WHEREAS, the Fund has entered into a distribution agreement (the "Distribution
Agreement") in a form approved by the Board of Trustees of the Trust (the "Board
of Trustees") in the manner specified in Rule 12b-1, with MFS Fund Distributors,
Inc., a Delaware corporation, as distributor (the "Distributor"), whereby the
Distributor provides facilities and personnel and renders services to the Fund
in connection with the offering and distribution of the Shares; and
WHEREAS, the Fund recognizes and agrees that the Distributor will enter into
agreements ("Dealer Agreements") with various securities dealers and other
financial intermediaries ("Dealers") pursuant to which the Dealers will act as
dealers of the Shares in connection with the offering of Shares; and
WHEREAS, the Distribution Agreement provides that a sales charge may be paid by
investors who purchase Shares and that the Distributor and Dealers will receive
such sales charge as partial compensation for their services in connection with
sale of Shares; and
WHEREAS, the Board of Trustees, in considering whether the Fund should adopt and
implement this Plan, has evaluated such information as it deemed necessary to an
informed determination as to whether this Plan should be adopted and implemented
and has considered such pertinent factors as it deemed necessary to form the
basis for a decision to use assets of the Fund for such purposes, and has
determined that there is a reasonable likelihood that the adoption and
implementation of this Plan will benefit the Fund and its Class A shareholders;
NOW, THEREFORE, the Board of Trustees hereby adopts this Plan for the Fund as a
plan of distribution relating to the Shares in accordance with Rule 12b-1 under
the Act, on the following terms and conditions:
1. As specified in the Distribution Agreement, the Distributor shall
provide facilities, personnel and a program with respect to the offering and
sale of Shares. Among other things, the Distributor shall be responsible for all
expenses of printing (excluding typesetting) and distributing prospectuses to
prospective shareholders and providing such other related services as are
reasonably necessary in connection therewith.
2. The Distributor shall bear all distribution-related expenses to
the extent specified in the Distribution Agreement in providing the services
described in Section 1, including without limitation, the compensation of
personnel necessary to provide such services and all costs of travel, office
expenses (including rent and overhead), equipment, printing, delivery and
mailing costs.
3. As partial consideration for the services performed and expenses
incurred in the performance of its obligations under the Distribution Agreement,
the Fund shall pay the Distributor a distribution fee periodically at a rate of
0.10% per annum of the average daily net assets of the Fund attributable to the
Shares.
4. As partial consideration for the personal services and/or account
maintenance services performed by each Dealer in the performance of its
obligations under its Dealer Agreement, the Fund shall pay each Dealer a service
fee periodically at a rate not to exceed 0.25% per annum of the portion of the
average daily net assets of the Fund that is represented by Shares that are
owned by investors for whom such Dealer is the holder or dealer of record. The
Distributor may from time to time reduce the amount of the service fee paid to a
Dealer for Shares sold prior to certain date.
5. In addition to fees payable pursuant to Sections 3 and 4 hereof,
the expenses permitted to be paid by the Fund pursuant to this Plan shall
include other distribution related expenses. These other distribution related
expenses may include, but are not limited to, a dealer commission and a payment
to wholesalers employed by the Distributor on net asset value purchases at or
above a certain dollar level.
The aggregate amount of fees and expenses paid pursuant to Sections 3
and 4 hereof and this Section 5 shall not exceed 0.35% per annum of the average
daily net assets of the Fund attributable to the Shares. No fees shall be paid
pursuant to Section 4 hereof or this Section 5 to any insurance company which
has entered into an agreement with the Fund and the Distributor that permits
such insurance company to purchase Shares from the Fund at their net asset value
in connection with annuity agreements issued in connection with the insurance
company's separate accounts. That portion of the Fund's average daily net assets
on which fees payable under Section 4 hereof and this Section 5 are calculated
may be subject to certain minimum amount requirements as may be determined, and
additional or different dealer or wholesaler qualification standards that may be
established, from time to time by the Distributor. The Distributor shall be
entitled to be paid any fees payable under Section 4 hereof or this Section 5
with respect to accounts for which no Dealer of record exists or qualification
standards have not been met as partial consideration for personal services
and/or account maintenance services provided by the Distributor to the Shares.
The fees and expenses payable pursuant to Section 4 and this Section 5 may from
time to time be paid by the Fund to the Distributor and the Distributor will
then pay these expenses on behalf of the Fund.
6. Nothing herein contained shall be deemed to require the Fund to
take any action contrary to its Declaration of Trust or By-Laws or any
applicable statutory or regulatory requirement to which it is subject or by
which it is bound, or to relieve or deprive the Board of Trustees of the
responsibility for and control of the conduct of the affairs of the Fund.
7. This Plan shall become effective upon approval by a vote of the
Board of Trustees and vote of a majority of the Trustees who are not "interested
persons" of the Fund and who have no direct or indirect financial interest in
the operation of the Plan or in any of the agreements related to the Plan (the
"Qualified Trustees"), such votes to be cast in person at a meeting called for
the purpose of voting on this Plan.
8. This Plan shall continue in effect indefinitely; provided,
however, that such continuance is subject to annual approval by a vote of the
Board of Trustees and a majority of the Qualified Trustees, such votes to be
cast in person at a meeting called for the purpose of voting on continuance of
this Plan. If such annual approval is not obtained, this Plan shall expire 12
months after the effective date of the last approval.
9. This Plan may be amended at any time by the Board of Trustees;
provided that (a) any amendment to increase materially the amount to be spent
for the services described herein shall be effective only upon approval by a
vote of a "majority of the outstanding voting securities" of the Shares and (b)
any material amendment of this Plan shall be effective only upon approval by a
vote of the Board of Trustees and a majority of the Qualified Trustees, such
votes to be cast in person at a meeting called for the purpose of voting on such
amendment. This Plan may be terminated at any time by vote of a majority of the
Qualified Trustees or by a vote of a "majority of the outstanding voting
securities" of the Shares.
10. The Distributor shall provide the Board of Trustees, and the
Board of Trustees shall review, at least quarterly, a written report of the
amounts expended under the Plan and the purposes for which such expenditures
were made.
11. While this Plan is in effect, the selection and nomination of
Qualified Trustees shall be committed to the discretion of the Trustees who are
not "interested persons" of the Fund.
12. For the purposes of this Plan, the terms "interested person" and
"majority of the outstanding voting securities" are used as defined in the Act.
In addition, for purposes of determining the fees payable to Dealers and
wholesalers, the value of the Share's net assets shall be computed in the manner
specified in the Fund's then current prospectus for computation of the net asset
value of the Shares.
13. The Fund shall preserve copies of this Plan, and each agreement
related hereto and each report referred to in Section 10 hereof (collectively
the "Records") for a period of six years from the end of the fiscal year in
which such Record was made and each such Record shall be kept in an easily
accessible place for the first two years of said record keeping.
14. This Plan shall be construed in accordance with the laws of The
Commonwealth of Massachusetts and the applicable provisions of the Act.
15. If any provision of this Plan shall be held or made invalid by a
court decision, statute, rule or otherwise, the remainder of the Plan shall not
be affected thereby.
EXHIBIT NO. 15(b)
MFS GOVERNMENT MORTGAGE FUND
PLAN OF DISTRIBUTION
PLAN OF DISTRIBUTION with respect to the shares of beneficial interest to be
designated "Class B" of MFS Government Mortgage Fund (the "Fund"), a
Massachusetts business trust, dated September 1, 1993 and amended this 21st day
of December, 1994.
WITNESSETH:
WHEREAS, the Fund is engaged in business as an open-end management
investment company and is registered under the Investment Company Act of 1940,
as amended (collectively with the rules and regulations promulgated thereunder,
the "1940 Act"); and
WHEREAS, the Fund intends to distribute the shares of beneficial interest
(without par value) of the Fund designated Class B Shares (the "Shares") in
accordance with Rule 12b-1 under the 1940 Act ("Rule 12b-1"), and desires to
adopt this Distribution Plan (the "Plan") as a plan of distribution pursuant to
such Rule; and
WHEREAS, the Fund desires for MFS Fund Distributors, Inc., a Delaware
corporation, to provide certain distribution services for the Fund (the
"Distributor"); and
WHEREAS, the Fund has entered into a distribution agreement (the
"Distribution Agreement") (in a form approved by the Board of Trustees of the
Fund in a manner specified in such Rule 12b-1) with the Distributor, whereby the
Distributor will provide facilities and personnel and render services to the
Fund in connection with the offering and distribution of the Shares; and
WHEREAS, the Fund recognizes and agrees that (a) the Distributor may retain
the services of firms or individuals to act as dealers (the "Dealers") of the
Shares in connection with the offering of Shares, and (b) the Distributor may
make payments for such services to the Dealers out of the fee paid to the
Distributor hereunder, any deferred sales charges imposed by the Distributor in
connection with the repurchase of Shares, its profits or any other source
available to it; and
WHEREAS, the Fund recognizes and agrees that the Distributor may impose
certain deferred sales charges in connection with the repurchase of Shares by
the Fund, and the Distributor may retain (or receive from the Fund, as the case
may be) all such deferred sales charges; and
WHEREAS, the Board of Trustees of the Fund, in considering whether the Fund
should adopt and implement this Plan, has evaluated such information as it
deemed necessary to an informed determination as to whether this Plan should be
adopted and implemented and has considered such pertinent factors as it deemed
necessary to form the basis for a decision to use assets of the Fund for such
purposes, and has determined that there is a reasonable likelihood that the
adoption and implementation of this Plan will benefit the Fund and its Class B
shareholders;
NOW, THEREFORE, the Board of Trustees of the Fund hereby adopts this Plan
for the Fund as a plan for distribution relating to the Shares in accordance
with Rule 12b-1, on the following terms and conditions:
1. As specified in the Distribution Agreement, the Distributor shall
provide facilities, personnel and a program with respect to the offering and
sale of Shares. Among other things, the Distributor shall be responsible for
commissions payable to Dealers, all expenses of printing (excluding typesetting)
and distributing prospectuses to prospective shareholders and providing such
other related services as are reasonably necessary in connection therewith.
2. The Distributor shall bear all distribution-related expenses to the
extent specified in the Distribution Agreement in providing the services
described in paragraph 1, including without limitation, the compensation of
personnel necessary to provide such services and all costs of travel, office
expenses (including rent and overhead), equipment, printing, delivery and
mailing costs.
3. It is understood that the Distributor may impose certain deferred sales
charges in connection with the repurchase of Shares by the Fund and the
Distributor may retain (or receive from the Fund, as the case may be) all such
deferred sales charges. As additional consideration for all services performed
and expenses incurred in the performance of its obligations under the
Distribution Agreement, the Fund shall pay the Distributor a distribution fee
periodically at a rate of 0.75% per annum of the Fund's average daily net assets
attributable to the Shares.
4. As partial consideration for the personal services and/or account
maintenance services performed by each Dealer in the performance of its
obligations under its dealer agreement with the Distributor, the Fund shall pay
each Dealer a service fee periodically at a rate not to exceed 0.25% per annum
of the portion of the average daily net assets of the Fund that is represented
by Shares that are owned by investors for whom such Dealer is the holder or
dealer of record. That portion of the Fund's average daily net assets on which
the fees payable under this paragraph 4 hereof are calculated may be subject to
certain minimum amount requirements as may be determined, and additional or
different dealer qualification standards that may be established from time to
time, by the Distributor. The Distributor shall be entitled to be paid any fees
payable under this paragraph 4 hereof with respect to Shares for which no Dealer
of record exists or qualification standards have not been met as partial
consideration for personal services and/or account maintenance services provided
by the Distributor to the Shares. The service fee payable pursuant to this
paragraph 4 may from time to time be paid by the Fund to the Distributor and the
Distributor will then pay these fees on behalf of the Fund.
5. The Fund understands that agreements between the Distributor and the
Dealers may provide for payment of commissions to Dealers in connection with the
sales of Shares and may provide for a portion (which may be all or substantially
all) of the fees payable by the Fund to the Distributor under the Distribution
Agreement to be paid by the Distributor to the Dealers in consideration of the
Dealer's services as a dealer of the Shares. Except as described in paragraph 4,
nothing in this Plan shall be construed as requiring the Fund to make any
payment to any Dealer or to have any obligations to any Dealer in connection
with services as a dealer of the Shares. The Distributor shall agree and
undertake that any agreement entered into between the Distributor and any Dealer
shall provide that, except as provided in paragraph 4, such Dealer shall look
solely to the Distributor for compensation for its services thereunder and that
in no event shall such Dealer seek any payment from the Fund.
6. The Fund shall pay all fees and expenses of any independent auditor,
legal counsel, investment adviser, administrator, transfer agent, custodian,
shareholder servicing agent, registrar or dividend disbursing agent of the Fund;
expenses of distributing and redeeming Shares and servicing shareholder
accounts; expenses of preparing, printing and mailing prospectuses, shareholder
reports, notices, proxy statements and reports to governmental officers and
commissions and to shareholders of the Fund, except that the Distributor shall
be responsible for the distribution-related expenses as provided in paragraphs 1
and 2 hereof.
7. Nothing herein contained shall be deemed to require the Trust to take
any action contrary to its Declaration of Trust or By-Laws or any applicable
statutory or regulatory requirement to which it is subject or by which it is
bound, or to relieve or deprive the Board of Trustees of the responsibility for
and control of the conduct of the affairs of the Fund.
8. This Plan shall become effective upon (a) approval by a vote of at least
a "majority of the outstanding voting securities" of the Shares, and (b)
approval by a vote of the Board of Trustees and a vote of a majority of the
Trustees who are not "interested persons" of the Fund and who have no direct or
indirect financial interest in the operation of the Plan or in any agreement
related to the Plan (the "Qualified Trustees"), such votes to be cast in person
at a meeting called for the purpose of voting on this Plan.
9. This Plan shall continue in effect indefinitely; provided that such
continuance is "specifically approved at least annually" by a vote of both a
majority of the Trustees of the Fund and a majority of the Qualified Trustees.
If such annual approval is not obtained, this Plan shall expire 12 months after
the effective date of the last approval.
10. This Plan may be amended at any time by the Board of Trustees; provided
that this Plan may not be amended to increase materially the amount of permitted
expenses hereunder without the approval of holders of a "majority of the
outstanding voting securities" of the Shares and may not be materially amended
in any case without a vote of a majority of both the Trustees and the Qualified
Trustees. This Plan may be terminated at any time by a vote of a majority of the
Qualified Trustees or by a vote of the holders of a "majority of the outstanding
voting securities" of the Shares.
11. The Fund and the Distributor shall provide the Board of Trustees, and
the Board of Trustees shall review, at least quarterly, a written report of the
amounts expended under this Plan and the purposes for which such expenditures
were made.
12. While this Plan is in effect, the selection and nomination of Qualified
Trustees shall be committed to the discretion of the Trustees who are not
"interested persons" of the Trust.
13. For the purposes of this Plan, the terms "interested persons",
"majority of the outstanding voting securities" and "specifically approved at
least annually" are used as defined in the 1940 Act. In addition, for purposes
of determining the fees payable to the Distributor hereunder, the value of the
Fund's net assets shall be computed in the manner specified in the Fund's
then-current prospectus and statement of additional information for computation
of the net asset value of the Shares of the Fund.
14. The Fund shall preserve copies of this Plan, and each agreement related
hereto and each report referred to in paragraph 11 hereof (collectively, the
"Records") for a period of six years from the end of the fiscal year in which
such Record was made and each such record shall be kept in an easily accessible
place for the first two years of said record-keeping.
15. This Plan shall be construed in accordance with the laws of The
Commonwealth of Massachusetts and the applicable provisions of the 1940 Act.
16. If any provision of this Plan shall be held or made invalid by a court
decision, statute, rule or otherwise, the remainder of the Plan shall not be
affected thereby.
EXHIBIT NO. 16
TOTAL RATE OF RETURN CALCULATION
Formula
P(1 + T)n = ERV
P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value
STANDARDIZED YIELD CALCULATION
__ __
| __ __ |
| | | |
| | |6 |
| | a - b | |
YIELD = 2 x | | ----- + 1 | |
| | c x d | |
| | | -1 |
| | | |
| -- -- |
-- --
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
THE FINANCIAL STATEMENTS OF MFS GOVERNMENT MORTGAGE FUND AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 8-MOS
<FISCAL-YEAR-END> JUL-31-1994
<PERIOD-END> JUL-31-1994
<INVESTMENTS-AT-COST> 1,736,303,311
<INVESTMENTS-AT-VALUE> 1,671,815,520
<RECEIVABLES> 17,360,889
<ASSETS-OTHER> 29,456
<OTHER-ITEMS-ASSETS> 290
<TOTAL-ASSETS> 1,689,206,155
<PAYABLE-FOR-SECURITIES> 28,746,250
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 7,476,549
<TOTAL-LIABILITIES> 36,222,799
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 1,808,617,523
<SHARES-COMMON-STOCK> 65,284,398
<SHARES-COMMON-PRIOR> 76,276,546
<ACCUMULATED-NII-CURRENT> (50,624)
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (88,989,835)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (66,593,708)
<NET-ASSETS> 1,652,983,356
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 96,676,046
<OTHER-INCOME> 0
<EXPENSES-NET> 22,127,075
<NET-INVESTMENT-INCOME> 74,548,971
<REALIZED-GAINS-CURRENT> (25,065,163)
<APPREC-INCREASE-CURRENT> (75,294,158)
<NET-CHANGE-FROM-OPS> (25,810,350)
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (14,372,080)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> (6,354,345)
<NUMBER-OF-SHARES-SOLD> 4,203,202
<NUMBER-OF-SHARES-REDEEMED> (16,516,662)
<SHARES-REINVESTED> 1,321,312
<NET-CHANGE-IN-ASSETS> (496,984,746)
<ACCUMULATED-NII-PRIOR> (11,856,473)
<ACCUMULATED-GAINS-PRIOR> (85,310,928)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 8,248,819
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 22,220,543
<AVERAGE-NET-ASSETS> 1,903,573,615
<PER-SHARE-NAV-BEGIN> 6.85
<PER-SHARE-NII> 0.29
<PER-SHARE-GAIN-APPREC> (0.36)
<PER-SHARE-DIVIDEND> (0.20)
<PER-SHARE-DISTRIBUTIONS> 0.00
<RETURNS-OF-CAPITAL> (0.09)
<PER-SHARE-NAV-END> 6.49
<EXPENSE-RATIO> 1.27
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
THE FINANCIAL STATEMENTS OF MFS GOVERNMENT MORTGAGE FUND AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 8-MOS
<FISCAL-YEAR-END> JUL-31-1994
<PERIOD-END> JUL-31-1994
<INVESTMENTS-AT-COST> 1,736,303,311
<INVESTMENTS-AT-VALUE> 1,671,815,520
<RECEIVABLES> 17,360,889
<ASSETS-OTHER> 29,456
<OTHER-ITEMS-ASSETS> 290
<TOTAL-ASSETS> 1,689,206,155
<PAYABLE-FOR-SECURITIES> 28,746,250
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 7,476,549
<TOTAL-LIABILITIES> 36,222,799
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 1,808,617,523
<SHARES-COMMON-STOCK> 189,497,087
<SHARES-COMMON-PRIOR> 237,911,856
<ACCUMULATED-NII-CURRENT> (50,624)
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (88,989,835)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (66,593,708)
<NET-ASSETS> 1,652,983,356
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 96,676,046
<OTHER-INCOME> 0
<EXPENSES-NET> 22,127,075
<NET-INVESTMENT-INCOME> 74,548,971
<REALIZED-GAINS-CURRENT> (25,065,163)
<APPREC-INCREASE-CURRENT> (75,294,158)
<NET-CHANGE-FROM-OPS> (25,810,350)
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (38,804,832)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> (17,156,825)
<NUMBER-OF-SHARES-SOLD> 4,217,881
<NUMBER-OF-SHARES-REDEEMED> (56,121,433)
<SHARES-REINVESTED> 3,488,783
<NET-CHANGE-IN-ASSETS> (496,984,746)
<ACCUMULATED-NII-PRIOR> (11,856,473)
<ACCUMULATED-GAINS-PRIOR> (85,310,928)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 8,248,819
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 22,220,543
<AVERAGE-NET-ASSETS> 1,903,573,615
<PER-SHARE-NAV-BEGIN> 6.84
<PER-SHARE-NII> 0.26
<PER-SHARE-GAIN-APPREC> (0.35)
<PER-SHARE-DIVIDEND> (0.18)
<PER-SHARE-DISTRIBUTIONS> 0.00
<RETURNS-OF-CAPITAL> (0.08)
<PER-SHARE-NAV-END> 6.49
<EXPENSE-RATIO> 1.94
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
